Compensation

Management

Compensation
Reward refers to a wide range of financial and

non financial rewards to the employees for the

services rendered to the organisation .
a) Transactional rewards
b) Relational rewards
All forms of financial returns and tangible
services & benefits employees receive as part
of an employment relationship

Compensation
It is a system of rewards
that motivates employees to perform
An organisational tool to foster the
values,culture & the behaviour they require
An instrument that enables organisations to
achieve their objectives

Objectives of Wage &Salary

Administration
To attract competent personnel
To retain the present employees
To improve productivity
To improve efficiency
To control Costs

Objectives of Wage &Salary

Administration

To ensure fairness
To improve union-management relations
To improve the public image of the
company
Comply with legal regulations

Adequate*

A
Compensation
system should
be:
Acceptable to
the employee

Equitable*

Incentiveproviding*
Cost-effective

Secure
Balanced

General and Individual

Factors affecting Wages
General Factors
Demand for and Supply

of labour
Ability to pay of the
Organization
Labour Unions
Cost of Living
Prevailing wage rates
Job Requirements
Productivity
State Regulation

Individual Factors
Employees Age and

work Experience
Educational Qualification
Promotion possibilities
Hazards involved in the
job
Stability of Employment
Demand for the product
Industrys role in the
economy
Potentials of an
employee

Labor Market

Economy

Government

Unions

Compensation and an International

Labor Force
Issues that affect the compensation

strategies of organizations competing in a

global market:
Global wage differentials verging on the

extreme
Moving employees to foreign locations
Employing local (foreign) managers and workers
Moving foreign workers for training or work

assignments

Essentials of sound wage

and Salary structure
Internal Equity
External Competitiveness
Built in incentive
Link with productivity
Individual worth
Increments

Compensation Definition
Compensation means all remuneration

capable of being expressed in terms of

money, which, if the terms of contract of
employment, express or implied, were
fulfilled, be payable to a person employed
in respect of his employment

11

Wage and Salary

Base
Wage : compensation
Remuneration paid by the employer for
the services of hourly ,weekly & fortnightly
workers doing manual or physical work.
Usually given to unskilled workers
It may also be defined as the compensation
paid to blue collar employees.
Salary:It refers to the remuneration paid to the
office
employees,foremen,managers,professional and
technical staff on a monthly basis.

Supplementary
compensation
Compensation over and above the base
compensation to retain the employees on a
long term basis . The basic purpose
behind this is to attract and retain the
employees and motivate them
Also known as
Employee benefits
Non wage payments

Examples
Fringe benefits
Payment for time not worked
Housing
Insurance
Career counseling
crche
Paid memberships in professional organizations

Perquisites or perks
take home vehicles /chauffeur driven vehicles
Paid vacations
Club membership
Entertainment allowance
Paternity leave
free refreshments
leisure activities on work time (golf, etc.),

Base compensation Vs
Supplementary compensation
Payment to the workers for

their work
Payment is in cash
Wage & salaries are paid to
compensate for their
services
Determined by job
evaluation,demand &
Supply of labour
,organizations capacity to
pay ,bargaining power of
trade unions
,productivity ,govt
regulations .

It denotes benefits over

&above their wages /salary

They are paid to increase
their efficiency & retain
them
Determined by the history
of the organisation,capacity
of the organisation to
pay ,need to retain the
talented employees ,desire
to enhance the public
image ,philosophy of the
management

Wage Concepts
The minimum wage Concept states that

one must provide not only for the bare

sustenance of life but for the preservation of
the efficiency of the worker.
For this purpose, Minimum wage should also
provide for some measure of education,
medical requirements and amenities

16

Wage Concepts
Living Wage is defined as one which

should enable the earner to provide for

himself and his family not only the bare
essentials of food, clothing and shelter but a
measure of frugal comfort, including
education for his children, protection against
ill-health, requirements of essential social
needs and a measure of insurance against
the
more important misfortunes, including old
age.
17

Living Wage Concept

The Living wage is fixed considering the

general economic conditions of the country.

In more advanced countries,Living wage itself
forms the basis for Minimum Wage.

18

Wage concept
Fair wage concept is a wage that is

someway above the minimum wage but

below the Living wage.
The lower limit for fair wage is the
Minimum wage & the upper limit is set by
the ability of the industry to.

