|
 





Prof S P Singh Bhalla

PGP/FW/2009-11/T3
|
PENSATI N PLANNING
Introduction:-

‡ Why Semi-skilled get more than unskilled and skilled get more
than semi-skilled?

‡ Employees exchange work for rewards ± obviously
oney.

‡ G ALS: To design lowest cost compensation to attract, motivate

and retain competent workforce; also to be fair for demands and
requirements of the job. Fairness is a two way traffic.

‡ |ompensation systems are designed around jobs; i.e.

responsibilities and demands of job determine the compensation.

‡ Govt. influences, statutory interventions, parameters of Industry

cum region patterns to play a role.
‡     |
  
 :-

‡ RISING GL BAL
ARKETS REQUIRE RGANIZATI NS T |
PETE AND

BE PR FITABLE AND EVEN F R SURVIVAL. T BE SU||ESSFUL,
RGANZATI NS
UST PR VIDE HIGH QUALITY G DS AND SERVI|ES
T | NSU
ERS IN A | ST-EFFE|TIVE
ANNER -
AJ R | ST WHERE F
G ES T µ  | .¶

‡ PRESSURE N | ST EFFE|TIVENESS KEEPS THE RGANIZATI NS

| NSTANTLY SEAR|HING WAYS T KEEP LAB UR | STS WITHIN
A||EPTABLE PARA
ETERS VIZ. AFF RDABILITY, E
PL YEES¶
SATISFA|TI N IN PR P RTI N T THE IN|
E THESE E
PL YEES GIVE IN
RETURN T E
PL YERS,
TIVATING LAB UR, UPGRADING THEIR SKILLS,
AND
EETING THEIR LIFE STYLES, A
BITI NS AND ASPIRATI NS.

‡ RESEAR|HES | NSTANTLY PR VE µ
¶ IS THE BIGGEST
TIVAT R

BRINGING µH N URS, FRIENDS, | NQUESTS AND RI|HES¶, AS PER
|ELEBRATED P ET, J HN
ILT N, µEXERTING P WERFUL INFLUEN|E N
THEIR BEHAVI UR.¶ N W REALISATI N DAWNS UP N US, ³WHY WE HAVE
BEEN |RA

ING DURING S|H L DAYS, µ

 


‡
any rganizations embark on significant change in business strategies to remain
competitive.

‡These changes bring about rganizational restructuring, downsizing and increases

in use of state-of-the-art technology.
‡ Labour Economics encompass many a most important issues in Economics. People
Earn income by selling their Labour time.

‡DEFINITI N:-

‡|ompensation is a systematic approach to providing monetary value to

employees in exchange for work performed. |ompensation may achieve several
purposes such as assisting in recruitment, job performance and job satisfaction.

‡In other words, |ompensation may be defined as µ
NEY¶ received in

performance of work + kinds of benefits and services that rganisations provide
their employees. ³
NEY´ part is Direct |ompensation ± also called wages while
benefits form Indirect compensation.
‡
  ||    |
 :-

‡|   ± by David Ricardo (1772-1823) ± also known as ³IR N

LAW F WAGES¶ conceptualised as :- Labourers are paid to enable them to
subsist and perpetuate the race without increase or diminution ± on the assumption
that if they are paid more than subsistence wages, their numbers would increase as
they would procreate more and this would bring down the rates of wages as a result
of µ  !"# ¶. If wages fall below subsistence level, no. of workers
would decrease, many would die of hunger, malnutrition, disease, cold etc., and
many would not marry ± when that happened the wage rates would go up again
affecting µ  !"# ¶.   
  |
! $  !  $
 WAGES TEND T SETTLE AT THE
LEVEL JUST SUFFI|IENT T
AINTAIN LTHE W RKER AND HIS FA
ILY AT
A
INI
U
LSUSBSTEN|E LEVEL.
‡ 
 $!     # #%&' ( )*+,-)*./); later on advanced by John
Stuart
ill in 1830s ± draws a basic assumption that wages are paid out of a pre-
determined fund of wealth, presumably collected from operations of previous years, by
wealthy persons ± as a result of savings. This fund could be utilized for employing
labour for work. If the fund was large, wages would be high; If small - would be at
subsistence level. Demand for labour and wages were determined by the size of
funds.

