Compensation Management 1

Biyani's Think Tank

Concept based notes

Compensation Management
(BBA )

Deptt. of Commerce & Management

Biyani Girls College, Jaipur

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Published by :

Think Tanks

Biyani Group of Colleges

Concept & Copyright :

Biyani Shikshan Samiti

Sector-3, Vidhyadhar Nagar,

Jaipur-302 023 (Rajasthan)

Ph : 0141-2338371, 2338591-95 Fax : 0141-2338007

E-mail : [email protected]

Website :www.gurukpo.com; www.biyanicolleges.org

Edition : 2011

Price :

While every effort is taken to avoid errors or omissions in this Publication, any mistake or
omission that may have crept in is not intentional. It may be taken note of that neither the
publisher nor the author will be responsible for any damage or loss of any kind arising to
anyone in any manner on account of such errors and omissions.

Leaser Type Setted by :

Biyani College Printing Department

Compensation Management 3

Preface

I am glad to present this book, especially designed to serve the needs of the students. The
book has been written keeping in mind the general weakness in understanding the
fundamental concept of the topic. The book is self-explanatory and adopts the “Teach
Yourself” style. It is based on question-answer pattern. The language of book is quite easy
and understandable based on scientific approach.

It includes the key points to be covered in every topic and is valuable to the students from the
point of view of examination.

Any further improvement in the contents of the book by making corrections, omission and
inclusion is keen to be achieved based on suggestions from the reader for which the author shall be
obliged.

I acknowledge special thanks to Mr. Rajeev Biyani, Chiarman & Dr. Sanjay Biyani, Director
(Acad.) Biyani Group of Colleges, who is the backbone and main concept provider and also have been
constant source of motivation throughout this endeavour. We also extend our thanks to Biyani
Shikshan Samiti Jaipur, who played an active role in co-ordinating the various stages of this
endeavour and spearheaded the publishing work.

I look forward to receiving valuable suggestions from professors of various educational

institutions, other faculty members and the students for improvement of the quality of the book. The
reader may feel free to send in their comments and suggestions to the under mentioned address.

—Author
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Syllabus
Compensation Management 5

Unit 1

Compensation
Q.1 Define the term Compensation

Ans Compensation mean all form of pay or reward going to employee & arising from their
employment.

Q.2 Define Wage?

Ans AWage is the remuneration paid, for the service of labour in production, periodically to an
employee / worker.

Q .3 Differentiate Wages & Salary

Ans Wages is paid to the labour involves in production process mainly daily basis / or on
howeley Basis.

Salary is paid to employee for the Services provided to organization mainly on monthly
basis.

Q.4 Outline theories of Nature

Ans (I) Economic theories:-

(i) Wages fund theory

(ii) Subsistence Theory

(iii) The Surplus Value theory of Wages

(iv) Marginal productivity theory

(v) The Residual Claimant theory

(vi) The Barganing theories of Wages

(II) Behavioural Theories

Q.5 Write down the formulae of Wages Acc to Time Rate System?

Ans Wages = No of days worked Rate per Day

OR
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No of Hours worked Rate per Hour

Q.6 Enumerate Various methods of Wage payment

Ans i) Time Rate System

ii) Piece Rate System

iii) Balance / Debt method

i) Time Rate System:- The worker are paid the wages on the basis of time. In this system
of wages payment, the worker are paid the wages on the basis of time as, per hour, per
day, per weak, per fortnight.

ii) Piece Rate System:- Under this system, worker are paid according to the amount of
work done or the number of unit completed, the rate of each unit being settled in
adauance, irrespective of time taken to do the fast.

iii) Balance or debt method:- It is essentially a combination of time and Piece Rates.
Under this method, the worker is guaranteed a fixed wages based an time rate with a
provision of piece wage method.

Q .7 What are the Benefits of incentive of compensation plan?

Ans Employees are motivated to bring new methods of production in order to increase the
productivity

The plan develops loyalty & commitment of individual toward the organization

Employee need lesser supervis or as they are disciplined & responsible

These compensation plan develops cordial & harmonious relationship between

management & worker.

