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COMENSATION
MANAGEMENT
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Wage, salary, Remuneration, Compensation
• Wage
– Based on hours worked, may be paid hourly, daily, weekly,
monthly
– Generally applied to skilled/unskilled or blue collar workers
– Employees who receive wage are often called “Non-Exempt”
– They are covered by minimum wage regulations and as well
labour regulations
• Salary
– Generally applied to executives, administrators, professionals
– They are generally called “Exempt”
– They are not covered by minimum wage provisions
– Generally on annual/ monthly basis
– Includes other monetary benefits such as HRA, PF etc
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Traditional Compensation system
• In the traditional organizational structures, employees
were expected to work hard and obey the bosses’
orders.
• In return they were provided with job security, salary
increments and promotions annually. The salary was
determined on the basis of the job work and the years
of experience the employee is holding.
• Some of the organizations provided for retirement
benefits such as, pension plans, for the employees.
• It was assumed that humans work for money, there was
no space for other psychological and social needs of
workers.
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WAGE, SALARY,
REMUNERATION AND
COMPENSATION
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Wage, salary, Remuneration, Compensation
• Remuneration
– Remuneration is the amount one can claim or one has to give
for the value of service rendered
– It is not fixed as Salary
– It is bargain-able
– There is only mild difference between Salary and
Remuneration
• Compensation
– More generic
– Includes both monetary and nonmonetary
– Used in the modern compensation system
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Need for Change in Compensation System
• With the behavioral science theories and evolution of labour
and trade unions, employees started asking for their rights.
Maslow brought in the need hierarchy for the rights of the
employees. He stated that employees do not work only for
money but there are other needs too which they want to
satisfy from there job, i.e. social needs, psychological needs,
safety needs, self-actualization, etc. Now the employees
were being treated as human resource.
• Their performance was being measured and appraised based
on the organizational and individual performance.
Competition among employees existed. Employees were
expected to work hard to have the job security. The
compensation system was designed on the basis of job work
and related proficiency of the employee.
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Modern Compensation System Direct Compensation

Direct compensation refers to
• Today the compensation systems are designed monetary benefits offered and
aligned to the business goals and strategies. provided to employees
• The employees are expected to work and take their in return of the services
they provide to the
own decisions. Authority is being delegated.
organization.
• Employees feel secured and valued in the The monetary benefits
organization. Organizations offer monetary and non- include basic salary,
monetary benefits to attract and retain the best house rent allowance,
talents in the competitive environment. conveyance, leave travel
allowance, medical
• Some of the benefits are special allowances like reimbursements, special
mobile, company’s vehicle; House rent allowances; allowances, bonus, Pf/Gratuity,
statutory leaves, etc. etc. They are given at a regular
interval at a definite time.
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Indirect Compensation Compensation Concept

Indirect compensation • A good compensation package is important to motivate the
refers to non-monetary employees to increase the organizational productivity.
benefits offered and
provided to employees
• Unless compensation is provided no one will come and work
in lieu of the services
provided by them
for the organization. Thus, compensation helps in running an
to the organization. organization effectively and accomplishing its goals.
They include
Leave Policy, • Salary is just a part of the compensation system, the
Overtime Policy, employees have other psychological and self-actualization
Car policy, Hospitalization, needs to fulfill. Thus, compensation serves the purpose.
Insurance, Leave travel
Assistance Limits, Retirement •The most competitive compensation will help the organization
Benefits, Holiday Homes. to attract and sustain the best talent. The compensation
package should be as per industry standards.
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Strategic Compensation What is Compensation?

Strategic compensation is determining and providing the
compensation packages to the employees that are aligned
with the business goals and objectives.
In today’s competitive scenario organizations have to take
special measures regarding compensation of the
employees so that the organizations retain the valuable
employees.
• Compensation represents both the intrinsic and
extrinsic rewards employees receive for
performing their jobs
– Intrinsic: Reflects employee’s psychological mindsets
that result from performing their jobs
– Extrinsic : Includes both monetary and nonmonetary
rewards

The compensation systems have changed from traditional

ones to strategic compensation systems.

