Compensation

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

 To ensure fairness
 To improve union-management relations
 To improve the public image of the
company
 Comply with legal regulations
Objectives of Wage &Salary
Administration

A Compensation
system should be:
Adequate*
Equitable*
Balanced
Cost-effective
Secure
Incentive-
providing*
Acceptable to the
employee

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
 Employee’s Age and work
Experience
 Educational Qualification
 Promotion possibilities
 Hazards involved in the job
 Stability of Employment
 Demand for the product
 Industry’s role in the economy
 Potentials of an employee

Labor Market Economy
Government Unions
External Influences on Compensation

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 compensation
 Wage : 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
 crèche
 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 brig about a more efficient allocation &
utilisation of manpower.
28

 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
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

Indian Wage Policy
The policy statements in the successive five-year
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 & inter-
state 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
37
Job Analysis
Wage Survey
Job Evaluation
Preparation of wage Structure
Developing Pay ranges

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

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

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

 Preparation of the wage structure: A
job‟s 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

 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

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

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 Act‟s
provisions.
46

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

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.

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

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.

 Government of India has so far set up 5 pay
commissions, the reports of which were
submitted in 1947,1959,1973,1984 & 1996
 The pay commissions function non-statutorily,
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
consumer‟s representative) nominated to
the board.

Functioning of the Wage Board:-
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

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.

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

 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 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.

It is the Govt. that decides to send the case
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

Government Influences: Wage Controls
and Guidelines: (1 of 2)
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

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 individual‟s 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 profit-sharing 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

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

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 employer‟s discretion and
amount to the payment being in accordance
with terms stipulated in an contract of
service.
89

Compensation

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Compensation