Q.8 Explain the Behavioural theories of Wages?

Ans Many Behavioural scientists – industrial psychologists & Sociologists like marsh &
Simon, Robert Dubin, Eliot Jacques Laue presented their views on wages & Salaries on
the basis of Research Studies & action programmer conducted by them.
Behavioural theories include various theories such as

The employee’s acceptance of wage level

The internal wage Structure

Wages & Salaries and Motivation

Compensation Management 7

Multiple Choice Questions

i) Wages are paid to the ?

a) employee

b) labor

c) Manager

d) Board of director

Ans labor

ii) Minimum Wages Act ?

a) 1948

b) 1949

c) 1958

d) 1979

Ans 1948

iii) Children below age group can’nt work as labor, according to labor
Act.

a) 14

b) 15

c) 18

d) 21

Ans 14 year

iv) Compensation is reward to the employee for their ?

a) Performance

b) Work

c) Contribution to organization
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d) Smartness

Ans Contribution to organization

v) Which is not the objective of Compensation?

a) To establish equity

b) To Improve Employee Efficiency

c) To Control Cost

d) To Comply with illegal Regulation

Ans To comply with illegal Regulation

Vi) Who is Responsible for compensation decision making?

a) HR Unit & Manager

b) Worker

c) laymen

d) BOD

Ans HR Unit & Manager

Compensation Management 9

Unit 2
Compensation Management

Q.1 Define Compensation Management?

Ans Compensation management refers to the payment system which determine employee
Wages & Salary, direct & indirect reward.

Q .2 Define Broadbanding.

Ans It refer to a human resource strategy that collapses salary grades into a few wide “band”
for the purpose of managing career growth & administering pay.

Q.3 Define equity

Ans Equity literary means application of general principle of justice to correct or supplement
the law or fairness.

Q .4 Define Compensation Differentials

Ans Compensation may differ tin different type of employment occupation, from industry to
industry, between person to person in same grade / level, from State to State, Country to
Country.

Q .5 Outline the objective of Compensation management?

Ans

Attracting & Retaining personnel

Motivating personnel
Optimising Cast of personnel
Consistency in Compensation

Q.6 Explain the Importance of Compensation management

Ans It is essential for integrating employee effort with organizational goal & objective

It help in generating talent tool

It help in providing job Satisfaction to employee

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It is part of sound people management framework for recruiting, selecting,

socializing, performing, developing & maintaining a capable and motivated
workforce

It is management tool for controlling & directing employee’s productive energies

for improcing organizational competence & performance

Q .7 Explain the determinants of Compensation decision?

Ans (i) Social environment has an impact on compensation decision member of a society
have ideas about the worth of different jobs & these idea need to be taken into
account.

(ii) Compensation decision are also affected by the dynamic of the particular
organization. Employee pay must be consistent with the organization’s structure.

The organization’s culture helps to determine the priority to be given to various

compensation goals.

(iii) It is also affected by the worldwide information highway. One can expect serve
communication conflict relating to compensation practices.

Q.8 Quetline the need of Equity

Ans

Algin management / Employment with Share holder

Build Motivation
Conserve Resources
Wealth Creation
Tax Advantage
Attraction and Retention
Capital Accumulation
Compensation Management 11

Unit 3
Job Evaluation

Q.1 Define Job Evaluation

Ans Job evaluation is an attempt to determine and compare demand which the normal
performance of a particular job makes an normal workers without taking into account the
individual abilities / performance of the workers concerned.

Q.2 Define Basic Salary?

Ans An Employee’s base Salary is the minimum annual money received, or the Standard
Salary that an employee receives for doing a specific job.

Q.3 Define Dearness Allowance

Ans The dearness allowance is a part of the total compensation a person receive for having
performed his or her job.

For ex- Workers in India might have a base Salary or pension, along with an allowance for
housing & dearness Allowance

Q.4 Define the form fringe Benefit

Ans Fringe Benefit (also called employee Benefit, perquisites or pets) are supplemental
compensation which employee receive from his employers, aside from their direct wages
or incentive pay. These are not Substitue wages / Salaries.

