Compensation Management

Compensation Compensation is what employees receive in exchange for their contribution to the organization. Total compensation = Direct + Indirect Compensation Direct compensation - Base Pay + Incentives Indirect Compensation - Benefits

Compensation It is a system of rewards that motivates employees to perform An organisational tool to foster the values,culture & the behaviour they require An instrument that enables organisations to achieve their objectives

Types of Compensations Direct Compensation - made up of salary payments and health benefits. The creation of salary ranges and pay scales for different positions within the company are the central responsibility of compensation management staff. Direct compensation that is in line with industry standards provides employees with the assurance that they are getting paid fairly.

Types of Compensations Indirect Compensation - focuses on the personal motivations of each person to work. Although salary is important, people are most productive in jobs where they share the company's values and priorities. These benefits can include things like free staff development courses, subsidized day care, the opportunity for promotion or transfer within the company, public recognition, the ability to effect change in the workplace, etc.

Components of Compensation Wages and Salary: Wages represent hourly rates of pay, and salary refers to the monthly rate of pay, irrespective of the number of hours put in by an employee. These are subject to annual increments.

Components of Compensation Allowances: Several allowances are paid in addition to basic pay. Some of these allowance are given below: Dearness Allowance House Rent Allowance City Compensatory Allowance Transport Allowance/Conveyance Allowance

Components of Compensation Incentives: Incentive compensation is performance-linked remuneration paid with a view to inspire employees to work hard and do better. Both individual incentives and group incentives are used. Bonus, profit-sharing, commissions on sales are some examples of incentive compensation

Components of Compensation Fringe Benefits/Perquisites: These include employee benefits such as provident fund, gratuity, medical care, hospitalization, accident relief, health and group insurance, canteen, uniform, recreation and the likes.

Examples Fringe benefits Perquisites or “perks” Payment for time not worked Housing Insurance Career counseling crèche Paid memberships in professional organizations Perquisites or “perks” take home vehicles /chauffeur driven vehicles Paid vacations Club membership Entertainment allowance Paternity leave free refreshments leisure activities on work time (golf, etc.),

Concept of Wage & Salary Wage in a wide sense means any economic compensation paid by the employer under some contract to his worker for the service rendered by them and in narrow term Wage are price paid for the services of labor in the process of production and include only the performance wages WAGES - MONEY WAGES, REAL WAGES, MINIMUM WAGES

Wage and Salary Base compensation Wage : Remuneration paid by the employer for the services of hourly ,weekly & fortnightly workers doing manual or physical work. Usually given to unskilled workers It may also be defined as the compensation paid to blue collar employees. Salary:It refers to the remuneration paid to the office employees,foremen,managers,professional and technical staff on a monthly basis.

Supplementary compensation Compensation over and above the base compensation to retain the employees on a long term basis . The basic purpose behind this is to attract and retain the employees and motivate them Compensation received from employment that is in addition to the regular, ordinary salary or wages. Supplementary wages may include commissions, overtime earnings, awards, bonuses, retirement matching programs, or payment for unused vacation days.

Base compensation Vs Supplementary compensation Payment to the workers for their work Payment is in cash Wage & salaries are paid to compensate for their services Determined by job evaluation,demand & Supply of labour ,organizations capacity to pay ,bargaining power of trade unions ,productivity ,govt regulations . It denotes benefits over &above their wages /salary They are paid to increase their efficiency & retain them Determined by the history of the organisation,capacity of the organisation to pay ,need to retain the talented employees ,desire to enhance the public image ,philosophy of the management

Objectives of Wage &Salary Administration To attract competent personnel To retain the present employees To improve productivity To improve efficiency To control Costs To ensure fairness To improve union-management relations To improve the public image of the company Comply with legal regulations

Essentials of sound wage and Salary structure Internal Equity External Competitiveness Built in incentive Link with productivity Individual worth Increments

A Compensation system should be: Adequate* Equitable* Incentive-providing* A Compensation system should be: Cost-effective Acceptable to the employee Secure Balanced

General and Individual Factors affecting Wages Employee’s Age and work Experience Educational Qualification Promotion possibilities Hazards involved in the job Stability of Employment Demand for the product Industry’s role in the economy Potentials of an employee General Factors Demand for and Supply of labour Ability to pay of the Organization Labour Unions Cost of Living Prevailing wage rates Job Requirements Productivity State Regulation

External Influences on Compensation Labor Market Economy Government Unions 4

Wage Concepts The minimum wage “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”..the lowest wage permitted by law or by a special agreement. M/o Labour & Employment Paycheck.in 20

The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection. Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value.

