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Compensation management


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Compensation management

  1. 1. Instructor Mr. Shyamasundar Tripathy Faculty Management (PG Dept.) 1
  2. 2. 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
  3. 3. 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
  4. 4. Objectives of Compensation Management To attract competent personnel  To retain the present employees  To improve productivity To improve efficiency  To control Costs
  5. 5. Objectives of Compensation Management To ensure fairness  To improve union-management relations  To improve the public image of the company Comply with legal regulations
  6. 6. A Compensation system should be: Adequate* Equitable* Balanced Cost-effective Secure Incentive- providing* Acceptable to the employee
  7. 7. 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
  8. 8. Labor Market Economy Government Unions
  9. 9. 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
  10. 10. Essentials of sound Compensation Management Internal Equity External Competitiveness Built in incentive Link with productivity  Individual worth  Increments
  11. 11. 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
  12. 12. Types of Compensation
  13. 13. Types of Compensation Direct compensation It refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, PF/Gratuity, etc. They are given at a regular interval at a definite time.
  14. 14. Types of Compensation Indirect compensation It refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Paid Leave, Car / transportation, Medical Aids and assistance, Insurance (for self and family), Leave travel Assistance, Retirement Benefits, Holiday Homes.
  15. 15. 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.
  16. 16. 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
  17. 17. 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.),
  18. 18. 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
  19. 19. 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 19
  20. 20. 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.” 20
  21. 21. 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. 21
  22. 22. 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. 22
  23. 23. 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
  24. 24. 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 24
  25. 25. Purposes of wage administration To recruit persons to a firm To control payroll costs To satisfy people To motivate people
  26. 26. 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
  27. 27. 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 27
  28. 28. 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 28
  29. 29. 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
  30. 30. Con.. EXTERNAL: Supply & demand in labour market Level of payment prevailing in similar jobs in other establishments
  31. 31. 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-supposes Low 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.
  32. 32. WAGE FUND THEORY Propounded 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 pay Which may touch even the subsistence level Focus of the theory: the employer and his capacity to pay.
  33. 33. SURPLUS VALUE THEORY Developed by Karl mark (1849-83) Here the labour is a commodity for trade And the wage subsistence price for commodity Employer 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.
  34. 34. RESIDUAL CLAIMANT THEORY Proposed 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’
  35. 35. MARGINAL PRODUCTIVITY THEORY Developed 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 mix Overall result better returns to the employer & lesser wages to employees
  36. 36. BARGAINING THOERY Proposed 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 level Wage structure Individual fixation Wage differentials & perks
  37. 37. BEHAVIOURAL THEORY Proposed by social scientists like Simon, Dubin, Jacques & others. Basis for the theory behavioural aspects a. 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 skill c. Motivation: need satisfier, recognition through merit rating & increment through wages increase motivation.
  38. 38. Criteria of Wage Fixation  The organizations ability to pay;  Supply and demand of labour;  The prevailing market rate;  The cost of living; Living wage; 38
  39. 39. Cont.. • Productivity; • Trade unions bargaining power; • Job requirements; • Managerial attitudes; and • Psychological and sociological factors. • Levels of skills available in the market. 39
  40. 40. (1) The organizations ability to pay: Wage increases should be given by those organizations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher those which running at a loss or earning low profits because of higher cost of production or low sales. 40
  41. 41. (2) Supply and demand of labour: The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and supply is low, the result is a rise in the price to be paid to these skills. When prolonged and acuter, these labour market pressures probably force most organizations to reclassify hard to fill jobs at a higher level” 41
  42. 42. (3) Prevailing market rate: This is known as the ‘comparable wage’ or ‘going wage rate’, and is the widely used criterion. An organization compensation policy generally tends to conform to the wage rate payable by the industry and the community.This is done for several reasons 1. Competition demand that competitors adhere to the same relative wage level. 2.Various government laws and judicial decisions 3. Trade union practice. 4.Functionally related firms in the same industry requires essentially the same quality of employees. 42
  43. 43. (4) The cost of living: The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living.” escalator clauses” are written into labour contracts. When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions. 43
  44. 44. (5) The living wage: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favor using the concepts of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need.  Also, they feel that the level of living prescribed in a workers budge is open to argument since it is based on subjective opinion. 44
  45. 45. (6) Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take pride in their work, or in the wages they get. 45
  46. 46. Sociologically and ethically, people feel that “equal work should carry equal wages”that“wages should be commensurate with their efforts,”that“they are not exploited, and that no distinction is made on the basis of caste, colour, sex or religion.” To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration. 46
  47. 47. (7) Skill Levels Available in the Market:  With the rapid growth of industries business trade, there is shortage of skilled resources.  The technological development, automation has been affecting the skill levels at faster rates.  Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level up to suit the market needs. 47
  48. 48. 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 48
  49. 49. 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 49
  50. 50. The Wage Determination Process 50 Job Analysis Wage Survey Job Evaluation Preparation of wage Structure Developing Pay ranges
  51. 51. 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 51
  52. 52. 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 52
  53. 53. 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 53
  54. 54. 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. 54
  55. 55. The Wage Determination process 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 55
  56. 56. 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. 56
  57. 57. 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 57
  58. 58. 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 58
  59. 59. 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 Act’s provisions. 59
  60. 60. 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. 60
  61. 61. 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.
  62. 62. The Wage Fixation Methods 1.Sectoral bargaining 2.Industry-cum-Region-wide agreements 3.Decentralised firm/Plant level Agreements
  63. 63. 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.
  64. 64. The Wage Fixation Methods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
  65. 65. 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.
  66. 66. 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.
  67. 67. The Wage Fixation MethodsFunctioning 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
  68. 68. 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.
  69. 69. The Wage Fixation Methods6.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
  70. 70. 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.
  71. 71. 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
  72. 72. The Wage Fixation MethodsIt 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.
  73. 73. 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.
  74. 74. 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
  75. 75. Wage Differentials2)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.
  76. 76. 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.
  77. 77. 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.
  78. 78. 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
  79. 79. Wage Stabilization Act (1942) Defense Production Act (1950) Economic Stabilization Act (1970)
  80. 80. 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
  81. 81. 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
  82. 82. Essentials of sound wage and Salary structure Internal Equity External Competitiveness Built in incentive Link with productivity  Individual worth  Increments
  83. 83. 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.
  84. 84. 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
  85. 85. 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.
  86. 86. 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
  87. 87. Human Capital Theory Individuals who invest money and time gain skills that improves their human capital and ultimately their productivity.
  88. 88. 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.
  89. 89. 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
  90. 90. 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 90
  91. 91. 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 91
  92. 92. 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 92
  93. 93. 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 . 93
  94. 94. 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 94
  95. 95. 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 95
  96. 96. 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. 96
  97. 97. 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. 97
  98. 98. 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 98
  99. 99. 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. Reward Policy 99
  100. 100. 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 100
  101. 101. 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 101
  102. 102. 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. 102