October 25, 2012

MU0013 [Human Resource Audit] Set1 Q4

Q.4 Explain compensation system. 

Ans: 

Employee compensation system along with the benefits programs, are one of the most complex HR systems. A reward system should help support the organization's strategic mission, motivate employees, and reward performance. 

Compensation systems should be both externally competitive and internally equitable. Auditors may want to work with a compensation expert when reviewing this area. A review of the organization's salary administration process is also important to determine how employees are paid throughout their careers, including merit increases, variable performance pay, promotions, bonuses, stock options, and deferred compensation, to name a few. 

Base salary 
During the audit, auditors should ensure that: a compensation philosophy has been developed that defines how the organization wants to pay people with respect to its position in the labor market; there are current job descriptions for each position; an effective market analysis has been conducted; a salary structure has been developed to help manage pay, and an appropriate job evaluation system is being used to slot jobs into the salary structure. 

Auditors should verify controls to ensure that the confidentiality of personnel data is maintained, additions to base pay are appropriately calculated and authorized, full compliance with tax and other deductions is made, terminating employees' payrolls are processed appropriately, and payroll costs are in line with budgeting objectives. 

Sales incentives 
Sometimes past incentive programme may be a reason for disappointment to both you and your salespeople. At the time of HR audit, sales incentive programme should be crosschecked because a payment less than the worth may lead the sales team to under perform or fail as a result. 

Corporations use incentive programs to drive behavior and it is a well known fact that what gets rewarded gets done. To ensure that the incentive programme at your organisation work, you may use 

The 80-20 principle: Twenty percent of the salespeople make eighty percent of the sales and profits. Too often, sales incentives are geared to the entire sales force. This may seem to be a fair strategy, but a strategist should remember that these 20% people are already motivated. That means that the sales incentives should be good enough to 
1.    Keep these motivated sales personnel going and 
2.    Light a fire under the next twenty percent the next logical group 

The results have shown that this doubles the business in a more cost efficient manner.

Keep it simple: Good salespeople look to simplicity to make things happen. Thus the organisation must keep the incentive program sweet, simple and attainable. There can be no ambiguity. Anything less will result in a lack of interest, as well as a waste of time and money that can sometimes spill over into other departments whose task it is to administer and account. 

Productivity incentives
HR audit should employ meaningful methodologies of productivity measurement to evaluate and monitor the performance of a business operation. Productivity measurements must show a linkage with profitability and should clearly demonstrate how efficiently (or inefficiently) a company is using its resources to produce quality goods and services. 

The auditor should analyze if a realistic means of measuring progress has been employed or not. More importantly, he should ensure that the organization has made realistic goals and performance targets that can be reached through productivity improvements. 

Executive bonus programs
In most of the companies, title and seniority mean more when it comes to bonus pay. By granting bonuses according to title and seniority, companies turn them into entitlements, not incentives. Due to this, executives, who do the field work and put in more labour do not get that much of the bonus. 

HR auditor should ensure that the organization links incentives to performance as the only fair and rationale way to reward employees. Bonus plans by design, should be geared to reward employees for short-term performance. 

In implementing a bonus program, employers must first establish how the program fits into their overall compensation philosophy as well as set criteria that need to be met for the reward. There are some that believe in paying low salaries and highly aggressive incentives, while others believe the exact opposite. Regardless, the auditor should check if the executive bonus plan fits the uniqueness of the company. 

Team based incentives 
Since in most of the big organisations, a project is assigned to a whole team together and the performance on the project depends on the collective performance of the team, the HR auditor should check if the due reward is being paid to the collective performance of the employees. 

There are primarily two ways to offer team based incentives, viz. 
1.    Team based 
2.    Gain sharing 

The auditor should also check if the employees are satisfied by the allocation method employed. The methods of team based incentive allocation are: 
• Equal incentive payments 
• Differential payments based on contribution to goals 
• Differential payment according to base pay 

Most often than not, the teams like the second one of the above methods of the incentive allocation. At the time of the audit, it should also be checked if the team is being told about the team based incentives entitled to them, and the allocation method involved or not. 

Exempt and non-exempt status determination 
This concept is more prominent in USA where the HR auditor should analyse if the finance department has correctly determined whether a salaried associate should be exempt or non-exempt? Exempt status is regulated by the Fair Labor Standards Act (FLSA).  When determining exemptions, employers must first consider the way in which the employee is paid (hourly vs. salaried), then they must review the duties and responsibilities of the job.  Although, there are a number of unique position that provide for exempt status. 

The majority of employers must use what is referred to as the “white-collar exemption tests” to determine exempt status. There are four main exemptions, executive, administrative, professional, and out-side sales, that positions can be placed in based upon the duties and responsibilities of the job. The determination is never, made based upon the job‟s title or the manner the position is paid.

Overtime computation 
According to the labour laws in India, when a worker works in an employment for more than nine hours on any day or for more than forty-eight hours in any week, he shall, in respect of such overtime work, be entitled to wages at double the ordinary rates of wages. 

The labour laws also state that the workers should be given double the normal salary when they work overtime (extra hours, either on working days or weekly offs). But many a company do not do so. They might, for example, not pay the entire double amount and instead replace it with an amount that is definitely higher than the basic, but still less than the double. This will definitely create employee unrest over time and the productivity is bound to suffer. At the time of HR audit, the auditor must make sure that no such practice is being undertaken and the employees are getting their dues properly.

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