‡    $ 

: - Developed by KARL
ARX
(1818-1883) ± This theory takes labour as an article of commerce ± could be
purchased on payment of µsubsistence price¶ ± Price of any product was
determined by Labour and time needed for producing it. Labour was not paid in
proportion to the time spent on work but much less and the surplus went over to
to be utilized for paying other expenses.
arks suggested that Labour is the only
source of economic value and therefore, Labour should exercise prime claim on
the revenue suggesting the price of an article consists of labour value and any other
value collected by the entrepreneur represents unacceptable exploitation of labour.

‡ ! |
   - - Francis A. Walker (1840-1897) propounded

this theory. There were four factors of production ± viz. land, labour, capital and
entrepreneurship. Wages represent amount of value created in production
which remains after payment has been made for all these factors of production. In
other words, labour is the residual claimant.
‡

  !|   - - developed by Philips Henry wicksteed,

arshal and John Bates |lark . It assumes - wages depend upon demand
and Supply of labour. Resultanty, workers get what they are economically worth.
Employer thus has a larger share in profit. As long as each additional worker
contributes more to the total value than the cost in wages, it pays the employer to
continue hiring; where this becomes un-economic, employer may resort to
superior technology. It assumes that wages depend upon the demand and Supply
of Labour. If demand for certain skills is high and supply is less, wages will rise.

‡ 

  $ 
 ± John Davidson propounded this theory vide
which wages are determined by relative bargaining power of workers or trade unions
and that of employers. When a trade Union is involved, basic wages, fringe benefits,
job differentials and individual differences tend to be determined by relative
strength of the rganization and the trade union.

‡     ± Notable industrial psychologists and sociologists

like
arsh and Simon, Trobert Dubin, Elio Jacques have presented their views on
basis of research studies and action programmes conducted by them. Briefly such
theories are:-

a. 
  ||| $  

 :- This takes into consideration
factors which may induce an employee to stay on with a company. Size and
prestige of |ompany, Power of Union, Wages and benefits that employee receives
in proportion to contributions made by him ± all have their impact.
‡ b.  
 |: - : - Social norms, traditions, customs
of the rganization and psychological pressures on
anagement, prestige
attached to certain jobs in terms of social status, need to maintain internal
consistency in wages at higher levels, ration of maximum and minimum
wage differentials and norms of span of control and demand for specialised
labour all affect internal wage structure of an rganization.

‡ c. 
0 !
 : -
oney often is looked upon as
means of fulfilling basic needs of man. Food, clothing, shelter, transportation,
Insurance, pension plans, education and other physical maintenance and
security factors are made available through purchasing power provided by
monetary income ± wages and salaries.
erit increases, bonuses based on
performance and other forms of money recognition for achievement are genuine
motivators. However, basic pay, cost of living increases and other wage
increases un-related to an individual¶s own productivity typically, may fall into
maintenance category.

‡ d.


1 $ ! 


 - are of recent trends ± around 1948 ±
conceptualised by Govt of India in next slide:-
‡



 has been defined as ³

³the wage which must provide not only for the bare sustenance
of life but for preservation of efficiency of the worker.
inimum
wage must provide for some measure of education, medical
requirements and amenities.´

Determining the minimum wage is difficult one for more than one reason such as:-

a. |onditions vary from place to place, industry to industry and from worker to worker.
b. Standard of living can¶t be determined accurately.
c. What should be the minimum wage?
d. What size of the family should be taken?
e. Who should determine these and the related factors?

However, certain principles for determining minimum wages have been evolved and
incorporated in µ
INI
U
WAGES A|T, 1948¶; important being that minimum wages
should provide not only for the bare sustenance life but also for preservation of
efficiency of the workers by way of education, medical care and other amenities.

