COMPENSATION MANAGEMENT

UNIT-1

1
COMPENSATION= MONETARY + NONMONETARY
BENEFITS

MONETARY: - WAGES, SALARIES, INCREMENT,

PERKS, BONUS, FRINGE BENEFITS.

2
NON-MONETARY: - HOSPITAL, HOUSE,
SCHOOL, COLLEGE.

MEANING:-

All firms are financial, deniable service and deifies that

employee receives as a part of them employment
relationship. Compensation is a systematic approach to
providing monetary value to employee in exchange for
work performance.

OVER-VIEW OF COMPENSATION

Compensation is refers to as money and other beneficial

received by an employee for providing service to his
employee for and providing service to his employer,
money and benefits received many be in deferent firms
that is various compensation in money form and various

3
benefits lick provident fund, gratuity, insurances scams
and any other payment which the employee receive.

DEFINITION: - ACCORDING TO CASCIO

Compensation includes direct cash payment, indirect

payment in the form of employee benefits and incentive
to motivate employee to strive for higher level of
productivity.

Wages Salary
Worker Officer
Blue collar employee White collar employee
Daly basis Monthly basis / yearly
basis

COMPENSATION MAY BE USE TO

4
 i. Required and retain qualified employee.
ii. Increase or maintain moral, satisfaction.
iii. Reward and encouragement pick performance.
iv. Reduce turn over and encouragement company.
v. Modify practices of unions.

METHODS OF COMPENSATION

i. Wages of salaries
ii. Commission
iii. Piece rate plan
iv. Bonus
v. Profit sharing payment
vi. Non cash Fringe benefits (company car, vacation,
membership in clubs, tickets to events etc.)

STRATEGIC ROLE OF COMPENSATION IN HR

SYSTEM

5
 Strategy refers to set of steps takes by an org’ in
achieving its mission and vision. The study of strategic
management therefore emphasis monitoring and
evaluating environment opportunities and threats and
threat light of a corporation strength and weakness.

The success of an org’ depends on the people there

in. These means how they are acquired developed
motivated and retained in the organization, play an
important role in the organizational success thus strategic
HRP means a strategic look at the HR functions in line
with the business function of an org’.

As compensation is an important factor the

strategic role of compensation in the HR system is bonus
to have the flowing objective.

1. To establish fair and equitable remuneration: -

6
 Compensation should not only the fair and just but it
should also be in accordance to the remuneration paid
in the same line of industry. Thus while fixing the
compensation the employee has to keep in mind the
prevailing wage rate as well as the government policy
towards fixing of wage.

2. To attract competent personal:-

Compensation policy should satisfy the demand of
union keeping in view the minimum wage which is a
essential for bare sustenance of life but also for bare
sustenance of life but also for providing the worker by
way of education, medical, cars, and other amenities.
Thus by providing for this the company can attract
competent and qualified personal and thus retain them
in the company.

3. To retain present employee :-

By adopting sound compensation policy company can
retain present employee by keeping wage level in
7
 tuned with competent unit thus employee will be
satisfy and incidence of quitting governess and fixing
will be reduces.

4. To control labor cost: -

Labor and administration cost can be control if they

are in line with the org’ to pay and also by stabiles a
fair and equitable compensation offering similar work.
Thus by motivating employee they cam be made to
remain in the org’ there reducing labor cost.

5. To improve motivation of employee:-

Motivation and moral of the employee can be boosted

by giving them educate and finely administration
incentive which are basic to his want and needs.
Motivation employee they achieve great deal while a
de-motivated employee will be slow, prone to error
and not likely to achieve.

6. To project a good image of the company:-

8
 Employee when paid according to requirement of
these jobs that is highly skilled job for paid more
compensation then low skilled jobs. This eliminates
inequality also changes of favoritism are greatly
minimization as a result of fixation of wage rate. Thus
this helps in projected a good image of the company.

