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1) Compensation Definition:-

-The total of all rewards provided employees in return for their services is called compensation.
-Compensation is what employees receive in exchange for their contribution to the organization.
-It is a systematic approach to providing monetary value to employees in exchange for work
1. Dale Yoder: “Compensation is paying people for work.”
2. Edwin B Flippo: “The function of compensation is defined as the adequate and equitable remuneration of
personnel for their contributions to the organizational objectives.”
3. Benham: Compensation is the value of work of the employees according to the agreement between
employer and employee.
4. John Dunlop has explained the concept of compensation / wages from three standpoints: a. wages
determined the standard and volume of services of employees of market. B. Compensation influences
distribution of employment of industries, firms and professional organizations by impact on cost and c.
Compensation has performed some important activities like supply of active media through which
technological facilities have been scattered through the economy.
5. R. S. Schular: Compensation is such an activity through which organization based on its ability and
within law reasonably assesses the contribution of employees directly and indirectly for the distribution of
financial and non-financial remuneration.
From the above definition we can say that compensation is a reward. It is given by the employer and
received by the employees. So a mutual understanding must be present between the parties.
2) Terms related to Compensation:- (Components)
Wages: Wages are the most important component of compensation and these are essential irrespective of the
type of organization. Wage is referred to as remuneration to workers.
Salary: Salary refers to as remuneration paid to white-collar employees including managerial personnel. It is
the compensation to an employee for service rendered on a weekly, monthly or annual basis.
Incentives: Incentives are the additional payment to employees besides the payment of wages and salaries.
Often these are linked with productivity, either in terms of higher production or cost saving or both. These
incentives may be given on individual basis or group basis.
Fringe Benefits: Fringe benefits include such benefits which are provided to the employees either having
long-term impact like provident fund, gratuity, pension; or occurrence of certain events like medical benefits,
accident relief, health and life insurance; or facilitation in performance of job like uniforms, Canteens,
recreation, etc.
Perquisites: These are normally provided to managerial personnel either to facilitate their job performance or
to retain them in the organization. Such perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc.
Real wages: Goods & services which could be purchased with the help of money wage.
Non-monetary benefits: These include challenging job responsibilities, recognition of merit, growth
prospects, competent supervision, comfortable working conditions, job sharing, and flexitime.
Rewards: People join organizations expecting rewards. Firms distribute money and other benefits in exchange
for the employee’s availability, competencies and behaviours
Nominal wages: Wage expressed in terms of money.
3) Objective of Compensation

Compensation has some important objectives. To achieve, these objectives a well-conceived compensation
scheme or plan may be established. These objectives are mentioned in the following point.

1.To be legal: It must get approval from the govt. or top management in
the organization.
2.To be adequate: Compensation must be sufficient so that needs of the
employees are fulfilled substantially.
3.To be Motivational: Compensation must increase the level of
motivation and job satisfaction of the employees.
4.To be equitable: Compensation policy should be declared in such a
way so that no discrimination can be observed.
5.To provide security: Employees must have guarantee of getting
wages or compensation regularly without any break.
6.To be cost benefit effective: The organization must make a balance
between cost for giving compensation and benefits to be accrued from
the employees.
Internal equity To measure the value of jobs in relation to organizational objectives rewards are usually
based on important components to make one job worth more than other these aspects called compensable
factors. The five most frequently used job evaluation methods are: Job ranking, Job grading, the point’s
method and, Factor comparison.
External equity- There is no absolute way to rate pay for a job. Setting pay rates, organization seek to integrate
the external information with what they have learnt through internal evaluation of jobs this process is called
pricing the wage structure. Wage and salary surveys, Identifying key jobs, selecting organization to survey,
collecting data, Pay level policy.
Individual equity- Wage grades are established and all the jobs within the grade are paid identically.
Designing pay ranges-Establishing pay ranges, Broad branding, Above and below range employees.
Setting individual pay- Seniority  Merit pay  Skilled based pay

Retain current employees- Employees may quit when compensation levels are not competitive, resulting in
higher turnover.

