One of the key responsibilities of any organization is to ensure economic prosperity for its shareholders and other stakeholders through efficient and effective production or service delivery.
To achieve these fundamental objectives different resources are required and these resources will include capital, land, technology, and most importantly human beings. The successful combination, deployment, and management of these resources will inevitably generate economic gains and prosperity for the organization.
For every resource deployed for the business of the organization, there is an expected reward, for examples, ventures capital will be rewarded with interest and capital growth, land and technology could take the form of improvement and value appreciation over time while the human resource is rewarded with compensation, reward, and other benefits. Rewarding people for their contribution to the growth and fulfillment of the organization has been viewed over time as a major impetus why people work.
Without taking a side on the appropriateness or inappropriateness of the term reward or compensation, it should be noted that this article will take reward and compensation as meaning the same. I will also restrict myself to compensation management for human resource as against other resources.
WHY PAY ATTENTION TO COMPENSATION MANAGEMENT
As it was with my previous blog write ups, this article is a response to a blog reader who sought to know the role of HR in payroll management vis-a -vis conflict with other departments in his organization over this role. He wanted to understand the ideal processes in salary determination so as to avoid some legal related problems and conflict of interest with the finance or account department.
To address all these issues I have decided to expand the article coverage beyond his initial questions and properly considered the below objectives as the primary aim of this article.
• To help reader clarify the role and responsibility of HR in compensation management as distinct from the role of finance or account department
• Established the fundamental and governing principles on which compensation and reward management lays
• Ensure that readers understand the law governing salaries determination, processes, procedures particularly within the ambit of the Nigerian Labour Act, Wages and Salaries Act, Minimum Wage Law and Living wage regulation.
• Espouses on the 21st-century practice of compensation management by looking at different countries and how things are done as a basis for improving our internal reward system
• Critically consider the aim of compensation management and how it could be extended to your organization for maximum benefits
• Help readers avoid the error of an over bloated payroll and organizational collapse resulting from the inability to meet up with overhead cost.
• And, lastly, pick on the issues of payroll fraud and what can be done to effectively curtailed such fraud
COMPENSATION MANAGEMENT DEFINED
The relationship between the organization and its employee should be value-based, whereby the employee gives his productive time, skill and labour for the services of the organization and in turn he or she gets rewarded for this through wages, salaries and other fringe benefits. By implication, it then means that employment is a derived demand; where people are employed for the value that they can create. The question, however, is how engaged is the employee in his day to day activities? How do you determine the rate of value created by the employee? How do you determine an appropriate and fair reward or compensation for an individuals effort?
Answering these questions should, therefore, take us much deeper into the definition of compensation or reward management.
According to Michael Armstrong, who prefers the terms reward management, he defines reward management as €¦ formulation and implementation of strategies and policies in order to reward people fairly, equitably and consistently in accordance with their value to the organization.
Implicitly, however, compensation is the sum total of monetary and non-monetary reward received by an employee in exchange for the labour and services rendered to the organization. Compensation primarily is made up of three components namely direct financial pay in the form of wages and salaries, bonuses and commissions received on a regular basis and indirect financial reward such as leave allowance, paid vacation, health insurance, pension, life insurance premium etc and non-financial compensation which will include intrinsic values created by the employment relationship such as career advancement, experience gained, work environment and others.
KEY CONSIDERATIONS AND AIM OF A TOTAL COMPENSATION SYSTEM
This was put more succulently by Brianna Whiting who said: The goal of compensation management is to find quality people who perform quality work and then compensate them in order to retain them and reduce turnover rates.
It suffices to say, therefore, that the key considerations or aims of a total reward system are:
• To find and retain quality talents, that is, employees that will help the organization achieved its corporate objectives
• To develop a culture of performance that motivates and help bring out the best in the employees
• Ensure pay equity, fairness, and justice in the pay system and create a sense of adequate compensation based on individual contribution and effort to the organization
• To reduce turnover rate and prevent disruption to the organizations business
• Ensure compliance with the extant law and government policies and regulations on salary and wages i.e., minimum wage, collective agreement, and contract of employment.