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Intrinsic Extrinsic
• Employees critical psychological states that result • Includes both monetary and non monetary
from performing their jobs rewards
– Skill variety: different skills, abilities, talents required – Monetary represents “core compensation”
– Task Identity: degree to which a job enables a person
– Nonmonetary represents other benefits or fringe
to complete an entire job
benefits
– Task Significance: degree to which the job has an
impact on others
– Autonomy: freedom, independence and discretion
– Feedback: degree up to which employer provides
information on the outcome/ performance

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Employee benefits or Fringe compensation Concept of Cost to the Company (CTC)

• Legally required benefits 8. Medical
1. Basic Pay
– PPF reimbursement/
2. Special Pay
– Paid leave: EL, CL, SL Medical Insurance
3. HRA
• Discretionary 9. Uniform
4. Conveyance 10. Annual Gifts
– Health Insurance
– Children education 5. Telephone expenses 11. Annual Bonus
– LTC 6. Meals/meals coupon 12. Performance linked
7. LTA/LTC Bonus
– ESOP
13. PF
– Performance linked Bonus
14. Gratuity
– House Rent etc 15. Loans

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Compensation Strategic Choices Key Steps to Formulate a Total Compensation Strategy

Corporate obj, What business should we be in? 1. Assess Total Compensation Implications
Strat plans, Culture and Values
vision, values Social, Economic and Political Context
Global Competitive Pressures
How do we win (gain competitive advantage) in Employee/Union Needs
Business Unit
Those businesses? Other HR Systems
Strategies

Strategic 2. Fit Policy Decisions to Strategy

Compensation Objectives
HR Strategies Compensation
Systems Consistency
Decisions
4. Reassess the Fit Competitiveness
Contributions
Social. Employees Administration
How should HR Competitive and Attitudes and
help us win? regulatory Behaviours
Environment
3. Implement Strategy
Competitive
How should total compensation Advantage
help us win?
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Forming Organisation’s Compensation Strategy Forming Organisation’s Compensation Strategy

1.Objective: How should Compensation support business 2.Consistency: How differently should the different types
Strategy and be adaptive to the cultural and regulatory and levels of skills and work be paid within the organisation?
Pressures in the environment? Example: Starbucks
Example: Starbucks • Deemphasise differences
• Grow by making employees feel valued • Use egalitarian pay structures with employees as
• Recognise that every dollar earned passes through ‘partners’
employees’ hands 3.Competitiveness: How should our total compensation be
• Use pay and perks to help gain employee loyalty and positioned against our competitors?
become difficult to imitate Example: Starbucks
• Pay just slightly above the other fast-food employers,
which is a low wage industry

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Forming Organisation’s Compensation Strategy Forming Organisation’s Compensation Strategy

4.Contributions: Should pay increases be based on individual 5.Administration: How open and transparent should the
and/or team performance, on experience and/or continuous bases for pay decisions be to all employees? Who should be
learning, or improved skills, on changes of cost of living, on involved in designing and managing the system?
personal needs (housing, transportation, health services), Example: Starbucks
and/or on each business unit’s performance? • As members of the Starbuks “family”, our employees
Example: Starbucks realise what is best for them
• Provide health insurance • Partners can and do get involved
• Provide stock options (called beans stock)

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Key Steps to Formulate a Total Compensation Strategy

Strategy – Based on Best Practices
1. Assess Total Compensation Implications • Traditional Strategy
Culture and Values
Social, Economic and Political Context – Compensation based on Business Strategy: That is Business
Global Competitive Pressures Strategy guides the Compensation Strategy
Employee/Union Needs
Other HR Systems
Socioeconomic/ Organisation HR/Compensation Competitive
2. Fit Policy Decisions to Strategy Political Environment Strategy Policies Advantage
Objectives
Consistency
4. Reassess the Fit
Realign as Conditions Change
Competitiveness • Best Practices
Contributions
Realign as Strategy Changes – Better Compensation package yield better performance
Administration
thus leading to Competitive Advantage