19

Fair Wage Concept

A wage is fair if it is equal to the rate

prevailing in the same trade & in the

neighbourhood for similar work
In a wider sense, a wage is fair if it is equal to
the predominant rate for similar work
throughout the country & for trades in general

Fair wage concept

While fixing Fair wage, the following are to be
taken into consideration:
The productivity of labour
The prevailing rates of wages in the same or
neighbouring localities
The level of the national income and its
distribution
The place of industry in the economy of the
country.
Capacity of the industry to pay

21

Purposes of wage
administration
To recruit persons to a firm
To control payroll costs
To satisfy people
To motivate people

Purposes of wage
administration
The goals of compensation administration are

to design a cost-effective pay structure that

will attract, motivate and retain competent
employees

Types of Wages
Nominal Wages : Wages expressed in

terms of money are called nominal wages

It is an evaluation of the wage without
considering its current purchasing value
Nominal wages are written down in
contracts between the employee and the
organization

24

Types of Wages
Real Wages - The amount of goods and

services that the money will buy.

The term real wages refers to wages that
have been adjusted for inflation

25

Wage Policy
According to ILO, the term Wage Policy refers

to the legislation or Government action

undertaken to regulate the structure of wages,
for the purpose of achieving specific
objectives of social & economic policy.

26

Wage Policy
The objectives of the wage policy in

developing countries as per ILO are :1.To abolish malpractices & abuses in wage
payment
2.To set minimum wages for people having weak
bargaining power as they are unorganised or
inefficiently organised, followed by separate
measures to promote the growth of trade
unions & collective bargaining.

27

Wage Policy
3. To see that the workers get a just share of
the fruits of economic development.
4. To bring about a more efficient allocation &
utilization of manpower.

28

Wage Policy
A tool of economic policy used to promote:

Internal Price stability

Worker efficiency
Effective distrbution of worker force
International competitiveness of the economy
Investment
Influx of foreign capital

Indian Wage Policy

The objectives of Wage Policy are:-

To provide minimum wages to workers

To fix wage ceilings
To improve the existing wage structure
To improve the economic & social position of
the working class

Indian Wage Policy

The policy statements in the successive fiveyear plans provide useful insight into the
Indian Wage Policy.
a) The 1st five year plan recommended that:Wages in public sector not less favourable
than in private enterprises
Permanent wage boards with tripartite
composition to be set up
b) The 2nd five-year plan (1956 1961)stressed
improvement in wages through increased
productivity, improved layout of plants &
improvement in management practices.
31

Indian Wage Policy

c) The fifth plan(1974 1979)
recommended that the reward structure
of industrial employees in terms of wage
& non-wage benefits must be related to
performance records in industrial
enterprises.
d) The sixth plan(1980 1985) stressed
the need to bring about a greater
rationalisation in the wage structure &
to link wages to Labour productivity
32

Indian Wage Policy

d) The eighth plan(1992-1997) laid focus on
formulation of a wage policy relating to child
labour,rural labour ,women kabour & interstate migrant labour.
e) The eleventh plan (2007 2012) aims at
generation of productive and gainful
employment, with decent working
conditions

33

Wage policy in India

The enactment of
Payment of wages Act 1936
The Industrial Disputes act 1947
The minimum Wages Act 1948
The Equal Remuneration Act 1976
Constituted Wage Boards that are tripartite
in nature
Pay Commissions at the central and state
level

Wage Determination
Wage and salary determination process in an

organisation is a multi dimensional task, the

steps of which have to be cleverly worked out
in order to get a package satisfying both the
employee and the employer

35

Wage Determination
The ultimate goals of wage determination
process is to establish & maintain an
equitable wage structure that enhances the
employee commitment to the organisation

36

The Wage Determination

Process
Job Analysis
Job Evaluation
Wage Survey
Preparation of wage Structure
Developing Pay ranges

37

The Wage Determination

process
1.Job Analysis This involves precisely
identifying the required tasks, the
knowledge & skills for performing them &
the conditions under which they are
performed.
Job Analysis basically defines the duties,
responsibilities & accountabilities of a job

38

The Wage Determination

process

Job Analysis basically defines the duties,

responsibilities & accountabilities of a job
It finalises the methods & equipments used
& the skills required for the successful
completion of the job

39

The Wage Determination

process

Job Evaluation:- This is the formal

process used to assign wage & salary
rates to jobs.
This is a systematic technique used to
determine the worth of a job. Once the
worth is finalised, it becomes much
easier to fix a wage structure that is fair
and remunerative

40

The Wage Determination

process
Conduct a Wage Survey: To build a
competitive wage structure, a knowledge of
the prevailing rates for similar jobs in the
same industry in that area is a must.
Recognising pay trends in the market, hiring &
retaining competent ,motivated employees &
thus to survive & grow.

