COMPENSATION MANAGEMENT

Article 43 of the Indian Constitutions states,

“The state shall endure to secure, .

by suitable Legislation, or economic organisation or
in any other way to all workers – Agriculture, industrial,
or otherwise, - work,
•a living wage,
•conditions of work
•ensuring a decent standard of life
•and of full employment
•of leisure and social and cultural opportunities.”
INTRODUCTION

➢Compensation is now the top reason for job satisfaction, even

overtaking job security as the top driver of satisfaction

➢To develop a loyal and motivated workforce, companies of all

sizes must create competitive compensation and benefits
packages.

➢A competitive compensation and benefits package is key to a

company's ability to attract, retain, and engage top talent.

➢Compensation of employees for their services is important

responsibility of human resource management.

➢If at any time, the wages offered by a firm are not competitive
as compared to other firms, the efficient workers may leave the
firm.
First, COMPENSATION helps define a person’s standard of living.
•To meet their most basic needs such as food and shelter
•to enjoy the finer things in life such as driving a luxury car, and
taking exotic vacations.

Second, COMPENSATION influences

an employee’s attitudes such as job satisfaction, which,
contribute to better
job performance.

Third COMPENSATION aligns the interests of employees with a

company’s mission.

Employees and companies alike strive to maximize their

earnings.
 Definition

Gary Dessler

"Employee compensation refers to all forms of pay going

to employees and arising from their employment.”

Thomas J. Bergmann

compensation consists of four distinct components:

Compensation = Wage or Salary + Employee benefits

+Non-recurring financial rewards+ Non-financial rewards

Compensation is the total of all rewards provided to

employees in return for their work.
 COMPENSATION
Compensation is essential

•To maintain a standard of living

•To develop a loyal and motivated workforce.
•to attract and retain top talent.
•Reward and encourage peak performance
•Achieve internal and external equity
•Reduce employee turnover
•Maintain morale and satisfaction

Every organization must offer good wages and fringe benefits to attract and
retain talented employees with the organization.

If at any time, the wages offered by a firm are not competitive as compared to
other firms, the efficient workers may leave the firm.

Compensation to workers will vary depending upon the nature of job, skills
required, risk involved, nature of working conditions, paying capacity of the
employer, bargaining power of the trade union.
 Principles of compensation
•Differences in pay should be based on differences in job
requirements
•Salary should be in line with those prevailing in the job market
•Follow the principle of equal pay for equal work
•Recognize individual difference in ability and contributions
•The employees and trade union should be involved in setting
wage rates
•The wage should be sufficient to ensure for the worker and
his family for reasonable standard of living
•Wages to the employees should be paid promptly
•Revise wages from time to time
1. External Equity
It refers to how a job’s pay rate in one company compares to the
job’s pay in other Companies
2. Internal Equity
It refers to how fair the job’s pay rate is when compared to other
jobs within the same coompany.
For example: sales manager getting same pay to that of
production manager
3. Individual equity
It refers to the fairness of an individual’s pay as compared with
what his or her co-workers are earning for the same or very
similar jobs within the company.
4. Procedural equity
It refers to the perceived fairness of the process and procedures
used to make decisions
Regarding the allocation of pay.
 Objectives of Compensation Management
To Establish a Fair and Equitable Remuneration
To Attract Competent Personnel
To Retain the Present Employees
To Improve Productivity
To Guarantee minimum wage
To Improve Union - Management Relations
To Improve Public Image of the Company
To Improve Job Satisfaction
To Motivate Employees: Employees
To have Peace of Mind
Increases Self-Confidence
Types OF Compensation
 DIRECT COMPENSATION

Basic Wages/Salaries
Basic wages / salaries refer to the cash component of the wage
structure.

It is normally a fixed amount which is subject to changes

based on annual increments or subject to periodical pay hikes.

Wages and salaries are subject to the annual increments. They

differ from employee to employee, and depend upon the nature of
job, seniority, and merit.
 Wage Salary
Paid on hourly basis Based on time – a week, a month –
a year
Paid as per the work Paid regardless of the number of
performed hours worked
For blue collar workers For white collar professional and
managers
Semi-skilled or unskilled Skilled personnel
It varies Salary is fixed
 Bonus

Bonus is paid to the employees during festive seasons to motivate

them and provide them the social security. The bonus amount usually
amounts to one month's salary of the employee.

Incentives

Incentives are paid in addition to wages and salaries and are also called 'payments
by results'. Incentives depend upon productivity, sales, profit, or cost reduction
efforts.
There are:
Individual incentive schemes, and
Group incentive programmes.
Individual incentives are applicable to specific employee performance. Where a
group incentive given task demands group efforts for completion, incentives are
paid to the group as a whole. The amount is later divided among group members
on an equitable basis.
 Commissions

Commission to managers and employees may be based on the

sales revenue or profits of the company. It is always a fixed
percentage on the target achieved.

