This document provides an overview of compensation and its key dimensions. It discusses how compensation refers to all forms of pay employees receive in exchange for their contributions. It then outlines the eight main dimensions that make up a total compensation package, including pay for work/performance, time not worked, income continuation if losing one's job, disability, deferred income, spouse/family continuation, health/accident protection, and income equivalent payments. The document also discusses objectives of compensation management and how pay structures are determined.

1. WELCOME TO THEWELCOME TO THE
SESSIONSESSION
ONON
COMPENSATIONCOMPENSATION

3. COMPENSATIONCOMPENSATION
Employee compensation refers to all forms of pay orEmployee compensation refers to all forms of pay or
rewards going to employees and arising from theirrewards going to employees and arising from their
employment i.e. compensation is what employeesemployment i.e. compensation is what employees
receive in exchange for their contribution to thereceive in exchange for their contribution to the
organization.organization.
Employees exchange their physical and mentalEmployees exchange their physical and mental
efforts for compensation, but compensation meansefforts for compensation, but compensation means
more than wage and salaries. It may includemore than wage and salaries. It may include
incentives that motivate employees and relate laborincentives that motivate employees and relate labor
costs to productivity.costs to productivity.

4. Compensation DimensionCompensation Dimension
The total compensation package may be described inThe total compensation package may be described in
many ways, but the classification scheme is based onmany ways, but the classification scheme is based on
eight dimensions.eight dimensions.
 Pay for work and performance.Pay for work and performance.
 Pay for time not worked.Pay for time not worked.
 Loss-of job income continuation.Loss-of job income continuation.
 Disability income continuation.Disability income continuation.
 Deferred income.Deferred income.
 Spouse (family) income continuation .Spouse (family) income continuation .
 Health, accident, and liability protection.Health, accident, and liability protection.
 Income equivalent payments.Income equivalent payments.

5. Pay for work and performancePay for work and performance
Pay for work and performance includesPay for work and performance includes
money that is provided in the shortmoney that is provided in the short
term and that permits employees to payterm and that permits employees to pay
for contract for the payments providedfor contract for the payments provided
to employees normally depends onto employees normally depends on
specified job requirements.specified job requirements.

6. Pay for time not workedPay for time not worked

Over the years, there has been decrease inOver the years, there has been decrease in
hours worked per weeks and number ofhours worked per weeks and number of
days worked per year.days worked per year.

During the past 40 years, workers haveDuring the past 40 years, workers have
enjoyed more days off with pay forenjoyed more days off with pay for
holidays, longer paid vacations, and paidholidays, longer paid vacations, and paid
time off for a wide variety of personaltime off for a wide variety of personal
reasons.reasons.

7. Loss-of job income continuationLoss-of job income continuation

Job security is and always has been theJob security is and always has been the
primary consideration for most workers.primary consideration for most workers.

They want assurance that their jobs andThey want assurance that their jobs and
the income derived from working willthe income derived from working will
continue until they are ready to retire.continue until they are ready to retire.

Workers also know that few jobs areWorkers also know that few jobs are
guaranteed to continue to retirement.guaranteed to continue to retirement.

8. Disability income continuationDisability income continuation

The possibility always exists that a worker mayThe possibility always exists that a worker may
incur health or accident disability.incur health or accident disability.

Because of these disabilities, employees areBecause of these disabilities, employees are
frequently unable to perform their normalfrequently unable to perform their normal
assignments.assignments.

Social security, workers, compensation, sickSocial security, workers, compensation, sick
leave, and short- and- long- term disability plansleave, and short- and- long- term disability plans
are examples of components that provide fundsare examples of components that provide funds
for employees who are unable to work for health-for employees who are unable to work for health-
related reasons.related reasons.

9. Deferred ( Delayed) incomeDeferred ( Delayed) income

First of all most employees do not have sufficientFirst of all most employees do not have sufficient
savings at retirement for to continue the lifestylessavings at retirement for to continue the lifestyles
they enjoyed while working.they enjoyed while working.


Various kinds of programs, such as employer-Various kinds of programs, such as employer-
provided pension plans, annuities, andprovided pension plans, annuities, and
supplemental income plans provide income aftersupplemental income plans provide income after
retirement.retirement.

These types of income help to lead their life in aThese types of income help to lead their life in a
continuous way.continuous way.