41

The Wage Determination

process
Preparation of the wage structure: A

jobs relative worth is determined by its

ranking through job evaluation and by
what the labour market pays for a similar
job
To get the right pay level,the internal
rankings & the survey wage rates are
combined through the use of a graph and
the wage-trend line is plotted

42

The Wage Determination

process
Designing pay ranges :The pay range
reflects the approximate differences in
performance or experience the employer
wishes to pay for a given level of work.
A range maximum sets the lead on what is
the most the employer is willing to pay for
that work & the minimum sets the floor.

43

The Wage Fixation

Methods
There are different methods for fixing the
wages of employees.
1.Legal Framework: The different
legislations that govern the payment of
wages are :
a)Payment of Wages Act,1936:The
purpose of the act is to ensure regular &
prompt payment of wages & to prevent
exploitation of the earner by prohibiting
unauthorised fines & deductions
44

The Wage Fixation

Methods
b)The Minimum wages Act,1948:This

act
requires the concerned authority to fix
minimum rates of wages payable to
employees
c)The payment of bonus act,1965:This act is to
for payment of Bonus to persons employed in
certain establishments

45

The Wage Fixation

Methods
d) The equal remuneration act,1976:The main objective is to provide equal
remuneration to men & women engaged in
same or similar work. It stipulates stringent
punishments for contraventions of the Acts
provisions.

46

The Wage Fixation

Methods
2)Unilateral Pay Fixation: Majority of
the wages in the unorganised sector is
unilaterally determined by the
management.
Workers in most cases get less than the
minimum wages & benefits stipulated
under law,but also have to face
discrimination in befits between one set
ofworkers from another.

47

The Wage Fixation

Methods
3) Collective Bargaining: It is a technique
by which an attempt is made to reconcile
the needs and objectives of workers and
employers and is therefore an integral part
of an industrial society
Collective Bargaining is a process whereby
standards are created to govern labour
relations including wages & working
conditions.

The Wage Fixation

Methods
1.Sectoral bargaining
2.Industry-cum-Region-wide agreements
3.Decentralised firm/Plant level
Agreements

The Wage Fixation

Methods
4) Pay Commissions:-The pay structure of the
central government employees are based on
the recommendations of the pay commissions
set up by the central government.
Certain state governments also follow the
recommendations of the pay commissions &
few other states have set up their own pay
commissions.

The Wage Fixation

Government of India has so far set up 5 pay
Methods
commissions, the reports of which were
submitted in 1947,1959,1973,1984 & 1996
The pay commissions function nonstatutorily, study the problems ,have their
own procedures for data collection & makes
recommendations to the government.
The ultimate responsibility as to whether to
accept, modify or reject the
recommendations lie with the central
government

4)Wage Boards:-The primary function is to

determine the wages payable to the
employees .
The first wage board was set up by the
government in 1957 in the cotton textile
industry.
The wage boards are set up to provide better
climate for industrial relations, to represent
consumers/public interests, to standardise the
wage structure throughout the industry
concerned & to align the wage settlements with
the social & economic policies of the
government.

The Wage Fixation

Methods
Constitution of wage Boards:-These are
tripartite in nature, consists of a
chairperson ,an equal number of
representatives of employers &
employees(2 members each) and two
independent members(an economist & a
consumers representative) nominated to
the board.

The Wage Fixation

Functioning of the Wage Board:Methods
a) Designs questionnaires to collect information
on the prevailing wage rates & other related
issues
b) Analysing the results & making an assessment
of the views of the parties
c) Recommendations are aubmitted to the
governmnet which can be modified if necessary.
d) The wage structure recommended is in
operation for 5 years

The Wage Fixation

Methods
5.Job Evaluation: This is an orderly and
systematic technique which aims at
determinig the relative worth of jobs. Once
the worth of jobs are determined, It
becomes easier to fix the wage structure
that is fair and equitable
It can also be stated as a formal system of
determining the base compensation of
jobs.

