Compensation Administration

Employees exchange work for rewards. Probably the most important reward and certainly
the most obvious is money. The goals of compensation administration are to design the
lowest-cost pay structures that will attract, motivate and retain competent employees, and
that also will be perceived as fair by these employees.

OBJECTIVES OF COMPENSATION ADMINISTRATION

The basic purpose of wage and salary administration is to establish and maintain an
equitable wage and salary structure. Its secondary objective is the establishment and
maintenance of an equitable labour-cost structure, i.e., an optimal balancing of conflicting
personnel interests so that the satisfaction of employees and employers is maximized and
conflicts minimized. A sound compensation administration tries to achieve the following
objectives:
a) For Employees
• Employees are paid according to requirements of their jobs, i.e., highly skilled jobs are
paid more compensation than low skilled jobs. This eliminates inequalities.
• The chances of favoritism are greatly reduced.
• Job sequences and lines of promotion are established whenever they are applicable.
• Employees’ morale and motivation are increased because a wage programme can be
explained and id based upon facts.

b) To Employers
• They can systematically plan for and control their labour costs.
• In dealing with a trade union, they can explain the basis of their wage programme
because upon a systematic analysis of job and wage facts.
• A wage and salary administration reduces the likelihood of friction and grievances over
wage inequities.

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• It enhances an employee’s morale and motivation because adequate and fairly
administered wages are basic to his wants and needs.
• It attracts qualified employees b ensuring and adequate payment for all the jobs.

Basically wage and salary programmes have four major purposes:

• To recruit persons for a firm.
• To control payroll costs;
• To satisfy people, to reduce the incidence of quitting grievances, and fractions over
pay, and
• To motivate people to perform better.

FACTORS AFFECTING COMPENSATION STRUCTURE

The compensation policies different organizations vary somewhat. A sound policy is to
adopt a job evaluation programme in order to establish fair differentials in wages based
upon differences in job contents. Besides the basic factors provided by a job description
and job evaluation, those that are usually taken into consideration are:

a) The Organization Ability to pay: Wage increases should be given by those

organizations, which can afford them. Companies that have good sales and, therefore, high
profits tend to pay higher wages than those which running at a loss or earning low profits
because of the high cost of production or low sales. In the short run, the economic
influence on the ability to pay is practically NIL. All employers, irrespective of their
profits or losses, must pay no less than their competitors and need pay no more if they wish
to attract and keep workers. In the long run, the ability to pay is very important. During the
time of prosperity, employers pay high wages to carry on profitable operations and because
of their increased ability to pay. But during a period of depression, wages are cut because
funds are not available. Marginal firms and non-profit organizations (like hospitals and
educational institutions) pay relatively low wages because of low or no profits.

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b) Supply and Demand of Labour: The labour market conditions or supply and demand
forces operate at the national, regional and local levels, and determine organizational wage
structure and level.
If the demand for certain skills is high and the supply is low, the result is a rise in the price
to be paid for these skills. When prolonged and acute, this labour market pressures
probably force most organizations to "reclassify hard-to-fill jobs at a higher level" than that
suggested by the job evaluation. The other alternative is to pay higher wages if the labour
supply is scarce; and lower wages when it is excessive. Similarly, if there is great demand
for labour expertise, wages rise; but if the demand for manpower skill is minimal, the
wages will be relatively low. The supply and demand compensation criterion is very
closely related to the prevailing pay, comparable wage and on-going wage concepts since,
in essence, all of these remuneration standards are determined by immediate market forces
and factors.

c) Prevailing Market Rate: This is also known as the 'comparable wage' or 'going wage
rate', and is the widely used criterion. An organization’s compensation policies generally
tend to conform to the wage-rates payable by the industry and the community. This is done
for several reasons. First, competition demands that competitors adhere to the same relative
wage level. Second, various government laws and judicial decisions make the adoption of
uniform wage rates an attractive proposition. Third, trade unions encourage this practice so
that their members can have equal pay, equal work and geographical differences may be
eliminated. Fourth, functionally related firms in the same industry require essentially the
same quality of employees, with the same skills and experience. This result in a
considerable uniformity in wage and salary rates. Finally, if the same or about the same
general rates of wages are not paid to the employees as are paid by the organization’s
competitors. It will not to be attract and maintain a sufficient quantity and quality of
manpower. Some companies pay on the high side of the market in order to obtain goodwill
to insure an adequate supply of labour, while other organizations pay lower wages because
economically they have to, or because by lowering hiring requirements they can keep jobs
adequately manned.

