Compensation

Compensation Management

Compensation

Reward refers to a wide range of financial and non financial rewards to the employees for the services rendered to the organisation .

a) Transactional rewards

b) Relational rewards

All forms of financial returns and tangible services & benefits employees receive as part of an employment relationship

Compensation

It is a system of rewards that motivates employees to perform An organisational tool to foster the

values,culture & the behaviour they require An instrument that enables organisations to

achieve their objectives

Objectives of Wage &Salary Administration

To attract competent personnel To retain the present employees To improve productivity To improve efficiency To control Costs

To ensure fairness To improve union-management relations To improve the public image of the

company Comply with legal regulations

Objectives of Wage &Salary Administration

A Compensation system should

be:

Adequate*Equitable*

Balanced

Cost-effective

Secure

Incentive-providing*

Acceptable to the employee

General and Individual General and Individual Factors affecting WagesFactors affecting Wages

General Factors Demand for and Supply of

labour Ability to pay of the

Organization Labour Unions Cost of Living Prevailing wage rates Job Requirements Productivity State Regulation

Individual Factors Employee’s Age and work

Experience Educational Qualification Promotion possibilities Hazards involved in the job Stability of Employment Demand for the product Industry’s role in the economy Potentials of an employee

Labor Market Economy

Government Unions

External Influences on CompensationExternal Influences on Compensation

Compensation and an International Labor Compensation and an International Labor ForceForce

Issues that affect the compensation strategies of Issues that affect the compensation strategies of organizations competing in a global market:organizations competing in a global market: Global wage differentials verging on the extremeGlobal wage differentials verging on the extreme Moving employees to foreign locationsMoving employees to foreign locations Employing local (foreign) managers and workersEmploying local (foreign) managers and workers Moving foreign workers for training or work Moving foreign workers for training or work

assignmentsassignments

Essentials of sound wage Essentials of sound wage and Salary structureand Salary structure

Internal Equity External Competitiveness Built in incentive Link with productivity Individual worth Increments

Compensation - Definition

Compensation means all remuneration capable of being expressed in terms of money, which, if the terms of contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment

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Wage and SalaryBase compensation

Wage : Remuneration paid by the employer for the services of hourly ,weekly & fortnightly workers doing manual or physical work.

Usually given to unskilled workers It may also be defined as the compensation paid

to blue collar employees. Salary:It refers to the remuneration paid to the

office employees,foremen,managers,professional and technical staff on a monthly basis.

Supplementary compensation

Compensation over and above the base compensation to retain the employees on a long term basis . The basic purpose behind this is to attract and retain the employees and motivate them

Also known as Employee benefits Non wage payments

Examples Fringe benefits

Payment for time not worked Housing Insurance Career counseling crèche Paid memberships in professional organizations

Perquisites or “perks” take home vehicles /chauffeur driven vehicles Paid vacations Club membership Entertainment allowance Paternity leave free refreshments leisure activities on work time (golf, etc.),

Base compensation Vs Supplementary compensation

Payment to the workers for their work

Payment is in cash Wage & salaries are paid to

compensate for their services Determined by job

evaluation,demand & Supply of labour ,organizations capacity to pay ,bargaining power of trade unions ,productivity ,govt regulations .

It denotes benefits over &above their wages /salary

They are paid to increase their efficiency & retain them

Determined by the history of the organisation,capacity of the organisation to pay ,need to retain the talented employees ,desire to enhance the public image ,philosophy of the management

Wage Concepts The minimum wage Concept states that one

must provide not only for the bare sustenance of life but for the preservation of the efficiency of the worker.

For this purpose, Minimum wage should also provide for some measure of education, medical requirements and amenities

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Wage Concepts Living Wage is defined as “one which

should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the

more important misfortunes, including old age.” 17

Living Wage Concept The Living wage is fixed considering the

general economic conditions of the country. In more advanced countries,Living wage itself

forms the basis for Minimum Wage.

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Wage concept

Fair wage concept is a wage that is someway above the minimum wage but below the Living wage.