The payment of commission is practiced heavily on target based

sales.

Depending upon the targets achieved, companies may pay a

commission on a monthly or periodical basis.
 2. INDIRECT COMPENSATION

House Rent Allowance

Organizations either provide accommodations to its

employees who are from different state or country or they
provide house rent allowances to its employees. This is done to
provide them social security and motivate them to work.

Conveyance

Organizations provide for cab facilities to their employees.

Few organizations also provide vehicles and petrol allowances
to their employees to motivate them
 Leave Travel Allowance
The employees are given allowances to visit any place they
wish with their families. The allowances are scaled as per the
position of employee in the organization.

Medical Reimbursement
Organizations also look after the health conditions of their
employees. The employees are provided with medi-claims for
them and their family members. These medi-claims include health-
insurances and treatment bills reimbursements.

Special Allowance
Special allowance such as overtime, mobile allowances, meals,
commissions, travel expenses, reduced interest loans; insurance,
club memberships, etc are provided to employees to provide them
social security and motivate them which improve the
organizational productivity
 Leave Policy

The organizations provide for paid leaves such as, casual

leaves, medical leaves (sick leave), and maternity leaves, statutory
pay, etc.

Overtime Policy

Employees should be provided with the adequate allowances

and facilities during their overtime, if they happened to do so, such
as transport facilities, overtime pay, etc.
Insurance
Organizations also provide for accidental insurance and life insurance
for employees. This gives them the emotional security.

Leave Travel
The employees are provided with leaves and travel allowances to go
for holiday with their families. This is usually done to make the employees
stress free.

Retirement Benefits
Organizations provide for pension plans and other benefits for their
employees which benefits them after they retire from the organization at the
prescribed age.

Holiday Homes
Organizations provide for holiday homes and guest house for their
employees at different locations. The organizations make sure that the
employees do not face any kind of difficulties during their stay in the guest
house.
 Different forms of Non-monetary Rewards

Treats Facilities Awards Environmen Social Tokens On-the-Job

acknowledgeme Rewards
t nt

Decorative Trophies Renovation Recognition at Movie More

Free office get-
lunches items together tickets
responsibilit
y
Company Plaques Music Friendly Vacation Job rotation
Festival Watches trips
bashes greetings

Broachers Certificate Flexible Solicitation of Coupons Special

Coffee advice, redeemable arrangemen
breaks s suggestions at stores t
Hours

Diaries Scrolls Internet Membership of Early time Training

clubs offs
Picnics facilities

Calendars Letters of Anniversar Representin

Dinner Appreciati y/ birth day g the
with on presents company at
Boss public fora
Factors Considered in Deciding the Compensation

External Factors Internal Factors

 External Factors
Compliance with Law

• To protect the working class from the exploitations of powerful

employers, the government has enacted several laws.
• Laws on minimum wages,
• hours of work,
• equal pay for equal work,
• payment of other allowances,
• payment of bonus, etc., have been enacted

Demand and Supply of Labour

Wage is a price or compensation for the services rendered by a

worker. The firm requires these services, and it must pay a price
that will bring forth the supply which is controlled by the
individual worker or by a group of workers acting together
through their unions.
 Cost of Living
This tends to vary money wage depending upon the
variations in the cost of living index following rise or fall in
the general price level and consumer price index.

Labour Union
Organized labor is able to ensure better wages than the
unorganized one. Higher wages may have to be paid by the firm
to its workers under the pressure or trade union.

Prevailing Wage Rates

Wages in a firm are influenced by the general wage level or the
wages paid for similar occupations in the industry, region and the
economy as a whole.
 Internal Factors
Ability to Pay
Employer's ability to pay is an important factor affecting wages
not only for the individual firm, but also for the entire industry. This
depends upon the financial position and profitability of the firm.

Top Management Philosophy

Wage rates to be paid to the employees are also affected by the
top management's philosophy, values and attitudes. As wage and
salary payments constitute a major portion of costs and /or
apportionment of profits to the employees, top management may
like to keep it to the minimum.

Productivity of Workers
Productivity is the key factor in the operation of a company. High
wages and low costs are possible only when productivity increases
appreciably.
 Job Requirements
Job requirements indicating measures of job difficulty provide a basis
for determining the relative value of one job against another in an
enterprise.
• Hardship,
• Difficulty of learning the job
• Stability of employment
• Responsibility of learning the job

Employees Related Factors

Several employees related factors interact to determine his remuneration.
These include
Performance: productivity is always rewarded with a pay increase..
Seniority: Unions view seniority as the most objective criteria for pay
Experience: Makes an employee gain valuable insights and is generally
rewarded
Potential: organizations do pay some employees based on their potential.
 Organizational Politics

•Determination of firms
•Choice of compensable factors for the job evaluation
plan
•Emphasis placed on either internal or external equity

Thus, a sound and objective compensation system may be

destroyed by organizational politics.
 Fringe benefits

Introduction
According to the International Encyclopedia of social sciences "A fringe
benefits has to meet two tests, it must provide a specific benefit to an
employee and it must represent a cost to the employer"

•Fringe benefits are indirect form of compensation given to employees in

addition to the various forms of cash pay- base pay, dearness allowance
and incentive pay.

