compensation

Compensation is what employee receive in

exchange for their contribution to the
organisation. The three bases of
compensation are
1. Base pay wage or salary
2. Variable pay linked directly to the
performance accomplishments
3. Benefits indirect rewards given to the
employees like insurance, vacation pay etc.,
Objectives
Internal equity
external equity
Individual equity
Attract talent
Retain talent
Ensure equity
New and desired behaviour
Control costs
Comply with legal rules
Ease of operation
Wage and salary surveys
Key job matching (similar key jobs are identified
between the organisations and the relevant wage
particulars are decided

Key class matching (similar classes of jobs are
identified and the necessary data about the classes
are collected)

Occupational method (certain basic occupational
groups like clerks, oficers managers are identified
and then the necessary data is collected)
Wage and salary surveys
Job evaluation method (all the parties
participating in the survey method, use the same
method same mechanism for evaluating the
similar jobs

Broad classification method (broad groups of
relatively homogeneous jobs, or by geographical
area are grouped and the relevant information
about these jobs is collected

Components of wage structure in India
Wages in India different Acts include different items
under the term wages, though all the Acts include
basic wage and dearness allowance under the term
wages.
Payment of Wages Act, 1948
- retrenchment compensation, payment in lieu of
notice and gratuity payable on discharge constitute
wages
Components of wage structure in India
Under the payment of wages Act, 1936, Section 2
(iv) any award of settlement and production bonus,
if paid constitute wages

Under the Workmens Compensation Act, 1923,
wages for leave period, holiday pay, overtime pay,
bonus, attendance bonus, and good conduct bonus
form part of the wages
Conditions not suitable for Wages Act
1. Bonus or other payments under a profit-sharing
scheme
2. Value of any house accommodation, supply of
light, water, medical attendance, traveling
allowance or any other concession
3. Any sum paid to defray special expenses
entailed by the nature of employment of a
workmen
4. Any contribution to pension, provident fund, or a
scheme of social security and social insurance
benefits
5. Any other amenity or service exclude from the
computation of wages by general or special
order of an appropriate government authority


Basic wage




Recommended by fair wage committee (1948) and
the 15
th
Indian labour Conference (1957).
The various awards by wage tribunals, wage boards,
pay commission reports and job evaluations also
serve as guiding principles in determining basic
wage
Basic wage
The criterions considered are
- skills needed of the job
- experience needed
- difficulty of work (mental as well as
physical)
- training needed
- responsibilities involved
- hazardous nature of job

Dearness allowance (DA)
It is the allowance paid to the employees in order
to enable them to face the increasing dearness of
essential commodities.
It serves as a cushion, a sort of insurance against
increase in price levels
DA is paid to neutralise the effect of inflation;
when prices go down, DA can always be reduced
Dearness allowance (DA)
DA is linked in India to three factors. They
are
1. All India consumer price index : The labor
Bureau, Shimla, computes the AICPI
2. Time factor : linked to rise of AICPI in a
related period
3. Point factor : DA rises in line with a rise in
the number of index points above a specific
level
4. Other allowances : list of allowances
granted by the employers in India
List of allowances in organised
sector
1. Attendance
2. Books
3. Car
4. Cards
5. City compensatory
6. Club membership
7. Computer
8. Deputation
9. Driver
10. Education
11. Group insurance
12. Leave travel
13. Lunch
14. Medical
15. Night shift
16. Overtime
17. Pension
18. Provident fund
19. Servant
20. Telephone
Objectives

To establish fair and equitable remuneration
offering similar pay for similar work
To attract qualified and competent personnel
To retain the present employees by keeping
wage levels in the tune with competing units
To control labor and administrative costs in line
with the ability of the organisation to pay.
To improve motivation and morale of employees
and to improve union-management relations
To project a good image of the company and to
comply with legal needs relating to wage and
salaries
Wage and salary administration
Employee compensation may be classified
into two types base compensation and
supplementary compensation
Base compensation refers to monetary
payments to employees in the form of wages
and salaries
Supplementary compensation signifies
incentive payments based on actual
performance of an employee or a group of
employees
Principles of Wage and salary
administration
It should be sufficiently flexible
Job evaluation must be done scientifically
Must consistent with overall organisational plans
and programes
Should be in conformity with the social and
economic objectives of the country like
attainment of equality in income distribution and
controlling inflationary trends
Should be responsive to the changing local and
national conditions
These plans should simplify and expedite other
administrative responses

