The pdf deals with the concepts of compensation management and related aspects. Its suitable for management PG/UG Students

1. COMPENSATION MANAGEMENT
Dr Shikha Rana

4. Concept Of Compensation
Compensation refers to a wide range of financial and non financial rewards to
employees for their services rendered to the organization. It is paid in the form
of wages, salaries and employee benefits such as paid vacations, insurance
maternity leave, free travel facility, retirement benefits etc., Monetary
payments are a direct form of compensating the employees and have a great
impact in motivating employees.
Compensation includes three aspects such as Pay, Incentives & Benefits.
Pay Refers to the basic pay and salaries employees normally receive (BASE
PAY).
Incentives includes bonuses, commissions and profit sharing plans (Variable
pay)
Benefits include insurance, medical, recreational, retirement etc (Benefits)

5. The system of compensation should be so designed
that it achieves the following objectives:
To establish a fair equitable remuneration
The capable employees are attracted towards the
organization
The employees are motivated for better
performance
 The employees do not leave the employer
frequently

7. 3P Compensation Model
1) Pay for Person
2) Pay for Position
3) Pay for Performance

8. Modern Trends in compensation
• Broad Banding
• Comparative Pricing
• Cafetaria Approach
• Skill-Based Approach
• Variable pay plans

9. Components Of Compensation
Basic Wages/Salaries
Basic wages / salaries refer to the cash component of the
wage structure based on which other elements of
compensation may be structured. It is normally a fixed
amount which is subject to changes based on annual
increments or subject to periodical pay hikes. Wages
represent hourly rates of pay, and salary refers to the
monthly rate of pay, irrespective of the number of hours
put in by the employee. Wages and salaries are subject to
the annual increments. They differ from employee to
employee, and depend upon the nature of job, seniority,
and merit.

10. Dearness Allowance
The payment of dearness allowance facilitates
employees and workers to face the price increase
or inflation of prices of goods and services
consumed by him. The onslaught of price increase
has a major bearing on the living conditions of the
labour. The payment of dearness allowance, which
may be a fixed percentage on the basic wage,
enables the employees to face the increasing
prices.

11. Incentives
Incentives are paid in addition to wages and salaries and
are also called ‘payments by results’. Incentives depend
upon productivity, sales, profit, or cost reduction efforts.
There are: (a) Individual incentive schemes, and (b) Group
incentive programmes. Individual incentives are
applicable to specific employee performance. Where a
given task demands group efforts for completion,
incentives are paid to the group as a whole. The amount
is later divided among group members on an equitable
basis.

12. Perquisites/Perks/Fringe Benefits:
These are allowed to executive and include
company car, club membership,Gym
Membership paid holidays, furnished house,
stock option scheme and the like. Perquisites are
offered to retain competent executives.

13. Bonus
The bonus can be paid in different ways. It can
be fixed percentage on the basic wage paid
annually or in proportion to the profitability. The
Government also prescribes a minimum
statutory bonus for all employees and workers.

14. Commissions
Commission to managers and employees may
be based on the sales revenue or profits of the
company. It is always a fixed percentage on the
target achieved. For taxation purposes,
commission is again a taxable component of
compensation.

15. Non-Monetary Benefits
These benefits give psychological satisfaction to
employees even when financial benefit is not
available. Such benefits are:
(a) Recognition of merit through certificate, etc.
(b) Offering challenging job responsibilities,
(c) Promoting growth prospects,
(d) Comfortable working conditions,
(e) Competent supervision, and
(f) Job sharing and flexi-time.

16. Mode of Determining Compensation
Job Evaluation
The core purpose of Job Evaluation is to determine
the relative worth of a particular job of an
organization.
Following Methods are used to evaluate the Job:
Non-Quantitative Methods
1) Ranking
2) Grading
Quantitative Methods
1) Point Rating
2) Factor Comparison

17. RANKING METHOD
Under this system, all the jobs are arranged or
ranked in the order of importance from the
simplest to the hardest, or in the reverse order
each successive job being higher or lower than
the previous one in the sequence

18. GRADING METHOD
Under the classification method, the number of
grades is first decided upon, and the factors
corresponding to these grades are then
determined. Facts about jobs are collected and
are matched with the grades which have been
established.

19. • Point-Rating Method: Under this method,
each job’s key factor is identified and then the
subfactors are determined. These sub-factors
are then assigned the points by its
importance.For example, the key factor to
perform a job is skills, and then it can be
further classified into sub-factors such as
training required, communication skills, social
skills, persuasion skills, etc.

20. • Factor-Comparison Method: Under this
method, the job is evaluated on the basis of
key jobs, and the ranks are given on the basis
of a series of factors Viz. Mental effort,
physical effort, skills required supervisory
responsibilities, working conditions, and other
relevant factors. Thus, each job is compared
against each other on this basis and is ranked
accordingly

21. Methods of wage payment
The methods of wage payment are as follows:
• Time Rate System
• Piece Rate System
Time Rate System
• Under this system, the amount of remuneration or the total wages outstanding to the
workers depends on the time for which he is employed. This is a simple and common
method of wage payment. In this method, the workman is paid an hourly, daily,
monthly or yearly rate of wages.
• Thus, the worker is paid on the basis of time but not on his/her performance or unit of
output. A number of wages payable to a workman under this method is to be calculated
as follows:
• Total wages = Actual time took x time rate
• or, Total wages = Total hours worked x Wages rate per hour.
Piece Rate System
• In this method, wages are paid to the employees after completion of work. Under it, a
worker is paid on the basis of output not the time taken by him. This is one of the
simplest and most commonly used systems of wage payment. In this system, the wage
rate is expressed in terms of per unit of output, per job or per work-order. A number of
wages payable to a workman under this method is to be calculated as follows:
• Total wages = Total output x Rate per Unit of Output.

22. Factors affecting Compensation
Decisions
• Ability to Pay
• Supply & Demand Factor
• Prevailing Wages
• Cost of Living
• Job Requirements
• Bargaining Power
• State Regulations
• Fringe Benefits
• Productivity

23. Issues in Compensation Decisions
1) Internal Equity
2) External Equity

24. Internal Equity
There should be a proper relationship between the wages and salaries of
various positions within the enterprise.
For ex.
If the salary of a foreman is lower than that of his subordinate, the foreman
is not being paid fairly.
An Internal Pay structure is being designed by defining 3 things:
1) No of levels in the organizations
2) Pay difference among Levels
3) Individual Pay determination
There are four basic approaches to determine individual pay:
1) Single Rate Approach (Simple Office jobs)
2) Merit Approach (Performance & Output based)
3) Automatic Approach (Amount and period are predetermined)
4) Informal Approach (Without Formal Guidelines)

25. External Competitiveness
• Comparison of the present company wage rates with
those being paid in the community for comparable
jobs.
• The wages and salaries of workers must be in
alignment with wages and salaries of other
organizations .
• To achieve external alignment the management must
execute a wage survey to understand the average rates
of its key jobs are prevailing in the community . After
this it may fix its own wage level at this average level or
may decide to fix it at higher or lower level.

26. Management may decide to pay above
average wage level in following cases:
1) When qualified personnel are in short supply
2) When it want to gain reputation of good
employer in the community
3) Union Pressure for high wages
4) When wages are linked to productivity which
is rising
5) When cost of living is going up

27. Below Average Rates may be decided
in following cases
1) There is an abundance of Labour
2) Enterprise is incurring loses
3) Cost of Living is going down
4) Enterprise pay substantial fringe benefits
5) When wages linked to productivity which is
falling