MS 511 Compensation Management 80 hrs

Unit – I: 10 hrs
Meaning and Concept of Wage and Salary – Concept, Nature, Scope, Objectives,
Principles and importance of Wage and Salary Administration – Theories of Wage
and Salary.
1. Meaning and Concept of Wage and Salary
Etymologically, the term wage is derived from words that indicate making a promise in
monetary form. The term emerged from the French word wagier or gagier, meaning to pledge or
to make a promise.
The terms salary and wages are often confused by people and are used interchangeably. But the
truth is that both these terms differ from each other and hold different meanings.
Salary is a fixed amount paid or transferred to the employees at regular intervals for their
performance and productivity, at the end of the month whereas wages are hourly or daily-based
payment given to the labour for the amount of work finished in a day.

1.1 Definition of Wages

Wage is termed as the amount that is given on the basis of the amount of work done and the
hours spent in doing that. Wages are variable and may vary with day to day functioning of an
individual. Wages are usually given to labours who are engaged in manufacturing.

Labour is paid on the basis of hours and in order to increase the pay, extra hours have to be
devoted to fetch more. An individual is paid for his presence, not for his absence i.e. in case a
person does not come for the work he will not be paid for that day.

The waged person are said to be doing “blue collar labour job” which implies that an individual
is engaged in the unskilled or semi-skilled job and is drawing wages on a daily basis.

1.2 Definition of Salary

The term salary is the agreed upon amount of money between the employer and the employee
that is extended at regular intervals on the basis of an individual’s performance. Salary is
generally a fixed amount of package calculated on the basis of time.

An employee is supposed to work for certain fixed hours daily but if sometimes the work is not
finished in time the employee has to devote his extra time without any additional pay. An
employee is entitled to leaves, perks, and benefits, i.e. salary will be given if an employee has
availed a leave and didn’t turn up for the work. However, for additional duties or assigned jobs,
the salaried employees are entitled to overtime.

Salaried persons are generally said to be doing “white collar office jobs” which implies that an
individual is well educated, skilled and is employed with some firm and holds a good position in
the society.
The main difference between salary and wages lies in the fact that salary is fixed, i.e. it is
predetermined and agreed between the employer and employee, while wages are not fixed, as it
varies depending on the performance of the labour. This article presents you the important
differences between salary and wages in tabular form.

1.3 Comparison Chart

BASIS FOR
SALARY WAGE
COMPARISON

Meaning: A fixed pay that an A variable pay that an individual

individual draws for the draws on the basis of hours spent
work done by him on an in completing the certain amount
annual basis. of work.

Skills: Skilled personnel Semi-skilled or unskilled

Type of cost: Fixed Variable

Rate of payment: Fixed rate Wage rate

Payment cycle: Monthly Daily

Basis of payment: Performance basis Hourly basis

Paid to whom: Employees Labor

Nature of work: Administrative-office Manufacturing-process work

work

KRA: Yes No
(Key result area)

Extra pay for extra hours: No Yes

1.4 Key Differences between Salary and Wages

Following are the major differences between salary and wages:

1. Salary is the fixed amount of compensation which is paid for the performance of an
employee. Wage is the variable amount of compensation which is paid on the basis of
hours spent in finishing a certain amount of work.
2. Salary is given to the skilled persons who apply their proficiencies in respective fields
and generate the revenues for the firm. Whereas wages are paid to the semi-skilled or
unskilled worker such as carpenter, welder, electrician, etc. who work on hourly basis.
 3. In the case of salary, the cost incurred is fixed i.e. fixed amount is paid monthly. Whereas
in wages, the cost is variable, because it can vary with the day to day performance of an
individual.
4. Salary once decided, in the beginning, remains fixed throughout. Whereas in wage
system, there is a wage rate that keeps on changing and an individual is paid on the basis
of prevailing wage rate.
5. Salary is generally paid at fixed intervals i.e. monthly. Whereas wages are paid on a daily
basis for the number of hours spent.
6. Salary is paid on the basis of the performance of an individual. Whereas wages are paid
on hourly basis i.e. the amount of work done in hours.
7. Salary is paid to employees who possess the skills and efficiencies in completing the
office work. Whereas wages are paid to the labours, who are engaged in manufacturing
processes and do the work on an hourly basis.
8. Salary is given to those who are engaged in administrative or office work job. Whereas
wages are paid to those, who are engaged in manufacturing processes that require
unskilled or semi-skilled workers.
9. A salaried person usually has KRA i.e. key resultant area set for the month on the basis of
which their performance is judged. Whereas the waged person does not have any KRA
and is judged on the basis of hourly work done.
10. Salaried persons are not paid additional compensation for any extra hours. Whereas wage
holder does get an additional pay for the extra hours devoted by him.
2. Meaning of Compensation