IMPORTANCE OF COMPENSATION

Compensation and reward system plays a vital role in a

business org’ among the 4 m’s MAN, MATERIAL,
MACHINE, & MONEY. Man has been the most import
factor. It is impossible to imaging a business process
without man. Every factor contributes to the process of
production and thus it expects return from business
process.

For example - Rent is the return expected by the landlord,

Capitalist expect interest and entrepreneur expects profit,

9
similarly labor expect wage from the process and there for
expect to have a fair share in the business/production
process. Thus a fair compensation system has the
following importance:

1. An ideal compensation system will have a positive

impact on the efficiency and the result reduces by the
employee. It will encourage the employee to perform
better and achieve the stander fix.
2. Sound compensation system brings peace in the
relationship employer and employee.
3. It aims at creating a healthy compensation among
them and encourage employee to work hard and
efficiently.
4. It will enhance the process of job evaluation. It will
help the setting up an ideal job evaluating and the set
stander would more realistic and achievable.
5. Such a system should well define and uniform. It will
apply to all levels of the org’ as a general system.

10
6. It will say the moral efficiently and comparative
among the workers being just and fair inputs provide
satisfaction to the workers.
7. Such a system should also solve. It distribute between
the employee union and management.
8. The org’ is able to retain the best adequate
compensation them by stopping them from switching
over the job.
9. A sound compensation system is hall mark of org’
success and stability of an org’ is major with the pay
package. It’s providing to its employees.
10. A perfect compensation system provide platform
for happy satisfy work force. This minimizes labor
true over.
11. The system should be simple and flexible so that
every employee would be able to compute his old
compensation receivable.

11
WAGE CONCEPT

Compensation wage rate minimum

wage

Earning gross earning fair wage

Basic wage take house pay living

wage

Wage

Allowance

Wage may be define as a aggregate earning of an

employee for a given period of time such as a employee
for a given period of time such as a day, a week or a
month for the service rendered by him to employer.

It is the payment made to worker for placing them

skill and energy at the disposal of an employer. The skill
12
and energy is use according to employer discretion (will)
and the amount of payment being in accordance with the
term stipulate in contract of service.

There are two other terms compensation and earning

which are used in place of wage. The term compensation
includes everything which an employee individual
receives in return for his work.

The term earning relate to remuneration in cash or in

time to paid employer, as a rule , at regular interest for
time work or for work done together with remuneration
for time not worked

Ex. - traveling money

Normally wage is composed two parts basic wage

and allowance. The basic wage is the remuneration which
is paid or payable to an employee in term of contract of
service for the work done by him in a given period of

13
time. Allowances are paid by a employer in additional to
the basis wage to maintain its value over a period of time.

Generally wage rate gross earnings or

take home pay are synonymous to wages.

WAGE RATE: - Wage rate is the rate of wages paid to a

worker of a unit of a time or production. It includes over
time payment and incentive.

GROSS EARNING: - Gross earning means total earning

of a worker during a different period of time. It is
calculated on the basis of number of day work by a
worker including overtime payments, allowance payable
in chase.

14
TAKE HOUSE PAY: -Return gross earning means all
deduction from gross earning by way of taxes employee
provided fund.

In INDIA several terms have game prevalence referring to

wage levels. They are

Minimum wage
Living wage
Fair wage

MINIMUM WAGE: - Minimum wage is that wage

which must paid weather the company earn any profit or
not once the rate of such wage are fixed according to the
relevant provision of the minimum wage act 1948. It is
the obligation of the employer to pay them, regardless of
his ability to pay. The committee on fair wage and define
minimum wage as “The wage must provide not only for

15
bare sustenance of line but for the preservation of
efficiency of the worker. For this purposes the minimum
wage must provide for same major of education, medical
requirement and amenities”.

LIVING WAGE : - a living wage is one which should

enable the earner to provide for himself and his family
not only the where essential food, clothing and shelter but
major of component including education for his children
and protection against ill health, requirement of essential
social need and majors of insurance.