It, however, needs to be mentioned that this Act is applicable only for the scheduled
employments and N T F R EXE|UTIVE/PR FESSI NALS.
‡ $ 
 is:-

³ THE WAGE WHI|H IS AB VE THE
INI
U
WAGE

BUT BEL W THE LIVING WGE´.

Lower limit of fair wage is obviously the minimum wage; upper limit is set by the
|apacity of the Industry to pay. Between thse two limits, actual wages should depend
on considerations of such factors such as:-

a. Productivity of labour;
b. Prevailing rates of wages in same or neighbouring localities; i.e. region.
c. Level of National Income and its distribution; and
d. Place of industry in the economy of the country.

‡
!   $ 
:- Demand for Labour: - 1. It reflects labour
Productivity and the market value of the product at different levels of production.
2. Increase in expected demand for a commodity increases the demand for labour.

‡ SUPPLY F LAB UR:- 1. No. of workers employed at various wage rates.

2. No. of hours per day/ No. of days per week they are willing to work.
3. Different for Firm, Industry, Economy.
‡  



:- under
inimum Wages Act, 1948 - rules and
Notifications. Statutorily binding effect regardless of their capacity to pay. Pay and
DA are revised periodically say 3-6 months. This statute covers only certain
scheduled employments (Non-executive levels) and not applicable other
categories of employments.

‡   |



 - also fixed by Industrial Tribunals, |ourts
and other judicial pronouncements notwithstanding that these are in the scheduled
employments or not. But this is not as a rule but only exception.
‡ 

 is defined as:-

³one which should enable the earner to provide for himself

and his family not only the bare essentials of food, clothing

and shelter but a measure of frugal comfort, including

education for his children, protection against ill-health,

requirements of essential social needs and a measure of

insurance against the more important misfortunes including old age.´

‡ ! $      $ 
:-

‡ Human Resource is an important asset of the rganization.

‡ rdinary Demand & Supply theory is not fully applicable.

‡ Labour and his labour are inseparable.

‡ Weak bargaining power of labourers.

‡ Exploitation of labour.

‡ |omparatively inelastic supply.

‡ 
 $   | 
|2-

‡&34 5&%42 - ne of the most important ideas in Labour Economics is a set of

arketable skills of employees as a form of |apital in which employees make a
variety of investment incentives. This perspective is important to understand both
investment incentives and the structure of wages.

Human |apital corresponds to any stock of knowledge and characteristics of the

Employee that contributes to his/her productivity.

Labour Economics thus deals with Income, what determines it and why it differs for
different individuals. It also deals allocation of most important in-puts of production
Processes.

Labour
arket thus with the buyers and sellers of labour Services and the
Institutions facilitating the buying and selling. Labour services are the direct in-put
of human muscle and brainpower into production including many tasks and
ccupations ± distinct from other puts such as raw material and capital services.

‡ 6 ! |    
:- Quantity is the amount of

of Labour input ± measured in no. of workers. Amount of labour time is worker hour.
Price is measured by the amount workers are paid per unit of labour time; the wage
or earnings.
‡ Since workers care about more than just the pay, there are non-wage benefits
and working conditions.

‡
"73"7 48 2-

‡ 9" &"2 per unit of time worked e.g. Rs. 50/- per hour. It could be per day or
even weekly or monthly too.

‡ %#" 9":- Wages paid according to time are called Time Wages referring to
daily wages, monthly wages. Where the work done is snot considered, the time
taken for doing f the work is considered is called time wages. This type of Wage
payment is soften used where quality of production is most important than it¶s
quantity.

‡ 4& 54#"7&%4: earnings + fringe benefits etc.

‡  !"# : - Demand side is business Employers. Supply side is

represented by Individual workers/Labour.

‡ 5" 43 4&& "88"5&:- As wage increases, cost increases; firm may typically
choose to produce less. It therefore needs less labour.

‡:7&%&&%4 88"5&:- As wage increases; business may try to substitute labour by

technology/machinery. Again this reduces quantity of labour.
‡ | 
2 Payment of the wages is made on the basis of quantity Work
In type of wage payment, quality of work is not considered. In other words, this
type of wage payment is good only where the quality of good is not affected by
making them in haste. This mode of wage payment helps in increasing the size
of production.

