Compensation Management The term compensation as a substitute word for wages and salaries is of recent origin.

Wages is now considered as a cost factor. Therefore, strategic management of wages and salaries is very important for organisations. It has become imperative for organisations to balance the cost of compensation and employee motivation (for retention) to survive in a competitive world. Employee compensation is a better term than employee benefits or wages or salaries. What the employee provides the employer is a labor service, usually known as work. This labor service consists of many different kinds of employee behavior, such as showing up regularly and on time, carrying out tasks dependently, cooperative with others and making useful suggestions. Pay or compensation represents an exchange between the employee and the organisation. Each gives something in return for something else. In the past, the compensation issue was often confidential and governed by individual employers preference and choice. However, in todays competitive world, compensation issues are more transparent. Different scholars in different countries, have defined the world compensation from different perspectives. Globally, almost every country views compensation as a measure of justice. Also, some countries (particularly developed ones) consider compensation as a means of protection against potential job loss. Compensation should be fair, irrespective of economic consideration. Many scholars believe that compensation is the outcome of productivity. Wages and Compensation

A wage is a basic compensation for labor and for labor per period of time referred to as the wage rate. Other frequently used terms for wages are payment per unit of time (typically an hour or year) Total compensation represented earnings and other benefits for labor. Wage Income represents total compensation and unearned income. Wages are also referred to as economic rent, which is the figure of total compensation, after reducing the opportunity cost. Opportunity cost represents the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity) or the most valuable forgone alternative. The term wages has emerged from French Word wagier or gagier meaning to pledge or promise. The term wage is thus meant; to indicate making a promise in monetary form.

Differences between Wages and Compensation:

The term labor cost is best understood from the International Labour Organisation (ILO) Geneva. Labor cost is the cost incurred by the employer in the employment of labor. This also includes payments in respect of time paid for but not worked, bonuses, gratuities, the cost of food, drink and other payments in kind, the cost of workers housing borne by employers, employers social security expenditures, the cost to the employer for vocational training, welfare services, miscellaneous items, such as transport of

workers, work clothes and cost of recruitment and taxes paid by the employers on employment. From the employers perspective, therefore, the compensation consists of all payments (in kind or in cash) and all contributions to employees social security, pension, insurance etc. Labor cost and the compensation of employees are thus closely-related concepts, with many common elements. The major part of labor cost comprises compensation of employees. However, definition of labor cost and the compensation of employees differ from country to country. For example, some items of labor cost such as vocational training are borne not by employers but by respective governments. The States contributions to wage-related social security schemes are not included in the cost of compensation for employers. In some countries, payroll taxes or; employment taxes are considered as labor costs. In Human Resource Management we consider the term from a broader perspective, that is, the strategic use of wages paid to employees. Some organisations refer to use the term rewards instead of wages or compensation. Compensation or wage structure in a given case should take into account industrial adjudication as well as considerations of right and wrong and fairness and unfairness. Given social conscience and the welfare policy of the state, collective bargaining is now the most dynamic form of negotiation to decide wage structure in a particular organisation.

The following types of remunerations are excluded from the purview of wages:

Bonus or other payments under a profit-sharing scheme, which do not form part of the contract of employment. Value of any house accommodation, supply of light, water, medical attendance. Any sum paid to defray special expenses entailed by the nature of the employment of a workmen. Any contribution to Pension, Provident Fund or a scheme of social security and insurance benefits. Any other amenity or service excluded from the computation of wages by a general or special order of an appropriate governmental authority. A wage level is an average of the rates paid for the jobs of an organisation., an industry , a region or a nation. A wage structure is a hierarchy of jobs to which wage rates have been attached

Objectives of Compensation: The objectives of compensation or wages can be classified under four broad categories equity, efficiency, macro-economic stability and optimum allocation of labor. 1. Equity: The first category is equity, which may take several forms. It includes income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power) and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity.