Compensation is a systematic approach to provide monetary as well as non monetary values to

employees in exchange for his or her engagement. Employee compensation may achieve several
purposes in recruitment, job-performance and job satisfaction.
"Employee compensation refers to all forms of payments and benefits given to employees and
arising from their employment".
Compensation can be defined as all the monetary as well as non monetary benefits earned by
employees in return for their engagement. Compensation in typically divided into direct &
indirect components:
• Direct Financial Compensation consisting of pay received in the form of wages, salaries,
bonuses and commissions provided as regular and consistent intervals.
• Indirect Financial Compensation including all financial rewards that are not included in
direct compensation and can be understood to form part of the social contract between the
employer and employee such as benefits, leaves, retirement plans, education, and employee
services.
• Non-Financial compensation referring to topics such as career development and advancement
opportunities, opportunities for recognition, as well as work environment and conditions.
In determining effective rewards, however, the uniqueness of each employee must also be
considered. People have different needs or reasons for working. The most appropriate
compensation will meet these individual needs. To a large degree, adequate or fair compensation
is in the mind of the employee.
A good compensation strategy includes a balance between internal equity and external
competitiveness. Compensation and benefits affect the productivity and happiness of employees,
as well as the ability of your organization to effectively realize its objectives. It is your advantage
to ensure that your employees are creatively compensated and knowledgeable of their benefits.
Types of Compensation

Financial Non-Financial

Direct Indirect The Job Work

Position Environment
1. Equitable wages 1. Insurance Plans for 1. Interesting Duties 1. Fair and Consistent,
and salaries Life, Supplementary and Responsibilities, 2. Practices and
Health, Dental, 2. Challenges, policies,
2. Market adjustments Vision, Disability, 3. Authority, 3. Competent
or cost of living Coverage. 4. Autonomy, Supervision
increases 5. Opportunity for 4. Cooperative Co-
2. Social security recognition, workers.
3. Merit increases or benefits, Retirement 6. Feeling of 5. Comfortable and
performance Bonuses plans, Employment/ achievement, Safe Working
Insurance, Workers 7. Advancement Environment,
4. Fair Compensation, opportunity. 6. Flexible Scheduling,
Commissions Educations Services, 7. Alternative Working
Employees’ Services. Arrangements.
8. Modified Retirement.
3. Paid Absences,
Vacations, Holidays,
Sick Leave,
Educational Loan,
Compassioned leave.