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The Living Wage criterion means that wages paid should be adequate to enable an
employee to maintain himself and his family at a reasonable level of existence. However,
employers do not generally favour using the concept of a living wage as a guide to wage
determination because they prefer to base the wages of an employee on his contribution
rather than on his head. Also, they feel that the level of living prescribed in a worker's
budget is open to argument since it is base on subjective opinion.

d) Trade Union's Bargaining Power: Trade unions do affect rate of wages. Generally, the
stronger and more powerful the trade union, the higher the wages.

e) Job Requirements: Generally, the more difficult a job, the higher are the wages,
Measures of job difficulty are frequently used when the relative value of one job to another
in an organization is to be ascertained. Jobs are graded according to the relative skills,
effort, responsibility, and job conditions required.

f) Managerial Attitudes: These have a decisive influence on the wage structure and wage
level since judgement is exercised in many areas of wage and salary administration ---
including whether the firm should pay below average, or above average rates, what job
factors should be used to reflect job worth, the weight to be given for performance or
length of service, and so forth, both the structure and level of wages are bound to be
affected accordingly. These matters require the approval of the top executives. Top
management's desire to maintain or enhance the company's prestige has been a major
factor in the wage policy of a number of rims. Desires to improve or maintain morale, to
attract high-caliber employees, to reduce turnover, and to provide a high living standard for
employees as possible also appear to be factors in management's wage-policy decisions.

g) Psychological and social Factors: These determine in a significant measure how hard a
person will work for the compensation received or what pressure he will exert to get his
compensation increased. Psychologically, persons perceive the level of wages as a measure
of success in life; people may feel secure; have an inferiority complex, seem inadequate or
feel the reverse of all these. They may not take pride in their work, or in the wages they

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get. Therefore, these things should not b overlooked by the management in establishing
wage rates. Sociologically and ethically, people feel that "equal work should carry equal
wages," that "wages should be commensurate with their efforts," that "they are not
exploited, and that no distinction is made on the basis of caste, colour, sex or religion." To
satisfy the conditions of equity, fairness and justice a management should take these
factors into consideration.

h) Skill Levels Available in the Market: With the rapid growth of industries business trade,
there is shortage of skilled resources. The technological development, automation have
been affecting the skill levels at a faster rates. Thus the wage levels of skilled employees
are constantly changing and an organization has to keep its level upto suit the market
needs.

i) Cost of Living: Next in importance market is the cost of living. This criterion matters
during periods of rising prices, and is forgotten when prices are stable or falling. The
justification for cost of living as a criterion for wage fixation is that the real wages of
workers should not be allowed to be whittled down by price increases. A rise in the cost of
living is sought to be compensated by payment of dearness allowance, basic pay to remain
undisturbed. Many companies include an escalatory clause in their wage agreement in
terms of which dearness allowance increases or decreases depending upon the movement
of consumer price index (CPI).

j) Labour Laws: We have a plethora of labour laws at the central as well as the state levels.
Some of the central laws which have a bearing on employee remuneration are the Payment
of Wages Act, 1936; the Minimum Wages Act, 1948. The payment of Bonus Act, 1965;
Equal remuneration Act, 1976; and the Payment of Gratuity Act, 1972.

EXECUTIVE COMPENSATION
The pay of executives is merely a special case within the topic of compensation, but it does
have several twists that deserve attention. First, the base salaries of executives are higher
than those of low-level-managers or operative personnel. Second, executives frequently

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operate under bonus and stock option plans that can dramatically increase their total
compensation. A senior executive at General motors, IBM, Data General, or General
Electric may in good year earn $500000 or $1000000 or more on top of his base salary.
Executives receive perquisites or special benefits that others do not.

How do organizations justify such extraordinary salaries for their executives? The answer
is simple: economics and motivation. In economic terms, we know that top managers are
expected to demonstrate good decision making abilities. This skill is not widely held in our
society. As a result, the supply of qualified senior executives is scarce, and organizations
have bid up the price for this talent. High salaries also act to motivate both top level-
managers to perform well in order to keep their jobs.

COMPONENTS OF EXECUTIVE COMPENSATION

a) Base salaries: Base salaries for CEOs are typically determined through competitive
“benchmarking,” based primarily on general industry salary surveys and supplemented by
detailed analyses of selected industry or market peers.

b) Annual Bonus Plans: Virtually every for-profit company offers an annual bonus plan
covering its top executives and paid annually based on a single-year’s performance. The
bonus is mostly computed using a formula, usually taking into account increases in sales
and profits. This bonus although earned in the current period, is distributed over several
years.

c) Stock options: Stock options have been common incentive offered to executives. They
generally allow executives to purchase, at some time in the future, a specific amount of the
company’s stock at a fixed price. Under the assumption that good management will
increase the company’s profitability and, therefore, the price of the stock, stock options are
viewed as performance based incentives.

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d) Perquisites: Executives are frequently offered a smorgasbord of perquisites not offered
to other employees. The logic of there perks is to attract and keep good managers and to
motivate them to work hard in the organization’s interests.

e) Golden Parachute: A popular benefit that accrued to top executives in the early 80s was
the “golden parachute”. It was designed by top executives as a means of protecting
themselves if a merger took place. These parachutes provide either a severance salary to
the departing executive or a guaranteed position in the newly created (merged)
organization.