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compensation

Compensation is what employee receive inexchange for their contribution to the

organisation. The three bases of

compensation are

1. Base paywage or salary

2. Variable paylinked directly to the

performance accomplishments

3. Benefitsindirect rewards given to theemployees like insurance, vacation pay etc.,

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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

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Wage and salary surveys

Key job matching (similar key jobs are identifiedbetween the organisations and the relevant wageparticulars are decided

Key class matching (similar classes of jobs are

identified and the necessary data about the classesare collected)

Occupational method (certain basic occupational

groups like clerks, oficers managers are identifiedand then the necessary data is collected)

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Wage and salary surveys Job evaluation method (all the parties

participating in the survey method, use the samemethod same mechanism for evaluating thesimilar jobs

Broad classification method (broad groups ofrelatively homogeneous jobs, or by geographicalarea are grouped and the relevant informationabout these jobs is collected

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Components of wage structure in India

Wagesin 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

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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 bonusform part of the wages

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Conditions not suitable for Wages Act

1. Bonus or other payments under a profit-sharingscheme2. Value of any house accommodation, supply of

light, water, medical attendance, travelingallowance or any other concession

3. Any sum paid to defray special expensesentailed by the nature of employment of aworkmen

4. Any contribution to pension, provident fund, or a

scheme of social security and social insurancebenefits

5. Any other amenity or service exclude from thecomputation of wages by general or specialorder of an appropriate government authority

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Basic wage

Recommended by fair wage committee (1948) andthe 15thIndian labour Conference (1957).

The various awards by wage tribunals, wage boards,pay commission reports and job evaluations alsoserve as guiding principles in determining basicwage

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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

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Dearness allowance (DA) It is the allowance paid to the employees in order

to enable them to face the increasing dearness ofessential 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

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Dearness allowance (DA)

DA is linked in India to three factors. Theyare

1. All India consumer price index : The labor

Bureau, Shimla, computes the AICPI2. 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 specificlevel

4. Other allowances : list of allowances

granted by the employers in India

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List of allowances in organised

sector

1. Attendance2. Books

3. Car

4. Cards

5. City compensatory

6. Club membership

7. Computer

8. Deputation9. Driver

10. Education

11. Group insurance

12. Leave travel

13. Lunch

14. Medical15. Night shift

16. Overtime

17. Pension

18. Provident fund

19. Servant

20. Telephone

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Objectives

To establish fair and equitable remunerationoffering similar pay for similar work

To attract qualified and competent personnel

To retain the present employees by keepingwage levels in the tune with competing units

To control labor and administrative costs in linewith the ability of the organisation to pay.

To improve motivation and morale of employeesand to improve union-management relations To project a good image of the company and to

comply with legal needs relating to wage andsalaries

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Wage and salary administration

Employee compensation may be classifiedinto two typesbase compensation and

supplementary compensation

Base compensation refers to monetarypayments to employees in the form of wages

and salaries

Supplementary compensation signifies

incentive payments based on actualperformance of an employee or a group of

employees

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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 likeattainment of equality in income distribution andcontrolling inflationary trends

Should be responsive to the changing local andnational conditions

These plans should simplify and expedite otheradministrative responses

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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 towork and goals

Determining efforts necessary to achieve standards

Measuring actual performance

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Elements Comparing the performance with salary received

Measuring job satisfaction of the employees

Evaluating the unsatisfied wants and unrealisedgoals aspirations of the employees

Finding out the dissatisfaction arising fromunfulfilled needs and unattained goals

Adjusting the salary levels accordingly with aview to enabling the employees to reach therequired goals and fulfill the unfulfilled needs and

aspirations

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Factors influencing compensation

levels

Job needsAbility to pay

Cost of living

Prevailing wage rates

Unions

Productivity

State regulation

Demand and supply of labour

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Establishing Pay Rates

Conduct Salary Survey (nearby regions andstate 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)

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Current trends in compensation Skill based payyou are paid for the range,

depth, and types of skills and knowledge you arecapable of using rather than for the job youcurrently hold.- competence testing- effect of job change

- seniority and other factors- advancement opportunities

for eg., in General Mills the workers weredivided into three levels. Therefore 12 pay levels

were administered (four blocks with three paylevels each). In this the classifications for levelsare Level 1 (limited ability)

Level 2 (partial proficiency)

Level 3 (fully competent in the area)

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Current trends in compensation

Broad banding :

Broad banding means collapsing salarygrades and ranges into just a few wide levels

or bands, each of which contains a relativelywide range of jobs and salary levels

Companies most often broadband tosupport overall organisational and strategicchanges

for eg., the broad banding in one Britishcompany was aimed to support a new cost-cutting strategy and consequent flattening anddownsizing of the organisation

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Current issues in compensation

management

The issue of comparable worthrefers to therequirement to pay equal wages for jobs ofcomparable rather than strictly equal value tothe employer

The issue of salary compressionresult ofinflation, means longer term employeessalaries are lower than those for workersentering the firm today

The issue of cost of living differentialsdifferences between cities can cause seriouscompensation problems

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Wage policy in India

In India it is been classified as three ways asMinimum Wage, Fair Wage and Living Wage.

Minimum wageis 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 byhim.

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Minimum wage

Standard working class family comprises threeconsumption unit for one earner. The earnings ofwomen and children be disregarded

Minimum food requirements calculated on the basis of aset intake of calories as recommended by Dr. Aykroydfor an average Indian adult of moderate activity

Clothing requirements estimated on the basis of percapita consumption of 18 yard per annum which wouldgive the average workers family a total of 72 yards

In respect of housing, minimum area provide for underGovernment Industrial Housing Scheme should betaken consideration

Fuel, lighting and other miscellaneous items ofexpenditure constitute 20% minimum wages.