Q.5 Define profit Sharing?

Ans Profit Sharing is an arrangement ontered into by which the employee receives a Share,
fixed in advance, of profit.

Q.6 Write a short note on Stock option?

Ans Stock option are a right given by an organization (grantor) to a person (optionee) to buy
(exercise) a specified number of share of company stock at a set price (grant/ exercise
price) during a prescribed period of time (exercise period)

It is the strategy of adopted by a company to boost the relationship with their employees
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Regardless of the market price of the stock at the time the option is exercised or redeemed,
the price will remain the same

Q.7 Write a short note on Performance link Reward System.

Ans Performance – related pay or merit pay is a method of compensation that links pay
progression to an assessment of individual performance, usually measured against pre-
agreed objective. This system offers individual financial reward in the form of an increase
in basic pay and / or cash bonuses, which are linked to an assessment of their
performance. Performance linked reward is basically based on the level of job
performance ability of an individual.

The one who can perform the job well can get high reward in comparison to the poor
performer.

Q.8 With the help of Diagram Explain Components of Compensation

Ans Components of Compensation

Basic Salary

Fringe Benefit

Incentive

Dearness Allowance

Bonus

Performance link Reward System &

Compensation Management 13

Non financial Compensation

Q.9 Differentiate between Incentive & Bonous

Ans Bonuses are additions to pay that are linked to individual or team performance & are
measured against a set of objective criteria.

Employers introduce bonus payment to reward individual or a team for doing well. Ex of
Bonuses include attendance bonus, profit related bonus, performance bonus payment for
high achievers.
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Unit 4

National Policy
Q.1 What is National Wages policy?

Ans Wages policies are principles acting as guideline for determining a wage structure.

Q.2 Define term Minimum Wages?

Ans The minimum amount that must be paid to the majority of worker of a country, generally
on an hourly, daily or monthly basis.

Q.3 Outline the need of tax planning

Ans - Reduce tax liability

- Minimize Delegation

- Productial Investment

- Healthy Economic Growth

Q.4 What do you understand by International Compensation?

Ans International Compensation deals with the compensation and Benefits structure for
employees of MNC’s in various location around the world

OR

The provision of monetary & Non-monetary reward, including bore salary, benefit &
Short perquisites, long term, short term incentives, valud by employed in accordance with
the relative contribution to MNC’S performance.

Q .5 Define Wage Board Nature?

Ans Tripartite in character

Statutory & Non Statutory

Protect Worker from exploitation

Operates in its own sphere

Compensation Management 15

Q.6 State the objective of national Wages policy in India?

Ans Provision of Minimum wages in Sweated Industries:-

(1) Though India is a labour intensive Country where labourers are exploited, the
basic objective of Wages policy is to provide for “Sofety Net” Wages to prevent
their exploitation.

(2) fixation of Wages ceilings:- The ceiling of wages need to be fixed to Save
employee from the pinch of inflationary tendencies that flow from uncontrolled
price rise.

(3) Improvement in existing Wage Structure:- A Rational Wage structure facilities the
acquisition of productive skills, serves as an incentive to higher productivity

(4) Control over Inflationary Trends

(5) Accelaration of Export promotion

Q.7 Discuss the essential elements of tax planning.

Ans

It should be legitimate by complying with legal provision.

It should be fair, honest and moral by taking advantage of permitted in centiues,
concessions, deductions, exemption, allowance etc.
It should be based on Sound knowledge of the subject, best methods and techniques
It should be a continuous process
It should increase the disposal Income in hand of tax payer of her tax reduction by tax
planning
It should improve economic resource at the hand of the government for forcasting greater
growth and development of the count.

Q.8 Explain the function of Wage Board.