Reward desired behavior- pay should reinforce desired behaviors and act as an incentive for those behaviors
to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility,
and other behaviours.
Efficiency,- which is often closely related to equity because the two concepts are not antithetical. Efficiency
objectives are reflected in attempts to link-to-link a part of wages to productivity or profit, group or individual
performance, acquisition and application of skills and so on. Arrangements to achieve efficiency may be seen
also as being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair).
Efficient allocation of labour in the labour market.- This implies that employees would move to wherever
they receive a net gain, such movement may be form one geographical location to another or form on job to
another (within or outside an enterprise). The provision or availability of financial incentives causes such
movement. For example, workers may move form a labour surplus or low wage area to a high wage area.
They may acquire new skills to benefit from the higher wages paid for skills. When an employer’s wages are
below market rates employee turnover increases. When it is above market rates, the employer attracts job
applicants. When employees move from declining to growing industries, an efficient allocation of labour due
to structural changes takes place.
4) Theories of Wages in Compensation
Some of the most important theories of wages are as follows: 1. Wages Fund Theory 2. Subsistence Theory
3. The Surplus Value Theory of Wages 4. Residual Claimant Theory 5. Marginal Productivity Theory 6.
The Bargaining Theory of Wages 7. Behavioural Theories of Wages
How much and on which basis wages should be paid to the workers for services rendered by them has been a
subject matter of great concern and debate among economic thinkers for a long time This has given birth to
several wage theories, i.e. how wages are determined. Out of them, some important theories of wages are
discussed here.
1. Wages Fund Theory:
This theory was developed by Adam Smith (1723-1790). His theory was based on the basic assumption that
workers are paid wages out of a pre-determined fund of wealth. This fund, he called, wages fund created as a
result of savings. According to Adam Smith, the demand for labour and rate of wages depend on the size of
the wages fund. Accordingly, if the wages fund is large, wages would be high and vice versa.
2. Subsistence Theory:
This theory was propounded by David Recardo (1772-1823). According to this theory, “The labourers are
paid to enable them to subsist and perpetuate the race without increase or diminution”. This payment is also
called as ‘subsistence wages’. The basic assumption of this theory is that if workers are paid wages more than
subsistence level, workers’ number will increase and, as a result wages will come down to the subsistence
level.The subsistence wages refers to minimum wages.
3. The Surplus Value Theory of Wages:
This theory was developed by Karl Marx (1849-1883). This theory is based on the basic assump­tion that like
other article, labour is also an article which could be purchased on payment of its price i e wages. This
payment, according to Karl Marx, is at subsistence level which is less than in propor­tion to time labour takes
to produce items. The surplus, according to him, goes to the owner. Karl Marx is well known for his advocation
in the favour of labour.
4. Residual Claimant Theory:
This theory owes its development to Francis A. Walker (1840-1897). According to Walker, there are four
factors of production or business activity, viz., land, labour, capital, and entrepreneurship. He views that once
all other three factors are rewarded what remains left is paid as wages to workers. Thus, according to this
theory, worker is the residual claimant.
5. Marginal Productivity Theory:
This theory was propounded by Phillips Henry Wick-steed (England) and John Bates Clark of U.S.A.
According to this theory, wages is determined based on the production contributed by the last worker, i.e.
marginal worker. His/her production is called ‘marginal production’.
6. The Bargaining Theory of Wages:
John Davidson was the propounder of this theory. According to this theory, the fixation of wages depends on
the bargaining power of workers/trade unions and of employers. If workers are stronger in bargaining process,
then wages tends to be high. In case, employer plays a stronger role, then wages tends to be low.
7. Behavioural Theories of Wages:
Based on research studies and action programmes conducted, some behavioural scientists have also developed
theories of wages. Their theories are based on elements like employee’s acceptance to a wage level, the
prevalent internal wage structure, employee’s consideration on money or’ wages and salaries as motivators.
5) Determinants pay structure and Level