• Align work processes, reward system to corporate objectives and goals
• Punish non-compliance with what the organization considered as non-helpful and acceptable work behavior thereby reinforcing positive behavior in the workforce
COMPENSATION STRATEGY AND GUIDELINES FOR 21ST CENTURY ORGANIZATION
Experience in compensation management has taught me over the years of the need to have a well thought out strategy that is built on specific corporate philosophies and direction which the organization has charted in realizing its long term objectives and aspirations. Compensation policies are not ad-hoc as it is being handled by some organizations but a truly strategic decision that adequate attention must be paid to.
The 21st-century organizations use compensation as a decisional tool that answers the questions about where are we going to? How do we get to our desired destination? And, how do we know when we get there?
Compensation strategy today pays attention the broader issue of alignment of employees aspiration within the context of corporate vision and look at the issue of corporate citizenship and engagement.
The 21st-century organization is faced with the question of pay equity and how people should be rewarded for their contribution to what the organization considered valuable as against erstwhile contingency pay scheme and so called year-of service-pay scheme as seen in the Nigerian civil service.
It is important to note that payroll in most organization constitutes about 65% plus of total budget and cost hence the need to be strategic in its planning.
It is recommended by experts that organization should have a guiding philosophy and strategic ideology on compensation so as to be able to navigate the organization to success using available resources. It should be noted, however, that compensation or reward management system is evolving and HR practitioners should be mindful of the need to adapt the companys compensatory system to evolving trend and the requirements of the 21st-century workforce.
DEFINING THE ROLE OF HUMAN RESOURCE MANAGEMENT IN COMPENSATION MANAGEMENT
First, let us start by defining Human Resource Management then look at the strategic role of HR department in an organization. It is important to state clearly that HRM functions has moved beyond the traditional role set and has become a strategic function in organizations. In the words of Susan M. Heathfield (October 2, 2016), Gone are the days when HR staff received direction from the executive team as to their priorities and needs, HR is now expected to sit at the executive table and recommend processes, approaches, and business solutions that improve the ability of the organizations people to effectively contributes.
STRATEGIC HUMAN RESOURCE MANAGEMENT DEFINED
Therefore, Human Resource Management is the formal, strategic and comprehensive management of an organization workforce through which tactical initiatives are created to promote the attainment of the organizations vision, workplace culture and create a balance that serves all stakeholders such as owners, executive members, employees, shareholders and customers alike.
WHOSE ROLE IS IT TO MANAGE COMPENSATION IN AN ORGANIZATION?
Compensation determination and payroll administration is a multilayer responsibility that requires the involvement of HR, Finance department, line managers, the staff and direct supervisors. The conflict over jurisdiction should ideally not arise if these roles are well structured and properly highlighted.
THE ROLE OF COMPANYS PROMOTER / BOARD IN COMPENSATION MANAGEMENT
Organizations are driven by motives or corporate objectives and it is expected that those who float or promotes a business should have an idea of how these objectives could be realized. Expectedly people will be brought onboard at the level of the board to drive these objectives. The appointment of the board of director is the function of the shareholders likewise it is their responsibility to determine the director fee.
The board would in turn through its committee on recruitment and remuneration hire top level executives such as the CEO, Managing Director and any other position of interest into functional offices.
Except in some rare occasion that Group Head of HR is hired by the Board the head of HR in most cases are left to the executive level officers to be recruited and their compensation determined appropriately.
Once the top executive level members are appointed and their remunerations determined, it automatically becomes the responsibility of the CEO and its executive team to search for a competent Human Resource professional to work out HR policies that will regulates the HR management functions such as recruitment, selection and placement, pay and benefits, performance appraisal and evaluation, training and development, companys social responsibility, Labour relations and employees exit planning.
