This document discusses compensation management and wage theories. It covers the different elements that make up total compensation, including base pay, incentives, and benefits. It also discusses objectives of wage policies, wage legislation like the Payment of Wages Act and Minimum Wages Act, compensation issues, wage determination methods, and various theories of wages like subsistence theory, wage fund theory, and marginal productivity theory. Maslow's hierarchy of needs and Herzberg's two-factor theory are also summarized.

1. MODULE-2

2. Compensation management
 Compensation is what employees receive in exchange
for their contribution to the organisation.
Total compensation = Direct + Indirect
Compensation
Base Pay Incentives Benefits

3. NATURE & SCOPE
 It is the policy of the Institute to pay fair, equitable and
competitive wages and salaries in order to attract,
retain and motivate competent employees.
 An effort is made to recognize the relative values of the
various jobs, to adapt realistic wage and salary ranges
and to make comparative studies of area rates and
changing job conditions to assure that the wage
structure is current.

4. Con…
 The primary objective of wage and salary
administration program is that each employee should
be equitably compensated for the services rendered by
him to the enterprise on the basis of,the nature of job.

5.  The present worth of the job.
 The effectiveness with which the individual performs
the job.

6. COMPENSATION
 Cash payments
 It also includes promotion or words of praise
 Difficult to explain every aspect of compensation

7. Sound compensation package
includes
 Social balance
 Supply & demand
 Fair comparison
 Equal pay for equal work
 Work measurement
 Adequacy of wages

8. Objectives of wage policy
 Control of cost
 Establishment of fair & equitable structure of
remuneration.
 Using wages & salaries as an incentive to greater
employee productivity
 To maintain a good public image
 To attracted talented personnel

9. Wage legislation
PAYMENT OF WAGES ACT,1936
OBJECTIVES:
To ensure that wages are paid properly.
To avoid all malpractices.
 Non-payment
 Short payment
 Irregular payment
 Short measurement of piece work
 Payment in kind

10. con..
To cover all employees earning 1,600 P.M
To provide a wage period of one month
Less than 1000 employees before 7th
& more than 1000 employees after 10th
To stipulate the dues of the discharged employee &
forbids salary deductions unless so authorised by the
employee.

11. Con..
 The employer can levy a fine only after the due notice
is given to the employee.
 To protect the workers from being exploited & to
ensure timely and exact cash payment

12. Minimum wages act,1948
 Seeks to avoid exploitation of workers by underpaying
them for their efforts
 Minimum wages sets the floor for pay levels
to skilled occupationals
 It is a central legislation
 It provides the computation of the cost of living
allowances.

13. Con..
 The cash value concession for essential commodities
supplied.
 It also lays down penalties for violation of the Act
Proposed amendment to the minimum wages Act,1948
 In order to inflation-linked hikes
 Two years once
 The element of the VDA is proposed to be introduced
based upon the CPI

14. COMPENSATION ISSUES
 WAGE & SALARY LEVELS
 WAGE & SALARY STRUCTURES
 INDIVIDUAL WAGE DETERMINATION
 METHOD OF WAGE PAYMENT
 COMPANY PHILOSOPHY

15. WAGE & SALARY LEVELS
 Mainly depends upon 4 factors:-
1.Wage enactment of the central & state Govt. sometimes
modified by tribunals & courts,compliance with which
is a statutory requirement.
2.Wage rate in the community and in similar industries.

16. Con..
3.The influence of the workers union on the wage rates.
4.Corporate philosophy on wages
Stage 1
 Self contained model where external influence is
marginal
Stage 2
 Depicting the interplay of external & internal
influence

17. Factors of Internal wage level
 Cost of living allowances (COLA )
 Productivity ( increased output of an employee with
lower cost )-shift in productivity leads to affect on
wages.
 Prevailing wage rates
 Ability to pay
 Attraction & retention of the employees

18. WAGE & SALARY STRUCTURES
 The jobs are placed in a grade or a rate these jobs are
arranged in an hierarchical order with those earning
higher wages on top.
 The process by which this hierarchy is reached is
known as JE.
 JE is a systematic method of appraising the value of
each job in relation to other jobs in the organisation

19. Con..
 The stepsinvolved in Determining wage
rates are:
1.Performing job analysis
2.Wage surveys.
3.Analysis of relevant organizational problems forming
wage structure

20. Con..
4.Framing rules of wage administration.
5 .Explaining these to employees, assigning grades to
each job and paying the guaranteed wages.