Elements

Identifying the available salary opportunities, their costs,
estimating the worth of its members
Relating salary to the needs and goals
Developing quality, quantity and time standards related to
work and goals
Determining efforts necessary to achieve standards
Measuring actual performance
Elements
Comparing the performance with salary received

Measuring job satisfaction of the employees

Evaluating the unsatisfied wants and unrealised
goals aspirations of the employees

Finding out the dissatisfaction arising from
unfulfilled needs and unattained goals

Adjusting the salary levels accordingly with a
view to enabling the employees to reach the
required goals and fulfill the unfulfilled needs and
aspirations

Factors influencing compensation
levels
Job needs
Ability to pay
Cost of living
Prevailing wage rates
Unions
Productivity
State regulation
Demand and supply of labour
Establishing Pay Rates
Conduct Salary Survey (nearby regions and
state Comparison)
Determine the worth of each Job (job
evaluation techniques)
Group Similar jobs into Pay Grades
(comprised of jobs of approximately equal
difficulty)
Price Each Pay Grade
Fine tune Pay rate (usually based upon years
of service)

Current trends in compensation
Skill based pay you are paid for the range,
depth, and types of skills and knowledge you are
capable of using rather than for the job you
currently hold.
- competence testing
- effect of job change
- seniority and other factors
- advancement opportunities
for eg., in General Mills the workers were
divided into three levels. Therefore 12 pay levels
were administered (four blocks with three pay
levels each). In this the classifications for levels
are Level 1 (limited ability)
Level 2 (partial proficiency)
Level 3 (fully competent in the area)
Current trends in compensation
Broad banding :

Broad banding means collapsing salary
grades and ranges into just a few wide levels
or bands, each of which contains a relatively
wide range of jobs and salary levels
Companies most often broadband to
support overall organisational and strategic
changes
for eg., the broad banding in one British
company was aimed to support a new cost-
cutting strategy and consequent flattening and
downsizing of the organisation
Current issues in compensation
management
The issue of comparable worth refers to the
requirement to pay equal wages for jobs of
comparable rather than strictly equal value to
the employer
The issue of salary compression result of
inflation, means longer term employees
salaries are lower than those for workers
entering the firm today
The issue of cost of living differentials
differences between cities can cause serious
compensation problems
Wage policy in India
In India it is been classified as three ways as
Minimum Wage, Fair Wage and Living Wage.

Minimum wage
is that wage which must invariably be paid
whether the company big or small, makes
profits or not. It is a minimum that a worker
can expect to get for services rendered by
him.

Minimum wage

Standard working class family comprises three
consumption unit for one earner. The earnings of
women and children be disregarded
Minimum food requirements calculated on the basis of a
set intake of calories as recommended by Dr. Aykroyd
for an average Indian adult of moderate activity
Clothing requirements estimated on the basis of per
capita consumption of 18 yard per annum which would
give the average workers family a total of 72 yards
In respect of housing, minimum area provide for under
Government Industrial Housing Scheme should be
taken consideration
Fuel, lighting and other miscellaneous items of
expenditure constitute 20% minimum wages.
Fair wage
It is that wage which is above the minimum
wage but below the living wage. According to
the Committee on Fair Wages, 1948 the
determining factors are

