COMPENSATION MANAGEMENT

UNIT-1

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COMPENSATION= MONETARY + NONMONETARY BENEFITS

MONETARY: - WAGES, SALARIES, INCREMENT, PERKS, BONUS, FRINGE

BENEFITS.

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 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

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 COMPENSATION MAY BE USE TO

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

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: -

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.
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 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 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:-

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, & MOMEY. 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, 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.

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 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.
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.

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 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.

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 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 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.

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
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 provide not only for bare sustainace 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 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.

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.

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 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.

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.

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 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
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 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.
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 that wages depend upon the demand and supply of
labor. Consequence worker are paid what they are economically wrath.
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

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.

(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.
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 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 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 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.
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(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.
(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 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.

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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 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.

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