In other words a living wage was to provide for a

stander of living that would ensure good health for the
workers and his family members as well as a measure of
decency, comfort, education and protection against
misfortune. This obviously implies a high level of living
according to the committee on the wages. The living wage

16
is the highest among the wages. It is the dynamic consent
which growth in line with the growth nation economy.

FAIR WAGE

It is that wage which is above the minimum wage but

below the living wage. The lover limit of the fair wage is
obviously the minimum wage and upper limit is set by the
capacity of the industry to pay.

This will depend not only on the present economic

position of the industry but also on its future prospect.
The fair wage depend on consideration such factor such
as

1). Productivity of labor

2). The prevailing rate of wage in the same/ neighboring

industry.

3). The level of national income.

17
 4). Place of industry in the economy of the country.

FACTORS INFLUENCING EFFECTIVE

COMPENSATION

1. Org’ ability to pay.

2. Demand and supply of labor.
3. Prevailing market rate.
4. The cost of living.
5. Living wage.
6. Productivity.
7. Tread union bargaining power.
8. Job requirements.
9. Managerial attitude.
10. Psychological and social factor.
11. Level of skill available in the market.

18
 FOUR FACTOR OF PRODUCTION

• Land.
• Labor.
• Capital.
• Entrepreneur.

ECONOMIC THEROY OF WAGE

• SUBSISTENCE THEORY.
• MARGINAL PRODUCTION.
• SURPLUS THEORY.
• WAGE FUND THEORY.
• BARGAINING THEORY.
• RESIDUAL THEORY.

19
1. Wages Fund Theory: - This theory was
development by ADAM SMITH. His theory was
based on the assumption that worker are paid out of a
predetermined fund of wage. This fund called wage
fund, which resulted by saving. If the fund was large,
wages could be high. If it was small wages would be
reduces to subsistence level. The demand for labor
and the wage that could be paid to them for the work
determine by the size of the fund.
2. Subsistence Theory: - This theory profounded
by DAVID RECARDO. According to this theory
“The labor are paid to enable them to subsist and
perpetuate the race without increase. This payment is
called as subsistence wage. This theory based on the
assumption that if the workers paid more then
subsistence wage there number would be increases
and as a result wage would come down to subsistence
level in the country. If the workers are paid less then
subsistence wage the number of worker will decrease
20
 as a result of starvation, malnutrition, decease etc.
then again wages would go up to subsistence level.
3. Surplus Value Theory of Wages: - This theory
was developed by KARL MARX. This theory is
based on the assumption that like any other article
wages labor is also an article which would be
purchase on the payment. Its price that is wage. The
price of any product was determined the labor time
needed for producing it. The surplus goes to the
owner.
4. Residual Claimant Theory: - FRANCIS A
WALKER profounder of this theory. According to
him there are for factors of production that is
LABOR, LAND, CAPITAL AND entrepreneurship.
He views that one all other three factor are rewarded
what remain left is paid as wage to workers. Thus
according to this theory worker is the residual
claimant.

21
5. Managerial Productivity Theory: - This theory
was profound by HENRY WICKSTEED and JHON
BATES CLARK. According to this theory wage is
determine based on the production consequently by
the last worker. That is marginal worker. In other
word it assumed that wages depend upon the demand
and supply of labor. Consequence worker are paid
what they are economically worth.
6. Bargaining Theory of Wage: - JHONE
DEVIDSION was the profounder of this theory.
According to this theory the fixation of wage is
depend on the bargaining power of the worker/tread
union and of an employer. If workers are stronger in
bargaining process the wage tend to be high, in case
employer plays a stronger role than wage tends to be
lower.

DESIGNING COMPENSATION SYSTEM

22
A sound and well establish compensation system should
be just and equitable. It should take into consideration
both the employee as well as employer point of views.
Following are the step in order to design sound
compensation system.