3. Implement Strategy
Socioeconomic/ HR/Compensation Organisation Competitive
Design Systems to Translate
Political Environment Policies Strategy Advantage
Strategy into Action
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Factors affecting the wage mix

INTERNAL FACTORS EXTERNAL FACTORS

DETERMINIG COMPENSATION Compensation

Strategy of the
Conditions of the
w labour market
Organisation
A
G Area wage rates
Answering the Basic Question Worth of the Job
E
How are the wages for my job Employee’s relative
M
Cost of Living
worth
determined? I
X
Collective bargaining
Employer’s ability to
Legal requirements
pay

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Comparison of Compensation Strategies Compensation System

A Fictitious Example
Bul Bul Pvt Ltd Jil Jil Pvt Ltd • It is the system which results from the allocation,
• Promote pay for performance • Be a pay leader in the industry
conversion and transfer of the portion of the
• Pay market competitive • Promote open pay practices income of an organisation to its employees for
compensation • Ensure fair employee treatment their monetary and in kind claims on goods and
• Achieve internal and external • Offer benefits promoting
pay equity individual employee needs
services
• Achieve simplicity in • Offer compensation for
compensation programme creativity and achievements
• Strive for employee • Obtain employee inputs when
commitment and a collaborative developing compensation
work environment practices
• Promote gender fairness pay • Emphasize performance
• Comply Govt regulations through variable pay and stock
•Minimize increased fixed costs options
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Choices in Designing a Compensation System

• Options that confront while designing a Compensation
Compensation System Components
System • Direct financial compensation consisting of pay received in
the form of wages, salaries, bonuses and commissions
– Internal and External pay
provided at regular and consistent intervals
– Fixed and Variable pay
• Indirect financial compensation including all financial rewards
– Performance and Membership that are not included in direct compensation and can be
– Below market versus above market understood to form part of the social contract between the
– Open versus Secret pay employer and employee such as benefits, leaves, retirement
plans, education, and employee services
• Non-financial compensation referring to topics such as career
development and advancement opportunities, opportunities
for recognition, as well as work environment and conditions

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A Good Practice Compensation System Design

• A good compensation strategy includes a COMPENSATION SYSTEM
balance between internal equity and external
FINANCIAL NON - FINANCIAL
competitiveness. Compensation and benefits
affect the productivity and happiness of WORK
DIRECT INDIRECT JOB POSITION
employees, as well as the ability of your ENVIRONMENT
Equitable Health related Responsibilities
Values
Challenges
organization to effectively realize its Market Based Insurance
Education Authority
Culture
Cost of Living Policies
objectives. It is to your advantage to ensure Merit Incentive Paid Leave- Promotion
Level of comfort
Performance EL,SL.CL Awards
that your employees are creatively Bonus Other Empowerment
Timings
Schedule
compensated and knowledgeable of their compensations
Alternate work
Gratuity
benefits. Retirement
arrangements
benefits
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Main Acts that Govern the Wages

• Payment of Wages Act 1936, amended in2005
• Minimum Wage Act 1948
COMPENSATION • Bonus Act 1965
AND
LEGISLATION

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Wage as per Legislation Wage as per Legislation