•They are not related to the performance but are granted to the
employees for just being a member of the organization.

•They are called benefits as the employees stand benefited on account of

such provisions.

For example key executives in large companies might also enjoy

fringe benefits like paid continuing education, use of a company jet,
use of a company credit card, discounted or free health club
memberships, and a significant amount of paid vacation.
Objectives of Fringe Benefits
The employer's views are that fringe benefits form an important part of
employee incentives to obtain their loyalty and retaining them.
The important objectives of fringe benefits are:
1. To create and improve sound industrial relations
2. To boost up employee morale.
3. To motivate the employees by identifying and satisfying their unsatisfied
needs.
4. To provide qualitative work environment and work life.
5. To provide security to the employees against social risks like old age
benefits and maternity benefits.
6. To protect the health of the employees and to provide safety to the
employees against accidents.
7. To promote employee's welfare by providing welfare measures like
recreation facilities.
8. To create a sense of belongingness among employees and to retain them.
Hence, fringe benefits are called golden hand-cuffs.
9. To meet requirements of various legislations relating to fringe benefits.
Features of Fringe Benefits

1. They are the payments and benefits to an employee by his employer in addition to
his normal earnings
2. Fringe benefits are not linked to performance or efficiency of any employee
3. Difference in fringe benefits may exist due to classification of employees based on
organizational status
4. Fringe benefits are paid to all the employees based on their membership in the
organization
5. Fringe benefits are indirect compensation because these are usually extended as a
condition of employment and are not directly related to performance.
6. Fringe benefits involve labour cost for the employer and are not meant directly to
improve efficiency
7. Fringe benefits may be statutory or voluntary. Provident fund is a statutory benefit
whereas housing is a voluntary benefit
8. Fringe benefits raise the standard of living of the employees
Principles of Fringe Benefits
The following principles must govern the administration of fringe benefits
1. Benefits and services must be provided to the employees on the basis of a
genuine interest in the protection and promotion of their well-being. The
management should not feel that the fringes are thrust upon them. Nor
should the management feel that they are providing the benefits as a
matter of charity.
2. The benefits must satisfy a real need. Employees resist or are indifferent to
any benefit which is not like by them
3. The benefits must be cost-effective
4. The benefits should be as broad based as possible
5. Administration of the benefits should be preceded by sound planning
6. The wishes of employees expressed by their union representatives and the
bargaining power of the union must be considered
7. Employees should be educated to make use of the benefits.
REASONS FOR OFFERING FRINGE BENEFITS
Current Fringe Benefit Practices

Currently three main approaches are in practice in the area of

fringe benefits:

Innovation: organizations are offering many new types of

fringe benefits to their employees

Flexibility in fringe benefits: employees are allowed to choose

from an array of benefits within certain cost limits and

Harmonization is tried to attempt to give a feeling of equity

and fair play to employees
For Employment Security
•Insurance,
• leave travel pay,
•overtime pay,
•leave for maternity,
•leave for grievances,
•holidays,
•cost of living bonus,
•call-back pay,
• lay-off,
•retiring rooms,
• jobs to the sons/daughters of the employees and the like.

For Health Protection

•accident insurance,
•disability insurance,
• health insurance,
•hospitalization,
•life insurance,
•medical care,
•sick benefits,
•sick leave, etc.
For Old Age and Retirement
•Benefits under this category include:
•pension,
•gratuity,
•provident fund,
• old age assistance,
•old age counseling,
•medical benefits for retired employees,
• traveling concession to retired employees,
•jobs to sons/daughters of the deceased employee and
the like.
For Personnel Identification, Participation and Stimulation

•anniversary awards,
•attendance bonus,
•canteen,
•cooperative credit societies,
•educational facilities,
• beauty parlor services,
•housing,
•income tax aid,
•counseling,
•quality bonus,
•recreational programs,
•stress counseling,
•safety measures etc.
Health Facility

In India, the Factories Act, 1948, stipulated certain

requirements regarding working conditions
•cleanliness,
•disposal of waste and effluents,
•ventilation
• free from dust and fume,
•over-crowding,
• lighting,
•drinking water,
•latrine urinals,
•and spittoons.
Safety Facility
•fencing of machinery,
•work on or near machinery in motion,
•employment of young person's on dangerous machines,
•devices for cutting off power,
•lifts,
•lifting machines,
• pressure plant,
•excessive weights,
•protection of eyes,
• precautions against dangerous fumes,
•explosive or inflammable dust, gas etc.
• Precautions in case of fire,
•safety of buildings and machinery etc.