Compensation management Compensation is what employees receive in exchange for their contribution to the organisation.Total compensation = Direct + Indirect CompensationBase Pay Incentives Benefits
NATURE & SCOPE It is the policy of the Institute to pay fair, equitable and competitive wages and salaries in order to attract, retain and motivate competent employees. An effort is made to recognize the relative values of the various jobs, to adapt realistic wage and salary ranges and to make comparative studies of area rates and changing job conditions to assure that the wage structure is current.
Con… The primary objective of wage and salary administration program is that each employee should be equitably compensated for the services rendered by him to the enterprise on the basis of,the nature of job.
The present worth of the job. The effectiveness with which the individual performs the job.
COMPENSATION Cash payments It also includes promotion or words of praise Difficult to explain every aspect of compensation
Sound compensation packageincludes Social balance Supply & demand Fair comparison Equal pay for equal work Work measurement Adequacy of wages
Objectives of wage policy Control of cost Establishment of fair & equitable structure of remuneration. Using wages & salaries as an incentive to greater employee productivity To maintain a good public image To attracted talented personnel
Wage legislationPAYMENT OF WAGES ACT,1936OBJECTIVES:To ensure that wages are paid properly.To avoid all malpractices. Non-payment Short payment Irregular payment Short measurement of piece work Payment in kind
con..To cover all employees earning 1,600 P.MTo provide a wage period of one monthLess than 1000 employees before 7th & more than 1000 employees after 10thTo stipulate the dues of the discharged employee & forbids salary deductions unless so authorised by the employee.
Con.. The employer can levy a fine only after the due notice is given to the employee. To protect the workers from being exploited & to ensure timely and exact cash payment
Minimum wages act,1948 Seeks to avoid exploitation of workers by underpaying them for their efforts Minimum wages sets the floor for pay levels to skilled occupationals It is a central legislation It provides the computation of the cost of living allowances.
Con.. The cash value concession for essential commodities supplied. It also lays down penalties for violation of the Act Proposed amendment to the minimum wages Act,1948 In order to inflation-linked hikes Two years once The element of the VDA is proposed to be introduced based upon the CPI
COMPENSATION ISSUES WAGE & SALARY LEVELS WAGE & SALARY STRUCTURES INDIVIDUAL WAGE DETERMINATION METHOD OF WAGE PAYMENT COMPANY PHILOSOPHY
WAGE & SALARY LEVELS Mainly depends upon 4 factors:-1.Wage enactment of the central & state Govt. sometimes modified by tribunals & courts,compliance with which is a statutory requirement.2.Wage rate in the community and in similar industries.
Con..3.The influence of the workers union on the wage rates.4.Corporate philosophy on wagesStage 1 Self contained model where external influence is marginalStage 2 Depicting the interplay of external & internal influence
Factors of Internal wage level Cost of living allowances (COLA ) Productivity ( increased output of an employee with lower cost )-shift in productivity leads to affect on wages. Prevailing wage rates Ability to pay Attraction & retention of the employees
WAGE & SALARY STRUCTURES The jobs are placed in a grade or a rate these jobs are arranged in an hierarchical order with those earning higher wages on top. The process by which this hierarchy is reached is known as JE. JE is a systematic method of appraising the value of each job in relation to other jobs in the organisation
Con.. The stepsinvolved in Determining wage rates are: 1.Performing job analysis 2.Wage surveys. 3.Analysis of relevant organizational problems forming wage structure
Con.. 4.Framing rules of wage administration. 5 .Explaining these to employees, assigning grades to each job and paying the guaranteed wages.
Wage Surveys: Once the relative worth of jobs has been determined by job evaluation, the actual amounts to be paid must be determined. This is done by making wage or salary surveys in the area concerned.
Con.. While determining pay ranges the following Consideration should be Attended to It is important to keep in mind that there is an adequate differential, between superiors and subordinates – whether they are paid under the same pay plan or under different ones. When the pay-range of one group is changed, equal attention must be given to the pay-range of the other.
Con.. Because of the continuous rise in wage and salary levels, a rise resulting from a variety of environmental pressures, considerable attention must be given to handling upward changes in wage-structure. The existing pay structure should be regularly reviewed and revised. This will make job evaluation programme more acceptable to employees. Regional differences in wages should invariably be maintained.
Con.. Unions do make a difference in wages. Union workers earn between 8.9% and 12.4% more than non-union workers. The size of the gap varies from year to year. During periods of higher unemployment and slow economies, the impact of unions is larger.