‡ 
:- In this type of wage payment, wages for the services of labour
is fixed at first. He is given the wages for the completion of work. He does the
work from the start till the end. These are also called |ontractual payments.

‡ |7' 9"72 - Wages paid in cash i.e. in money are called the cash wages.

‡ % 9"7:- Wages paid to workers for their services in the form of commodities
is called kind wages.

‡ Service Wages: Some times workers are neither paid in cash nor in kind. They are
paid through a service called the Service Wage.
‡ &'"3 54#7%47 % &'" :43
3;"& % &'" 3" <43 :-

‡a. Demand and Supply of Labour is adversely impacted by %47 acting

|3&" 43 #444. They usually impose a wage above the competitive
equilibrium through negotiations with the
anagements.

‡ Wage rigidity: Wages can¶t be reduced even when demand of labour falls.
‡
INI
U
WAGES A|T, 1928 ± Statutory binding effect.

‡ ||| $ 
 | include skill1 academia and

other professional attributes/in-puts viz. quality of academics, training, attitudes
towards work. This helps us to understand wage differentials in earnings
across workers.

Human |apital thus increases firm¶s prospects which will pay higher wages to
educated workers as they would be more useful for employers by their better
understanding business requirements and complexities; forming the µhub¶ of
the knowledge and hierarchy.

Human |apital possesses (A) &" quality. Workers can have different amounts of
skills due to innate differences.

(B) There is component of IQ.

‡|. Heterogeneity in Human |apital.

‡We have to search for these differences and correlate with other variables of
interests.

‡Academics/Professional attributes ± most easily observable component.

‡Skill/Training for a particular Industry or useful for a particular set of

Technologies. Industry also hires with exposure to more specific and
specialised training/exposures.

HU
AN |APITRAL IS THUS A VITAL IN-PUT IN THE PR DU|TI N

PR |ESS.
‡   IN ALL RGANIZATI NS IS H W T GIVE RIGHT IN|ENTIVES
T E
PL YEES.

‡!

$|  IN|LUDE: -

‡
ulti-tasking.
‡ Relative Performance evaluations.
‡ |areer Progressions.
‡ Team Productions.
‡ Wage Differentials.
‡ Upgradation of Skills.
‡Firm specific skills and attributes.
‡ 
 1 
 | $  ! |
 
.

‡ We had a look at the supply and demand sides of Labour
arket. Putting them
together in a competitive market gives us theory of equilibrium wages subject to
compulsions of
onopoly of Employers, |ollectives, Govt regulations/Acts etc.

‡ 7&:%7'%9  &"2-

‡ An rganization has a specific mission. To accomplish this, it must attract and hire
requisite skills with attitudes and aptitudes. It has, therefore, to reward to retain the
skills and accordingly designs a system to focus staff¶s attention to specific
behaviours to accomplish its objectives.

The critical or base reasons for compensation differentials for different categories of
skills relate to the following determinants:-

1. Kinds and levels of required knowledge and skills.

2. Kind of Business.
4. |apital intensive or Labour intensive.
6. Philosophy of
anagement.
8. Geographic location.
10. Profitability of the firm.
3. Union or non-Union status.
5. Size of Business.
7. Total compensation package.
9. Supply and demand of skills.
11. Employment stability.
‡ ! $  |
 


:-

‡A. THE
ANAGERIAL ENVIR N
ENT.

‡B. THE A|QUISITI N, ALL |ATI N, DEVEL P
ENT AND SAN|TI N

F HU
AN RES UR|ES; AND

‡ |HANGE AND STHE FUTURE.

‡
=43 545"&7: - |
PENSATI N, REWARDS, IN|ENTIVES AND BENEFITS.

‡  $ |
 :-

‡1. direct compensation. 2. indirect compensation.

‡
4" (also known as basic salary or wage i.e. gross pay.