Name of the Scheduled Employment Total Minimum Wages Per Month (in Rs) Zone I Zone II Zone III Basic Pay + Special Allowance=Total Minimum Wage Advocate and Attorney Special Allowance =3024 Skilled 7900.00 + 3024.00 = 10924.00   Semi-skilled 7200.00 10224.00 Un-skilled 6700.00 9724.00

Automobile Repairing Special Allowance = 3881 Skilled 5500.00 + 3881.00 = 9381.00 5200.00 9081.00 4900.00 8781.00 Semi-skilled 5100.00 8981.00 4800.00 8681.00 4500.00 8381.00 Un-skilled 4200.00 8081.00

Wage Concepts Living Wage is defined as “one 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 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.”

Living Wage Concept The Living wage is fixed considering the general economic conditions of the country. In more advanced countries,Living wage itself forms the basis for Minimum Wage. 25

Wage concept Fair wage concept is a wage that is someway above the minimum wage but below the Living wage. The lower limit for fair wage is the Minimum wage & the upper limit is set by the ability of the industry to pay. 26

Fair Wage Concept A wage is fair if it is equal to the rate prevailing in the same trade & in the neighbourhood for similar work In a wider sense, a wage is fair if it is equal to the predominant rate for similar work throughout the country & for trades in general

Fair wage concept While fixing Fair wage, the following are to be taken into consideration: The productivity of labour The prevailing rates of wages in the same or neighbouring localities The level of the national income and its distribution The place of industry in the economy of the country. Capacity of the industry to pay 28

Purposes of wage administration The goals of compensation administration are to design a cost-effective pay structure that will attract, motivate and retain competent employees

Wage Determination Wage and salary determination process in an organisation is a multi dimensional task, the steps of which have to be cleverly worked out in order to get a package satisfying both the employee and the employer The ultimate goals of wage determination process is to establish & maintain an equitable wage structure that enhances the employee commitment to the organisation

The Wage Determination Process Job Analysis Job Evaluation Wage Survey Preparation of wage Structure Developing Pay ranges 31

The Wage Determination process 1.Job Analysis – This involves precisely identifying the required tasks, the knowledge & skills for performing them & the conditions under which they are performed. Job Analysis basically defines the duties, responsibilities & accountabilities of a job 32

The Wage Determination process Job Analysis basically defines the duties, responsibilities & accountabilities of a job It finalises the methods & equipments used & the skills required for the successful completion of the job 33

The Wage Determination process Job Evaluation:- This is the formal process used to assign wage & salary rates to jobs. This is a systematic technique used to determine the worth of a job. Once the worth is finalised, it becomes much easier to fix a wage structure that is fair and remunerative 34

The Wage Determination process Conduct a Wage Survey: To build a competitive wage structure, a knowledge of the prevailing rates for similar jobs in the same industry in that area is a must. Recognising pay trends in the market, hiring & retaining competent ,motivated employees & thus to survive & grow. 35

The Wage Determination process Preparation of the wage structure: A job’s relative worth is determined by its ranking through job evaluation and by what the labour market pays for a similar job To get the right pay level, the internal rankings & the survey wage rates are combined through the use of a graph and the wage-trend line is plotted 36

The Wage Determination process Designing pay ranges :The pay range reflects the approximate differences in performance or experience the employer wishes to pay for a given level of work. A range maximum sets the lead on what is the most the employer is willing to pay for that work & the minimum sets the floor. 37

Wage Differentials Wage differentials refer to differences in the average levels of pay for group of workers that can be classified according to the industry or location in which they work or according to the occupational or social group to which they belong. Wage differentials perform important economic functions like labour productivity, maximising productivity, attracting employees from different jobs & labour productivity.