SPECIFIC ROLE OF HR IN THE MANAGEMENT COMPENSATION
1. Determinations of Compensation policies and practices that will help the organization achieve its objectives.
It is instructive to mention here that compensation should be design in such a way that enables its implementation motivates and helps the organization achieves its objectives in the long run. It is the concerned of Human Resource to provide answers to the following questions:
1. Within the HR policy framework can our compensation plans attract top quality talents required to drive the production or operations?
2. Relative to other companies in our industry is our compensation package competitive enough?
3. To what extent will this plan motive employee to deliver their very best and be fully engaged?
4. In view of production or sales performance, how sustainable is our plan?
2. Human Resource Planning, Job Analysis ( Job Description and Person Specification) and organizations staffing requirement
This is the most important requirement in salary and wages determination and erroneously the often neglected by most practitioners. Determining the organizations manpower requirement, the nature and form of the task to be performed and the specific skills required to be effectively and efficiently deliver on these task falls within the realm of Human Resource Planning and Job Analysis.
The import of human resource planning is further highlighted in the definition given by Reilly, P., who defines (Workforce Planning) As a process in which an organization attempts to estimates the demand for labour and evaluate the size, nature, and sources of supply which will be required to meet the demand
Benefits of Human Resource Planning
• It allows for perfect prediction of manpower requirement thereby preventing overstaffing and quickly detect shortfalls
• It enables the manager to determine in advance the quality of personnel to be employed and their sources of supply
• It helps organization keep down the cost of recruitment
• It supports training and development needs in the organization
JOB ANALYSIS AND ITS EFFECT ON COMPENSATION MANAGEMENT
One important requirement of good compensation policy is pay equity where the job of equal values is placed on an equal pedestal without discrimination. Individual employees would naturally place value on their work and this should be made clear by HR through a systematic process called job analysis. Arnold, Cooper, and Robertson (1995) construe Job Analysis as the process of extracting systematic information about jobs, including the nature of the work performed, equipment used, the working conditions and the position of the job within the organization.
In his definition, Michael Armstrong (2009), defines, Job Analysis as the process of collecting, analyzing and setting out information about the content of jobs in order to provide the basis for a job description and data for recruitment, training, job evaluation and performance management
Without a proper analysis of the job, compensation cannot be said to fair and just. It is one of the fundamental roles of HR to set out a proper analysis of the job and ensure that a workable job description and person specification are generated within the organization.
3. Determination of salary structure that will help attract, retain and motivate the employee
Compensation should be properly structured in a way that it has the capacity to attract suitable employees and as well motivated them to give their best. When the job positions are well graded and allow for mobility along the levels in the organization then it will serve as an engagement tool.
For instance, companys organogram specifies either position or duties points and by the same tokens who report to whom in terms of job functions. We have also noted that this structure in most cases determines pay level and seniority scales in an organization.
Pay structure should result from organizations structure, appropriate HR Planning, and Job analysis; it must be thorough and ensures that it maintains some level of orders and corporate harmony.
4. Determination of salary levels for different categories of works in the organization
Skills, knowledge, experience and the worth of individuals contribution to the realization of business goals should form the basis for salary differentials and not who are you or your connection in the organization. In actual fact, longevity or how long you have spent in the organization is no longer a key consideration in todays businesses. The question should be asked, what value is he or she adding, if this cannot be quantified in terms of productivity then there are no reasons for retaining such an individual.
5. Ensure compliance with extant laws and relevant government regulations on compensation
Laws governing labour matters are within the precinct of the government and her agencies, therefore, it is required that HR should be well acquainted with all relevant laws and regulations so as not to run afoul of the laws in place. The major flank of such law is the Nigerian Labour Acts, Wages and Salary Acts, Workmen Compensation Acts and the minimum wage Acts.
Also, it is important to state here that Collective Agreement and Collective Bargaining Agreement stands strong and should be understood by HR Practitioner particularly in the industry that they operated in. We should come to term that one major consideration in signing such agreement is the companys ABILITY TO PAY so no agreement is entered into with extensively deliberation with key stakeholders and management consent.
