This document provides an overview of compensation and rewards in organizations. It defines compensation as a systematic approach to providing monetary value to employees in exchange for work performed. Compensation serves several purposes like assisting in recruitment, job performance, and job satisfaction. Compensation management involves establishing an equitable wage and salary structure. The key objectives of compensation management are to establish and maintain an equitable compensation structure and labor cost structure to maximize employee and employer satisfaction.

2. LESSON 1:
ROLE OF COMPENSATION AND REWARDS IN THE
ORGANIZATION
Learning Objectives
 Understand the meaning of Compensation
 Know the role of Compensation management
 Importance and purpose of Compensation management in organizations
If the abilities ofemployees havebeendeveloped to the pointwhere theymeet orexceed job requirements,it is
now appropriate that they be equitably compensated for their contributions. The factors affecting the
determination ofequitable compensation are many,varied and complex. And management must come to some
decision concerning the basic wage orsalary.To motivate improved performance on the job many systems of
variable compensation havebeendevisedandfinally organizations havedevelopednumerous ways ofproviding
supplementary compensation in the formof fringe benefits.
Now Students Lets Try to Define Exactly What Compensation Is?
Compensationis a systematic approachto providing monetary value to employees in exchange forwork
performed.
Compensationmay achieve severalpurposes assistingin recruitment,job performance,and job satisfaction.
Now lets Discuss how is Compensation used? Compensation is a toolusedby management fora variety
of purposesto furtherthe existence ofthe company.
Compensationmay be adjusted accordingthe business needs,goals,and available resources.
Compensation may be used to
 Recruit and retain qualified employees.
 Increase ormaintain morale/ satisfaction.
 Reward and encourage peakperformance.
 Achieve internaland externalequity.
 Reduce turnoverand encourage company loyalty.
 Modify (through negotiations)practices ofunions.
Recruitment and retention ofqualified employees is a common goal sharedbymany employers.To some extent,
the availability and cost ofqualified applicants foropen positions is determined by market factors beyondthe
control of the employer. While an employer may set compensation levels for new hires and advertise those
salary ranges, it does so in the context of other employers seeking to hire fromthe same applicant pool.
Morale and job satisfactionare affected bycompensation.Often there is a balance (equity)that must be reached
between the monetaryvalue the employeris willing to pay and the sentiments ofworth felt be the employee.In
an attempt to save money,employers may opt to freeze salaries orsalary levels at theexpense ofsatisfactionand
morale. Conversely,an employerwishingto reduceemployee turnovermay seekto increasesalaries and salary
levels.
Compensation may also be used as a reward for exceptional job performance. Examples of such plans
include: bonuses, commissions, stock, profit sharing, gain sharing.
Employee compensation refers to all forms of pay or rewards going to employees and arising from their
employment,and it has two main components.There are direct financial payments in the form of wages,
salaries, incentives, commissions and bonuses and there are indirect payments in the form of financial
benefits like employee paid insurance and vacations.
So in nutshellwe can say that employee compensationrefers to all the forms of pay or rewards going to
employees and arising fromtheir employment
Compensation includes direct cash payments, indirect payments in the form of employee benefits &
incentives to motivate employees to strive for higher leveis of productivity is a critical component of
employment relationship.
Compensation is affected by many factors like labour market factors, collective bargaining, government
legislation & top management philosophy regarding pay benefits.
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3. What is Compensation Management?
Process ofcompensationmanagement is to establish&maintain an equitable wage &salary structure &
an equitable coststructure .it involves jobevaluation,wage&salary survey,profit sharing &controlofpay
costs.
Two important functionsofcompensation
 Equity function
 Motivation function
Equity is based onpast &current performance& motivationwith which the workhas been performed in
the past &current performance.
Nature and Purpose of compensation management The basic purpose ofcompensation
management is to establishand maintain an equitable reward system.The otheraimis the
establishment andmaintenance ofan equitable
compensation structure,i.e, an optimal balancing ofconflicting personnelinterests so that the satisfaction of
employees and employers is maximized and conflicts minimized. The compensationmanagement is concerned
with the financialaspects of needs,motivation andrewards.Managers,therefore,analyze and interpretthe needs
of their employees so that reward canbe individually designedto satisfy these needs.Forit has been rightly said
that people do what they do to satisfy some need.Before they do anything, they lookfora reward orThe reward
may be money or promotion,but more likely it will be some pay-off-a smile, acceptance by a peer,receipt of
information,a kind word of recognitionetc.
Lets Talk About The Significance of Compensation Fromindividualstandpoint -remuneration is a major
source ofan individual’s purchasing power.It determines his orherstatus,prestige &worth in society.
