COMPENSATION

MANAGEMENT
Compensation
 Pay is a statement of an employee’s worth
by an employer.
Compensation is what employees receive in exchange for their contribution to
the organization. Generally speaking, employees offer their services for three
types of rewards
 Base pay
 Variable pay
 Benefits

The most important objective of any pay system is fairness or equity, generally
expressed in three forms

 Internal equity: where more difficult jobs are paid more

 External equity: where jobs are fairly compensated in comparison to
similar jobs in labour market
 Individual equity: where equal pay is ensured for equal work
 Total
Total Compensation
Compensation

Direct
Direct Indirect
Indirect

Wages Time
TimeNot
NotWorked
Worked
Wages//Salaries
Salaries ••Vacations
Vacations
••Breaks
Breaks
••Holidays
Commissions
Commissions Holidays

Insurance
InsurancePlans
Plans
Bonuses ••Medical
Medical
Bonuses ••Dental
Dental
••Life
Life
Gainsharing
Gainsharing Security
SecurityPlans
Plans
••Pensions
Pensions

Employee
EmployeeServices
Services
••Educational
Educationalassistance
assistance
••Recreational programs
Recreational programs
Components of Pay Structure

The two essential components of pay structure are; basic wages and
dearness allowance
.the basic wage rate is fixed taking the skill needs of the job,
experience needed, difficulty of work, training required,
responsibilities involved and the hazardous nature of the job.
Dearness allowance it paid to employees in order to compensate
them for the occasional or regular rise in the price of essential
commodities.
Components of Pay Structure

The following, however, do not come under the term wages

 Bonus
 Payments made under a profit sharing scheme
 Value of house accommodation
 Medical allowances
 Travelling allowances
 Any other sum paid to defray special expenses incurred by
the worker
 Contribution to pension, provident fund
 Any amenity or service excluded from the computation of
wages
Wage Policy In India

A wage policy offers certain guidelines for determining a wage

structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
 Minimum wage: Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities of life
 Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employer’s capacity to pay etc.
 Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.
State regulation of wages

Institutions involved in fixation of

wages
 E m p lo y e r
 C o lle c t i v e B a r g a in in g
 L e g is la t io n  M in im u m W a g e s A c t
 W a g e B o a rd s  P a ym e nt of W ages A ct
 P a y C o m m is s io n s  A d ju d i c a t io n M a c h in e r y
Wage differentials
Differences in wage rates are inevitable in any industry and the
reasons are fairly obvious
Reasons for wage differentials
W a g e d iffe r e n tia ls
In te r p e r s o n a l d iff e r e n tia ls
I n t e r - o c c u p a t io n a l d i ff e r e n t ia ls
In te r - a r e a d iffe r e n tia ls
In t e r - f ir m d iff e r e n t ia ls
R easons
D if f e r e n t ia ls in s e x , s k i ll s , a g e , k n o w l e d g e , e x p e r i e n c e
V a r y in g r e q u ir e m e n ts o f s k ill, k n o w le d g e , d e m a n d - s u p p l y s it u a t io n
C o s t o f li v in g , a b il it y o f e m p lo y e r s t o p a y , d e m a n d a n d s u p p l y s i t u a t io n , e x t e n t
o f u n io n is a t i o n
A b i l i t y o f e m p l o y e r t o p a y , e m p l o y e e s ’ b a r g a i n i n g p o w e r, d e g r e e o f
u n io n is a t io n , s k i ll n e e d s , e t c .
Choices In Designing A
Compensation System
The compensation that is followed by a firm should be in tune with
its own unique character and culture and allow the firm to achieve
its strategic objectives. A variety of choices confront a firm here:
 Internal and external pay
 Fixed vs. variable pay
 Performance vs. membership
Managerial Compensation In India

Executive compensation is built around three factors in India

 Job complexity
 Employers’ ability to pay
 Managerial productivity
Common Strategic
Compensation Goals
1. To reward employees’ past performance
2. To remain competitive in the labor market
3. To maintain salary equity among employees
4. To mesh employees’ future performance with
organizational goals
5. To control the compensation budget
6. To attract new employees
7. To reduce unnecessary turnover
The Bases for Compensation

 Hourly Work
 Work paid on an hourly basis.
 Piecework
 Work paid according to the number of units
produced.
 Salary Workers
 Employees whose compensation is computed on
the basis of weekly, biweekly, or monthly pay
periods.
Factors Affecting the Wage Mix