2.1 Differences between wages and compensation

For a better understanding of the difference between wages and compensation, let us consider the
International Labour Organization’s (ILO) series of texts on labour costs.
The term labour cost is best understood from the definitions accepted in ILO’s Eleventh
International Conference of Labour Statisticians (Geneva 1966). Labour cost is the cost incurred
by the employer in the employment of labour. The statistical concept of labour cost comprises
remuneration for work performed. This also includes payments in respect of time paid for but not
worked; bonuses and gratuities; the cost of food, drink, and other payments in kind; the cost of
workers’ housing borne by employers; employers’ social security expenditures; the cost to the
employer for vocational training, welfare services; and miscellaneous items such as the transport
of workers, work clothes, and cost of recruitment, and taxes paid by the employers on
employment. From the employers’ perspective, therefore, the compensation of employees
consists of all payments (in kind or in cash), and all contributions to employees’ social security,
pension, insurance, etc.
Labour cost and the compensation of employees are closely-related concepts with many common
elements. The major part of labour cost comprises compensation of employees. However,
definitions of labour cost and the compensation of employees differ from country to country. For
example, some items of labour cost such as social security and vocational training are borne not
by employers but by the respective governments. In India, the Central Board for Workers’
Training and the Regional Labour Institutes provide either free or subsidized training for
industrial workers. Similarly, the Regional Provident
Fund Commission now marginally contributes to employees’ pension along with the employers.
The state’s contributions to wage-related social security schemes are not included in the cost of
compensation for employers. In some countries, payroll taxes or employment taxes are
considered labour costs.
Operationally, there is no difference between the terms compensation and wages. Both are
intended to price the efforts of employees. However, the word compensation is used more
holistically to acknowledge the strategic importance of wages. Theoretically, compensation
means something such as money given or received as payment for some damage. However, in
human resource management literature, we consider the term from a broader perspective, that is,
the strategic use of wages paid to employees. Some organizations prefer to use the term rewards
instead of wages or compensation. In human resource management, we should not just use
rewards to acknowledge good performances, instead, as a more strategic design of compensation.
So that, when employees get paid at the end of the month, they feel they are not just getting their
wages, but also being rewarded. In this chapter, however, the terms compensation, wages, and
salary have been used interchangeably.
Compensation or wage structure in a given case should take into account industrial adjudication
as well as considerations of right and wrong, and fairness and unfairness. Given social
conscience and the welfare policy of the state, collective bargaining is now considered the most
dynamic form of negotiation to decide wage structure in a particular organization. Wage issues
are no longer purely mathematical issues. It was with this perspective that the framers of the
Constitution drew up Article 43 (part of the Directive Principles of State Policy) which states
that, ‘The state shall endeavour to secure, by suitable legislation or economic organization 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 full employment of leisure and social
and cultural opportunities.’ By this declaration, the state not only acknowledged its role in
directly promoting social welfare, but also recognized the inadequacy of market forces in
determining a wage level that is consistent with welfare standard of a living wage. The
declaration, in effect, assured labour that where they were not able to secure a living wage for
themselves, the government through legislation or other means will come to their aid. Two
aspects of the state’s role prevent employers from taking undue advantage of the workers’—
strong bargaining strength and direct participation of the state in the economic life of the nation.
The former gives the worker a fair share, and the latter enlarges this share.
3. Meaning and objectives of Wage and Salary Administration:
A Wage is the remuneration paid for the service of labour in production periodically to an employee /
worker. So payment made to labour is generally referred to as wages. Wages also refer to the hourly
rate paid to such groups as production and maintenance.
Salary normally refers to the periodically rates paid to clerical, administrative and professional
employees. So money paid periodically to person whose output cannot be measured is generally
referred as salary. Wage and salary are paid as per contract of employment. Wages include basic
wage / salary and allowances. Allowances are paid in addition to basic wage to maintain the value of
basic wage over a period of time. In India, different Acts and statutes include different items under
wages.
Wage and salary administration is establishment and implementation of sound policies and practices
of employee compensations. Wage policies of different organisations very somewhat. Some
organisations pay minimum necessary to attract the required number and kind of labour, while some
organisations pay well above the going rates in the labour market. Various factors influence wage
and salary structure and administration like govt. legislation and public policy, organisations ability
to pay, labour supply and demand, going wages and salaries, cost of living, productivity, trade
union’s bargaining power, job requirement, management attitude about wage to be paid etc.
The basic objective of wage and salary administration is to establish and maintain an equitable wage
and salary structure and secondary objective is to establish and maintain an equitable labour cost
structure. Generally sound wage and salary administration tries to achieve following objectives:

(1) To attract and retain the service of employee.

(2) To pay employees according to the content and difficulty of the job.

(3) To reward employees according to the effort and merit.

(4) To improve employee morale and productivity.

(5) To satisfy employee as to how and why they are paid.

(6) To facilitate pay roll administration, budgeting and wage and salary control.

(7) To simplify collective bargaining.

(8) To promote employee organizational flexibility promotion and transfer.

Remuneration provides more than a means of satisfying the physical needs-it provides recognition, a
sense of accomplishment and determines social status. Hence formulation and administration of wage
and salary to attract and retain right personnel in right position is the prime responsibility of the
management in any organisation.

3.1 System of wage and salary payment:

Wages if dependent generally on the rates of wages which may be an hourly rate or time rate or
based on a piece rate i.e. dependent on worker’s output. The time and piece output rate wage plans
are the two basic systems. All other plans are simply variation of these two.
In this wage system, an employee is paid a define amount of money for a specific period of work.
Production of an employee is not taken into consideration to fix the wages. In piece wage system, an
employee is paid fixed rate per unit produced of job completed.
The PGVCL applies time wage system for payment of wages and salary which includes basic pay,
dearness allowance, C.L.A./H.R.A project allowance tribal allowance, bad climate allowance, hotline
allowance, charge allowance etc.

Significance of wage & salary administration:

Wage & salaries have two different purposes from point of employers & employees.
(i) Employers perceive as a cost of business effort and attempt to reduce it. But they also realise
that it is not possible because of these reasons:
(a) Wage & salary are essential to attract and retain an effective work force.
(b) Wage and salary are required to motivate, employees for positive attitudes and better
performance.
(c) Employees have to be provided compensation for service rendered by them to the
organisation.
(ii) Employees consider wage as a means for satisfying their need to maintain their standard.
They also want it equitable with similar skills for doing similar work.

Principles of Wage & Salary administration:

1. Wage & salary plans and policies should be sufficiently flexible. Wage and salary plans
should be sufficiently flexible or responsive to changes in internal and external conditions of the
organization.

2. Job evaluation must be done scientifically. Efforts should be made to ensure that differences in
pay for jobs are based on variations in job requirements such as skill, responsibility, efforts and
mental and physical requirements.

