Compensation

 It is basically what employees receive in

exchange for their contribution to the organization
 Compensation is the term used to denote ‘wage’
or ‘salary’ for the performance of work plus many
kinds of benefits and services that organizations
provides to their employees.
 It consists of direct compensation which means
as gross pay and indirect compensation which
means what employer pays for employee’s
welfare as social security i.e. provident fund,
pension for retirement, accidents etc.
Types of compensation
 Base compensation- monetary
payments given to employees in the
form of wages and salaries. It is fixed
and non incentive payment
 Supplementary compensation –
incentive payment based upon actual
performance of an employee
Objectives
1. Internal equity-more difficult jobs are
paid more
2. External equity-jobs are fairly
compensated in relation to similar jobs
in the market
3. Individual equity-equal pay for equal
work.
Wage and Salary administration
 Wage and salary administration is a
process of managing a company’s
compensation programme. Its main
purpose is to design a cost effective pay
structure that will attract, motivate and
retain competent employees
 Wage- remuneration to workers doing
manual work
 Salary – compensation to office,
managerial, technical and professional staff
 Meaning of Wage and Salary
Wage Salary

It may be defined as the It is a compensation to an

aggregate earnings of an employee for services
employee for a given period
rendered on a weekly,
of time such as a day, a week
monthly, or annual basis. It is
or a month. Wage is
usually associated with office
basically the price paid for
the services of a labor in the staff, supervisors, managers
process of production. (for etc. whose performance
blue collar worker) cannot be measured directly.
(for white collar workers)
 Objectives
 To establish fair and equitable remuneration
offering similar pay for similar work
 To attract qualified & competent personnel
 To retain the present employees by keeping
wage levels in tune with competing markets
 To control labor and administrative costs in line
with the ability of the organization to pay
 To improve motivation and morale of employees
 To project a good image of the company
Principles of wage and salary
administration
 Should be flexible
 Must be done scientifically
 Consistent with overall organizational plans
and programmes
 Conformity with social and economic
objectives of the country
 Responsive to changing local and national
conditions
 Should simplify and expedite other
administrative processes
Elements of Wage & Salary
Administration
 Identifying the available salary opportunities
and communicating them to employees
 Relating salary to needs and goals
 Developing quality, quantity and time
standards related to work and goals
 Determining the effort necessary to achieve
standards
 Measuring the actual performance
 Comparing performance with salary received
 Measuring job satisfaction of the employees
 Evaluating the unsatisfied wants and
unrealized goals of the employee
 Finding out the causes of dissatisfaction
 Adjusting the salary levels accordingly
with a view to enable the employee to
reach unreached goals
 Factors affecting compensation
 Job needs – a worker will get less pay for simple, routine
tasks but will be paid more for complex tasks
 Ability to pay- high profit levels enable companies to pay
higher wages
 Cost of living- inflation reduces the purchasing power of
employees
 Prevailing wage rates- prevailing wage rates in
competing firms within same industry are taken into
account while fixing wages
 Unions- higher unionized sectors have higher wages
 Productivity- worker’s wages are linked with productivity
level
 State regulation – the legal stipulations determine the
wage structure
 Demand and supply of labour
 Types of Wages
1. Minimum Wages:
 It is the amount of remuneration, which is just sufficient to enable an
average worker to fulfill all his obligations. It can be either the minimum –
piece rate or minimum time rate.
 It is fixed by government & enforced by law with respect to all the
scheduled employments, and is revised at least once in 5 years based on
consumer price index.
 It is applicable to across the country and is governed by Minimum Wage
Act,1948. It follows the basic norms:
○ In calculating the minimum wage, the standard working class family
should be taken to consist of 3 consumption units
○ Minimum Food requirement should be calculated on the basis of net
intake of calories, of an average Indian adult.
○ Clothing requirements- 18 yards per person
○ Fuel lightening and other miscellaneous requirement- 20% of the
total minimum wage
○ Children’s education, medical requirements, minimum recreation
2. Fair Wage :

Workers performing work of equal skill, difficulty or unpleasantness should

receive equal or fair wages. “ Fair Wage” should also take into
consideration the financial capacity of employer. Fair wage may therefore
be higher than minimum wage level but never lower that it. In India, the
fair wages committee recommended that a fair wage should be less than the
living wage and more than the minimum wage. Following factors are taken
into account:-
 The productivity of the labour