• Wages refers to all remuneration (whether by way of salary,
allowances, or otherwise) expressed in terms of money which
would (if the terms of employment, express or implied, are
fulfilled) be payable to a person employed in respect of his
employment or of work done in such employment.
• It includes:-
– any remuneration payable under any award or settlement between
the parties or order of a Court
– any remuneration to which the person employed is entitled in respect
of overtime work or holidays or any leave period;
– any sum which by reason of the termination of employment of the
person employed is payable under any law, contract or instrument
which provides for the payment of such sum, whether with or without
deductions, but does not provide for the time within which the
payment is to be made;
– any sum to which the person employed is entitled under any scheme
framed under any law for the time being in force.
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• As per the 'Committee on Fair wages', there are three distinct
levels of wages:-
– Living wage represents a standard of living which provides not merely
for a bare physical subsistence, but for the maintenance of health and
decency, a measure of frugal comfort including education for children,
protection against ill-health, requirements of essential social needs
and some insurance against the more important misfortunes;
– Minimum wage ensures not merely the bare sustenance of life, but
the preservation of the efficiency of the worker by providing some
measure of education, medical requirements and amenities. Thus, the
minimum wage prescribes the lower limit while the upper limit is set
by the capacity of the industry to pay;
– Fair wage is the wage which is above the minimum wage but below
the living wage.
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Payment of Wages Act 1936-Salient Points
• Act applicable to all persons employed in factory, industrial or
railways, whether directly or indirectly through contractor or
all employees drawing salary less than Rs6500/- per month
• Wage period shall be one month and to be paid in current
legal tender
• To be paid on a working day and on or before 7th if employees
are less than 1000 and before 10th otherwise
• Deductions allowed in the wages are:- fines, for absence,
house rent if accommodation provided, recovery of advances/
loan, insurance, other authorised through written order
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Minimum Wages Act 1948-Salient Points
• There are two methods for fixation/revision of minimum wages
– Committee method - Under this method, committees and sub-committees
are set up by the appropriate Governments to hold enquiries and make
recommendations with regard to fixation and revision of minimum wages,
as the case may be.
– Notification method - Under this method, Government proposals are
published in the Official Gazette for information of the persons likely to be
affected thereby and specify a date not less than two months from the
date of the notification on which the proposals will be taken into
consideration.
– The fixation of minimum wages depends on a number of factors such as
level of income and paying capacity, prices of essential commodities,
productivity, local conditions, etc. Since these factors vary from State to
State, the wages accordingly differ throughout the country. Hence, in the
absence of a uniform national minimum wage, the Central Government
introduced a 'national floor level minimum wage'. All the States/UTs
Governments are required to ensure that fixation/revision of minimum
rates of wages in all the scheduled employments is not below this national
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Law Enforcers
• Ministry and Departments which enforce the
Acts are
– Ministry of Labour and Employment
– Central Industrial Relations Machinery
(CIRM) enforces all the labour legislations and the
rules framed there under. This organisation is also
known as Chief Labour Commissioner (Central)
[CLC(C)] Organisation.
– Wage cell and Wage board have been set up for
the purpose
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Minimum Wages Act 1948
• It binds the employers to pay their workers the minimum wages
fixed under the Act from time to time.
• Under the Act, both the Central Government and the State
Governments are the appropriate Governments to fix, revise,
review and enforce the payment of minimum wages to workers in
respect of 'scheduled employments' under their respective
jurisdictions. There are 45 scheduled employments in the Central
sphere and as many as 1530 in State sphere.
• The minimum rate of wages consists of a basic wage and a special
allowance, known as 'Variable Dearness Allowance (VDA)' linked
to the Consumer Price Index Number. The allowance is revised
twice a year, once in April and then in October.
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Payment of Bonus Act 1965-Salient Points
• The Act was enacted to provide for the payment of bonus to
persons employed in certain establishments on the basis of
profits or productivity and for the matters connected
therewith. The Act applies to:-
– every factory as defined under the Factories Act, 1948; and
– every other establishment in which twenty or more persons are
employed on any day during an accounting year.
• An employer shall pay minimum bonus at the rate of 8.33% of
the salary or wages earned by an employee in an year
• In any accounting year, if the allocable surplus exceeds the
amount of minimum bonus payable to the employees, the
employer shall in lieu of such minimum bonus, be bound to
pay bonus (maximum bonus) equivalent to the amount which
shall not exceed 20% of the salary or wages earned by
employees
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CONCLUSION
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Thank You
for
Your patient listening

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