Ans 1.Primary functions:- The primary function of Wage Board shall to be determine the
Wages payable to the employee of the activity. The Appropriate Govt. or the recognized
organization of employers and employees, by mutual agreement, may refer to the Wage
Board by any other matter for determination.
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The Wage Board shall follow such procedure as may be preseribed; provided that,
whatever the appropriate Government has not prescribed any procedure, the Wage board
may evolve its own procedure.

2. Subsidiary function:- It relate to allied problem such as hour of work, holiday with
pay procuision for adolescent, sub-standard worker, etc.
Compensation Management 17

Unit 5

Management of Employee
Q.1 What do you mean by organizational exit?

Ans Exits Separation occur when an employee leave the organization. It can also defined as the
cessation of Service of agreement with the organization for one or other reason.

Q.2 Define VRS

Ans It is the most human technique to provide overall reduction in the existing strength of
employee.

Q.3 Define lay-offs

Ans A lay-off is a temporary separation of employee from his / her employer at the instance of
latter without any prejcidice to the former.

Q.4 Define Downsizing

Ans It refer to as a management action taken to drastically refer the Size of a Company is
workforce, which usually takes the form of massive lay-off.

Q .5 Defined Retirement?

Ans Retirement is the discharge of an employee from his services at the attainment of a certain
type of predetermined age.

Q .6 Write a brief note on compensation for manager

Ans Managers are thare who report directly to the Board of director on to chief executive
officer of a company.

Manager’s compensation packages are usually the responsibility of the compensation

committee of the BOD.

A managers total compensation packages.

Consist of three components:-

1) Salary

2) Benefits
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3) Incentives compensation

Q .7 Explain the Exit Options Available for employee

Ans
Exit Option

Involuntary Exit Voluntary Exit

Voluntary Retirement Resignation

lay off Retirements
Downsizing
Discharge

Involuntary Exit occur as the result of either performance problems or changing

business needs. In this employee entertains the feeling of injustice & Seeks legal
protection to undo it.

Voluntary Exit involves, employee choose to leave organization of their own volition or
choice.

Q.8 Explain Benefits of Employee Exit?

Ans Reduced labour Cost:- An organization can reduce its total labour Cost by
reducing the Size of its workforce.

Replacement of poor performance:- An integral part of management is identifying poor

performer & helping them improve their performance unuseful employee can be
terminated So that a new employee can brought it.

Increased Imouation:- Separation create advancement opportunities for high performing

individual

Opportunity for Greater Diversity:- Separation create opportunities to hire employee from
diverse background and to redistribute the cultural & gender composition of workforce.
Compensation Management 19

Bibliography
1. Milkovich and New man, Compensation, Tata MC Graw Hill

2. Joseph J Martochhio, Strategic Compensation, Pearson

3. Soni Shyan Singh, Compensation management, Excel Bock

4. Soffia Dube, Compensation management, Excellent Books TM

Selected Sites

1. www. Scribd.com

2. www.mb alonol.com

3. www.enotes.com
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Key Words
Attendence Bonus:- A bonus payment that is dependent on employee attaining an attendance
target during the period over which that bonus is calculated

Attrition: The reduction in the Size of a work force through normal process, such as voluntary
resignation, retirement, discharge for cause, transfer, and deaths

Base pay: It is the rate of pay for a job or grade in an organization, to which can be added various
supplements, benefits Bonus, Allowance

Bench – marking is the technique of comparing organization or jobs in order to identity best
practice.

Cofeteria Benefit: A form of flexible Benefit which provide maximum choice to employee in
determining the form of their remuneration package

Compensation is payment for work, compensates the employee for the disutility of labor. It also
means wages or Salaries given to worker / employee for rendering their personal services.

Competitive pay policy: The strategic decision about which labor markets to use as comparison
group, and how to set pay level with respect to those group.

Deferred pay: It form part of remuneration and represent payment for labor but is withheld until
the point of retirement in order to provide for security in old age or because of medical
incapacity.

Diffential pay: A type of Supplemental pay, typically paid working certain days or certain time
period.

Equal employment opportunity Category (EEO CA): A job category code designating the
kind of work performed for affirmative action reporting purpose.