10. Health, accident, and liabilityHealth, accident, and liability
protectionprotection

When a health problem occurs, employeesWhen a health problem occurs, employees
must be concerned not only with incomemust be concerned not only with income
continuation, but also with payments forcontinuation, but also with payments for
goods and services required ingoods and services required in
overcoming the illness or disability.overcoming the illness or disability.

Organizations provide a wide variety ofOrganizations provide a wide variety of
insurance plans to assist in paying forinsurance plans to assist in paying for
these goods and services.these goods and services.

11. Income equivalent paymentsIncome equivalent payments
 A final set of compensation componentsA final set of compensation components
may be grouped under the title of incomemay be grouped under the title of income
equivalent payments.equivalent payments.
 Many of these components are frequentlyMany of these components are frequently
called perquisites or “perks” andcalled perquisites or “perks” and
employees usually find them highlyemployees usually find them highly
desirable, and both employers anddesirable, and both employers and
employees find certain tax benefits in thememployees find certain tax benefits in them

12. Spouse (family) incomeSpouse (family) income
continuationcontinuation

Most employees with family obligationsMost employees with family obligations
are concerned with what may happen ifare concerned with what may happen if
they are no longer able to provide money.they are no longer able to provide money.

Certain plans are designed to provideCertain plans are designed to provide
dependents with income when andependents with income when an
employees dies or is unable to workemployees dies or is unable to work
because of total and permanent disability.because of total and permanent disability.

13. Objectives Of CompensationObjectives Of Compensation
ManagementManagement
1) Acquire qualified personnel:1) Acquire qualified personnel:
Compensation needs to be high enough toCompensation needs to be high enough to
attract applicants. Pay levels must respondattract applicants. Pay levels must respond
to the supply and demand of workers in theto the supply and demand of workers in the
labor market since employers compete forlabor market since employers compete for
workers. Premium wages are sometimesworkers. Premium wages are sometimes
needed to attract applicants already workingneeded to attract applicants already working
for others.for others.

14. Objectives Of CompensationObjectives Of Compensation
ManagementManagement
2) Retain current employees:2) Retain current employees:
Employees may quit when compensationEmployees may quit when compensation
levels are not competitive, resulting inlevels are not competitive, resulting in
higher turnoverhigher turnover
3) Ensure equity:3) Ensure equity:
Compensation management strives forCompensation management strives for
internal and external equity. Internal equityinternal and external equity. Internal equity
requires that pay be related to the relativerequires that pay be related to the relative
worth of a job so that similar jobs getworth of a job so that similar jobs get
similar pay. External equity means payingsimilar pay. External equity means paying
workers what comparable workers areworkers what comparable workers are
paid by other firms in the labor market.paid by other firms in the labor market.

15. 4) Reward desired behavior:4) Reward desired behavior:
Pay should reinforce desired behaviors andPay should reinforce desired behaviors and
act as an incentive for those behaviors toact as an incentive for those behaviors to
occur in the future. Effective compensationoccur in the future. Effective compensation
plans reward performance, loyalty,plans reward performance, loyalty,
experience, responsibility, and otherexperience, responsibility, and other
behaviors.behaviors.
5) Control costs:5) Control costs:
A rational compensation system helps theA rational compensation system helps the
organization obtain and retain workers at aorganization obtain and retain workers at a
reasonable cost. Without effectivereasonable cost. Without effective
compensation management, workers couldcompensation management, workers could
be overpaid or underpaid.be overpaid or underpaid.
Objectives Of
Compensation Management

16. 6) Comply with legal regulations:6) Comply with legal regulations:
A sound wage and salary system considers the legalA sound wage and salary system considers the legal
challenges imposed by the government and ensureschallenges imposed by the government and ensures
the employer's compliance.the employer's compliance.
7) Facilitate understanding:7) Facilitate understanding:
The compensation management system should beThe compensation management system should be
easily understood by human resource specialists,easily understood by human resource specialists,
operating managers, and employeesoperating managers, and employees..
8) Further administrative efficiency:8) Further administrative efficiency:
Wage and salary programs should be designed to beWage and salary programs should be designed to be
managed efficiently, making optimal use of the HRIS,managed efficiently, making optimal use of the HRIS,
although this objective should be a secondaryalthough this objective should be a secondary
consideration compared with other objectives.consideration compared with other objectives.
Objectives Of
Compensation Management

17. Determination of Pay Structure and levelDetermination of Pay Structure and level
The process of establishing pay rates while ensuringThe process of establishing pay rates while ensuring
external and internal equity takes five stages:external and internal equity takes five stages:
Stage1:Stage1: Conduct a salary survey of what other employersConduct a salary survey of what other employers
are paying for comparable jobs.are paying for comparable jobs.
Stage 2:Stage 2: Determine the worth of each job through jobDetermine the worth of each job through job
evaluation.evaluation.
Stage 3:Stage 3: Group similar jobs into pay grades.Group similar jobs into pay grades.
Stage4:Stage4: Price each pay grade by using wage curvesPrice each pay grade by using wage curves..
Stage 5:Stage 5: Fine-tune pay rates.Fine-tune pay rates.