Con.. During strong economies the union-nonunion gap is smaller. Unions in the public sector make a difference in wages of 7% to 12% more than their nonunion counterparts.
Wage differentials Different kinds of jobs is determined differently either in the same or in a different industry. The factors contribute to these differences are :-Highly skilledSkilledSemi-skilledunskilled
Con… Experience Qualification Level of employment ( grade ) Two important factors considered while deciding the wages are: The demand & supply of a particular category of skills The performance of the industry or unit(productivity & profitability )
Con.. Arbitration or judicial rulings can sometimes also effect wage differentials. Ex.western region of india has higher wage rates. Inter-industrial differentials. Gender differentials
Methods of wage payment PAYMENT BY TIME : Time keeping. Time recording SKILL EVALUATION PAY PLANS : No. of jobs handled by an individual PAYMENT BY RESULTS: Directly relating to employee productivity
Piece rate/wage rate method Rate of wage of a worker per unit is called wage rate. This does not include any allowance or bonuses or overtime payment. MINIMUM WAGES : this is the wage fixed by the Govt. which it considers adequate, taking into A/C the cost of living ,all firms and organisations are bounded to follow this direction so that no employee is paid a wage less than the minimum wage fixed by the Govt.irrespective of grade,class or nature of work
Debt method Combination of piece & time rates The worker is guaranteed an hourly or day rate with an alternative piece rate. If piece rate > time rate, worker gets credit for the balance If Piece rate< Time rate, time rate payment is considered & excess payment is carried forwarded as DEBT to be paid by the employee in future
Fair wage This is fixed by employer. This level of wage vary from industry to industry. The main criteria is the capacity of payment As per definition fair wage committee“ fair wage is a wage above the minimum wage but below the living wage “
Living wage It should enable the earner to provide for himself & his family not only the essentials of food,clothing & shelter,but a measure of comfort including education for his children, protection against ill health, requirement of essential social needs and a measure of insurance against more misfortune including oldage.
Nominal wage It is the wage received which is expressed in terms of money received. REAL WAGE : This is the wage or earning which is expressed in terms of goods and services which can be purchased from the money received as wages. nominal wages RW= --------------------- CPI
THEORIES OF WAGES Theory of wages is a branch of study which analyses the supply & demand conditions of labour.Two dimensions of wage theory:INTERNAL: Capacity to pay Work content & context Wage sufficient to meet basic needs of food, shelter, security, social commitment & like
Con..EXTERNAL: Supply & demand in labour market Level of payment prevailing in similar jobs in other establishments
SUBSISTENCE THEORY Proposed by David Ricardo (1772-1823) “the labourers are paid to enable them to subsist & perpetuate the race without increase or diminution” The theory Pre-supposesLow wages decrease of labour force due to death, malnutrition,family problems etc.High wages increase their number due to better health, long life, procreations. This theory is despised by many and known as “iron law of wages” payment is limited to subsistence level.
WAGE FUND THEORYPropounded by Adam Smith (1723-90)Wage level is a function of surplus fund available with the employer.Higher the fund more is the level of pay.Lower the fund lower is the level of payWhich may touch even the subsistence levelFocus of the theory: the employer and his capacity to pay.
SURPLUS VALUE THEORYDeveloped by Karl mark (1849-83)Here the labour is a commodity for tradeAnd the wage subsistence price for commodityEmployer account– “cost of labour” put up for producing an item as part of price fixed for it.Basis labour adds value to the product.Only a part what is collected from the customer is paid to the labour.
RESIDUAL CLAIMANT THEORYProposed by Francis. A. Walker (1840-97)According to this theory, 4 factors add value to the product, viz., Land the revenue earned by selling Capital product is distributed among Entrepreneurship these 3 Labour remaining is paid to labour as against his value addition to the product.Hence, labour is considered the‘residual claimanant’
MARGINAL PRODUCTIVITY THEORYDeveloped by Philips henry Wicksteed (UK) and John Bates Clark (USA)Wages are determined by the “Supply and Demand of labour” in the labour market.Basis of wage payment by employer: Assessment of their economical worth Value addition by the marginal labour is more than the cost -continue discontinue hiring & resort to technology or product mixOverall result better returns to the employer & lesser wages to employees
BARGAINING THOERYProposed by John Davidson. Wage levels are determined by the bargaining power of employees & their unions V/s employers & their associations. Relative strengths of these forces determine all aspects of wages, viz.,Wage levelWage structureIndividual fixationWage differentials & perks
BEHAVIOURAL THEORYProposed by social scientists like Simon, Dubin, Jacques & others.Basis for the theory behavioural aspectsa. Wage level: based on the influence/ power exercised by forces on the mgt. Viz, size, prestige, power of union, contribution by employees.b. Wage structure: influenced by factors such as norms, tradition, customs, good will, social pressure & specialist skillc. Motivation: need satisfier, recognition through merit rating & increment through wages increase motivation.