1. The productivity of labour
2. The prevailing rates of wages in the same or
similar occupations in the regions
3. The level of national income and its distribution
4. The place of industry in the economy of the
country
5. The employers capacity to pay
Living wages
According to Committee on Fair Wages, the
living wage is the highest among three. It must
provide
i) Basic amenities of life
ii) Efficiency of workers
iii) Satisfy social needs of workers such as
medical, education, retirement etc.,
iv) It is a concept which grows in line with the
growth of the national economy.
Minimum Wages Act, 1948
The act provides for setting up a tripartite body of
consisting of employees, unions and the government,
to advise and assist in fixing and revising minimum
wage rates. The rates could be subjected to revision at
intervals not exceeding 5 years. The act has not been
able to prevent exploitation of labour due to a variety of
reasons
1. The Vidyasagar Committee, 1965, pointed that the
desired objective of the Act could not be realised due to
inadequate and improper organisation of the
administrative machinery
2. Minimum wages have not been revised as the
stipulated in the Act. They are revised after much
longer intervals
Minimum Wages Act, 1948
3. The act did not define minimum wages nor
specified any norms for its determination
4. The Supreme Court has held (in 1992) that the
appropriate authorities should take into
consideration the components such as
- childrens education allowance
- medical needs
- minimum recreation
- provision for marriage
- old age etc., while calculating minimum
wages
The payment of Wages Act, 1936
Main objective is to provide regular payment of
wages without any unauthorized reduction
The persons who are employed in any industrial
establishment or factory or railway or by a railway
contractor whose monthly wages are not less than
Rs.1600. are eligible to this act
The act prescribes the following permissible
deductions to be made from the employees salary:
The payment of Wages Act, 1936

- fines and deductions for
i) absence
ii) loss of goods entrusted to worker
iii) house of given by the employer
iv) services provided by employer
v) advances given by employer
vi) deductions under court orders
vii) cooperative society
viii) provident fund
ix) insurance premium etc.,

the adjudication of disputes related to various issues
is cleared through collective bargaining. The Wage
settlement can also be cleared with this
Wage Boards
This is one of the important institutions set up by the
government of India for fixation and revision of
wages.
Separate wage boards are set up for separate
industries
Wage boards are not governed by any legislation but
are appointed on an adhoc basis by the government
Wage boards revise and fix various components like
basic pay, house rent allowance and other
allowances
Wage Boards
The factors considered by wage boards are
1. Job evaluation
2. Wage rates comparison
3. Employees productivity
4. Firms ability to pay
5. Various wage legislations
6. Existing level of wage differentials and their
desirability
7. Governments objectives regarding social
justice, social equality, economic justice and
economic equality
8. Place of the industry in the economy
9. Need for incentives improvement
Pay Commission
Wages and allowances of Central and State
Government employees are determine through the
pay commissions appointed by the appropriate
government
The disputes, arising out of pay commission awards
and their implementation are decided by
commissions of inquiry, adjudication machinery and
joint consultative machinery
Wage Boards
Each wage board consists of one neutral
chairman, two independent members and two or
three representatives of workers and
management each.
The wage boards have to study various factors
before making any recommendations.
The recommendations of wage boards are first
referred to the government for acceptance
The recommendations accepted by the
government are enforceable by the parties
concerned
Bonus
It is provided besides the salary
Starting as an adhoc and exgratia payment, bonus
was claimed as dearness allowance during the
World War II.
Then it was changed as a reward or an incentive for
good work, into defendable right and a just a claim
It is also treated as a source of bridging the gap
between the actual wage and the need based wage
The Payment of Bonus Act, 1965
Bonus is calculated on a salary of Rs. 2500/- Per
month
Bonus is to be paid at a minimum of 8.33 per
cent of salary
The bonus is to be paid within 8 months from the
close of an accounting year
Available surplus exceeds the employer has to
pay higher bonus
Even if there is no surplus the employer is
expected to pay bonus treating it as deferred
wages
To claim bonus the employee must have worked
for 30 days in that year
Choices in designing a
compensation system

Internal and external pay
Fixed Vs. Variable pay
Performance Vs. Membership
Job vs. individual pay
Below market vs. above market compensation
Open vs. secret pay
Methods of wage payment
Time wage system
the worker is paid on the basis of time spent
on the work irrespective of the amount of work
done.
the basis of this may be hour, day, week or
month
it is a oldest system and is widely employed
in those organisations where