The Wage Fixation

Methods
6.Arbitration & Adjudication:-

When collective bargaining and conciliation attempts

fail to resolve a dispute between the labour and
management, the cases are decided through
voluntary arbitration or compulsory adjudication
Voluntary arbitration implies that the two contending
parties, unable to compose their differences by
themselves or with the help of the mediator or
conciliator, agree to submit the conflict/dispute
between them to be resolved by an impartial
authority, whose decision they are ready to accept
.

The Wage Fixation

Methods
In others words, under voluntary arbitration,
the parties to the dispute can and do
themselves refer voluntarily any dispute to
arbitration before it is referred for
adjudication. This type of reference is known
as a voluntary reference, for the parities
volunteer themselves to come to a settlement
through an arbitration machinery.

The Wage Fixation

Methods
The essential element in voluntary arbitration is:
-the voluntary submission of dispute to an
arbitrator;
- the subsequent attendance of witness and
investigations;
-The enforcement f an award may not be
necessary and binding because there is no
compulsion.
But generally, the acceptance of an arbitration
implies the acceptance of its award-be it
favorable or unfavorable; and
-voluntary arbitration may be specially needed
for disputes arising under agreements.

The Wage Fixation

It is the Govt. that decides to send the case
Methods
for adjudication, it is referred to either

Labour Court or Industrial Tribunal. Decision

of Industrial Tribunal/ Labour Court can be
challenged only in High Court.
The employee or employer can not directly
go to the Industrial Tribunal/ Labour Court
except in some cases where direct
monetary loss can be proved.

Wage Differentials
Wage differentials refer to differences in the

average levels of pay for group of workers

that can be classified according to the
industry or location in which they work or
according to the occupational or social group
to which they belong.
Wage differentials perform important
economic functions like labour productivity,
maximising productivity, attracting employees
from different jobs & labour productivity.

Wage Differentials
1)Occupational Differentials: This wage
differential arises due to varying levels of
occupational proficiencies.
The jobs vary according to the skills required
and the degree of responsibility attached to it,
This induce the person to undertake more
demanding & more challenging jobs,
encourage workers to develop their skills &
motivate employees for T & D program

Wage
Differentials
2)Inter-firm Differentials:This reflects the
relative wage levels of workers in the same
area & occupation.
The factors can be differences in the quality of
labour employed by different firms,
differences in the efficiency of equipment,
supervision,firm size, financial capabilities etc.

Wage Differentials
3) Inter-area or Regional Differentials:-This
arises when workers in different geographical
area, but in the same industry or occupation
are paid different wages.
This is the result of the prevailing working
conditions in different parts of the country,
disparities in the cost of living and availability
of manpower.
Sometimes regional disparities are used to
encourage planned mobility of labour.

Wage Differentials
4)Inter-industry Differentials:- When
workers in the same occupation and same
areas but in different industries are paid
different wages.
This is the result of varying skill requirements,
level of unionisation,nature of the product
market,ability to pay ,labour-capital ratio and
the stage of development of the industry.

Wage Differentials
5)Interpersonal Differentials:- This
differential arises between workers in the
same occupation and plant but with different
age & other personal characteristics
Wage diifferential based on sex is another
important wage differential.
The principle of Equal pay for Equal work is
only preached , not practiced

Wage Stabilization
Act (1942)
Defense Production
Act (1950)
Economic
Stabilization Act
(1970)

Government Influences: Wage

Controls
and
Guidelines: (2 of 2)
Wage freezes forbid wage increases
Wage controls limit the size of wage

increases
Wage guidelines voluntary limits on wage

increases

Government Influences: Wage and

Hour Regulations
Fair Labor Standards Act (FLSA) of 1938
minimum wage
overtime
exempt workers
nonexempt workers

child labor
recordkeeping requirements
Equal Pay Act of 1963

Essentials of sound wage

and Salary structure
Internal Equity
External Competitiveness
Built in incentive
Link with productivity
Individual worth
Increments

Theory of Equalizing Differences

This theory states that wage differentials occur
as the result of intrinsic properties of specific
occupations that require wage compensation
for negative job traits or are compensated for
with non-pecuniary positive traits.