 Prevailing wage rates in the same or similar occupations

 Level of national income and its distribution

 The employer’s capacity to pay

3. Living Wage:
The Committee on Fair Wages observed “Living Wages should
enable the male earner to provide for himself and his family, (not
only) the bare essentials of food, clothing and shelter, but also a
measure of frugal comfort including education for the children,
protection against ill-health, requirements of essential social needs
and a measure of insurance against the more important misfortunes
including old age.
 Highest among the three
Definition……
 Wage payment is a matter of great importance to workers.
It determines their standard of living their attitudes
towards the company and influences their motivation to
work.
Characteristics of wage system
1. Simple
2. Equitable
3. Guaranteed minimum wage
4. Balanced –pay benefits and other rewards should be
balanced
5. Incentive oriented-workers should be encouraged to
produce more and earn more.
6. Certainty
7. Cost effective
8. Flexible
9. Quality output.
1. Time Wage System
In this system the workers is paid on the basis of time
spent on the work irrespective of the amount of work
done.
Basis could be hour ,day week or month .
Merits
 It is simple to understand
 Suitable to beginners and learners
 Used for precision work
 Workers are assured of min. guaranteed wages
Demerits
 No distinction between efficient and inefficient
workers.
 Management has to spend more on close
supervision.
 Wages are not linked with productivity.
2. Guaranteed Time Rate
 Payment is at the time rate but adjusted
to the cost of living
 Merit awards for the personal qualities,
skill, ability and punctuality are also
considered
3. Piece rate system
The workers are paid under the system on the basis
of stipulated rate per piece or unit of output
irrespective of the time taken to complete the job
This method is applicable where
 Quality of work is not important
 Work is of a repetitive nature
 There is sufficient demand for output to guarantee
continuous work
 Job is a standardized one
Merits
 It provides encouragement to efficient workers.
 In the bid to earn, more workers will perform better.
 Idle time will be reduced.
 Cost of supervision is less.
Demerits
 No minimum remuneration is guaranteed.
 Beginners and average workers will not be able to
earn significantly
 Quantity is over emphasized .
 Causes dissatisfaction to workers due to their
varying capacity.
 Tendency among workers to overstrain themselves
in order to record higher output- Health is affected
 TU opposes it as they feel that it will create rivalry
among the employees
 Types of piece rate system
a. Straight piece rate. payment is made on the
basis of fixed amount per fixed units produced
without regards of time.
 Earnings= No. of Units X Rate Per Unit
b. Piece rate with guaranteed time rate-workers
are paid minimum wages on the basis of time
rates. May include any one of the following:-
 As in
○ If earnings on the piece rate< guaranteed min. wages-
Payment on the basis of time rate
○ If earnings according to piece rate> guaranteed min.
wages:- workers will get more
  Guaranteed wages according to time rate +
piece rate payment for units above a
required minimum
 Piece rate with fixed DA or cost of living
bonus
c. Differential piece rate-under this rate
per piece is increased as the output
level is increased. Their is more than
one-piece rate system.
 Extra benefits provided to employees in
addition to the normal compensation
paid in the form of wage or salary.
Features
- Supplementary forms of compensation
- Paid to all employees
- Indirect compensation
- Raise the living conditions of employees
- May be statutory or voluntary
 Need for fringe benefits
1. Employee demands- in view of the sharp
increase in cost of living and for reduction in tax
burden
2. Trade union demands
3. Employer’s preference- employees prefer fringe
benefits to pay hike as it keeps them motivated
4. Social security- against accidents, medical
facilities etc.
5. To improve human relations
Objectives of fringe benefits
 To improve industrial relations
 To motivate the employees by identifying
and satisfying their unsatisfied needs
 To provide security to the employees- old
age benefits etc.
 To protect the health
 To promote employees’ welfare
 To create a sense of belongingness
 To meet the requirements of various
legislations
 Types of fringe benefits
1. Payment for time not worked
 Hours of work- Factories Act 1948- no more than
48 hours per week and not more than 9 hours per
day
 Paid holiday- one weekly off preferably Sunday
 Shift premium
 Holiday pay- double the normal during holidays
 Paid vacation- In mining, manufacturing and
plantations, employees who have worked for 240
days in a calendar year are eligible for a paid
vacation at the rate of one vacation every 20
days
2. Employee security-
 Retrenchment compensation
 Lay-off compensation
3. Safety and health-under factories act 1948.
 Safety measures
 Workmen’s compensation
 Health benefits
- Sickness benefits
- Maternity benefits
- Disablement benefits
- Dependent’s benefit
4. Welfare and recreational facilities:
 Canteens-Factories Act 1948- more than 250
workers.
 Consumer stores
 Credit societies
 Housing
 Legal aid
 Employee counseling
 Welfare officers
 Holiday homes
 Educational facilities
 Transportation
 Parties and picnics
5. Old age and retirement benefits:
 Provident fund-basic 12 percent employer and 12
percent employee.
 Pension-out of 12 percent employers contribution
8.33 goes to PF and 3.67 goes to the pension
scheme.
 Gratuity-at the rate of 15 days of wages for every
one completed year of service.
 Medical benefit
 Incentive plan is a basic rate on time basis
applicable to all workers and incentive rates
payable to the more efficient among them as extra
compensation for their performance in terms of
time, cost and quality
 May take the form of bonus or premium
 Bonus means payment to workers of the entire
benefit accruing from savings in costs, time,
improvement in quality etc.
 Premium means the benefits accruing to the firm
as a result of higher output or better quality will be
shared equally or on some agreed basis between
the management and the workers
Features
 Minimum wages are guaranteed to all
workers
 Incentives by way of bonus etc. are
offered to efficient workers for the time
saved
 Fixation of standard time after making
time studies for the performance of a
specific job is done. And the worker is
expected to work within the standard
time
 Incentive Plans