The lower limit for fair wage is the Minimum wage & the upper limit is set by the ability of the industry to.

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Fair Wage Concept A wage is fair if it is equal to the rate

prevailing in the same trade & in the neighbourhood for similar work

In a wider sense, a wage is fair if it is equal to the predominant rate for similar work throughout the country & for trades in general

Fair wage conceptWhile fixing Fair wage, the following are to be

taken into consideration: The productivity of labour The prevailing rates of wages in the same or

neighbouring localities The level of the national income and its

distribution The place of industry in the economy of the

country. Capacity of the industry to pay

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Purposes of wage administration

To recruit persons to a firm To control payroll costs To satisfy people To motivate people

Purposes of wage administration

The goals of compensation administration are to design a cost-effective pay structure that will attract, motivate and retain competent employees

Types of Wages

Nominal Wages : Wages expressed in terms of money are called nominal wages

It is an evaluation of the wage without considering its current purchasing value

Nominal wages are written down in contracts between the employee and the organization

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Types of Wages

Real Wages - The amount of goods and services that the money will buy.

The term real wages refers to wages that have been adjusted for inflation

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Wage Policy

According to ILO, the term ‘Wage Policy’ refers to the legislation or Government action undertaken to regulate the structure of wages, for the purpose of achieving specific objectives of social & economic policy.

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Wage Policy The objectives of the wage policy in developing

countries as per ILO are :-

1. To abolish malpractices & abuses in wage payment

2. To set minimum wages for people having weak bargaining power as they are unorganised or inefficiently organised, followed by separate measures to promote the growth of trade unions & collective bargaining.

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Wage Policy

3. To see that the workers get a just share of the fruits of economic development.

4. To brig about a more efficient allocation & utilisation of manpower.

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A tool of economic policy used to promote:

Internal Price stability

Worker efficiency

Effective distrbution of worker force

International competitiveness of the economy

Investment

Influx of foreign capital

Wage Policy

The objectives of Wage Policy are:-

To provide minimum wages to workers

To fix wage ceilings

To improve the existing wage structure

To improve the economic & social position of the working class

Indian Wage Policy

Indian Wage Policy

The policy statements in the successive five-year plans provide useful insight into the Indian Wage Policy.

a) The 1st five year plan recommended that:-

Wages in public sector not less favourable than in private enterprises

Permanent wage boards with tripartite composition to be set up

b) The 2nd five-year plan (1956 – 1961)stressed improvement in wages through increased productivity, improved layout of plants & improvement in management practices.

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Indian Wage Policy

c) The fifth plan(1974 – 1979) recommended that the reward structure of industrial employees in terms of wage & non-wage benefits must be related to performance records in industrial enterprises.

d) The sixth plan(1980 – 1985) stressed the need to bring about a greater rationalisation in the wage structure & to link wages to Labour productivity 32

Indian Wage Policy

d) The eighth plan(1992-1997) laid focus on formulation of a wage policy relating to child labour,rural labour ,women kabour & inter-state migrant labour.

e) The eleventh plan (2007 – 2012) aims at generation of productive and gainful employment, with decent working conditions

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Wage policy in India

The enactment of Payment of wages Act 1936 The Industrial Disputes act 1947 The minimum Wages Act 1948 The Equal Remuneration Act 1976 Constituted Wage Boards that are tripartite in nature Pay Commissions at the central and state level

Wage Determination

Wage and salary determination process in an organisation is a multi dimensional task, the steps of which have to be cleverly worked out in order to get a package satisfying both the employee and the employer

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Wage Determination

The ultimate goals of wage determination process is to establish & maintain an equitable wage structure that enhances the employee commitment to the organisation

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The Wage Determination Process

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Job Analysis

Wage Survey

Job Evaluation

Preparation of wage Structure

Developing Pay ranges

The Wage Determination process

1.Job Analysis – This involves precisely identifying the required tasks, the knowledge & skills for performing them & the conditions under which they are performed.