Methods of wage payment
1. Quality of work is more important than the
volume
2. Measurement of work is not convenient
3. Production involves delay and interruption due
to uncontrollable factors
4. Where work requires a high degree of skill and
dexterity
5. Efficiency can only be measured by close
supervision
Guaranteed time rates
Payment is at time rates, but adjusted to the cost of
living
Merit awards for personal qualities, skill ability,
punctuality etc., are also considered
The employer compensates the high labour cost by
increasing the price of the products
It is difficult to determine the wage index though the
scheme is acceptable to all
Piece rate system
The workers are paid at a stipulated rate per
piece or unit of output
Here speed is the basis of payment, instead time
The rate is fixed per piece of work and worker is
paid according to the number of pieces
completed or the volume of work done by him
Piece rate system

The method is applicable where
a) Quality of work is not important
b) Work is of a repetitive nature
c) Job rate can be fixed satisfactorily
d) There is sufficient demand for output to
guarantee continuous work
e) The job is a standardised one

Types of Piece rate system
Straight piece rate system
fixed amount per fixed units produced
without regard to the time taken
earnings = number of units X rate per unit
Piece rate with guaranteed time rate - with
regard to the dearness allowance or cost of
living
Differential piece rate proportionate to the
total output
Organisation wide incentive plans
A. Profit sharing
is a scheme whereby employers
undertake to pay a particular portion of net
profits to their employees on compliance
with certain service conditions and
qualifications
the purpose is to strengthen the loyalty of
employees to the firm by offering them an
annual bonus
the share of the worker may be given in
cash or in the form of shares in the
company
Organisation wide incentive plans
Gain Sharing
gain sharing plan aims at increasing
productivity or decreasing labour costs and the
resultant gains with the employees
gain sharing plans tend to increase the level
of cooperation across workers and teams by
giving them a common goal
it protects low performers
Organisation wide incentive plans
Employee stock ownership plans
under this the eligible employee are
allotted companys shares below the market
price
the eligibility criteria may include the
length of service, contribution to the
department/division where the employee
works etc.,
the allotted shares are generally held in
trust and transferred to the name of the
employee whenever he or she decide to
exercise the option
Organisation wide incentive plans
Fringe benefits
they are supplementary forms of
compensation
paid to all employees based on their
membership in the organisation
they are indirect compensation because they
are usually extended as a condition of
employment and are not directly related to the
performance
they help raise the living conditions of
employees
they may be statutory or voluntary
Objectives of fringe benefits
To create and improve sound industrial relations
To motivate employees by identifying and
satisfying their unsatisfied needs
To provide security to the employees against
social risks like old age benefits and maternity
benefits
To protect the health of the employees
To promote employees welfare
To create a sense of belongingness among
employees and to retain them
To meet the requirements of various legislations
relating to fringe benefits
Compensation management
Microsoft Corporation
- innovative and competitive benefits
packages
- trying out new policies
- endorsing work/life balances
- satisfaction by different means like
a. health benefits
b. investment benefits
c. performance management
Compensation management
Infosys technology Ltd.,
- creates an environment which gives energy
and vitality
- freshness
- work on campus like facility and culture
- unafraid to voice new ideas
- minimal hierarchy
Compensation management
Wipro technologies
- rewards based on performance
- potential
- criticality
- market value
- deferred benefits such as provident fund,
gratuity, pension plan etc.,
Compensation management
Cognizant technologies
- we believe that our strength lies in our
people and we design our benefit packages to
help our people grow and develop in every aspect
of their lives
Compensation management
ICICI bank
- benchmark with global best practices
- ensure optimum utilisation of our resources
and the fines exposure to our workforce
- vision is to empower by bright and talented
individuals, working in teams and riding on the
backbone of world class technology
Compensation management
The goldman sachs group Inc,
- six distinct areas like
a. health
b. work
c. family
d. nutrition
e. learning
f. recreation
Compensation management
Tata Consultancy services
- end of the month paycheck
- high motivation level guarantees
- stimulating job content
- outstanding development opportunities
- innovative recognition mechanism
Compensation management
Glaxosmithkline
- 78% employees said in 2004 they have
enough flexibility to balance their work and
personal responsibilities
- an environment that supports the desired
values, helps them attract and retain people in
high integrity.