Lesson-29

Now we shall take up the factors, which affect pay decisions:

The factors can be classified into two:

Internal Factors:
These factors relate to the internal policies and HR strategies of any organization.
As we have understood in our earlier chapters that Human resource is an
important resource for any organization and it is very important for any
organization to not just compensate its employees but also through the monetary
and other rewards, motivate them for better performance. Though it is true that
money is not every thing but no one can deny the importance of financial rewards
as motivator. The various internal factors which effects pay decisions are:

Compensating Policy of organization:

This means that what are the various policies that an organization follows with
regard to payment. This involves decisions related to pay level.
E.g. Whether or not to be a high wage employer. Though it is true that as we have
discussed above that being a high wage employer it can attract may applicants
which can be a big advantage in times of intense competition but a major factor to
be understood is that in can be a very costly option. So it is very important for
any organization that before it formulates its policies related to payments it must
fully understand the pros and cons of the situation.

Worth of the job:

By worth of the job we mean the relative importance of the job as compared to the
others. This can be judged from job evaluation. This process helps to estimate the
relative worth of a particular job and hence arrive at a pay structure. There are
various ways through which the jobs are evaluated. We have already studied about
it in our previous chapter.

Employee’s relative worth:

Here comes the importance of individual pay decisions. Though pay structure may
generally set the pay range but since individual skills and capabilities vary
therefore organizations may give due importance to the same.
E.g. many a times after performance appraisal it may be found that the individual
deserves grater pay that currently being given then accordingly his superior may
recommend a pay increase.
E.g. If two persons are joining at the same post but one of them may ask for a
greater pay on the grounds that he has more experience or the employer feels that
he deserves grater pay due to possession of some special skills.

Employer’s ability to pay:

This is self evident that an employer will pay his employees only as much as he is
capable of.
E.g. a big organization of repute may tend to give higher pays to its employees.

External factors:

“These are those factors which though are existent in the external
environment of the organization but have a great influence on the organist
ions pay decisions. The major important external factors are:

Conditions of the Labour Market:

Depending on the Labour situations the organizations are forced to set their pay
structure. The most important thing that an organization has to consider is the
availability of Labour as per its requirements. If persons with required skills and
abilities are abundantly available and the percentage of unemployment is high
then an organization can set pay levels lower but for a opposite situation the
organization may have to set for higher pay structures.

Cost of Living:
This is a major determinant of pay packages. Depending upon the cost of living
an organization may have to increase the pay of its employees.
E.g. In a metro city the cost of living will usually be high so a pay package of Rs.
10,000/- may not be sufficient for a comfortable life but on the other hand for
some smaller city where the cost of loving in not that high Rs.10, 000/- may be
quite sufficient for living with comfort.

Collective Bargaining:
Bargaining in simple terms means deal. It is common to decide certain matters;
especially those, which have, direct significance for workers, on the basis of
collective bargaining. The growth of trade unionism, the workers awareness of
their rights and strength and the recognition of the importance of negotiations by
labour and management have contributed to growth of collective bargaining.

Legal Requirement:
These days due to awareness of the govt. and its concern for the malpractices in
the business, govt. has laid down some laws related to compensation, which every
organization has to abide by.

Compensation Packages:
Compensation consists of two kinds of payments during employment and after
employment.
During employment:
It basically consists of four components: the basic salary, cash allowances, and
bonus and non-cash perquisites.
Now we shall discuss each one in detail;
Basic salary:
It is the major component of during employment compensation package. Basic
Salary is worked out on the basis of job evaluation and is adjusted either because
of reclassification or changes in the cost of living index. Basic salary is a range
with top and base clearly defined. It is also called the pay scale.
E.g.: Rs. 9,000-400-11,000-600-14,000 represents a scale
If one starts at Rs.9, 000 he gets Rs.400 per year as an increment for next fie
years that takes him to basic salary of Rs.11, 000. Subsequent increment is Rs.600
per year.

An increment is simply a constant addition in the basic salary may be taken as a

reward for work done according to expectation.

Allowances:
Some of the well known allowances are dearness allowance, house rent, travel allowance, daily
allowance in case of outstation travel, shift allowance etc. the concept of allowance is based on the
cost of living index as dearness allowance and house rent allowance are to compensate for the
extra efforts needed to perform one’s normal duties. The exact amount of most allowances is
usually linked to the basic salary as they represent a percentage of the basic.

Bonus:

This payment is gesture of goodwill over the regular wages. It usually amounts to
8.33 percent of salary, which basically works out to be equivalent to one-month
salary. This is the minimum and the organizations have the freedom to pay more
than this minimum depending upon the available surplus. In India, the payment of
bonus is regulated by the payment of Bonus Act, 1965, which we shall discuss in
the subsequent chapter.

Perquisites:

Perquisites or perks are those benefits that do not usually come in the form of
cash but are provided to maintain certain needs and status of the employee and
the image of the organization. These may include such perks as stock options,
club memberships, car or housing loans, reimbursement of the cost of children’s
education, paid holidays, medical benefits, furnishing of residence etc