Job Analysis basically defines the duties, responsibilities & accountabilities of a job

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Job Analysis basically defines the duties, responsibilities & accountabilities of a job

It finalises the methods & equipments used & the skills required for the successful completion of the job

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Job Evaluation:- This is the formal process used to assign wage & salary rates to jobs.

This is a systematic technique used to determine the worth of a job. Once the worth is finalised, it becomes much easier to fix a wage structure that is fair and remunerative

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Conduct a Wage Survey: To build a competitive wage structure, a knowledge of the prevailing rates for similar jobs in the same industry in that area is a must.

Recognising pay trends in the market, hiring & retaining competent ,motivated employees & thus to survive & grow.

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Preparation of the wage structure: A job’s relative worth is determined by its ranking through job evaluation and by what the labour market pays for a similar job

To get the right pay level,the internal rankings & the survey wage rates are combined through the use of a graph and the wage-trend line is plotted

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The Wage Determination process Designing pay ranges :The pay range reflects

the approximate differences in performance or experience the employer wishes to pay for a given level of work.

A range maximum sets the lead on what is the most the employer is willing to pay for that work & the minimum sets the floor.

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The Wage Fixation Methods

There are different methods for fixing the wages of employees.

1.Legal Framework: The different legislations that govern the payment of wages are :

a)Payment of Wages Act,1936:The purpose of the act is to ensure regular & prompt payment of wages & to prevent exploitation of the earner by prohibiting unauthorised fines & deductions 44


b)The Minimum wages Act,1948:This act requires the concerned authority to fix minimum rates of wages payable to employees

c)The payment of bonus act,1965:This act is to for payment of Bonus to persons employed in certain establishments

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d) The equal remuneration act,1976:-

The main objective is to provide equal remuneration to men & women engaged in same or similar work. It stipulates stringent punishments for contraventions of the Act’s provisions.

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2)Unilateral Pay Fixation: Majority of the wages in the unorganised sector is unilaterally determined by the management.

Workers in most cases get less than the minimum wages & benefits stipulated under law,but also have to face discrimination in befits between one set ofworkers from another.

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3) Collective Bargaining: It is a technique by which an attempt is made to reconcile the needs and objectives of workers and employers and is therefore an integral part of an industrial society

Collective Bargaining is a process whereby standards are created to govern labour relations including wages & working conditions.


1.Sectoral bargaining

2.Industry-cum-Region-wide agreements

3.Decentralised firm/Plant level

Agreements


4) Pay Commissions:-The pay structure of the central government employees are based on the recommendations of the pay commissions set up by the central government.

Certain state governments also follow the recommendations of the pay commissions & few other states have set up their own pay commissions.


Government of India has so far set up 5 pay commissions, the reports of which were submitted in 1947,1959,1973,1984 & 1996

The pay commissions function non-statutorily, study the problems ,have their own procedures for data collection & makes recommendations to the government.

The ultimate responsibility as to whether to accept, modify or reject the recommendations lie with the central government


4)Wage Boards:-The primary function is to determine the wages payable to the employees .

The first wage board was set up by the government in 1957 in the cotton textile industry.

The wage boards are set up to provide better climate for industrial relations, to represent consumers/public interests, to standardise the wage structure throughout the industry concerned & to align the wage settlements with the social & economic policies of the government.


Constitution of wage Boards:-These are tripartite in nature, consists of a chairperson ,an equal number of representatives of employers & employees(2 members each) and two independent members(an economist & a consumer’s representative) nominated to the board.


Functioning of the Wage Board:-

a) Designs questionnaires to collect information on the prevailing wage rates & other related issues

b) Analysing the results & making an assessment of the views of the parties

c) Recommendations are aubmitted to the governmnet which can be modified if necessary.

d) The wage structure recommended is in operation for 5 years


5.Job Evaluation: This is an orderly and systematic technique which aims at determinig the relative worth of jobs. Once the worth of jobs are determined, It becomes easier to fix the wage structure that is fair and equitable

It can also be stated as a formal system of determining the base compensation of jobs.


