COMPENSATION
MANAGEMENT
Dr. ANJU DWIVEDI SHUKLA
INTRODUCTION
Compensation is a systematic approach to
providing monetary & non monetary value to
employees in exchange for work performed.
Compensation may be defined as money received
in performance of work and many kinds of
benefits that an organization provides to their
employees.
NATURE OF COMPENSATION
BASE PAY-It is the basic compensation an
employee gets, usually as a wage or salary.
VARIABLE PAY-It is the compensation that is
linked directly to performance
accomplishments(bonuses ,incentives, stock
options).
BENEFITS-These are indirect rewards given to an
employee or group of employees as a part of
organizational membership (health insurance,
vacation pay, retirement pension etc.
OBJECTIVES
1. The most important objective of any
pay system is fairness or equity. The
term equity has 3 dimensions.
Internal Equity- This ensures that
more difficult jobs are paid more.
External Equity-This ensures that jobs
are fairly compensated in comparison
to similar jobs in the labor market.
Individual Equity-It ensures equal pay
for equal work i.e. each individual’s pay
is fair in comparison to others doing
the same jobs.
2. Attract Talent-Compensation needs to
be high enough to attract talented
people. Since many firms compete to
hire the services of competent people,
the salaries offered must be high
enough to motivate them to apply.
3.Retain Talent-If Compensation levels fall below the expectations of
employees or are not competitive, employees may quit in frustration.
4.Ensure Equity-Pay should equal the worth of a job. Similar jobs should
get similar pay.
5.New and Desired behavior - Pay should reward, loyalty, commitment,
experience, risks takings ,initiative and other desired behaviors. Where the
company fails to reward such employees may go in search of greener
pastures outside.
6.Control costs-The cost of hiring people should not be too high. Effective
compensation management ensures that workers are neither overpaid nor
underpaid.
7.Comply with Legal rules- Compensation programmes must invariably
satisfy governmental rules regarding minimum wages, bonus, allowance,
benefits etc.
8.Ease of Operation-The Compensation Management System Should be
easy to understand and operate. Then only will it promote understanding
regarding pay-related matters between employees, unions and managers.
COMPONENTS OF PAY STRUCTURE
IN INDIA
The pay structure of a company depends on several
factors such as labour market conditions, company’s
paying capacity and legal provisions.
In India, different acts include different items under
wages, though all the acts include basic wage and
dearness allowance under the term wages.
Wages include : holiday pay , overtime pay , bonus,
attendance bonus and good conduct bonus form part of
wages.
Under the payment of wages act, 1936 ,any award of settlement
and production is paid constitutes wages and any retrenchment
compensation, payment in lieu of notice and gratuity payable on
discharge constitute wages.
However following types of remuneration do not amount to
wages:
Bonus under profit sharing scheme.
Value of any house accommodation, supply of light, water,
medical attendance or travelling allowance.
Any contribution to pension, PF or a scheme of social
security.
The wage structure in India may be examined broadly under the
following heads:
1. BASIC WAGE:
While deciding the basic wage, the following criteria may be
considered :-
Skill needs for the job
Experience needed
Difficulty of work: mental as well as physical
Training needed
Responsibilities involved
Hazardous nature of job.
2. DEARNESS ALLOWANCE (DA):
• It is the allowance paid to employees in order to enable
them to face against inflation.
• It serves as a cushion, a sort of insurance against increase
in price levels of commodities.
• DA is paid to neutralise the effects of inflation.
• It is linked with three factors:
i. Index factor
ii. Time factor
iii. Point factor
WAGE AND SALARY
ADMINISTRATION
Employee compensation may be classified into
two types-
1. Base compensation
2. Supplementary compensation
BASE COMPENSATION:
• It refers to monetary payments to employees in the form
of wages and salaries.
• The term “wages” implies remuneration to workers doing
manual work measured in terms of number of hours
worked.
• The term “salaries” (payment relating to a specific period
regardless of the no. of hours worked, payment is usually
made at the end of a month) is usually defined to mean
compensation to office, managerial, technical and
professional staff.
• Base compensation is a fixed and non- incentive payment
on the basis of time spent by an employee on the job.
SUPPLEMENTARY COMPENSATION:
• It signifies incentive payments based on actual
performance of an employee or a group of employees.
• The term “compensation administration” or “wages and
salaries administration” denotes the process of
managing a company’s compensation programme.
• The goals of compensation administration are to design
a cost- effective pay structure that will attract, motivate
and retain competent employees.
OBJECTIVES of Wage and salary
Administration
A sound plan of compensation administration seeks to achieve
the following objectives:
To establish a fair and equitable remuneration offering
similar pay for similar work.
To attract qualified and competent personnel.
To retain the present employees by keeping wage levels
in tune with competing units.
To control labor & admininistrative cost in line with the
ability of the organization to pay.
To improve motivation & morale of employees and to
improve union- management relations.
To project a good image of the company and to comply
with legal needs relating to wages and salaries.
PRINCIPLE OF WAGE AND SALARY
ADMINISTRATION
Wage and salary plans should be sufficiently flexible.
Job evaluation must be done scientifically
Wage and salary administration plans must always
be consistent with overall organisational plans and
programmes.
Wage and salary administration plans and
programmes should be in conformity with the social
and economic objectives of the country like
attainment of equality in income distribution and
controlling inflationary trends.
Wage and salary administration plans and
programme should be responsive to the changing local
and national conditions.
These plans should simplify and expedite other
administrative processes.
FACTORS INFLUENCING COMPENSATION
LEVELS
Job needs
Ability to Pay
Cost of living
Prevailing wage rates
Unions
Productivity
State regulation
Demand and supply
WAGE DIFFERENTIALS
Wage differentials Reasons
Interpersonal differentials Differentials in sex, skills, age,
knowledge, experience.
Inter-occupational differentials Varying requirements of skills ,
knowledge, demand supply
situation
Inter-area differentials Cost of living, ability of employers
to pay, demand and supply
situation, extent of unionisation
Inter-firm differentials Ability of employer to pay,
employees’ bargaining power,
degree of unionisation, skill needs,
etc.