From enterprise stand point-compensation is a crucialelement in the cost ofproduction,which is expected to
permit adequateprofits leadingto increase in newcapital,expansion production,and capacity.
From national point of view –dissatisfied work force hampers equitable distribution of aggregate real income
among various group involved .it causes inflation.
A Sound Compensation Structure Tries to Achieve These Objectives
 To attract manpower in a competitive market.
 To controlwages &salaries &labourcosts by determining rate change & frequency of increment .
 To maintain satisfaction of employees by exhibiting that remuneration is fair adequate & equitable.
To induce & reward improved performance, money is an effective motivator.
a.For employees
1. Employees are paid according to requirements of theirjobs,i.e., highly skilled jobs are paid more compensation
than low skilled jobs.This eliminates inequalities.
2. The chances offavoritism(which creep in whenwagerates are assigned)are greatly minimized.
3. Job sequencesand lines ofpromotion are established wherever they areapplicable.
4. Employees’morale and motivation are increasedbecause of the sound compensation structure.
b. To Employers
1. They can systematically plan forandcontrolthe turnoverin the organization.
2. A sound compensationstructure reduces the likelihood offriction and grievances overremuneration
3. It enhancesanemployee’smorale and motivationbecause adequate andfairly administeredincentives are basic
to his wants and needs.
4. It attracts qualified employees by ensuring and adequate payment for all the jobs.
Now we come to the principles of Compensation
 Differences in pay should be based on differences in job requirements.
 Wage &salary levelshouldbe in line with those prevailing in the job market.
 Follow the principle of equalpay forequal work.
 Recognize individualdifferences in ability & contributions.
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4.  The employees & trade unions should be involvedin while establishingwage rates.
 The wages should be sufficient to ensure forthe worker&his family reasonable standardof living.
 There should bea clearly establishedprocedure forredressalofgrievances concerningwages
 The wage & salary structure should be flexible .
 Wages dueto employees shouldbe paid correctly &promptly.
 A wage committee should review&revise wages fromtime to time.
What are the components of a compensation system?
Employees as fair if based on systematic components will perceive compensation.Various
compensation systems have developedto determine the value ofpositions.These systems utilize many
similar componentsincluding job descriptions,salary ranges/ structures,and written procedures.
The componentsofa compensationsysteminclude:
 Job Descriptions: A critical component ofbothcompensation andselection systems,job
descriptionsdefine in writing the responsibilities,requirements,functions,duties,location,
environment,conditions,and otheraspects ofjobs.Descriptions may be developed forjobs
individually orfor entire job families.
 Job Analysis:The process ofanalyzing jobs fromwhich job descriptions are developed.Job
analysis techniquesinclude the use ofinterviews,questionnaires,and observation.
 Job Evaluation: A systemforcomparing jobs forthe purpose ofdetermining appropriate
compensation levelsforindividualjobs orjob elements.There are fourmain techniques:Ranking,
Classification,FactorComparison,and Point Method.
 Pay Structures:Usefulforstandardizing compensation practices.Mostpaystructuresinclude
severalgrades witheach grade containing a minimum salary/ wage and eitherstep increments or
grade range.Step incrementsare common with union positions where the pay foreach job is pre-
determined through collective bargaining.
 SalarySurveys:Collections ofsalary andmarket data.May include average salaries,inflation
indicators,cost ofliving indicators, salary budget averages.Companies may purchase results of
surveysconductedby survey vendorsormay conduct theirown salary surveys.Whenpurchasing
the results ofsalary surveysconducted by othervendors,note that surveys may be conducted
within a specific industry oracross industries aswellas within one geographicalregion oracross
different geographicalregions. Knowwhich industry orgeographic locationthe salary results
pertain to before comparing the resultsto your company.
 Policies and Regulations
What are Different Types of Compensation?
Different types ofcompensation include:
 Base Pay
 Commissions
 Overtime Pay
 Bonuses,Profit Sharing,Merit Pay
 Stock Options
 Travel/ Meal/ HousingAllowance
Benefits including:dental,insurance,medical,vacation,leaves,retirement,taxes...
In a layman’s language the word Compensationmeans something,suchas money,givenorreceived as
payment orreparation,as fora service orloss.On the otherhand,the word Reward means something givenor
received in recompense forworthy behaviororin retribution forevil acts.
Now students let us try to demarcate between compensation and rewards
In a layman’s language the word Compensationmeans something,suchas money,givenorreceived as
payment orreparation,as fora service orloss.On the otherhand,the word Reward means something givenor
received in recompense forworthy behaviororin retribution forevil acts.
