Compensation Systems
There are two major systems of compensation:
1. Time-Wage system
Under this system, wages are paid on basis of time spent on
the job regardless of the work done. The unit of work may be
a day, week, or month.
When is the system suitable?
a. Where units of output are non-measurable
b. When employees have little control over the quantity
of output
c. When delays in work are frequent and beyond the
control of the employee
d. When quality of work is especially important
e. When supervision is good and supervisors know what
constitutes a “fair day’s work”
f. When competitive conditions and cost control do not
require din advance the precise knowledge of labour
costs per unit of output
g. Where machinery and materials used are very
sophisticated and expensive
h. Work is of a highly varied nature and standards of
performance cannot be established
i. Employees and trade unions strongly oppose
incentive payment
j. When workers are new and learning the job
k. When collective efforts of a group of persons are
essential for completing the job
2. Piece Wage System
Remuneration is based on the amount of work done or
output of a worker. One unit of output is considered as one
piece and a specific rate of wage is paid per piece.
- It is also called payment bu results.
Where is the system suitable?
a. When work done by an individual worker can be
measured accurately.
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- E.g. production of standardised goods in a
factory
b. When the quantity of output depends directly upon
the skill and effort of the worker
c. Where the flow of work is regular and interruptions
are minimum, i.e. repetitive jobs
d. Where quality and workmanship are not very
important
e. In large scale production involving heavy overheads
and broad supervision
f. When competitive conditions and cost control
require that labour cost per unit is fixed in order
g. When methods of production are standardised and
the job is of a repetitive nature
3. Third method: Balance or Debt Method
This is a combination of Time and Piece Wage Systems.
- The worker is guaranteed a time rate with an
alternative piece rate
- If the wages calculated at piece rate exceed the
time rate, the worker gets credit
- On the other hand, if the time wages exceed piece
wages, the worker is paid time wage and the deficit
is carried forward as a debt to be recovered in
future.
The Process of Wage Determination
1. Job Analysis
- Analyse the contents and requirements of a job
- The data collected are specific compensation
methods:
- Time Rates:
- Related to the number of hours, e.g. monthly pay
- Payments by Results (PBR)
- Based on the individual’s output
- Performance – Rated Pay
Considers not only results (output), but also actual
behaviour at work
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- Group PRP Schemes
They link rewards to outcomes such as meeting
budget targets or org profitability
- It is a team-based pay
- Profit – Related Pay
- Sharing the profit
- Skill – Based Pay
- Places emphasis on “Inputs”, i.e. knowledge,
skills and competencies injected into the job.
Used to prepare job description and job
specification.
- On the basis of these statements, standards of
job performance are laid down
2. Second Step: – Job Evaluation
At this step, the relative value of every job is determined.
The relative job value is then converted into money value so
as to fix basic wage for the job.
3. Third Step: - Wage Survey
At this step, wage/salary surveys are conducted to find out
wage/salary levels prevailing in the region or industry for
similar jobs
4. Fourth Step: - Developing Wage Structure
On the basis of the outgoing steps, an equitable wage
structure is prepared. While determining such a structure,
several points need to be considered.
- Legislation relating to wages
- Payments equal to, more or less than prevailing
wage rates
- Number and width off pay grades
- Jobs to be placed in each pay grade
- Provision for merit increases
- Differentials between pay plans
- Dealing with wages/salaries that are out of line with
the structure
5. Fifth Step: - Wage Administration Rules
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- Frequency with which pay
increments will be awarded
- The rules that will govern
promotions from one pay grade to another
o Once formulated, rules should be communicated
to the employees.
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6. Step Six: - Employee Appraisal
- Some difference in pay are based on differences in
employee performance
- It is necessary to provide incentive for hard-workers
and superior performance which is determined by
comparing between performances v/s predetermined
standards of performance
Principles of Wage and Salary Management
1. Wage policy should be developed keeping in view the
interest of the employer, employees, customers and the
community
2. Wage policy should be stated clearly in writing to ensure
uniform and consistent application
3. Wage and salary plans should be consistent with the
overall plans of the company. Compensation planning
should be an integral part of the Financial Planning
4. Wage and salary plans should be sufficiently flexible or
responsive to changes in internal and external conditions
of the org.
5. Management should ensure that employees know and
understand the wage policy of the company. Workers
should participate in formulation and implementation of
the wage policy
6. All wage and salary decisions should be checked against
the standard set in advance in the wage policy
7. Wage and salary plans should simplify and expedite
administrative processes
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8. An adequate database and a proper organisational set up
should be developed for compensation determination
administration
9. Wage policy and programme should be reviewed and
revised periodically in conformity with changing needs.
Essentials of a Sound Wage and Salary Structure
1. Internal Equity
Refers to proper relationship between wages paid for
different jobs within the org.
- To realize this, pay differentials should be related
directly to job requirements (do job evaluation to
realize equity)
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2. External Competitiveness
- Salaries should reflect the comparable jobs in
other organisation
3. Built in Incentive
Wage and salary plan should contain a built-in
incentive so as to motivate employees to perform
better. Such an incentive can be developed through
performance – based payment
4. Link with Productivity
- Some parts of the total pay should be linked to
productivity
5. Maintain Real Wages
At least a part of the increase in cost of leaving should
be neutralised so as to protect the real wages of labour
6. Increments
- Link the increment with merit
- But annual increments should be linked with
seniority or years of service.
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Factors Affecting Compensation
1. Demand for and Supply of Labour
- The law of demand an supply applies as far as
price is concerned
2. Ability to pay
- Depending up on profit earning capacity
3. Labour Unions
- Through collective bargaining well organised
unions can cause higher salaries
4. Cost of Living
- Due to inflation, the real wages decline affecting
the purchasing power of workers
- Contracts of employment usually have a clause
providing an automatic increase in pay a cost of
living rises
-
5. Prevailing Rates
6. Job Requirements
- Depending on the physical and mental
requirements of the job (e.g. Mortuary job)
7. Productivity
- Refers to the performance level of workers which
should determine the compensation levels
8. State Regulations
- E.g. on minimum wage
- Dearness allowance
TAKE HOME ASSIGNMENT
Identify two service organisations and two manufacturing
organisations where are variations in compensation packages
(Basic compensation) among the employees holding the same
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job positions exist. Thereafter, identify at least 5 factors which
are responsible for the situation