Human Capital Theory

It seeks to explain wage differentials as a

consequence of differing human capital stocks

that determine an individuals marginal
productivity.
Human Capital Theory explains wage
differentials as a byproduct of productivity
differentials

Human capital
Human Capital is the stock of knowledge,

skills, aptitudes, education, and training that

an individual or a group of individuals possess
It is all those skills that are acquired through

education, but also talents, I.Q. ,practical

experience, etc.

Types of Human Capital

1. General human capital
transferable to every other job and thus
improves overall productivity and thus wage
2. firm-specific human capital
not transferable to any other firm and therefore
does not improve productivity and thus wages
anywhere else

Human Capital Theory

Individuals who invest money and time gain

skills that improves their human capital and

ultimately their productivity.

Internal Labor Markets

ILM focuses on the long-term relationships

of employers and employees and the gains

to be made by both parties by continuing
to operate with one another
ILM theory argues that firms benefit from
maintaining good relationships with their
employees and visa versa
Reduction of costs
Employees benefit from improved
employment stability and the chance for
increased wages and promotions.

Devaluation Theory
Wage differentials as a result of biases

towards those employed and earning wages.

Devaluation Theory suggests that the wage

difference stems from the bias of the wage

payer, the firm. Bias from those gauging
productivity could result in women earning
less

Reward Policies
Reward Policies provide guidelines for

implementation of the reward strategies and

aids in designing and managing the reward
processes
It indicates how the management should
behave in various issues related to Reward
management

77

Reward Policy
Reward policy addresses a wide range of

issues
1.Levels of Rewards: This indicates the
paying capacity of a company. The pay
policy depends on a number of factors
Policies on the level of rewards also cover
employee benefits like sick pay, holidays,
health care & other perks

78

Reward Policy
2.Market rate and Equity:-A policy should
be formulated on the extent to which
rewards are market driven rather than
equitable.
It is possible to use market supplements to the
rate of the job as determined by job
evaluation which reflect market rates

79

Reward Policy
3.Attraction and Retention -Golden
hellos and golden hand cuffs to attract
and retain high quality people ie having a
total reward policy.
To attract prospective employees, factors
for specific occupations should be
analysed .

80

Reward Policy
Retention policies should take into account

the major retention issues the company is

facing and sets out ways by which the issues
can be dealt with

81

Reward Policy
4.Relating rewards to business
performance:-The rewards can vary
according to results. This policy includes
guidelines on how gain sharing and profitsharing schemes should operate in the
company

82

Reward Policy
5.Total reward Policy:-assesses the
importance of the non-financial rewards and
how they should complement the financial
awards.
6.Contingent Reward:- this policy states
whether the company is willing to pay for
contribution, skill, performance ,competence
etc and if so, to what extent and under what
circumstances.

83

Reward Policy
7.Assimilation policies:-When new pay
policies are introduced, measures to be
taken to assimilate existing employees
into it. This policy should state, where
should they be placed and what needs to
be done if their present rate is above or
below the new scale.

84

Reward Policy
8.Flexibility:- The extent to which the
organisation wants to introduce benefits in
response to the fast changing business
conditions.
9.The role of Line managers:- The policy will
cover the level of decisions, the line manager
can make and the guidance that should be
given to them

85

Reward Policy
10.Transpaency:-Employees will be satisfied
only if they know what is the criteria for
rewards and how they are used to determine
their pay and their methods of pay
progression.

86

Reward Policy
11.Involve employees:- Reward policies are
more likely to be understood and will be
more effective if employees are also given a
voice in the design and management of the
policy.This is very much applicable to job
evaluation and relating pay to the
performance

87

Reward Policy
12.Communicating to employees:Reward processes in an organisation is a
powerful media to convey messages
relating to the organisational goals to the
employees. This will convey to the
employees how their total remuneration
package is made up

88

Wage - Definition
Money paid to the workers is considered as

wages
The wage is the payment made to the
workers for placing their skill and energy at
the disposal of the employer.
The method of use of that skill and energy
being at the employers discretion and
amount to the payment being in
accordance with terms stipulated in an
contract of service.

89