18. Establishing Pay RatesEstablishing Pay Rates
Stage 1: Conduct the Salary SurveyStage 1: Conduct the Salary Survey::
Salary survey means a survey aimed atSalary survey means a survey aimed at
determining prevailing wage rates. A gooddetermining prevailing wage rates. A good
salary survey provides specific wage rates forsalary survey provides specific wage rates for
specific jobs. Formal written questionnairespecific jobs. Formal written questionnaire
surveys are the most comprehensive, butsurveys are the most comprehensive, but
telephone surveys and newspaper ads are alsotelephone surveys and newspaper ads are also
source of information.source of information.

19. Stage 2: Determine the worth of each job:Stage 2: Determine the worth of each job:
job evaluationjob evaluation
Job evaluation is aimed at determining a job’s relativeJob evaluation is aimed at determining a job’s relative
worth.worth.
It is a formal and systematic comparison of jobs toIt is a formal and systematic comparison of jobs to
determine the worth of one job relative to anotherdetermine the worth of one job relative to another
eventually results in a wage or salary hierarchy.eventually results in a wage or salary hierarchy.
The basic procedure is to compare the content of jobsThe basic procedure is to compare the content of jobs
in relation to one another in terms of their effort,in relation to one another in terms of their effort,
responsibility, and skills.responsibility, and skills.

20. StageStage 3: Group similar jobs into pay3: Group similar jobs into pay
grades:grades:
Once a job evaluation method has been used toOnce a job evaluation method has been used to
determine the relative worth of each job, thedetermine the relative worth of each job, the
committee can turn to the task of assigning paycommittee can turn to the task of assigning pay
rates to each job, but it will usually want to firstrates to each job, but it will usually want to first
group jobs into pay grades.group jobs into pay grades.

21. If the committee used the ranking, point, or factorIf the committee used the ranking, point, or factor
comparison method, - it could assign pay ratescomparison method, - it could assign pay rates
to each individual job.to each individual job.
But for a larger employer such a pay plan wouldBut for a larger employer such a pay plan would
be difficult to administer, since there might bebe difficult to administer, since there might be
different pay rates for hundreds or evendifferent pay rates for hundreds or even
thousands of jobs.thousands of jobs.

22. StageStage 4: Price Each Pay Grade – Wage Curve4: Price Each Pay Grade – Wage Curve
Assigning pay rates to each pay grade (or to each job) is usuallyAssigning pay rates to each pay grade (or to each job) is usually
accomplished with a wage curve.accomplished with a wage curve.
The wage curve depicts graphically the pay rates currentlyThe wage curve depicts graphically the pay rates currently
being paid for jobs in each pay grade, relative to the points orbeing paid for jobs in each pay grade, relative to the points or
rankings assigned to each job or grade by the job evaluation.rankings assigned to each job or grade by the job evaluation.
Note that pay rates are shown on the vertical axis, and the payNote that pay rates are shown on the vertical axis, and the pay
grades (in terms of points) are shown along the horizontal axis.grades (in terms of points) are shown along the horizontal axis.
The purpose of the wage curve is to show the relationshipThe purpose of the wage curve is to show the relationship
between ( I ) the value of the job as determined by one of the jobbetween ( I ) the value of the job as determined by one of the job
evaluation methods and (2) the current average pay rates forevaluation methods and (2) the current average pay rates for
individual grades.individual grades.

23. Stage 5: Fine- Tune Pay Rates:Stage 5: Fine- Tune Pay Rates:
Fine-tuning involves correcting out-of-line rates and (usually)Fine-tuning involves correcting out-of-line rates and (usually)
developing rate ranges. Here rate ranges is a series of levelsdeveloping rate ranges. Here rate ranges is a series of levels
within a pay grade, usually based upon years of service.within a pay grade, usually based upon years of service.
There are several benefits to using rate ranges for each payThere are several benefits to using rate ranges for each pay
grade.grade.
1)The employer can take a more flexible position with respect1)The employer can take a more flexible position with respect
to the labor market.to the labor market.
2)Rate ranges allow individuals to provide for performance2)Rate ranges allow individuals to provide for performance
differences between employees within the same grade ordifferences between employees within the same grade or
between those with different seniorities.between those with different seniorities.