6.Arbitration & Adjudication:-

When collective bargaining and conciliation attempts fail to resolve a dispute between the labour and management, the cases are decided through voluntary arbitration or compulsory adjudication

Voluntary arbitration implies that the two contending parties, unable to compose their differences by themselves or with the help of the mediator or conciliator, agree to submit the conflict/dispute between them to be resolved by an impartial authority, whose decision they are ready to accept

.


In others words, under voluntary arbitration, the parties to the dispute can and do themselves refer voluntarily any dispute to arbitration before it is referred for adjudication. This type of reference is known as a “voluntary reference”, for the parities volunteer themselves to come to a settlement through an arbitration machinery.


The essential element in voluntary arbitration is:

-the voluntary submission of dispute to an arbitrator;- the subsequent attendance of witness and investigations; -The enforcement f an award may not be necessary and binding because there is no compulsion. But generally, the acceptance of an arbitration implies the acceptance of its award-be it favorable or unfavorable; and -voluntary arbitration may be specially needed for disputes arising under agreements.


It is the Govt. that decides to send the case for adjudication, it is referred to either Labour Court or Industrial Tribunal. Decision of Industrial Tribunal/ Labour Court can be challenged only in High Court.

The employee or employer can not directly go to the Industrial Tribunal/ Labour Court except in some cases where direct monetary loss can be proved.

Wage Differentials

Wage differentials refer to differences in the average levels of pay for group of workers that can be classified according to the industry or location in which they work or according to the occupational or social group to which they belong.

Wage differentials perform important economic functions like labour productivity, maximising productivity, attracting employees from different jobs & labour productivity.

Wage Differentials

1)Occupational Differentials: This wage differential arises due to varying levels of occupational proficiencies.

The jobs vary according to the skills required and the degree of responsibility attached to it,

This induce the person to undertake more demanding & more challenging jobs, encourage workers to develop their skills & motivate employees for T & D program

Wage Differentials

2)Inter-firm Differentials:This reflects the relative wage levels of workers in the same area & occupation.

The factors can be differences in the quality of labour employed by different firms, differences in the efficiency of equipment, supervision,firm size, financial capabilities etc.

Wage Differentials

3) Inter-area or Regional Differentials:-This arises when workers in different geographical area, but in the same industry or occupation are paid different wages.

This is the result of the prevailing working conditions in different parts of the country, disparities in the cost of living and availability of manpower.

Sometimes regional disparities are used to encourage planned mobility of labour.

Wage Differentials

4)Inter-industry Differentials:- When workers in the same occupation and same areas but in different industries are paid different wages.

This is the result of varying skill requirements, level of unionisation,nature of the product market,ability to pay ,labour-capital ratio and the stage of development of the industry.

Wage Differentials

5)Interpersonal Differentials:- This differential arises between workers in the same occupation and plant but with different age & other personal characteristics

Wage diifferential based on sex is another important wage differential.

The principle of ‘Equal pay for Equal work’ is only preached , not practiced

Government Influences: Wage ControlsGovernment Influences: Wage Controlsand Guidelines:and Guidelines: (1 of 2)(1 of 2)

Wage Stabilization Act (1942)

Defense Production Act (1950)

Economic Stabilization Act

(1970)

Government Influences: Wage ControlsGovernment Influences: Wage Controlsand Guidelines: and Guidelines: (2 of 2)(2 of 2)

Wage freezes –Wage freezes – forbid wage increases forbid wage increases

Wage controls –Wage controls – limit the size of wage limit the size of wage increasesincreases

Wage guidelines –Wage guidelines – voluntary limits on wage voluntary limits on wage increasesincreases

Government Influences: Wage and Hour Government Influences: Wage and Hour RegulationsRegulations

Fair Labor Standards Act (FLSA) of 1938Fair Labor Standards Act (FLSA) of 1938 minimum wageminimum wage overtimeovertime

exempt workersexempt workers nonexempt workersnonexempt workers

child laborchild labor recordkeeping requirementsrecordkeeping requirements Equal Pay Act of 1963Equal Pay Act of 1963

Essentials of sound wage Essentials of sound wage and Salary structureand Salary structure

Internal Equity External Competitiveness Built in incentive Link with productivity Individual worth Increments

Theory of Equalizing Differences

This theory states that wage differentials occur as the result of intrinsic properties of specific occupations that require wage compensation for negative job traits or are compensated for with non-pecuniary positive traits.

