COMPENSATION MANAGEMENT

INTRODUCTION :

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.

COMPENSATION MANAGEMENT

Pay or compensation represents an exchcange 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. In India, right from Vedic Age, the volume
of work and the time required to perform the work were
considered to decide compensation.

COMPENSATION MANAGEMENT

I n Europe, the Church advocated the principles of just
wage or compensation. The word compensation may
be defined as all forms of financial returns, tangible
;services and benefits that an employee receives in
his/her tenure of employment.
The modern definition of compensation, however,
considers both intrinsic and extrinsic components of
compensation. While extrinsic compensation covers
both monetary and non-monetary rewards, intrinsic
compensation covers both monetary and non-
monetary rewards, intrinsic compensation reflects the
employees mental satisfaction with their job
accomplishments.

Wages and Compensation :

A wage is a basic compensation for labour and for Labour
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
representes earnings and other benefits for labour.
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.
payment to a person for service rendered, the amount paid periodically,
by the day or week or month for the time during which workman or
servant at the employers' discretion- Oxford english dictionary
Under Sec. 2(m) wages includes Wages for leave period, holiday pay,
overtime pay, bonus, attendance bonus etc. Any award of settlement and
production bonus if paid, constitutes wages. But under Payment of Wages
Act, 1948 Retrenchment compensation , payment in lieu of notice and
gratuity payable on discharge constitute wages.
SALARY: A periodic payment to persons to persons doing a job other than
mechanical usually to white collared employees remineration paid
monthly

TYPES OF WAGES

TIME RATE- oldest and most common method- worker is paid
according to the work doneduring a certain period of time.( hour,
day, week, month etc)
PIECE RATE Payment for each item produced, payment by result
system.
BALANCE OR DEBT METHOD- Combination of time and piece rates,
If the earnings of a worker calculated at piece rate exceeds the
amount , which he could have earned if paid on time basis, he is
credited for the balance( the excess piece rate earnings over time
rate earnings)where piece rate earnings are less than time rate
earnings , he is paid on the basis of time rate , but the excess which
he is paid is carried forward as debt against him to be recovered
from any future balance of piece work earnings over time work
earnings.

COMPENSATION MANAGEMENT

From financial perspective, wages are defined as the cash paid for some
specified quantity of labor, in contrast with salaries. Wages are paid based
on wage rate (based on units of time) while salaries are paid periodically
without reference to a specified number of hours worked. Given an
established job description , wages can often be negotiated by workers
through collective bargaining.
Differences between Wages and Compensation :
The term labour cost is best understood from the International Labour
Organisation (ILO) Geneva. Labour cost is the cost incurred by the
employer in the employment of labour. 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.
Labour 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 labour cost and the
compensation of employees differ from country to country.
For example, some items of labour cost such as vocational
training are borne not by employers but by respective
government s. In India, the Central Board for Workers
Training and the Regional Labour Insitutes provide either
free or subsidised training for industrial workers.

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 labour 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.

Wage issues are no longer purely mathematical issues.
It was with this perspective that the framers of the
Constitution drew up Article 43 (part of the directive
principles of State Policy) which states that The State
shall endeavour to secure, by suitable legislation or
economic organisation or in any other way, to all
workers agriculture, industrial or otherwise work , a
living wage, conditions of work ensuring a decent
standard of life and full employment of leisure and
social and cultural opportunities. The declaration in
effect, assured labour that where they were not able to
secure a living wage for themselves, the government,
through legislation or means will come to their aid.

Two aspects of the States role prevent employers from taking undue
advantage of workers-strong bargaining strenghth and direct participation
of the state in the economic life of the nation.
Wage Components :
Although the term wage is an encompassing and includes any form of
financial support and benefits , in a narrower sense wages are the price
paid for the services of labour.
Broadly, there are two wage components the base or basic wages and
other allowances. The basic wage is the remuneration, by way of basic
salary and allowances which are paid or payable to an employee in terms
of the contract of employment` for the work done.
Allowances are paid in addition to the basic wage to ensure that the value
of basic wage to ensure that the value of basic wages does not fall over a
period of time. Some allowances are statutory , while others are voluntary.

Factors Affecting Wages

Demand for and supply of labor:
Labor unions:
Cost of living:
Prevailing wage rates
Ability to pay
Job requirements:
State regulation:
Increment system

Compensation Management Process :

In order to achieve the objectives of compensation
management, it should proceed as a process.
This process has various sequential steps as shown:
Organizations strategy
Compensation policy
Job analysis and evaluation
Analysis of contingent factors
Design and implementation of compensation plan
Evaluation and review

Designing and Developing the
Compensation Plan:

Develop a program outline :
Set an objective for the program.
Establish target dates for implementation and completion.
Determine a budget.
Designate an individual to oversee designing the
compensation program :
Determine whether this position will be permanent or
temporary.
Determine who will oversee the program once it is
established.
Determine the cost of going outside versus looking inside.
Determine the cost of a consultant's review.