It is erroneous and a misnomer for HR to commit their organization to any agreement without first obtaining consensus from management and being able to present both short, medium and long term implications of such agreement to the organization.
6. Pay advice and payment monitoring
An effective compensation policy must be dynamic and flexible enough to adapt to policies measures such as government regulations on minimum wage, cost of living dictates, trends in the industry and other labour related bargaining.
Therefore, it is the responsibility of HR to ensure that appropriate advice is given to management and guide such policy compliance in the best interest of the organization. For example, HR should be a member of relevant bodies and form appropriate alliances with agencies that regulate salaries and wages.
Preparation of monthly pay advice is a key responsibility of HR, issues such as when and how salary should be paid are regulated by law, matters that bother on salary deduction on disciplinary issues could attract law suits and should be handled by HR. Leave allowance, maternity pay, payment for overtime work formed part of compensation and are mostly regulated by law.
HR has played important role in ensuring that salaries are not over blotted and manipulated by fraudulent personnel, checks are put in place and sometimes managed in the best interest of the organization. Today, software is available for effective management of payroll, so HR must be well familiar with the use of modern technology to manage payroll.
7. Converting compensation to a motivational tool that brings out the best in the employee
Over the years researchers and organizational development experts have advanced postulations to justify the linkage between employee job performance, reward received and the evaluation of reward for satisfaction or dissatisfaction. Motivational theorists such as Victor Vrooms Valence-Instrumentality-Expectancy theory (1964), Lawlers Productivity-Reward-Satisfaction Model (1968) and Adams Equity Theory are sufficient reasons to know that if well-managed compensation can be a veritable motivational tool to enhanced productivity and staffs performance.
A trained HR practitioner should be well suited to utilize compensation as an instrument for motivation that ultimately leads to productivity. Having said this, it is important to make the clarification that compensation should not be a tool for manipulation but motivation.
NIGERIAN LABOUR ACTS, LAWS, REGULATIONS AND COMPENSATION MANAGEMENT
Part 1, of the Labour Act, Chapter 198, Laws of the Federation of Nigeria, 1990, makes general provisions as to the protection of wages, contracts of employment and terms and conditions of employment.
It is my advice to HR practitioners to get a copy of this act and study it extensively. However, I will be x-raying some specific sections of the Act that speak specifically to the focus of this article.
Part 1, Section 1 subsection a and b: Manner of payment
This section specifies the currency of payment to workers in Nigeria, i.e, its states that:
The wages of a worker shall in all contracts be made payable in legal tender and not otherwise, and
If in any contract the whole or any part of the wages of a worker is made payable in any other manner the contract shall be illegal, null and void
Section 2: Agreement as to the place and manner of spending wages is illegal
No employer shall prescribe or dictates how a worker should spend or where he or she should expend his or her salary or wages.
Section 3: Wages not to be paid on certain premises
Wages shall not be paid to a worker in premises used for the sale of intoxicating liquor or for the retail sale of goods, except in the case of a worker employed on the premises.
Section 4: Advances
(1) No employer may make to a worker an advance of wages in excess of one month’s wages.
(2) Where an advance in respect of wages has been paid to a worker the minimum period for the recovery of the advance by the employer shall be three months.
(3) No advance in respect of wages shall be paid to a worker who is liable to repay any part of such an advance paid to him previously, except in cases of necessity as so approved by the employer.
(4) No employer shall make any deduction by way of discount, interest or any similar charge on account of any advance of wages paid to a worker in anticipation of the regular period of payment of the wages.
(5) The State Authority may by order declare that this section shall not apply to any particular kind of advance paid to any particular class of worker or to all workers.