Internal factors: The internal factors exist within the organization and influences the pay structure of the company.
These are as follows:
Ability to Pay: The prosperous or big companies can pay higher compensation as compared to the competing firms
whereas the smaller companies can afford to maintain their pay scale up to the level of competing firm or sometimes
even below the industry standards.
Business Strategy: The organization’s strategy also influences the employee compensation. In case the company
wants the skilled workers, so as to outshine the competitor, will offer more pay as compared to the others.Whereas, if
the company wants to go smooth and is managing with the available workers, will give relatively less pay or equivalent
to what others are paying.
Job Evaluation and Performance Appraisal: The job evaluation helps to have a satisfactory differential pays for the
different jobs.The performance Appraisal helps an employee to earn extra based on his performance.
Employee: The employee or a worker himself influences the compensation in one of the following ways.
Performance: The better performance fetches more pay to the employee, and thus with the increased compensation,
they get motivated and perform their job more efficiently.
Experience: As the employee devote his years in the organization, expects to get an increased pay for his experience.
Potential: The potential is worthless if it gets unnoticed. Therefore, companies do pay extra to the employees having
better potential as compared to others.

External Factors: The factors that exist out of the organization but do affect the employee compensation in one or the
other way. These factors are as follows:
Labor Market: The demand for and supply of labor also influences the employee compensation. The low wage is
given, in case, the demand is less than the supply of labor. On the other hand, high pay is fixed, in case, the demand is
more than the supply of labor.
Going Rate: The compensation is decided on the basis of the rate that is prevailing in the industry, i.e. the amount
the other firms are paying for the same kind of work.
Productivity: The compensation increases with the increase in the production. Thus, to earn more, the workers need
to work on their efficiencies, that can be improved by way of factors which are beyond their control.The introduction
of new technology, new methods, better management techniques are some of the factors that may result in the better
employee performance, thereby resulting in the enhanced productivity.
Cost of Living: The cost of living index also influences the employee compensation, in a way, that with the increase
or fall in the general price level and the consumer price index, the wage or salary is to be varied accordingly.
Labor Unions: The powerful labor unions influence the compensation plan of the company. The labor unions are
generally formed in the case, where the demand is more, and the labor supply is less or are involved in the dangerous
work and, therefore, demands more money for endangering their lives.The non-unionized companies or factories enjoy
more freedom with respect to the fixation of the compensation plan.
Labor laws: There are several laws passed by the Government to safeguard the workers from the exploitation of
employers.The payment of wages Act 1936, The Minimum wages act 1948, The payment of Bonus Act 1965, Equal
Remuneration Act 1976, Payment of Gratuity Act 1972 are some of the acts passed in the welfare of the labor, and all
the employers must abide by these.

Thus, there are several internal and external factors that decide the amount of compensation to be given to the workers
for the amount of work done by them.
6) Wages: Definition, Types and Other Details
In economics, the price paid to labour for its contribution to the process of production is called wages.
Labour is an important factor of production. If there is no labour to work, all other factors, be it land or capital,
will remain idle.
Thus, Karl Marx termed labour as the “creator of all value”.
However, labour alone cannot produce as most of the production is the result of joint efforts of different factors
of production. Therefore, the share of the produce paid to labour for its production activity is called wage.
“A wage may be defined as the sum of money paid under contract by an employer to worker for services
rendered.” -Benham
“Wages is the payment to labour for its assistance to production.” -A.H. Hansen
‘Wage rate is the price paid for the use of labour.” -Mc Connell
“A wage is price, it is the price paid by the employer to the worker on account of labour performed.” -J.R.
Types of Wages:
In real practice, wages are of many types as follows:
1. Piece Wages:
Piece wages are the wages paid according to the work done by the worker. To calculate the piece wages, the
number of units produced by the worker are taken into consideration.
2. Time Wages:
If the labourer is paid for his services according to time, it is called as time wages. For example, if the labour
is paid Rs. 35 per day, it will be termed as time wage.
3. Cash Wages:
Cash wages refer to the wages paid to the labour in terms of money. The salary paid to a worker is an instance
of cash wages.
4. Wages in Kind:
When the labourer is paid in terms of goods rather than cash, is called the wage in kind. These types of wages
are popular in rural areas.
5. Contract Wages:
Under this type, the wages are fixed in the beginning for complete work. For instance, if a contractor is told
that he will be paid Rs. 25,000 for the construction of building, it will be termed as contract wages.
7) Tests of Good Wage Plan