Expatriation:- is the process of sending managers to another country to run a subsidiary of a

multinational organization.

Flat Rate:- fixed amount is paid to all categories of workers, irrespective of their Wage Scale

General allowance:- is paid to worker depending upon the nature of duties. This include HRA,
(TA, Washing Allowance, dinner / lunch, allowance etc.

Graduated Scale: payment is made to Worker according to Slabs.

Holiday pay:- Additional compensation for time worked by an employee during regularly
scheduled hour on a date observed as a holiday by state.
Compensation Management 21

Internal equity:- A fairness criterion that directs an employer to establish Wages rates that
corresponds to each job’s relative value to the agency

Job enrichment:- The practice of adding more responsibility and or dicersity to a specific job to
make it more challenging for the incumbent

Minimum Wage:- A basic, minimum rate of pay below which earning cannot fall. Minimum
Wages can be established either through multi / employer bargaining or through statutory
mechanisms.

No cash Incentive:- Incentive payment that are not readly convertible to Cash. (eg. extra time
off, meal, reserved parking Space)

Pay difference: may paying different Wages for different jobs

Pay equity: means equal pay between men & women.

Quality Incentive: are output based payment System which usually link a bonus payment to the
achievement of a quality objective & target.

Redundancy pay: is payment to an employee to compensate for a job due to redundancy

Salary matrix:- A chart that can be used to determine the annual Salary award and rate of Salary
progression of an individual employee.

Symapthy Stricke:- A Strike by worker not directly involved in a labor dispute to show support
for those who are involved

Skill:- A task that a person perform to a satisfactory level

Time rate:- A rate of pay based on amount of time that the employee spend at work. It include
hourly rate of pay, weekly payment & annual Salary.

Wage drift: is tendency for earning to rise more rapidly than collective bargained rate of pay.

Youth Rate: A lower Rate of pay for young workers engaged in same work task as adults.

Zero hour contract:- are contracts of employment that do not specify the amount of hour to the
worker. This allow the employer the flexibility to offer employee work according to fluctuating
demand of Business.
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UNIT-I
Q Wages are paid to the ?

a) employee

b) labor

c) Manager

d) Board of director

Ans labor
Compensation Management 23

Q Minimum Wages Act ?

a) 1948

b) 1949

c) 1958

d) 1979

Ans 1948

Q Children below age group can’nt work as labor, according to labor Act.

a) 14

b) 15

c) 18

d) 21

Ans 14 year

MCQ’S

Q Compensation is reward to the employee for their ?

a) Performance

b) Work

c) Contribution to organization

d) Smartness

Ans Contribution to organization

Q Which is not the objective of Compensation?

a) To establish equity

b) To Improve Employee Efficiency

c) To Control Cost
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d) To Comply with illegal Regulation

Ans To comply with illegal Regulation

Q Who is Responsible for compensation decision making?

a) HR Unit & Manager

b) Worker

c) laymen

d) BOD

Ans HR Unit & Manager

UNIT-II
Q Compensation management is about the development, implementation, maintenance,
communication & evaluation of compensation process.

a) True

b) False

Ans True

Q First step of comensation process (management) is ?

a) Developing of pay Structure

b) Evaluation of Job
Compensation Management 25

c) Pricing of Job

d) Analysis of Job

Ans Analysis of Job

Q When the Royal Commission on labor was appointed?

a) 1975

b) 1938

c) 1928

d) 1958

Ans 1928

Q When the new economy policy has been passed?

a) 1991

b) 1999

c) 1961

d) 1948

Ans 1991

Q Which one is not the Internal Contingent factor in Compensation plan

a) Organization Strategy

b) Trade Union

c) Nature of Jobs

d) Nature of personnel

Ans Trade Union

Q Under Employee provident fund provision Act 1952, The employer has to contribute

% of Wages / Salary of employee per month

a) 7.5%
26

b) 9%

c) 7%

d) 8.5%

Ans 8.5%

Q In factories Act 1948, these provisions are covered under following heading a) Health,
Safety Welfare, Working hour.