21. Wage Surveys:
 Once the relative worth of jobs has been
determined by job evaluation, the actual
amounts to be paid must be determined.
 This is done by making wage or salary
surveys in the area concerned.

22. Con..
 While determining pay ranges the following
Consideration should be Attended to
 It is important to keep in mind that there is an
adequate differential, between superiors and
subordinates – whether they are paid under the same
pay plan or under different ones.
 When the pay-range of one group is changed, equal
attention must be given to the pay-range of the other.

23. Con..
 Because of the continuous rise in wage and salary levels, a
rise resulting from a variety of environmental pressures,
considerable attention must be given to handling upward
changes in wage-structure.
 The existing pay structure should be regularly reviewed
and revised. This will make job evaluation programme
more acceptable to employees.
 Regional differences in wages should invariably be
maintained.

24. Con..
 Unions do make a difference in wages.
 Union workers earn between 8.9% and 12.4% more
than non-union workers.
 The size of the gap varies from year to year.
 During periods of higher unemployment and slow
economies, the impact of unions is larger.

25. Con..
 During strong economies the union-nonunion gap is
smaller.
 Unions in the public sector make a difference in wages
of 7% to 12% more than their nonunion counterparts.

26. Wage differentials
 Different kinds of jobs is determined differently either
in the same or in a different industry.
 The factors contribute to these differences
are :-
Highly skilled
Skilled
Semi-skilled
unskilled

27. Con…
 Experience
 Qualification
 Level of employment ( grade )
 Two important factors considered while deciding the
wages are:
 The demand & supply of a particular category of skills
 The performance of the industry or unit(productivity
& profitability )

28. Con..
 Arbitration or judicial rulings can sometimes also
effect wage differentials.
 Ex.western region of india has higher wage rates.
 Inter-industrial differentials.
 Gender differentials

29. Methods of wage payment
 PAYMENT BY TIME :
Time keeping.
Time recording
 SKILL EVALUATION PAY PLANS :
No. of jobs handled by an individual
 PAYMENT BY RESULTS:
Directly relating to employee productivity

30. Piece rate/wage rate method
 Rate of wage of a worker per unit is called wage rate.
This does not include any allowance or bonuses or
overtime payment.
 MINIMUM WAGES : this is the wage fixed by the
Govt. which it considers adequate, taking into A/C the
cost of living ,all firms and organisations are bounded
to follow this direction so that no employee is paid a
wage less than the minimum wage fixed by the
Govt.irrespective of grade,class or nature of work

31. Debt method
 Combination of piece & time rates
 The worker is guaranteed an hourly or day rate with an
alternative piece rate.
 If piece rate > time rate, worker gets credit for the
balance
 If Piece rate< Time rate, time rate payment is
considered & excess payment is carried forwarded as
DEBT to be paid by the employee in future

32. Fair wage
 This is fixed by employer.
 This level of wage vary from industry to industry.
 The main criteria is the capacity of payment
 As per definition fair wage committee
“ fair wage is a wage above the minimum wage but below
the living wage “

33. Living wage
 It should enable the earner to provide for himself & his
family not only the essentials of food,clothing &
shelter,but a measure of comfort including education
for his children, protection against ill health,
requirement of essential social needs and a measure of
insurance against more misfortune including oldage.

34. Nominal wage
 It is the wage received which is expressed in terms of
money received.
REAL WAGE : This is the wage or earning which is
expressed in terms of goods and services which can be
purchased from the money received as wages.
nominal wages
RW= ---------------------
CPI

35. 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

36. Con..
EXTERNAL:
 Supply & demand in labour market
 Level of payment prevailing in similar jobs in other
establishments

37. 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.

38. 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.

39. 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.

40. 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’

41. 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

42. 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

43. 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.