Incentive
Group of Team
Individual Organization Schemes for
Based
Incentives Wide Indirect
Incentives
Workers
Types of Individual Incentives
1. Piece rate:
 Taylor’s differential Piece rate
- Two piece work rates, lower and higher
- Standard of efficiency is determined
- If the worker finishes the work within/ less than the
standard time, he will be given higher piece rate
 Merrick’s differential piece rate system:
- Three piece rates
- Earnings increase with increased efficiency
- Performance above standard is rewarded
- Upto 83% of the standard work- ordinary piece rate
- 83%- 100% of the standard work- 110% of above
- Above 100%- 120% of the ordinary piece rate
2. Standard Hour plans:
a) Halsey plan
 Recognizes individual efficiency and pays bonus
on the basis of time saved
 Standard time is fixed and time rate is guaranteed
 If the job is completed in less than the standard
time, the worker is paid a bonus of 50% of the
time saved in addition to normal time wage
b) Rowan plan :
 A worker is guaranteed minimum wages for time
spent on the job
 Gets bonus for completing the job in less than the
standard time
 Bonus= (Time saved/ Standard Time)
c) Gantt task and bonus plan
This plan combines time, piece and bonus systems.
The main features are:
 Day wages are guaranteed
 Standard time for task is fixed and both time wage
as well as high rate per piece is determined
 Worker who can’t complete the work within
standard time , is paid on time basis.
 If a worker reaches the standard, he will be paid
time wage plus a bonus at 20% of the normal time
wage
 If the worker exceeds the standards, he is paid at
a higher piece rate
d) Bedeaux plan
 Every operation or job is expressed in terms of
standard minutes which are called Bedeaux points
 If actual performance exceeds the standard
performance, 75% of the wages of time saved is
given to employee as bonus and 25% is given to
foreman
e) Emerson’s efficiency plan
 Under this plan, when the efficiency of the worker
reaches 67% he gets bonus at the given rate
 The rate of bonus increase gradually from
67%- 100%
 Above 100%, bonus will be 20% of basic rate +
1% for each 1% increase in efficiency
f) Accelerated premium bonus plan
 Premium is paid at varying rates for increasing
efficiency
 As efficiency of the worker improves, his earnings
would increase in greater proportion
3. Bonus
 Incentive pay given to the employee beyond one’s
normal standard wage
 Given at the end of the year
4. Merit pay and individual incentive plan
 Merit pay is a reward based on how well an
employee has done the assigned job
 Rewarding the best performer with the largest pay
tend to be the powerful motivator
5. Lumpsum merit pay
- Employee get the single lumpsum payment at the
time of their review which is not added to their
base pay
6. Commissions for sales people
- Salary plan- sales people get the salary for the
sales, no bonus or extra incentive is given to him
for extra work done
- Commission plan- sales peolple get only
commission for the sales
 if there are no sales, he will not get anything
Group or team based incentive plans
- Reward team members equally
- Cash or non-cash bonuses
- Encourages the cohesiveness among the team
members
Organization wide incentive plan
Profit sharing
- Employers undertake to pay a particular portion of
net profits
- Cash or shares
ESOPs (Employee Stock Option Plans)
- Eligible employees are allotted company’s shares
below the market price
- The term stock option implies the right of an
eligible employee to purchase a certain amount of
stock in future at an agreed price
- The eligibility criteria may include length of
service, contribution to the department/ division
etc.