Compensation

 

1.0 INTRODUCTION

Compensation can be defined as the payment an employee receives for the services he/she renders. This note shall explore, how compensation is determined, the factors that goes into the determining of salaries and wages. This note will also look into major influences on the level of salaries and wages

payable by various organizations and employees. 

2.0 OBJECTIVES

 At the end of this note, you should be able to:

· define what compensation is

· explain the effects of economic, social and ethical factors on salaries and wages

· identify reasons why some employees in organizations pay higher wages than others · undertake a survey on how to gather facts to be used in establishing a pay scale. 

3.0 MAIN CONTENT

 3.1 Definition There is no one singular definition of the word compensation. Its meaning is deduced from its purpose and policy. According to Edioni Flippo (1984) there are three purposes of employee compensation programmes, namely:

 (1) To attract capable employees to the organization.

(2) To motivate them towards superior performance.

(3) To retain their services over an extended period of time. 

But to A. G. Cole (1997) the fourth purpose is that compensation is to reward employees for effort, loyalty, experience and achievement Then with all these, compensation can be defined as: The money being salaries and wages, which an employer pays an employee for the services rendered, and which is meant to keep him rendering such services for an extended period of time. Wages and Salaries is the most single obligation an employer owes his employees.

The most common system by which non management employees are compensated is wages, which are based on time increments or the number of notes produced. Non-management employees traditionally have been paid at an hourly or daily rate, although some are now being paid bi-weekly or monthly. Employees who are compensated on a weekly or longer schedule are paid salaries. 

3.2 Factors Determining the General Pay Level

3.2.1 Economic Consideration There is a vital relationship between the total amount spent for wages and the total production which is the total amount of goods and services produced.

Secondly, there is a vital relationship between the amounts spent on wages and the proportions of total income going to the other factors of production. As a society is economically organized, there is a practical limitation upon the height to which the general level of all compensation can go – a limitation determined first by the total productivity of industry, and second by the irreducible requirements of the various other factors in production.

A wage set with due regard to these considerations is regarded as an economic wage, and private establishments paying “uneconomic” wages are likely to be forced out of business.  Government pay level is not bound by the economic factor. In theory, what sets a limit to what government can pay in wages and salaries is its income and the extent to which it has to compete in the labor market.

However, despite the fact that government is not bound by the economic argument, it behaves it to be guided by such arguments. If Government competes with industry pays, labor will drain into public service and production in industry will suffer. If on the other hand, it pays far below economic way, the government will find it difficult to attract labor. 

3.2.2 Social and Ethical Consideration Although from an economic point of view, government is somewhat freer in setting its pay policy than most competitive private establishments, from the social and ethical stand points if it is less free to do so as it will. This is so because the government is the body which is saddled with the responsibility of ensuring that every citizen of a country lives a life that is adjudged ‘adequate” and to ensure that this is attained by means of paying a wage that cannot go below a certain level. The reason for the social and ethical consideration is that the bargaining power of public employees is limited as a result of the followings:

 - The absence of effective labor organization among civil servants.

- Limitation upon the right to strike and to participate in political activities

- And the special character of much government work, which makes it difficult for the civil servant to leave the service for private employment. The effect of all this reasons is the real bargaining position in which many public servants produces a situation conducive to arbitrary dissemination. The chief restraint against unfairness must be self-imposed on the ground that the government should be a model employer.

The social and ethical consideration is what gives rise to the idea of a long wage or standard minimum wage. In reality, references to minimum wage is the issue whereby the government should pay its employees a salary based upon what it costs them to maintain an appropriate standard of living.

This approach to the determination of salary has nothing to do with economic consideration but purely ethical consideration. This is based on the contention that every citizen of a civilized community should be assured the means to a reasonable sense of living according to the standard prevailing in the community. 

3.2.3 The Basis of Compensation and Reward

 Compensation and reward administration as a tool of management is designed to achieve certain objectives.

- Adequacy:

Employees work not because they wish to assist the employers to maximize profit but rather because they have needs to satisfy. It is therefore the expectation of employees that the wages and salaries, they obtain from the sale of their labor, will to a large extent “adequate satisfy their needs. If these are unsatisfied needs, this may result in negative work behavior such as low morale and absenteeism.

- Equity:

A fair day’s job must be followed by a fair days pay. And equal work must elicit equal pay. The compensation and reward system must be seen to be fair and consistently applied throughout the organization to the extent that people with the same competence and skills performing the same work must be equally remunerated. The reward system must be a reflection of an employee’s contribution to the organization.

 - Competition:

One of the philosophical bases of reward management is to attract and retain high calibre employees. The organization exist in a competitive advantage over others both the product and labor market. In such a scheme of things, firms design their reward system in such a way to attract competent employees. 

3.2.4 Aims and Objectives of Reward Management

 The reward system is of critical importance to the capability of an organization in obtaining its economic performance. Thus the aims of the reward system are to:

- Improve Individual and Organizational Performance

Here organizational performance is summation of individual performance, a reward system that is based on performance or competence is most likely to improve individual performances thus improving organizational performance.

- Encourage Value Added Performance

 This is aimed at achieving continuous improvement by focussing attention on areas where maximum added value can be obtained from improved performance.

- Support Culture Management

To this end, reward system provides a means for changing the organizations culture as expressed by its values and norms for performance, innovation and risk taking. This supported by the correlation between behavioral phenomenon and social facilitation.

- Achieve Integration

Organizational goals differ from the goals of its employees. The rider which the gap between these two sets of goals, the greater the degree of alienation, thus a good reward system strives to bridge the gap between the goals of the organization and those of its employees by ensuring that its reward system is encouraged to integrate employees into the organization. This essentially is the objective of incentives given to employees, which does not only seek to retain employees but also to integrate them into the organization.

- Support-Managers T

he reward system provides managers with the authority and skills needed to use rewards to achieve their goals. However, it is necessary that managers have a strong frame work guiding principles and procedure within which they can partake in managing rewards of their staff. 

3.2.5 The Nigerian Situation The 1974 Udoji Commission refers on salaries and wages had a major impact in the Nigerian Public service. The work of the Public service review commission popularly known as the Udoji Commission, the salary policy was developed based upon the following premises:

- Public Service Salaries: If they are to have any economic base must be generally related to salaries for comparable work in the private sector, which reflects the economy of the market.

- In view of the super-abundance of labor at the lower level of skills, the market price of labor at these levels as reflected in private sector pay is likely to be below that which the public service should be willing to pay and below that which will support a desirable standard of living of public servants.

- Similarly at the highest levels of management factors such as contributory pensions, security of tenure and psychic satisfaction contributes to salaries in the top management positions in the public sector being lower than those in the private sector. - The principle of equal pay for equal work militates against establishing regional or urban rural differentials between employees in the same grade.

- Fringe benefits such as pensions and allowances which are quantifiable should be taken into account in comparing compensation between the public and private sectors. These are the salient and most relevant premises upon which compensation is based in Nigeria. 

4.0 CONCLUSION

 This note has examined the topic Compensation and Reward. It has given its meaning and factors used in determining it. The most important factors being economic, social and ethical factors. The former is more relevant in the private sector, whilst the latter is more relevant in the public sector although neither sector can do without them both. 

5.0 SUMMARY
 Compensation is one if not the most important incentives that makes an employee offer his services to an employer. 



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