Compensation management

InstructorMr. Shyamasundar Tripathy

Faculty Management (PG Dept.)

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CompensationReward refers to a wide range of financial

and non financial rewards to the employees for the services rendered to the organisation .

a) Transactional rewardsb) Relational rewards

All forms of financial returns and tangible services & benefits employees receive as part of an employment relationship

CompensationIt is a system of rewards that motivates employees to performAn organisational tool to foster the

values,culture & the behaviour they requireAn instrument that enables organisations to

achieve their objectives

Objectives of Compensation Management

To attract competent personnel To retain the present employees To improve productivityTo improve efficiency To control Costs

Objectives of Compensation ManagementTo ensure fairness To improve union-management relations To improve the public image of the

companyComply 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 FactorsDemand for and Supply

of labour Ability to pay of the

Organization Labour Unions Cost of Living Prevailing wage rates Job RequirementsProductivity State Regulation

Individual Factors Employee’s Age and

work ExperienceEducational

Qualification Promotion possibilitiesHazards involved in the

job Stability of EmploymentDemand for the productIndustry’s role in the

economyPotentials of an

employee

Labor Market Economy

Government Unions

Compensation and an International Labor ForceIssues that affect the compensation

strategies of organizations competing in a global market:Global wage differentials verging on the

extremeMoving employees to foreign locationsEmploying local (foreign) managers and

workersMoving foreign workers for training or work

assignments

Essentials of sound Compensation Management

Internal EquityExternal CompetitivenessBuilt in incentiveLink with productivity Individual worth Increments

Compensation - DefinitionCompensation 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 compensationIt 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.


Indirect compensationIt 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 SalaryBase compensationWage : Remuneration paid by the employer for

the services of hourly ,weekly & fortnightly workers doing manual or physical work.

Usually given to unskilled workersIt 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 refreshmentsleisure activities on work time (golf, etc.),

Base compensation Vs Supplementary compensationPayment to the workers

for their workPayment is in cashWage & 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 ConceptsThe 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 ConceptThe 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 ConceptA 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 conceptWhile fixing Fair wage, the following are to be

taken into consideration:The productivity of labourThe 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 firmTo control payroll costsTo satisfy peopleTo 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 WagesNominal Wages : Wages expressed in

terms of money are called nominal wagesIt is an evaluation of the wage without

considering its current purchasing valueNominal 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 payWork content & contextWage sufficient to meet basic needs of food,

shelter, security, social commitment & like

Con..EXTERNAL:Supply & demand in labour marketLevel 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-supposesLow 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 THEORYPropounded 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 payWhich may touch even the subsistence levelFocus 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 tradeAnd the wage subsistence price for

commodityEmployer 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 THEORYProposed 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 3Labour remaining is paid to labour as against

his value addition to the product.Hence, labour is considered the ‘residual claimanant’

MARGINAL PRODUCTIVITY THEORYDeveloped 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 worthValue addition by the marginal labour is more

than the cost -continue discontinue hiring & resort to technology or

product mixOverall result better returns to the employer &

lesser wages to employees

BARGAINING THOERYProposed 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 levelWage structureIndividual fixationWage differentials & perks

BEHAVIOURAL THEORYProposed by social scientists like Simon, Dubin,

Jacques & others. Basis for the theory behavioural aspectsa.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 decisions3.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.

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(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

The Wage Determination 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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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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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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The Wage Determination processConduct 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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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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The Wage Determination processDesigning 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 MethodsThere 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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The Wage Fixation Methodsb)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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The Wage Fixation Methodsd) 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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The Wage Fixation Methods 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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The Wage Fixation Methods3) 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.

The Wage Fixation Methods1.Sectoral bargaining

2.Industry-cum-Region-wide agreements

3.Decentralised firm/Plant level Agreements

The Wage Fixation Methods4) 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 MethodsGovernment 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

The Wage Fixation Methods5.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 authority, whose decision they are ready to accept

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The Wage Fixation MethodsIn 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 Wage Fixation MethodsThe 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 needed for disputes arising under agreements.

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 DifferentialsWage 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 Differentials1)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 Differentials3) 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 Differentials4)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 Differentials5)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 Controlsand 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 RegulationsFair Labor Standards Act (FLSA) of 1938

minimum wageovertime

exempt workers nonexempt workers

child laborrecordkeeping requirementsEqual Pay Act of 1963

Essentials of sound wage and Salary structureInternal EquityExternal CompetitivenessBuilt in incentiveLink 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 TheoryIt 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 capitalHuman 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 Capital1. General human capital transferable to every other job and thus

improves overall productivity and thus wage2. firm-specific human capitalnot transferable to any other firm and

therefore does not improve productivity and thus wages anywhere else

Human Capital TheoryIndividuals 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 costsEmployees 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 PoliciesReward 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 PolicyReward policy addresses a wide range of

issues1.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

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Reward Policy2.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

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Reward Policy3.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 Policy4.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 Policy5.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 Policy7.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 Policy8.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 Policy11.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 Policy12.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

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Wage - DefinitionMoney paid to the workers is considered

as wagesThe 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.

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Compensation management

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