24. Theories of WagesTheories of Wages
A sound wage policy addresses itself to questionsA sound wage policy addresses itself to questions
such as adequacy of wages, fairness andsuch as adequacy of wages, fairness and
equity, hard working conditions and efforts,equity, hard working conditions and efforts,
compensation against inflation, and additionalcompensation against inflation, and additional
commitment of employeescommitment of employees

25. The main theories of wages are:The main theories of wages are:
 Subsistence (Survival) theory.Subsistence (Survival) theory.
 Wage fund theory.Wage fund theory.
 Surplus ( value theory.Surplus ( value theory.
 Residual ( Outstanding) claimant ( applicant)Residual ( Outstanding) claimant ( applicant)
theory.theory.
 Marginal productivity theory.Marginal productivity theory.
 Bargaining theory.Bargaining theory.
 Behavioral theory.Behavioral theory.

26. 1. Subsistence theory1. Subsistence theory
 David Ricardo develops it.David Ricardo develops it.
 It says that workers are paid to enable then to subsistIt says that workers are paid to enable then to subsist
(exist) and perpetuate ( achieve) the race without(exist) and perpetuate ( achieve) the race without
increase or diminution ( decrease).increase or diminution ( decrease).
 Low wage lead to decrease of labor due to death andLow wage lead to decrease of labor due to death and
malnutrition, while higher wages increase their numbermalnutrition, while higher wages increase their number
due to better health, long life and more marriage.due to better health, long life and more marriage.

27. 2. Wage fund theory2. Wage fund theory
 Adam smith developed it.Adam smith developed it.
 Wage level is a function of surplus fund available withWage level is a function of surplus fund available with
the employer.the employer.
 Higher the fund, higher the wage. Focus is on employerHigher the fund, higher the wage. Focus is on employer
and his capacity to pay.and his capacity to pay.
3. Surplus value theory3. Surplus value theory
 Karl Marx developedKarl Marx developed itit
 Here labor is viewed as a commodity for trade. LaborHere labor is viewed as a commodity for trade. Labor
adds value to the product. The employer did not payadds value to the product. The employer did not pay
the full amount so collected from the customer andthe full amount so collected from the customer and
instead only a part is paid to them as wage, retaininginstead only a part is paid to them as wage, retaining
the remaining by the employer.the remaining by the employer.

28. 44. Residual claimant theory. Residual claimant theory
 According to this theory four factors add value to theAccording to this theory four factors add value to the
product, which is manufactured. These are land, labor,product, which is manufactured. These are land, labor,
capital and entrepreneurship.capital and entrepreneurship.
 The revenue earned by selling product was firstThe revenue earned by selling product was first
distributed among the three factors as compensationdistributed among the three factors as compensation
against their contribution. Whatever remained was paidagainst their contribution. Whatever remained was paid
to labor as wage against their value addition. Thusto labor as wage against their value addition. Thus
labour is considered as a residual claimant.labour is considered as a residual claimant.

29. 5.Marginal productivity theory5.Marginal productivity theory
 Here demand and supply of labor in the laborHere demand and supply of labor in the labor
market determine wages. Accordingly workersmarket determine wages. Accordingly workers
are paid what they are economically worth asare paid what they are economically worth as
assessed by the employer.assessed by the employer.
 Marginal concept says that employer continuesMarginal concept says that employer continues
to employ labor as long as value addition by theto employ labor as long as value addition by the
marginal worker is more than his cost.marginal worker is more than his cost.

30. 6. Bargaining theory6. Bargaining theory
 Here wages level is determined by bargaining power ofHere wages level is determined by bargaining power of
employers and their association Vs employees andemployers and their association Vs employees and
their trade unions.their trade unions.
7. Behavioral theory7. Behavioral theory
 Norms, traditions, customs, good will and socialNorms, traditions, customs, good will and social
pressure influence wage structure.pressure influence wage structure.
 Wages are best motivators of workers. Wage mustWages are best motivators of workers. Wage must
satisfy a number of needs as identified by Maslow andsatisfy a number of needs as identified by Maslow and
others like physiological, security, food and shelter, etcothers like physiological, security, food and shelter, etc