a) True

b) False

Ans True

Q Fair Committee established in year:-

a) 1948

b) 1936

c) 1935

d) 1958

Ans 1948

UNIT-III
Q The Job Grading method was made popular by the Civil Service Commission

a) US

b) UK

c) France

d) India

Ans US

Q The basic objective of compensation management is meeting the need of both

& .
Compensation Management 27

a) employee & organization

b) employee & labor

c) labor & labor union

d) employee & manager

Ans employee & organization

Q Which theory explain the employee & employer Relationship

a) Agency theory

b) Piece Rate theory

c) Gantt – task theory

d) Maslow’s hierarchy meed theory

Ans Agency theory

Q Job evaluation is a process?

a) One – time process

b) Yearly process (at end)

c) Continous

d) Randam

Ans Continous process

Q Which is not included in system of payment of Dearness Allowance

a) Flat Rate

b) Graduated Scale

c) Cost of living & Consumer Price Index number

d) General allowance

Ans General Allowance

Q It is legal to pay differences on such protected personal characteristics as Sex, race, color;
martial Status.
28

a) True

b) False

c) Slitely False

d) Slitely True

Ans False

Q Wage fund theory is propound by

a) Adam Smith (1723-1790)

b) J.S. Mill (1723-1790)

c) David Ricardo (1772-1823)

d) Karl Marx (1818-1883)

Ans Adam Smith (1723-1790)

Q Which theory of Wage is based on population

a) Wage fund Theory

b) Subsistence Theory

c) Marginal productivity Theory

d) Behavioural Theory

Ans Subsistence Theory

Compensation Management 29

UNIT-IV
Q Payment of Wages Act, ?

a) 1936

b) 1948

c) 1976

d) 1965

Ans 1936

Q Minimum Wage Act, ?

30

a) 1936

b) 1948

c) 1976

d) 1965

Ans 1948

Q Equal Remuneration Act, ?

a) 1936

b) 1948

c) 1965

d) 1976

Ans 1976

Q Payment of Bonus Act ?

a) 1965

b) 1948

c) 1936

d) 1976

Ans 1965

Q The minimum Wages fixing Machinery Conuontion was held at during 1928.

a) America

b) France

c) Australia

d) Geneva

Ans Geneva

Q Article under the directive principle of state policy of Indian Constitution

enjoins upon the state to Secure equal pay for equal work for both men & Women
Compensation Management 31

a) 39

b) 32

c) 31

d) 27

Ans 39

Q The first Wage Board was appointed for the which Industry in march 1957

a) Cotton textile industry

b) Metal Industry

c) Chemical Industry

d) Steel plants

Ans Cotton textile Industry

Q Sixth pay Commission recommends hik in Salary of government employee

a) 30%

b) 50%

c) 80%

d) 40%

Ans 40%

Q Tax Rebate of on education per child to the maximum of two children

a) 12050

b) 12500

c) 13500

d) 12000

Ans 12000
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UNIT-V
Q Which exit technique is known as Golden Handshake?

a) VRS

b) Cay-off

c) Retirement

d) Resignation

Ans VRS

Q An Employee can apply for VRS after completing year of Service?

Compensation Management 33

a) 7

b) 10

c) 15

d) 25

Ans 10 years

Q Which Section of Industrial dispute Act 1947, define lay-off as the failure, refusal of
employer to give employment to Worker whose name is present on rolls but who has not
been retrenched.

a) 2 (KKK)

b) 2 (KJ)

c) Section 2

d) Section 2 (a)

Ans 2 (KKK)

Q Acc to Sec 198 (2) of Companies Act 1956 Any fee payable to director shall be excluding
of maximum remunerating of .

a) 11%

b) 25%

c) 12.5%

d) 9%

Ans 11%

Q The maternity leave for women is of months?

a) 9 month

b) 6 months

c) 10 months

d) 5 months

Ans 6 months
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Q Equity is concerned with felt according to natural law or right

a) equal

b) fair

c) Unfair

d) Justice

Ans Justice
Compensation Management 35