Compensation management

Instructor
Mr. Shyamasundar Tripathy
Faculty Management (PG Dept.)
1

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

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

Objectives of Compensation Management
To attract competent personnel
 To retain the present employees
 To improve productivity
To improve efficiency
 To control Costs

Objectives of Compensation
Management
To ensure fairness
 To improve union-management relations
 To improve the public image of the company
Comply with legal regulations

A
Compensation
system should
be:
Adequate*
Equitable*
Balanced
Cost-effective
Secure
Incentive-
providing*
Acceptable to
the employee

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

Labor Market Economy
Government Unions

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

Essentials of sound Compensation
Management
Internal Equity
External Competitiveness
Built in incentive
Link with productivity
 Individual worth
 Increments

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
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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.

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.

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.

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

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.),

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

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
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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.”
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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.
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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.
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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

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
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Purposes of wage administration
To recruit persons to a firm
To control payroll costs
To satisfy people
To motivate people

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

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
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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
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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-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.

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.

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.

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’

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

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

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.

Criteria of Wage Fixation
 The organizations ability to pay;
 Supply and demand of labour;
 The prevailing market rate;
 The cost of living;
Living wage;
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Cont..
• Productivity;
• Trade unions bargaining power;
• Job requirements;
• Managerial attitudes; and
• Psychological and sociological factors.
• Levels of skills available in the market.
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(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.
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(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”
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(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.
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(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

(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.
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(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.
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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.
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(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.
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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
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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
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The Wage Determination
Process
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Job Analysis
Wage Survey
Job Evaluation
Preparation of wage Structure
Developing Pay ranges

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
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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
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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
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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.
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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
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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.
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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
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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
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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.
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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.
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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.

1.Sectoral bargaining
2.Industry-cum-Region-wide agreements
3.Decentralised firm/Plant level
Agreements

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.

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

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.

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.

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

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.

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

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.

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

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.

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.

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

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.

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.

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.

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

Wage Stabilization
Act (1942)
Defense Production
Act (1950)
Economic
Stabilization Act
(1970)

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

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

Essentials of sound wage
and Salary structure
Internal Equity
External Competitiveness
Built in incentive
Link with productivity
 Individual worth
 Increments

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.

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

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.

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

Human Capital Theory
Individuals who invest money and time gain skills
that improves their human capital and ultimately
their productivity.

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.

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

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
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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

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

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 .
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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
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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
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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.
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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.
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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
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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
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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
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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

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

Compensation management

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