Course: MBA SEM 2
Subject: Human Resource Management
Nature of Compensation
Compensation offered by an organisation can come both directly through
base pay and variable pay and indirectly through benefits.
Objectives of Compensation Planning
The most important objective of any pay system is fairness or equity. The
term equity has three dimensions (Cascio).
1. Internal equity
2. External equity
3. Individual equity
Some of the important objectives that are sought to be achieved through
effective compensation management are listed below. (Dessler, Fisher,
1. Attract talent
2. Retain talent
3. Ensure equity
4. New and desired behaviour
5. Control costs
6. Comply with legal rules
7. Ease of operation
Components of Pay Structure in India
The pay structure of a company depends on several factors such as
labour market conditions, company's paying capacity and legal
Dearness Allowance (DA)
List of Allowances in the Organised Sector in India
• Attendance Night shift Tiffin
• Books Overtime Transport
• Car Paternity Telephone
• Card (Credit card) Pension Uniform
• City Compensatory Provident Fund
• Club Membership Relocation
• Computer Servant
• Group Insurance
• Leave Travel
Wage and Salary Administration
Employee compensation may be classified into two types:
To establish a fair and equitable remuneration offering similar pay for
To attract qualified and competent personnel.
To retain the present employees by keeping wage levels in tune with
To control labour and administrative costs in line with the ability of the
organisation to pay.
To improve motivation and morale of employees and to improve
To project a good image of the company and to comply with legal
needs relating to wages and salaries.
Principles of Wage and Salary Administration
1. Wage and salary plans should be sufficiently flexible.
2. Job evaluation must be done scientifically.
3. Wage and salary administration plans must always be
consistent with overall organisational plans and programmes.
4. Wage and salary administration plans and programmes should
be responsive to the changing local and national conditions.
Factors Influencing Compensation Levels
1. Job needs
2. Ability to pay
3. Cost of living
4. Prevailing wage rates
7. State regulation
8. Demand and supply of labour
A wage bill is an important part of the production cost. For any reason
whatsoever, if the wage bill increases beyond the paying capacity of an
employer, the very survival of the firm becomes difficult.
Wage Policy in India
State Regulation of Wages
The Government has adopted various methods to
regulate wages in India such as prescribing minimum
rates of wages, regulating payment of wages, settlement
of wage-related disputes through adjudication process,
setting up of wage boards, etc.
Institutions Involved in Fixation of Wages
Legislation Minimum Wages Act
Wage Boards Payment of Wages Act
Pay Commissions Adjudication Machinery
An important component of employees' earnings, besides salary, is
The Payment of Bonus Act, 1965, it secured the character of a legal
The dictionary meaning of 'bonus' is an extra payment to the workers
beyond the normal wage.
It is argued that bonus is a deferred wage payment which aims at
bridging the gap between the actual wage and the need based wage.
Wage differentials Reasons
Interpersonal differentials Differentials in gender, skills, age, knowledge, experience
Inter-occupational differentials Varying requirements of skill, knowledge, demand-supply situation
Inter-area differentials Cost of living, ability of employers to pay, demand and supply
Inter-firm differentials Ability of employer to pay, employees’ bargaining power, degree of
unionisation, skill needs, etc.
Reasons for Wage Differentials
Choices in Designing a Compensation System
1. Internal and external pay
2. Fixed vs. variable pay
3. Performance vs. membership
4. Job vs. individual pay
5. Below market vs. above market compensation
6. Open vs. secret pay
Organisations decide executive compensation
packages, consisting of basic pay, allowances,
perquisites, stock options, etc., based on a
number of factors. The United States
Compensation institutes' Phoenix plan uses 28
Phoenix Plan – Compensable Factors
Job related experience
Training time required
Frequency of review of work
Utilisation of independent choice
Frequency of reference to guidelines
Frequency of work transferred through supervisor
Time spent in processing information
Supervisors reporting to position level
Travel outside work location
Salary grade to which this position reports
Salary grade of positions supervised
Time spent in planning
Contact with suppliers/customers
Impact on departmental budget
Directing of others.
Training of staff/physical stress
Time spent working under deadlines
Time spent in hazardous conditions
•Human Resource and Personnel
Management- K. Aswathappa, Tata