STEP 1 – Establish general wage level for organization: -

factor is considered at

(A) Other firm’s rate or industry rate.

(B) Union demand.
(C) Firm’s ability to pay.
(D) Firm’s performance.
(E) Cost of living change.
STEP 2 – Establish wage structure (That pay for each
job)

1. Employer has a job evaluation system and that

methods are

(A) Ranking method.

23
 (B) Job grading method.
(C) Point system.
(D) Factor comparison.
2. Other point to consider are

(A) High rick/low risk jobs.

(B) Tuff or hard living area.

(C) Cities.

STEP 3 – Establish pay for each individual or each job.

(A) Performance appraisal

(B) Seniority/merit system (Experience).
(C) Output system (Based on targets).
STRATEGIC COMPENSATION

Earlier much business organization did not find the need

to spend high level of effort energy time on the strategic

24
part of compensation management as they did in area
sealing and marketing of product and services. One major
reason for this is that the result and game of strategy
compensation management are difficult to measure and
are in tangible where as the result of the efforts in sealing
and marketing are comparatively easy to measure.

In addition to this earlier the economy was manufacturing

based while to day’s economy is knowledge based where
manpower is the most important resource. So that the
increasing demand for talented manpower the mission and
the business strategy of the compare are been define more
clearly. Hence it is necessary for the organization to use
compensation management as a strategic tool.

Designing and managing the strategic compensation

system for an organization is one of the most difficult

25
 HRM function. There is a possibility of a huge gape
between the theory or the concept and the actual practical.
The challenge is to bridge this gape.

This indicates that compensation management is so

important in an organization that it deserved to be use as a
strategic tool. The strategic perspective focuses on those
compensation chosen that help the organization gain and
substance competitive advantage.

FORMULATION THE COMPENSATION

STRATEGY

• Read the mission and vision statement.

• Determine organization strategy.
(A) Differentiation.
(B) Customer service.
(C) Internal growth.
26
(D) External growth.
• Ass’s internal and external environment.
(A) Internal environment.
(I) Organization value.
(II) Employee/union need
(B) External environment.
(I) Social environment.
(II) Economic environment.
(III) Labor market.
• Right compensation philosophy.
(A) Objective.
(B) Consistency.
(C) External competitiveness.
(D) Individual contribution.
(E) Management.
• Implement strategy.
(A) Design a compensation system which translates strategy
in practice.

27
(B) Choose techniques to fit strategy.
• Re- asses the fit.
(A) Re- alien as conditions change.
(B) Re-alien as strategy change.

COMPENSATION PHILOSOPHY

Employee compensation is and extremely important

aspect for HRM. Wage, salary, and other forms of
employee compensation constitute a major portion of
operation cost in all organization. Most of the disputes
between the tread unions and management are in relation
to remuneration.

No organization can expect to attract and retain qualified

and motivated employee unless it wage fair remuneration

28
employee compensation thus directly influence the
growth and profitability of the organization.

Before am organization actually develop a compensation

plane there are several aspect that need to be addressed
they are

1. Goal of the organization compensation system.

2. Where there is intent to reward employee for
motivation good performance and/or create or
reinforce a particular type of organization climate.
3. The communication policy on the organization and
how the organization is going to communicate plane
to employee one it has been developed.
4. Process of decision making regarding payment
people involve in this decision and decision guideline
require to be developed.
5. The organization desired market position related to
pay whether the organization choose to pay at the
29
 market rates above market rates or below the market
rates.
6. Analysis of competitive factors involve that will
determine the pay strategy.
7. Desired mix between benefit are an important form
of compensation. Hoe done an organization use them
to maximization the effectiveness of compensation
plane.
8. What dose the organizations pay for? Does it pay for
performance or seniority or a combination of both?
9. The role of performance appraisal in an organization
is the important and region for it importance.
10. Synchronization of compensation philosophy and
plane with the rest of the organization.

30
31