(1) Except where it is expressly permitted by this Act or any other law, no employer shall make any deduction or make any agreement or contract with a worker for any deduction from the wages to be paid by the employer to the worker, or for any payment to the employer by the worker, for or in respect of any fines:
(2) Provided that, with the prior consent in writing of an authorized labour officer, a reasonable deduction may be made in respect of injury or loss caused to the employer by the willful misconduct or neglect of the worker.
(3) An employer may with the consent of a worker make deductions from the wages of the worker and pay to the appropriate person any contributions to provident or pension funds or other schemes agreed to by the worker and approved by the State Authority.
(4) Upon the registration and recognition of any of the trade union specified in Part A of Schedule 3 to the Trade Unions Act, the employer shall-
(a) make deductions from the wages of all workers eligible to be members of the union for the purpose of paying contributions to the trade union so recognized; and
(b) pay any sum so deducted to the union, but a worker may contract out of the system, in writing, and where he has done so, no deductions shall be made from his wages in respect of contributions mentioned in paragraph (a) of this section.
(5) No deductions shall be made from the wages and salaries of persons who are eligible members of any of the trade unions specified in Part B of the Schedule 3 to the Trade Unions Act except the person concerned has accepted, in writing, to make voluntary contributions to the trade union.
(6) Deductions may be made from the wages of a worker in respect of overpayment of wages, but only in respect of any such overpayment made during the three months immediately preceding the month in which the overpayment was discovered.
(7) An employer shall, when making a payment to a trade union under paragraph (b) of subsection (3) of this section, include with such payment a list of the employees from whom deductions were made pursuant to paragraph (c) of the said subsection.
(8) Notwithstanding any other provision of this Act, the total amount of deductions that may be made from the wages of a worker in any one month shall not exceed one-third of the wages of the worker for that month.
Section 6: Authority of employer to open shop
(1) The Minister may, after consultation with the State Authority, give approval to an employer to establish a shop for the sale of provisions to his workers, but no worker shall be compelled by any contract or agreement, written or oral, to purchase provisions at any shop so established.
(2) No employer shall in any place of employment establish a shop for the sale of provisions to his workers (or permit such a shop to be established or kept) otherwise than in accordance with subsection (1) of this section.
This write-up has dealt extensively with the role and responsibility of Human Resource management units, departments, and practitioners in compensation, wages and salaries administration with the aim of helping them appreciate and to understand their specific duties and avoid controversy with other units in their organization.
An attempt was made in looking at the law governing salaries and wages determination and how to construe it to meet the 21st-century organization and its challenges. Without a doubt, human resource is the most important driver of corporate objective hence, the focus on how to use compensation as a motivational tool.
It is believed by this writer that if done well, the problem of disequilibrium between performance and reward will be totally eliminated and just and equitable pay system will be instituted in the organization to the extent of driving corporate prosperity and support performance improvement.
Lastly, this article does not intend to create an impression of having covered all grounds on compensation, salaries and wages administration but should be a vehicle that drives further discourse and help HR practitioner mastered the art and science of human resource management.
Thank you for being a part of this.
Kayode Ibukunoluwa-Micah (Master in Managerial Psychology, B.sc Political Science)
Certified International Professional Trainer (CIPT), Certified Human Resource Management Professional (CHRMP), Certified International Supply Chain Manager (CISCM), Certified International Professional Negotiator (CIPN), Member Association for Talent Developer, AM- Institute of Director
Armstrong. M, (11th Edition, 2009): Armstrongs Handbook of Human Resource Management Practice. Koga Page, London, and Philadelphia
Labour Acts: www.nigeria-Law.org/ : Labour Act.htm
O.B. Fagbohungbe (2006): Personnel or Human Resource Management: The Repository for Human Resource Utilization. Redemption RH Horizon
Reilly .P, (2003): Guide to Workforce Planning in Local Authority Employers Organization for Local Government. London.
The National Minimum Wage Act, 2011
The Employees Compensation Act, 2010
Thompson . M, (1992): Pay and Performance: The Employer Experience. Institute of Manpower Studies, Brighton
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