Internal equity requires that pay be related to the relative worth of a job so that similar jobs get similar pay. 2. Efficiency: It is often closely related to equity, because two concepts are not antithetical. The objectives of efficiency are reflected in attempts to link a part of wages to productivity or profit, group or individual performance acquisition and application of skills and so on. 3. Macro-economic stability: It can be achieved through high employment levels and low inflation. For instance, an inordinately high minimum wage would have an adverse impact on levels of employment. 4. Efficient allocation of labor: The efficient allocation of labor in the labor market implies that employees will move to wherever they receive a net gain. Such movement may be from one geographical location to another or from one job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move from a labor 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 employers wages are below market rates, employee turnover increases. When it is above market rates,then employer attracts job applicants. When employees move from declining to growth industries, an efficient allocation of labor due to structural changes take place. Other Objectives of Compensation: 1. Acquire Qualified Personnel: Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others. 2. Retain Current Employees: Employees may quit when compensation levels are not competitive, resulting in high turnover. 3.Reward Desired Behavior: Pay should reinforce desired behaviors and act as an incentive for such behavior to occur in the future. Effective compensation plans reward performance, loyalty, experience, responsibility and other behaviors. 4. Control Costs: A rational compensation system helps an organisation obtain and retain workers at a reasonable cost. With effective compensation management, workers might be over-paid or under-paid. 5. Comply with Legal Regulations: A sound wage and salary system considers the legal challenges imposed by the Government and ensures the employers compliance. 6. Facilitate Understanding: The compensation management system should be easily understood by human resource specialists, operating managers and employees. 7. Further Administrative Efficiency: Wage and salary programmes should be so designed that they can be managed efficiently.

Theories of Wage Determination

There are two key theories to determine wages: 1.The traditional theory of wage determination and 2. The theory of negotiated wages. Traditional Theory of Wage Determination: This theory assumes that market forces, that is, demand and supply determine wages. Computer programmers are in short supply, so they are able to command higher salaries. In our country, many organisations pay very high salaries to entry-level IT professionals, who sometimes get more than senior managerial employees in other sectors. This is because of demand and supply gap. Theory of Negotiated Wages: Union employees can negotiate salaries. This is done through collective bargaining. Normally, in any unionised organisations Unions periodically submit their memorandum to the management, asking for wage raises to keep pace with market standards and organisational profitability. Principles of Compensation Determination: 1. Subsistence Theory: David Ricard (1772-1832) advocated this theory. In Ricardos words, workers; should be paid To enable them to subsist and perpetuate the race without increase or diminution. The theory is based on the notion that if workers are paid more than the subsistence wage their numbers will increase as they would procreate more And this would bring down the rate of wages. If wages fell down below the subsistence level, the number of workers would decrease, as many would die of hunger, malnutrition, disease, cold etc and many would not marry. When this happened wages would increase again. In economics, the subsistence theory of wages states, that in the long run, wages will be reduced to the minimum level needed to keep workers alive. 2. Wages Fund Theory: This theory was developed by Adams Smith (1723-1790) on the assumption that wages are paid out of a predetermined fund of wealth, the surplus savings of the wealthy. This fund could be utilised for employing laborers for work. If the fund was large, wages would be high; if it was small, ages would be reduced to subsistence level. The demand for labor and the level of wages were determined by the size of the fund. 3. Surplus Value Theory: The surplus value theory owes its developments to Karl Marx (1818-1883) According to this theory, labor was an article of commerce, which could be purchased on payment of the subsistence price. The price of any product was determined by labor and time needed for producing it. The labor was not paid in proportion to the time spent on work, but was paid much less, and the surplus was utilised for paying other expenses.

4. Residual Claimant Theory: The residual claimant theory advocated by Francis Walker (1840-1897) assumes that there are four factors of production/business activity land, labor, capital and entrepreneurship. Wages represent the amount of value created in the production, which remains after payment has been made for all these factors of production. In other words, labor is the residual claimant. 5. Marginal Productivity Theory: This theory assumes that wages are based upon an entrepreneurs estimate of the value that will probably be produced by the last or marginal worker.