Wage Differentials 1)Occupational Differentials: This wage differential arises due to varying levels of occupational proficiencies. The jobs vary according to the skills required and the degree of responsibility attached to it, This induce the person to undertake more demanding & more challenging jobs, encourage workers to develop their skills & motivate employees for T & D program

Wage Differentials 2)Inter-firm Differentials:This reflects the relative wage levels of workers in the same area & occupation. The factors can be differences in the quality of labour employed by different firms, differences in the efficiency of equipment, supervision,firm size, financial capabilities etc.

Wage Differentials 3) Inter-area or Regional Differentials:-This arises when workers in different geographical area, but in the same industry or occupation are paid different wages. This is the result of the prevailing working conditions in different parts of the country, disparities in the cost of living and availability of manpower. Sometimes regional disparities are used to encourage planned mobility of labour.

Wage Differentials 4)Inter-industry Differentials:- When workers in the same occupation and same areas but in different industries are paid different wages. This is the result of varying skill requirements, level of unionisation,nature of the product market,ability to pay ,labour-capital ratio and the stage of development of the industry.

Wage Differentials 5)Interpersonal Differentials:- This differential arises between workers in the same occupation and plant but with different age & other personal characteristics Wage diifferential based on sex is another important wage differential. The principle of ‘Equal pay for Equal work’ is only preached , not practiced

Wage Policy According to ILO, the term ‘Wage Policy’ refers to the legislation or Government action undertaken to regulate the structure of wages, for the purpose of achieving specific objectives of social & economic policy. 44

Wage Policy The objectives of the wage policy in developing countries as per ILO are :- To abolish malpractices & abuses in wage payment To set minimum wages for people having weak bargaining power as they are unorganised or inefficiently organised, followed by separate measures to promote the growth of trade unions & collective bargaining. 45

Wage Policy 3. To see that the workers get a just share of the fruits of economic development. 4. To bring about a more efficient allocation & utilization of manpower. 46

Wage Policy A tool of economic policy used to promote: Internal Price stability Worker efficiency Effective distribution of worker force International competitiveness of the economy Investment Influx of foreign capital

Indian Wage Policy The objectives of Wage Policy are:- To provide minimum wages to workers To fix wage ceilings To improve the existing wage structure To improve the economic & social position of the working class

Indian Wage Policy The policy statements in the successive five-year plans provide useful insight into the Indian Wage Policy. The 1st five year plan recommended that:- Wages in public sector not less favourable than in private enterprises Permanent wage boards with tripartite composition to be set up b) The 2nd five-year plan (1956 – 1961)stressed improvement in wages through increased productivity, improved layout of plants & improvement in management practices. 49

Indian Wage Policy c) The fifth plan(1974 – 1979) recommended that the reward structure of industrial employees in terms of wage & non-wage benefits must be related to performance records in industrial enterprises. d) The sixth plan(1980 – 1985) stressed the need to bring about a greater rationalisation in the wage structure & to link wages to Labour productivity 50

Indian Wage Policy d) The eighth plan(1992-1997) laid focus on formulation of a wage policy relating to child labour,rural labour ,women kabour & inter-state migrant labour. e) The eleventh plan (2007 – 2012) aims at generation of productive and gainful employment, with decent working conditions

The Wage Fixation Methods There are different methods for fixing the wages of employees. 1.Legal Framework: The different legislations that govern the payment of wages are : a)Payment of Wages Act,1936:The purpose of the act is to ensure regular & prompt payment of wages & to prevent exploitation of the earner by prohibiting unauthorised fines & deductions 52

Wage policy in India The enactment of Payment of wages Act 1936 The Industrial Disputes act 1947 The minimum Wages Act 1948 The Equal Remuneration Act 1976 Constituted Wage Boards that are tripartite in nature Pay Commissions at the central and state level

The Wage Fixation Methods b)The Minimum wages Act,1948:This act requires the concerned authority to fix minimum rates of wages payable to employees c)The payment of bonus act,1965:This act is to for payment of Bonus to persons employed in certain establishments 54

The Wage Fixation Methods d) The equal remuneration act,1976:- The main objective is to provide equal remuneration to men & women engaged in same or similar work. It stipulates stringent punishments for contraventions of the Act’s provisions. 55

The Wage Fixation Methods 2)Unilateral Pay Fixation: Majority of the wages in the unorganised sector is unilaterally determined by the management. Workers in most cases get less than the minimum wages & benefits stipulated under law, but also have to face discrimination in befits between one set of workers from another. 56

The Wage Fixation Methods 3) Collective Bargaining: It is a technique by which an attempt is made to reconcile the needs and objectives of workers and employers and is therefore an integral part of an industrial society Collective Bargaining is a process whereby standards are created to govern labour relations including wages & working conditions.

