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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

Objectives of Wage &Salary


Administration

To ensure fairness
To improve union-management relations
To improve the public image of the
company
Comply with legal regulations

Adequate*

A
Compensation
system should
be:
Acceptable to
the employee

Equitable*

Incentiveproviding*
Cost-effective

Secure
Balanced

General and Individual


Factors affecting Wages

General Factors

Individual 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

Employees Age and work


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

External Influences on Compensation

Labor Market

Economy

Government

Unions

Compensation and an International Labor


Force

Issues that affect the compensation strategies of


organizations competing in a global market:

Global wage differentials verging on the extreme

Moving employees to foreign locations

Employing local (foreign) managers and workers

Moving foreign workers for training or work


assignments

Essentials of sound wage


and 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 Salary


Base 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
crche
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.

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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 concept


While 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

1.

2.

The objectives of the wage policy in developing


countries as per ILO are :To abolish malpractices & abuses in wage
payment
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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Wage Policy

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

Indian 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


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

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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 & interstate 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


Job Analysis
Job Evaluation
Wage Survey
Preparation of wage Structure
Developing Pay ranges

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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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The Wage Determination process


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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The Wage Determination process


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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The Wage Determination


process

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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The Wage Determination process

Preparation of the wage structure: A


jobs 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

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The Wage Fixation Methods


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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The Wage Fixation Methods


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 Acts
provisions.

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The Wage Fixation Methods


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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The Wage Fixation Methods


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.

The Wage Fixation Methods


1.Sectoral bargaining
2.Industry-cum-Region-wide agreements
3.Decentralised firm/Plant level
Agreements

The Wage Fixation Methods


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.

The Wage Fixation Methods

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

The Wage Fixation Methods


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.

The Wage Fixation Methods


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
consumers representative) nominated to
the board.

The Wage Fixation Methods


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

The Wage Fixation Methods


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.

The Wage Fixation Methods


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
.

The Wage Fixation Methods

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 Wage Fixation Methods


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.

The Wage Fixation Methods


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 Controls


and Guidelines: (1 of 2)
Wage Stabilization
Act (1942)
Defense Production
Act (1950)
Economic
Stabilization Act
(1970)

Government Influences: Wage Controls


and Guidelines: (2 of 2)

Wage freezes forbid wage increases

Wage controls limit the size of wage


increases

Wage guidelines voluntary limits on wage


increases

Government Influences: Wage and Hour


Regulations

Fair Labor Standards Act (FLSA) of 1938

minimum wage
overtime
exempt workers
nonexempt workers

child labor
recordkeeping requirements
Equal Pay Act of 1963

Essentials of sound wage


and 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 individuals 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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Reward Policy
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
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 employers discretion and
amount to the payment being in accordance
with terms stipulated in an contract of
service.
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