COMPENSATION

Compensation is the total amount of the monetary

and non-monetary pay provided to an employee by an

employer in return for work performed as required.

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COMPENSATION DIFFERENTIAL
Compensation differential refers to differences in wage

rates due to the location of company, hours of work,

working conditions, type of product manufactured, or
other factors.
It may be the difference in wages between workers
with different skills working in the same industry or
workers with similar skills working in different
industries or regions.

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Wages Differential that exists between

the industry are termed as
Inter Industry Compensation
Differentials,
whereas those that exist between
various organizations in an industry are
termed as
Intra Industry Compensation
Differentials.

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For Instance
Employees in MNCs are paid higher.
Different industries have different wage structures

resulting in disparities in remuneration for identical

works.
Wide gaps exist between wages of employees of
organized sector vs. unorganized sector.

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Factors Governing

Minimum Wages
Demographic Factors
Premium for Skill
Demand for Employees
Collective Bargaining
Labour Reserve
Economic Progress
Job Experience
Short and Long-Run Factor
Level of Profit
Productivity
SOURCE:Performance Reward System- Tapomay
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Minimum Wages
The Rate of Minimum Wages across different states of

India is different due to socio-economic factors.

The Rate of Minimum Wages for similar skill grades
across different sectors of industry is also different.
Eg. Agriculture which is one of the largest source of
employment yet minimum wages are much lower than
what is applicable to industry.

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Demographic Factors
The going rate or market rate are different in different

regions or parts of the country depending on the

economic conditions.
Eg: Going rates in rural or backward areas could be
lower than in urban and semi-urban areas.

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Premium for Skill

Different occupations require different qualifications,

skills and different degree of responsibility.

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Demand for Employees

As the economy grows and increasingly employees

newer technologies, the demand for unskilled

employees decreases while demand for skilled
employees increases.
Now most of the workforce is skilled as the demand for
unskilled employees shrinks significantly.

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Collective Bargaining
Collective Bargaining takes place at plant, industry and

national levels.
For Plant level bargaining and assuming negotiations
to be effective, the compensation differential will be
more for that plant as compared to those plants where
collective bargaining is weak.
Further, collective bargaining at Industry or National
level reduces compensation differential between
similar job groups within a particular industry in a
given region or whole of India.
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Labor Reserve
Labor Reserve can be both +ve and ve.
In +ve labor reserve scenario, labor markets are

characterized by easy availability of trained and able

manpower will be cheaper to hire and therefore
compensation differential will be at lower side.
On the other hand if the labor reserve is ve, that is
restricted availability of trained and able manpower,
then compensation differential will be more.

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Economic Progress
Regions characterized by high economic progress shall

tend to employ skilled employees and outsource

unskilled employees to reduce overall cost of
compensation.
Such organizations will pay their skilled employees
more and pay minimum to the unskilled employees.

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Job Experience
Employees with longer experience or greater depth of

skill shall be paid more than those employees who

have lesser job experience.

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Level of Profit
Organizations ability to pay is regulated by its level of

profitability.
Higher is the profitability of a given organization,
more will be its ability to pay.

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Productivity
Employees who are more productive tend to be

rewarded with higher compensation than employees

with lower productivity.
This leads to increasing compensation differential
between more productive and less productive
employees.

SOURCE:Performance Reward System- Tapomay

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Conclusion
It can be concluded that a host of Inter and Intra

Industry factors determine Compensation Differential.

These differentials seek to act as performance catalyst
for the employees in their endeavor to efficiently
achieve goals and objectives of the organization.

SOURCE:Performance Reward System- Tapomay

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