The Wage Fixation Methods Collective bargaining can be in following forms : 1.Sectoral bargaining 2.Industry-cum-Region-wide agreements 3.Decentralised firm/Plant level Agreements

The Wage Fixation Methods 4) Pay Commissions:-The pay structure of the central government employees are based on the recommendations of the pay commissions set up by the central government. Certain state governments also follow the recommendations of the pay commissions & few other states have set up their own pay commissions.

The Wage Fixation Methods Government of India has so far set up 6 pay commissions, the reports of which were submitted in 1947,1959,1973,1984 & 1996, 2006 The pay commissions function non-statutorily, study the problems ,have their own procedures for data collection & makes recommendations to the government. The ultimate responsibility as to whether to accept, modify or reject the recommendations lie with the central government

The Wage Fixation Methods 4)Wage Boards:-The primary function is to determine the wages payable to the employees. The first wage board was set up by the government in 1957 in the cotton textile industry. The wage boards are set up to provide better climate for industrial relations, to represent consumers/public interests, to standardise the wage structure throughout the industry concerned & to align the wage settlements with the social & economic policies of the government.

The Wage Fixation Methods Constitution of wage Boards:-These are tripartite in nature, consists of a chairperson ,an equal number of representatives of employers & employees(2 members each) and two independent members(an economist & a consumer’s representative) nominated to the board.

The Wage Fixation Methods Functioning of the Wage Board:- a) Designs questionnaires to collect information on the prevailing wage rates & other related issues b) Analysing the results & making an assessment of the views of the parties c) Recommendations are submitted to the governmnet which can be modified if necessary.

The Wage Fixation Methods 5.Job Evaluation: This is an orderly and systematic technique which aims at determinig the relative worth of jobs. Once the worth of jobs are determined, It becomes easier to fix the wage structure that is fair and equitable It can also be stated as a formal system of determining the base compensation of jobs.

The Wage Fixation Methods 6.Arbitration & Adjudication:- When collective bargaining and conciliation attempts fail to resolve a dispute between the labour and management, the cases are decided through voluntary arbitration or compulsory adjudication Voluntary arbitration implies that the two contending parties, unable to compose their differences by themselves or with the help of the mediator or conciliator, agree to submit the conflict/dispute between them to be resolved by an impartial authority, whose decision they are ready to accept .

The Wage Fixation Methods In others words, under voluntary arbitration, the parties to the dispute can and do themselves refer voluntarily any dispute to arbitration before it is referred for adjudication. This type of reference is known as a “voluntary reference”, for the parities volunteer themselves to come to a settlement through an arbitration machinery.

The Wage Fixation Methods The essential element in voluntary arbitration is: -the voluntary submission of dispute to an arbitrator; - the subsequent attendance of witness and investigations; -The enforcement f an award may not be necessary and binding because there is no compulsion. But generally, the acceptance of an arbitration implies the acceptance of its award-be it favorable or unfavorable; and -voluntary arbitration may be specially needed for disputes arising under agreements.

The Wage Fixation Methods It is the Govt. that decides to send the case for adjudication, it is referred to either Labour Court or Industrial Tribunal. Decision of Industrial Tribunal/ Labour Court can be challenged only in High Court. The employee or employer can not directly go to the Industrial Tribunal/ Labour Court except in some cases where direct monetary loss can be proved.

Government Influences: Wage Controls and Guidelines: (1 of 2) Wage Stabilization Act (1942) Defense Production Act (1950) Economic Stabilization Act (1970)

Government Influences: Wage Controls and Guidelines: (2 of 2) Wage freezes – forbid wage increases Wage controls – limit the size of wage increases Wage guidelines – voluntary limits on wage increases

Government Influences: Wage and Hour Regulations Fair Labor Standards Act (FLSA) of 1938 minimum wage overtime exempt workers nonexempt workers child labor recordkeeping requirements Equal Pay Act of 1963

Essentials of sound wage and Salary structure Internal Equity External Competitiveness Built in incentive Link with productivity Individual worth Increments

Theory of Equalizing Differences This theory states that wage differentials occur as the result of intrinsic properties of specific occupations that require wage compensation for negative job traits or are compensated for with non-pecuniary positive traits.