Human Capital Theory

It seeks to explain wage differentials as a consequence of differing human capital stocks that determine an individual’s marginal productivity.

Human Capital Theory explains wage differentials as a byproduct of productivity differentials

Human capital

Human Capital is “the stock of knowledge, skills, aptitudes, education, and training that an individual or a group of individuals possess

It is all those skills that are acquired through education, but also talents, I.Q. ,practical experience, etc.

Types of Human Capital

1. General human capital

transferable to every other job and thus improves overall productivity and thus wage

2. firm-specific human capital

not transferable to any other firm and therefore does not improve productivity and thus wages anywhere else

Human Capital Theory

Individuals who invest money and time gain skills that improves their human capital and ultimately their productivity.

Internal Labor Markets

ILM focuses on the long-term relationships of employers and employees and the gains to be made by both parties by continuing to operate with one another

ILM theory argues that firms benefit from maintaining good relationships with their employees and visa versa

Reduction of costs Employees benefit from improved employment

stability and the chance for increased wages and promotions.

Devaluation Theory

Wage differentials as a result of biases towards those employed and earning wages.

Devaluation Theory suggests that the wage difference stems from the bias of the wage payer, the firm. Bias from those gauging productivity could result in women earning less

Reward Policies Reward Policies provide guidelines for

implementation of the reward strategies and aids in designing and managing the reward processes

It indicates how the management should behave in various issues related to Reward management

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Reward Policy

Reward policy addresses a wide range of issues

1. Levels of Rewards: This indicates the paying capacity of a company. The pay policy depends on a number of factors

Policies on the level of rewards also cover employee benefits like sick pay, holidays, health care & other perks

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Reward Policy

2.Market rate and Equity:-A policy should be formulated on the extent to which rewards are market driven rather than equitable.

It is possible to use market supplements to the rate of the job as determined by job evaluation which reflect market rates

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Reward Policy

3.Attraction and Retention -Golden hellos and golden hand cuffs to attract and retain high quality people ie having a total reward policy.

To attract prospective employees, factors for specific occupations should be analysed .

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Reward Policy

Retention policies should take into account the major retention issues the company is facing and sets out ways by which the issues can be dealt with

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Reward Policy

4.Relating rewards to business performance:-The rewards can vary according to results. This policy includes guidelines on how gain sharing and profit-sharing schemes should operate in the company

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Reward Policy

5.Total reward Policy:-assesses the importance of the non-financial rewards and how they should complement the financial awards.

6.Contingent Reward:- this policy states whether the company is willing to pay for contribution, skill, performance ,competence etc and if so, to what extent and under what circumstances.

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Reward Policy

7.Assimilation policies:-When new pay policies are introduced, measures to be taken to assimilate existing employees into it. This policy should state, where should they be placed and what needs to be done if their present rate is above or below the new scale.

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Reward Policy

8.Flexibility:- The extent to which the organisation wants to introduce benefits in response to the fast changing business conditions.

9.The role of Line managers:- The policy will cover the level of decisions, the line manager can make and the guidance that should be given to them

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10.Transpaency:-Employees will be satisfied only if they know what is the criteria for rewards and how they are used to determine their pay and their methods of pay progression.

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Reward Policy

Reward Policy

11.Involve employees:- Reward policies are more likely to be understood and will be more effective if employees are also given a voice in the design and management of the policy.This is very much applicable to job evaluation and relating pay to the performance

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Reward Policy

12.Communicating to employees:- Reward processes in an organisation is a powerful media to convey messages relating to the organisational goals to the employees. This will convey to the employees how their total remuneration package is made up

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Wage - Definition

Money paid to the workers is considered as wages

The wage is the payment made to the workers for placing their skill and energy at the disposal of the employer.

The method of use of that skill and energy being at the employer’s discretion and amount to the payment being in accordance with terms stipulated in an contract of service.

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