44. HIERARCHY OF NEEDS
 Profounded by maslow,s
1.Physiological needs
2.Safety needs
3.Social
4.Esteem
5.Self actualisation

45. Con..
 Maslow separated 5 needs into 2 levels
 Higher order – 1 &2
 Lower order –3,4 &5
 The higher order needs are satisfied internally
 Lower order needs are satisfied externally
( wages,union contacts,working condition,tenure etc.)

46. Con..
 All most all permanently employed workers have their
lower order needs substantially met.
 But as the time changed ,a renewed emphasis was
revealed.
 As people become unemployed & their unemployment
benefits ceased,their attention turned towrds survival-
lower order needs.

47. HERZBERG’s MOTIVATION THEORY
(two factor theory )
 Opposite of satisfaction is not dissatisfaction.
 Removing dissatisfying characteristics from a job does
not necessarily make the job satisfying or vice versa.
 Salary is considered as a hygiene factors.
 When they are satisfactorily maintained, people will
not be dissatisfied.

48. MOTIVATING FACTOR
(intrinsic factor )
 The presence of which motivate a person but absence
Do not demotivate.
Ex.Nature of job, challenges, responsibility,authority
recognition, achievement and job satisfaction

49. Hygene factor (Extrinsic factors )
 Presence of which will not motivate a person but
absence definitely demotivate him.
 Ex. Salary ,status ,company policy &
administration,supervision,relationship with the
supervisor etc.
Adequate Inadequate
Motivation Motivation No motivation
Hygene factor No dissatisfaction Dissatisfaction

50. Equity theory (Adam’s)
 Eq & fairness practiced by management.
 Greater the fairness practiced,higher motivation and
viceversa.
 Employee makes comparison of input in the job with
that of outcome and compare the same with that of
another colleague of eqivalent cadre.
Outcome
 --------------- ratio is used
input

51. Tension state
 Ratio is equal fairness is perceived
 Ratio is unequal – eq.tension (negative tension)
Ex.O/IA Lessthan O/IB =under rewarded (eq.tension)
O/IA = O/IB = equity
O/IA morethan O/IB =over rewarded (eq.tension)

52. Referents
 There are 4 comparisons an employee can make these
are called “referents”.
1.self-inside;an employees experience in a different
position inside the present organisation.
2.self-outside;an employees experience in a different
position outside the present organisation.
3.other-inside;other employees in the present
organisation.
4.Other -outside;other employees experience outside
the present organisation.

53. postulates
 Individuals are not only concerned with their own
rewards but equally concerned with others get in
comparison.

54. EXPECTANCY THEORY (VICTOR
VROOM’S)
 THIS THEORY MAINLY DEPENDS ON 3 FACTORS.
1.Perception that his efforts will lead to good
performance. ( expectancy )
2.Perception that good performance will lead to good
rewards.( instrumentality )
3.Perception that the rewards are worth getting.
(valence )
motivation =E X I X V

55. PORTER & LAWLER’S MODEL OF
MOTIVATION
 Porte & Lawler’s modified & built upon Vroom’s
expectancy & Adam’s equity theories of motivation.
 They consider the relationship between
effort --performance-reward
The model state the following principles:
1. Employee’s must value the rewards
(intrinsic or extrinsic ) offered by the organisation.
2. Employee’s must believe that good performance will be
linked to the achievement of the desired rewards.thus
employees should perceive that higher performance will
result in greater rewards.

56. Con..
3. Managers must clearly communicate their expectations &
objectives,thereby ensuring employees understand which
behaviours are required.
4.To increase expectation that desired performance will be
rewarded,managers must make sure rewards are clearly &
visibly linked to performance.
5.Employees must be able to engage in good performance
.they must have the ability to carry out the tasks & must
believe the quality of their work and hence their rewards
is directly related to and reflects the effort they put into
the job.

57. Con…
 If these conditions are not there then employees will
not believe that working hard ,will lead to a reward or
an increase in rewards & therefore the link between
desired behaviour & desired reward will be taken.

58. Pay-secrecy
 It is an administrative strategy that may increase the
manageability of the system in which less information
has to be communicated & fewer challenges to fairness
may have to be heard.
 The compensation system is formulated and
administered is critical to the organisation.