Human Capital Theory It seeks to explain wage differentials as a consequence of differing human capital stocks that determine an individual’s marginal productivity. Human Capital Theory explains wage differentials as a byproduct of productivity differentials

Human capital Human Capital is “the stock of knowledge, skills, aptitudes, education, and training that an individual or a group of individuals possess It is all those skills that are acquired through education, but also talents, I.Q. ,practical experience, etc.

Types of Human Capital 1. General human capital transferable to every other job and thus improves overall productivity and thus wage 2. firm-specific human capital not transferable to any other firm and therefore does not improve productivity and thus wages anywhere else

Human Capital Theory Individuals who invest money and time gain skills that improves their human capital and ultimately their productivity.

Internal Labor Markets ILM focuses on the long-term relationships of employers and employees and the gains to be made by both parties by continuing to operate with one another ILM theory argues that firms benefit from maintaining good relationships with their employees and visa versa Reduction of costs Employees benefit from improved employment stability and the chance for increased wages and promotions.

Devaluation Theory Wage differentials as a result of biases towards those employed and earning wages. Devaluation Theory suggests that the wage difference stems from the bias of the wage payer, the firm. Bias from those gauging productivity could result in women earning less

Reward Policies Reward Policies provide guidelines for implementation of the reward strategies and aids in designing and managing the reward processes It indicates how the management should behave in various issues related to Reward management 80

Reward Policy Reward policy addresses a wide range of issues 1. Levels of Rewards: This indicates the paying capacity of a company. The pay policy depends on a number of factors Policies on the level of rewards also cover employee benefits like sick pay, holidays, health care & other perks 81

Reward Policy 2.Market rate and Equity:-A policy should be formulated on the extent to which rewards are market driven rather than equitable. It is possible to use market supplements to the rate of the job as determined by job evaluation which reflect market rates 82

Reward Policy 3.Attraction and Retention -Golden hellos and golden hand cuffs to attract and retain high quality people ie having a total reward policy. To attract prospective employees, factors for specific occupations should be analysed . 83

Reward Policy Retention policies should take into account the major retention issues the company is facing and sets out ways by which the issues can be dealt with 84

Reward Policy 4.Relating rewards to business performance:-The rewards can vary according to results. This policy includes guidelines on how gain sharing and profit-sharing schemes should operate in the company 85

Reward Policy 5.Total reward Policy:-assesses the importance of the non-financial rewards and how they should complement the financial awards. 6.Contingent Reward:- this policy states whether the company is willing to pay for contribution, skill, performance ,competence etc and if so, to what extent and under what circumstances. 86

Reward Policy 7.Assimilation policies:-When new pay policies are introduced, measures to be taken to assimilate existing employees into it. This policy should state, where should they be placed and what needs to be done if their present rate is above or below the new scale. 87

Reward Policy 8.Flexibility:- The extent to which the organisation wants to introduce benefits in response to the fast changing business conditions. 9.The role of Line managers:- The policy will cover the level of decisions, the line manager can make and the guidance that should be given to them 88

Reward Policy 10.Transpaency:-Employees will be satisfied only if they know what is the criteria for rewards and how they are used to determine their pay and their methods of pay progression. 89

Reward Policy 11.Involve employees:- Reward policies are more likely to be understood and will be more effective if employees are also given a voice in the design and management of the policy.This is very much applicable to job evaluation and relating pay to the performance 90

Reward Policy 12.Communicating to employees:- Reward processes in an organisation is a powerful media to convey messages relating to the organisational goals to the employees. This will convey to the employees how their total remuneration package is made up 91

Wage - Definition Money paid to the workers is considered as wages The wage is the payment made to the workers for placing their skill and energy at the disposal of the employer. The method of use of that skill and energy being at the employer’s discretion and amount to the payment being in accordance with terms stipulated in an contract of service. 92