Compensation Management

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 Wages//Salaries Salaries

Time TimeNot NotWorked Worked

Commissions Commissions Bonuses Bonuses Gainsharing Gainsharing

••Vacations Vacations ••Breaks Breaks ••Holidays Holidays

Insurance InsurancePlans Plans ••Medical Medical ••Dental Dental ••Life Life

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

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Medical allowances



Travelling allowances

Any other sum paid to defray special expenses incurred by the worker 

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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

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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

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P a ym e nt of W ages A ct



P a y C o m m is s io n s

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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

R easons

In te r p e r s o n a l d iff e r e n tia ls

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

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

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

In te r - a r e a d iffe r e n tia ls

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

In t e r - f ir m d iff e r e n t ia ls

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

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Fixed vs. variable pay

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Performance vs. membership

Managerial Compensation In India Executive compensation is built around three factors in India 

Job complexity

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Employers’ ability to pay

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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 

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Piecework 

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Work paid on an hourly basis. 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