‡ ""8%&7 (Insurance, Pensions, pay for vacation or illness, Welfare and Social
Security and the like fringe benefits are called  %3"5& |4#"7&%4.
‡ | | $  
 $   ! |
 
 ! 
2-

‡ To establish and maintain an equitable compensation structure.

‡ Establishment and maintenance of an equitable labour-cost structure, an optimal

balancing of conflicting personnel interests so that of employees and employees
is maximized and conflicts minimized.

‡ 5"&%>"7: - PERF R
AN|E; J B ASSIGN
ENTS; RETENTI N & TRAINING.

| ST, FAIRNESS AND LEGAL |
PLIAN|E.

$ $   ! |
 



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‡ &'"3 4:="5&%>"7 48 |4#"7&%4
9"#"&::-

1. To induct qualified personnel for the rganization.

2. Retain the Skills and control the paryroll costs.

3. Reward desired behaviour.

4. To motivate staff to perform better.

5. Helps in compliance with legal requirements.

6. To further enhance administrative efficiency ± making optimal use of HRIS.

‡ |
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‡ | 
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4 <'%5' 4&'"3 ""#"&7 48 54#"7&%4 :" 7&35&3"  & 54 :"  8%A"
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‡
%A" 7:- |ompanies may also pay combination of pay as well as
|ommissions. This system is called combination or mixed plan. Apart from other
compensation, employees may be eligible for fixed %age of commission upon
achievement of fixed target of sales or profits or performance objectives.

‡ 348%& 7'3%9 #"&7: - This a novel concept . This is paid through payment
aiming to generate competitiveness and improved productivity.

‡ $3%9" :""8%&7:- includes |ompany cars, Paid vacations,
embership of Social,

Professional and cultural clubs, Entertainment tickets/allowances, Leave Travel
concessions, Family vacation packages, spouses accompanying officers on tour/
vacations.

‡ 

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Remuneration

Financial Non financial

Incentive,
Basic
Individual plans
Wages Job |ontext
Group Plan
|hallenging Job
Responsibilities. Growth
Perquisites Prospects. Supervision
Fringe benefits, PF, Working conditions
|ar, |lub, Paid

edical care Job sharing.
Holidays, Furnished
Accident relief
House, Stock
Health and Group
ption scheme
Insurance.
 The Wage Determination Process.

Job Wage
Analysis Legislations.

Wage
Wage Surveys & Structure
Job description Analysis of relevant
Job Evaluation rganizational problems
& specification
Rules of
Administration

Differential
Performance
Employee Appraisal
Standard

Wage Payments
‡ |
      
: -

‡ |ompensation is used as a Business Strategy to achieve rganizational objectives

in particular:-

‡ It helps in tracking cost control of the Products and services. Un-checked and
un-related compensation adversely affects Business objectives and profitability.

‡ |ompensation planning helps in Proper Budgeting |ompany¶s Business expenses

and ultimately profitability.

‡ |ompensation is central to supporting the company culture and Business strategy.

‡ |ompensation is central to motivating the employees who have ultimately to

pursue Business strategies for enhancing organizational objectives.

‡ |ompensation is based on job evaluations. The latter is a monitoring system as a

Business strategy including planning, organizational control, critical human skills
and the evolving sizes and worth of the Jobs in view of fast changing profile of
Business and ever evolving strategies.
‡ |ompensation helps in bringing about clarity in the roles and responsibilities

which are directly related to Business strategies.

‡ |ompensation processes help in evaluation of Performance appraisal which is

a tool as a business strategy.

‡ |ompensation is aligned to share holders¶s rewards and company¶s objectives.

‡ Financial performance of the rganization comes from talent and skills of

an Individual
‡ |
 $$|
|
 2 -

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 |
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Skill based pay.

Salary reviews

Remuneration

Employee
|omparable
participation Pay Secrecy.
worth
 | $ 
 $H 

Ability to Pay. Going Rate.

Living Wage.
1. 2.
8.

Salary & Wage

Productivity.
|ost of Living. |riteria.
3.
7.

.
Supply & Job |ollectives¶
Demand Requirements. Bargaining
6. Power
5. 4.