The word Compensationmay be defined as money receivedin the performance ofwork,plus the many kinds
of benefits andservicesthat organizations provide theiremployees.
On the otherhand,the word Reward orIncentive means anythingthatattracts an employees’attentionand

5. stimulates himto work. An incentive scheme is a plan ora programme to motivate individualorgroup
performance.
An incentive programme is most frequently built on monetary rewards (incentive payormonetary bonus),but
may also include a variety ofnon-monetary rewards orprizes.
Compensation or rewards (incentives) can be classifiedinto
1. Direct compensationand
2. Indirect compensation.
Money is includedunderdirect compensation(popularly known as basic salary orwage,i.e. gross pay)where
the individualis entitled to forhis job,overtime-work and holiday premium, bonuses based on performance,
profit sharing and opportunitiesto purchase stockoptions.
While benefits come underindirect compensation,and may consistoflife, accident,and health insurance,the
employer’s contributionto retirement (pensions),pay forvacationorillness, andemployer’s required
payments foremployeewelfare as socialsecurity.
While French says,the term“ Incentive system” has a limited meaning that excludes many kinds of
inducementsoffered to people to performwork,or to work up to or beyondacceptable standards.It does not
include:
1. Wage and salary paymentsand merit pay;
2. Over-time payments,pay forholiday workordifferentialaccording to shift,i.e.all payments which
could be considered incentives to perform work at undesirable times; and
3. Premium pay forperforming danger tasks.
It is related with wage payment plans which tie wages directly orindirectly to standards ofproductivity or
to the profitability ofthe organization orto both criteria.Compensationrepresents by farthe most
important and contentious element in the employment relationship,and is ofequalinterest to the
employer,employee and government.
1. To the employerbecause it representsa significantpart ofhis costs,is increasingly important to his
employee’s performance and to competitiveness,andaffects his ability to recruit andretain a labor
force ofquality.
2. To the employee because it is fundamentalto his standard ofliving and is a measure of the value of
his services orperformance.
3. To the government because it affects aspects ofmacro- economic stability suchas employment,
inflation,purchasing powerand socio – economic development in general.
While the basic wage orpay is the main componentofcompensation,fringe benefits and cash andnon-
cash benefitsinfluence the levelofwages orpay because theemployeris concernedmore about labor
costs than wageratesperse.The tendency nowis towards an increasing mix ofpay element of executive
compensation has substantially increased in recent years.
Basic Purpose for Establishment of a Sound Compensation and Reward Administration
The basic purposeofestablishment ofa sound compensationand reward administration is to establish
and maintain an equitable compensationstructure.
Its secondaryobjective is the establishment and maintenance ofan equitable labor-cost structure,an
optimal balancing ofconflicting personnelinterests sothat the satisfactionofemployees and employers is
maximized and conflicts minimized.
A sound wage and salary administration tries to achieve these objectives
a. For employees
1. Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are paid more
compensation than low skilled jobs. This eliminates inequalities.
2. The chances offavoritism(which creep in whenwagerates are assigned)are greatly minimized.
3. Job sequencesand lines ofpromotion are established wherever they areapplicable.
4. Employees’morale and motivation are increased because a wage programme can be explained and
is based uponfacts.
b. T
o Employers
1. They can systematically plan forand controltheirlaborcosts In dealing with a trade union,they can explain the basis of
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6. their wage programme because it is based upon a systematic analysis ofjob and wage facts.
2. A wage and salary administrationreducesthe likelihood offriction and grievances overwage
inequities.
3. It enhances an employee’smorale and motivate because adequate andfairly administered wages are basic to his wants
and needs.
4. It attracts qualified employees by ensuringandadequate payment forallthe jobs.
Assignments
1. Discuss the concept of compensation. What factors affect compensation of employees in industrial organizations?
2. What is the basic purpose behind the establishmentof a sound Compensation and Reward administration system
in the organizations?
Case study
Roshans Limited-Transport Facility
The personnel Manager of Roshans Limited have received. an application for the introduction of company conveyance for
employees staying in town. Although Roshans Limited has provided living facilities to its employees about 60percent ofits
1000 employees stillhave to commute an average of10 km to come to work. The union and some of the employee s living
on campus have supported the demand . Though the management might favour such a move some sections of the work force
are concerned that the introduction of the company conveyance facility may cut down theirwages the company underdisguise
ofcompensation allowance paysRs.20/-permonth fortraveling to employees staying more than 8 km away from the company
premises.
1. What factorswould youtake into account in evaluation of this demand fromtheworkers?
2. Provide the rationale forimplementing or not implementing this demand.
Notes