3. Wage & salary administration plans must always be consistent with overall organisation plans
and programmes.

4. Wage & salary administration plans and programmes should be in conformity with the social
and economic objectives of the country like attainment of equality of income distribution and
controlling inflationary trends. Wage policy should be developed keeping in view the interests of
all concerned parties viz., employer, employees, the consumers and the society.

5. Wages & salary administration plans and programmes should be responsive to the changing
local and national conditions. The plans should simply & expedite other administration
processes.

6. Employees should be involved, as far as possible, in formulation and implementation of wage

policy.

7. The general level of wages and salaries should be reasonably in line with that prevailing in the
labor market.
8. There should be a clearly established procedure for hearing and adjusting wage complaints.
This may be integrated with the regular grievance procedure, if it exists.

9. The workers should receive a guaranteed minimum wage to protect them against conditions
beyond their control.

10. The wage and salary payments must fulfill a wide variety of human needs including the need
for self actualization.

11. Wage policy and programme should be reviewed and revised periodically in conformity with
changing needs. For revision of wages, a wage committee should also be preferred to the
individual judgment however unbiased of a manager.

Objectives of wage & salary administration:

1. To acquire qualified and competent personnel:
Candidates decide upon their career in a particular organisation mostly on the basis of the
amount of remuneration the organisation offers. Qualified and competent people join the best-
paid organisation. As such, the organisation should aim at payment of salaries at that level,
where they can attract competent and qualified people.
2. To retain the present employees:
If the salary level does not compare favourable with that of other similar organisation, employees
quit the present one and join other organisation. The organisation must keep the wage & salary
structure at the competitive level, with those of similar organisation4.
3. To secure internal and external equity:
Internal equity does mean payment of similar wages for similar jobs within the organisation.
External equity implies that payment of similar wages to similar jobs in comparable
organisations.
4. To ensure desired behaviour:
Good rewards reinforce desired behaviour like performance, loyalty, accepting new
responsibilities and changes etc.
5. To keep labour and administrative costs in line with the ability of the organisation to pay.
6. To project in public as progressive employers and to comply with the wage legislations.
7. To pay according to the content and difficulty of the job and in tune with the effort and merit
of the employee.
8. To facilitate pay roll administration of budgeting and wage and salary control.
9. To simplify collective bargaining procedures and negotiations.
10. To promote organisation feasibility.

The Elements of Wage and Salary System:

Wage and salary system should have relationship with the performance, satisfaction and
attainment of goals of an individual. Following are the elements of wage and salary system:
1. Identifying the available salary opportunities, their costs, estimating the worth of its members
of these salary opportunities and communicating them to employees.
2. Relating salary to needs and goals.
3. Developing quality quantity and time standards relating to work and goals.
4. Determining the effort necessary to achieve standards.
5. Measuring the actual performance.
6. Comparing the performance with the salary received.
7. Measuring the job satisfaction gained by the employees.
8. Evaluating the unsatisfied wants and unreached goals of the employees.
9. Finding out the dissatisfaction arising from unfulfilled needs and unattained goals.
10. Adjusting the salary levels accordingly with a view to enable the employees to reach
unreached goals and fulfill the unfulfilled needs.

Unit – II: 10 hrs

Employee Reward System: Concept, Components, Elements of Employee Reward Factors
affecting the Rate of Pay – Process of Wage and Salary Determination, Wage and Salary
Structure: Essentials of a sound wage and salary structure – Purpose – Types.

Unit – III: 10 hrs

Machineries for Wages and Salary Fixation: Wage Laws in Wage Boards – Pay Commission –
Adjudication – Collective Bargaining etc.

Unit – IV: 10 hrs

Techniques for Fixation of Wage and Salary Levels: (Concept and Basic Elements only) Job
Analysis – Job Description – Job Evaluation – Work Study.

Unit – V: 10 hrs
Wage Payment System: Time Wage – Piece Wage – Balance Method; Wage Incentives:
Meaning – Essentials of a sound incentive Plan – Types of Wage Incentive Plans – Indian
Practices.

Unit – VI: 10 hrs

Concept of Minimum wages, Fair Wages, Living Wages, Need Based Wages, Dearness
Allowance, Fringe Benefits, Bonus and Executive Compensation.

Unit- VII: 14 hrs

Legislation and Compensation: The Payment of Wages Act, 1936 – the minimum Wages Act,
1948 – the Equal Remuneration Act, 1976.
Other Legislations: The payment of Bonus Act, 1965 – the Payment of Gratuity Act, 1971 – the
Employee’s Provident Funds and Miscellaneous Provisions Act, 1952.

Unit – VIII: 6 hrs

Case Studies/ Projects/ Assignments