Concept of Compensation, Exploring & Defining Compensation Context

Dr. G C Mohanta, BE, MSc(Engg), MBA, PhD(Mgt)

Professor Al-Qurmoshi Institute of Business

Management Hyderabad

Concept of Compensation

CompensationCompensation - money and other benefits

received for providing servicesCascio defined compensation as “Direct

cash payments, indirect payments (employee benefits) and incentives to motivate employees to strive for higher levels of productivity”

Strategic CompensationStrategic compensation is determining &

providing compensation packages to employees, those are aligned with the business goals and objectives

Organizations have to take special measures regarding compensation to retain the valuable employees

Exploring and Defining Compensation Context

Total Compensation

Core compensation• Hourly

wage· Annual

salary

Core compensation• Hourly

wage· Annual

salary

Adjustments to core

compensation• Cost-of living

· Seniority· Merit

· Incentive· Person-focused

Adjustments to core

compensation• Cost-of living

· Seniority· Merit

· Incentive· Person-focused

Total CompensationTotal Compensation

Extrinsic Compensation

Extrinsic Compensation Intrinsic

CompensationIntrinsic

Compensation

Legally Required Employee Benefits• Social Security Act • Workers compensation

laws · Family & Medical leave

Act

Legally Required Employee Benefits• Social Security Act • Workers compensation

laws · Family & Medical leave

Act

Discretionary Employee Benefits Health insurance

Disability insurance

· Life insurance · Retirement plans

· Paid time-off · Accommodation

and enhancement

Discretionary Employee Benefits Health insurance

Disability insurance

· Life insurance · Retirement plans

· Paid time-off · Accommodation

and enhancement

Job characteristics• Skill variety• Task identity

· Task significance· Autonomy· Feedback

Job characteristics• Skill variety• Task identity

· Task significance· Autonomy· Feedback

Extrinsic Compensation

Core Compensation1) Salaries (Monthly)2) Wages (Hourly, Daily, or Weekly)

Cost-of-Leaving Adjustment (COLAs)1) Consumer Price Index (CPI)2) Seniority Pay3) Merit Pay4) Incentive Pay5) Person-focused Pay (Pay-for-Knowledge and

Skill-Based Pay)

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Extrinsic Compensation (Contd.)

Employee Benefits: Legally Required Benefits

1) Social Security2) Workers Compensation & Sick leave3) Family & Medical Leave

Discretionary Benefits:1) Health Insurance2) Life Insurance3) Retirement Benefits 4) Paid time-off.

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Components of Compensation Wage and SalaryIncentivesFringe BenefitsPerquisites

Wage and SalaryWage - remuneration to workers, hourly-

rated paymentSalary - remuneration paid to white-collar

employees & managerial personnelWages and salary - paid on the basis of

fixed time period, not associated with productivity of an employee

IncentivesIncentive - Any reward or benefit given to an

employee over and above the wage or salary with a view to motivate him to excel in his work

Incentives include both monetary as well as non-monetary rewards

A scheme of incentive is a plan to motivate an individual or a group performers

Benefits

Fringe BenefitsFringe benefits - Provident fund, gratuity, pension - Medical benefits, accident relief, health

and life insurance - Facilitation in performance of job, like

uniforms, Canteens & recreation

PerquisitesPerquisites - provided to managerial

personnel either to facilitate their job performance or to retain them in the organization

Perquisites include company car, club membership, free residential accommodation, paid holiday trips and stock options

Factors Influencing Compensation

Market Forces

WorkValue

OrganisationPolicy

IndividualPerformance

Three Pay PoliciesThree Pay Policies

Pay Policy Attract Retain Motivate Control Costs

Lead + + ? ?

Match = = ? =

Lag - ? ? +

Govt. Regulation for Compensation in India

Minimum Wages Act, 1948Payment of Wages Act, 1936Adjudication of Wage DisputesWage boardsPay CommissionsPayment of Bonus Act, 1965

Compensation Structures

Job Evaluation

Rate Ranges

Pay Grades

Issues Involved in

Setting Compensation

Structures

Issues Involved in

Setting Compensation

Structures

Wage and Salary Surveys

Concept of Different Wages

Minimum WageFair WageLiving Wage (Highest in Value)

Concept of Minimum Wage

Minimum Wage - For sustenance of life and preservation of efficiency of workers and to provide some measure of education, medical requirements and amenities.

 

Concept of Living Wage Living Wage – In addition to providing

food, clothing and shelter for worker and family, education for children, protection against ill-health, essential social needs and insurance against misfortunes and old age.

Concept of Fair Wage Fair Wage -above minimum wage but

below living wage; fair wage to be paid based on capacity of industry to pay.

Calculation of Minimum Wages

Worker’s family – 3 members, earnings of women, children & adolescents disregarded

Minimum food requirements - 2,700 calories/adult.

Clothing requirements - 18 yards per annum/person.

Housing - minimum rent charged by Govt for houses under subsidized housing scheme

Fuel, lighting and other miscellaneous items - 20 % total minimum wage.