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Fair wage

It is that wage which is above the minimumwage but below the living wage. According tothe Committee on Fair Wages, 1948 thedetermining factors are

1. The productivity of labour2. The prevailing rates of wages in the same or

similar occupations in the regions

3. The level of national income and its distribution4. The place of industry in the economy of the

country

5. The employers capacity to pay

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Living wages

According to Committee on Fair Wages, theliving wage is the highest among three. It mustprovide

i) Basic amenities of life

ii) Efficiency of workersiii) 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.

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Minimum Wages Act, 1948

The act provides for setting up a tripartite body ofconsisting of employees, unions and the government,to advise and assist in fixing and revising minimumwage rates. The rates could be subjected to revision atintervals not exceeding 5 years. The act has not been

able to prevent exploitation of labour due to a variety ofreasons

1. The Vidyasagar Committee, 1965, pointed that thedesired objective of the Act could not be realised due toinadequate and improper organisation of the

administrative machinery

2. Minimum wages have not been revised as thestipulated in the Act. They are revised after muchlonger intervals

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Minimum Wages Act, 1948

3. The act did not define minimum wages norspecified any norms for its determination

4. The Supreme Court has held (in 1992) that theappropriate authorities should take intoconsideration the components such as

- childrens education allowance

- medical needs

- minimum recreation- provision for marriage

- old age etc., while calculating minimumwages

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The payment of Wages Act, 1936

Main objective is to provide regular payment ofwages without any unauthorized reduction

The persons who are employed in any industrialestablishment or factory or railway or by a railwaycontractor 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:

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The payment of Wages Act, 1936

- fines and deductions fori) 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 issuesis cleared through collective bargaining. The Wagesettlement can also be cleared with this

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Wage Boards

This is one of the important institutions set up by thegovernment of India for fixation and revision ofwages.

Separate wage boards are set up for separateindustries

Wage boards are not governed by any legislation butare appointed on an adhoc basis by the government

Wage boards revise and fix various components likebasic pay, house rent allowance and other

allowances

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Wage Boards The factors considered by wage boards are

1. Job evaluation

2. Wage rates comparison

3. Employees productivity4.

Firms ability to pay

5. Various wage legislations

6. Existing level of wage differentials and theirdesirability

7. Governments objectives regarding socialjustice, social equality, economic justice andeconomic equality

8. Place of the industry in the economy9. Need for incentives improvement

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Pay Commission

Wages and allowances of Central and StateGovernment employees are determine through thepay commissions appointed by the appropriategovernment

The disputes, arising out of pay commission awardsand their implementation are decided bycommissions of inquiry, adjudication machinery andjoint consultative machinery

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Wage Boards

Each wage board consists of one neutralchairman, two independent members and two or

three representatives of workers and

management each.

The wage boards have to study various factorsbefore 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

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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 forgood 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

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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 yearAvailable 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 deferredwages To claim bonus the employee must have worked

for 30 days in that year

Ch i i d i i

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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

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Methods of wage payment

Time wage systemthe worker is paid on the basis of time spent

on the work irrespective of the amount of workdone.

the basis of this may be hour, day, week ormonth

it is a oldest system and is widely employedin those organisations where

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Methods of wage payment

1. Quality of work is more important than thevolume

2. Measurement of work is not convenient

3. Production involves delay and interruption due

to uncontrollable factors4. Where work requires a high degree of skill and

dexterity

5. Efficiency can only be measured by close

supervision

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Guaranteed time rates

Payment is at time rates, but adjusted to the cost ofliving

Merit awards for personal qualities, skill ability,punctuality etc., are also considered

The employer compensates the high labour cost byincreasing the price of the products

It is difficult to determine the wage index though thescheme is acceptable to all

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Piece rate system

The workers are paid at a stipulated rate perpiece 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

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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 toguarantee continuous work

e) The job is a standardised one

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Types of Piece rate system

Straight piece rate systemfixed 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 rateproportionate to thetotal output

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Organisation wide incentive plans

A. Profit sharingis a scheme whereby employers

undertake to pay a particular portion of netprofits to their employees on compliance

with certain service conditions andqualifications

the purpose is to strengthen the loyalty ofemployees to the firm by offering them an

annual bonusthe share of the worker may be given in

cash or in the form of shares in thecompany

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Gain Sharinggain sharing plan aims at increasing

productivity or decreasing labour costs and theresultant gains with the employees

gain sharing plans tend to increase the levelof cooperation across workers and teams bygiving them a common goal

it protects low performers

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Fringe benefitsthey are supplementary forms of

compensationpaid to all employees based on their

membership in the organisationthey are indirect compensation because they

are usually extended as a condition ofemployment and are not directly related to the

performancethey help raise the living conditions ofemployees

they may be statutory or voluntary

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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 maternitybenefits

To protect the health of the employees To promote employees welfare

To create a sense of belongingness amongemployees and to retain them

To meet the requirements of various legislationsrelating to fringe benefits

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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

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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

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Wipro technologies- rewards based on performance

- potential

- criticality

- market value

- deferred benefits such as provident fund,

gratuity, pension plan etc.,

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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

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ICICI bank- benchmark with global best practices

- ensure optimum utilisation of our resourcesand the fines exposure to our workforce

- vision is to empower by bright and talentedindividuals, working in teams and riding on thebackbone of world class technology

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The goldman sachs group Inc,- six distinct areas like

a. health

b. work

c. familyd. nutrition

e. learning

f. recreation

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Tata Consultancy services- end of the month paycheck

- high motivation level guarantees

- stimulating job content

- outstanding development opportunities

- innovative recognition mechanism

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Glaxosmithkline- 78% employees said in 2004 they have

enough flexibility to balance their work and

personal responsibilities

- an environment that supports the desiredvalues, helps them attract and retain people in

high integrity.

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