HIERARCHY OF NEEDS Profounded by maslow,s1.Physiological needs2.Safety needs3.Social4.Esteem5.Self actualisation
Con.. Maslow separated 5 needs into 2 levels Higher order – 1 &2 Lower order –3,4 &5 The higher order needs are satisfied internally Lower order needs are satisfied externally( wages,union contacts,working condition,tenure etc.)
Con.. All most all permanently employed workers have their lower order needs substantially met. But as the time changed ,a renewed emphasis was revealed. As people become unemployed & their unemployment benefits ceased,their attention turned towrds survival- lower order needs.
HERZBERG’s MOTIVATION THEORY (two factor theory ) Opposite of satisfaction is not dissatisfaction. Removing dissatisfying characteristics from a job does not necessarily make the job satisfying or vice versa. Salary is considered as a hygiene factors. When they are satisfactorily maintained, people will not be dissatisfied.
MOTIVATING FACTOR (intrinsic factor ) The presence of which motivate a person but absence Do not demotivate. Ex.Nature of job, challenges, responsibility,authority recognition, achievement and job satisfaction
Hygene factor (Extrinsic factors ) Presence of which will not motivate a person but absence definitely demotivate him. Ex. Salary ,status ,company policy & administration,supervision,relationship with the supervisor etc. Adequate Inadequate Motivation Motivation No motivation Hygene factor No dissatisfaction Dissatisfaction
Equity theory (Adam’s) Eq & fairness practiced by management. Greater the fairness practiced,higher motivation and viceversa. Employee makes comparison of input in the job with that of outcome and compare the same with that of another colleague of eqivalent cadre. Outcome --------------- ratio is used input
Tension state Ratio is equal fairness is perceived Ratio is unequal – eq.tension (negative tension)Ex.O/IA Lessthan O/IB =under rewarded (eq.tension) O/IA = O/IB = equity O/IA morethan O/IB =over rewarded (eq.tension)
Referents There are 4 comparisons an employee can make these are called “referents”.1.self-inside;an employees experience in a different position inside the present organisation.2.self-outside;an employees experience in a different position outside the present organisation.3.other-inside;other employees in the present organisation.4.Other -outside;other employees experience outside the present organisation.
postulates Individuals are not only concerned with their own rewards but equally concerned with others get in comparison.
EXPECTANCY THEORY (VICTORVROOM’S) THIS THEORY MAINLY DEPENDS ON 3 FACTORS.1.Perception that his efforts will lead to good performance. ( expectancy )2.Perception that good performance will lead to good rewards.( instrumentality )3.Perception that the rewards are worth getting. (valence ) motivation =E X I X V
PORTER & LAWLER’S MODEL OFMOTIVATION Porte & Lawler’s modified & built upon Vroom’s expectancy & Adam’s equity theories of motivation. They consider the relationship between effort --performance-rewardThe model state the following principles:1. Employee’s must value the rewards (intrinsic or extrinsic ) offered by the organisation.2. Employee’s must believe that good performance will be linked to the achievement of the desired rewards.thus employees should perceive that higher performance will result in greater rewards.
Con..3. Managers must clearly communicate their expectations & objectives,thereby ensuring employees understand which behaviours are required.4.To increase expectation that desired performance will be rewarded,managers must make sure rewards are clearly & visibly linked to performance.5.Employees must be able to engage in good performance .they must have the ability to carry out the tasks & must believe the quality of their work and hence their rewards is directly related to and reflects the effort they put into the job.
Con… If these conditions are not there then employees will not believe that working hard ,will lead to a reward or an increase in rewards & therefore the link between desired behaviour & desired reward will be taken.
Pay-secrecy It is an administrative strategy that may increase the manageability of the system in which less information has to be communicated & fewer challenges to fairness may have to be heard. The compensation system is formulated and administered is critical to the organisation.