HUMAN RESOURCE

MANAGEMENT
CHAPTER-7 COMPENSATION
MANAGEMENT
 Table of Contents
Compensation Management........................................................................................................................2

Meaning of Compensation Management .............................................................................................. 2

Objectives of Compensation Management ........................................................................................... 2

Importance of compensation and benefits ............................................................................................ 2

Components of Compensation Management........................................................................................ 3

Principles of Compensation Management ............................................................................................ 5

Factors affecting Compensation in Organization ................................................................................ 6

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 Compensation Management
Meaning of Compensation Management
Compensation Management refers to the establishment and implementation of sound policies,
programmes, and practices of employee compensation. It is essentially the application of a
systematic and scientific approach for compensating the employees for their work in a fair,
equitable and logical manner.

Compensation Management is concerned with the compensation to employees for their work
and contribution for attaining organisational goals. Obviously, it is concerned with designing and
implementing total compensation package. It is also known as wage and salary administration
or remuneration management.

Objectives of Compensation Management

• To attract competent and qualified persons towards organization by offering fair wage and
incentive.
• To retain present employees by paying competitive remuneration.
• To establish fair and equitable remuneration to avoid pay disparities.
• To improve production, productivity, and profitability of the organization.
• To minimise un-necessary expenditure and to control cost through a device of internal
check and establishment of standard.
• To improve and maintain good human relation between employer and employee through
a process of payment of bonus, profit sharing and other fringes benefits.
• To enhance the name and fame of the company through a proper system of wage
payment.
• To ensure prompt and regular payment of wage and salary to all the employees.

Importance of compensation and benefits

Companies hire people individual to achieve their organizational goals and people join companies
to earn money & build their career. One of the biggest factors why people join companies is
the compensation and benefits, salaries, perks, incentives etc. which is given to them.
Apart from the company's reputation and job profile, the money offered as a salary is
pivotal in attracting people to work for the organization.
The more the compensation and benefits offered to employees, the more is their loyalty,
motivation to work and do well.

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However, companies which offer lesser salaries see a high attrition rate and less
productivity from employees. All these factors help in making compensation and benefits an
important factor in managing workforce.
Salaries of employees are defined by several parameters like experience, education background
etc.
In senior management, skills like team management, communication management, leadership,
time management etc. are also considered while finalizing the pay package.

Components of Compensation Management

1)Wage or Salary:

Wage:

The term wage refers to the remuneration paid to the workers appointed on hourly, daily, or
weekly basis in return for the service rendered.

It varies according to physical and mental requirement of the job.

Wage may be minimum wage, fair wage and living wage.

Minimum Wage:

It is that wage which is sufficient to meet the basic need of a worker and his family. This minimum
wage must be paid to the worker irrespective of the capacity of the industry to pay. For this
purpose, minimum wage must provide some measures of education, medical requirements, and
amenities”.

Fair Wage:

Fair wage is the wage, which is above the minimum wage but, below the living wage. It is fixed
between the minimum wage and capacity to pay by the industry. The lower limit of the fair wage
is the minimum wage; the upper limit is set by the capacity of the industry to pay.

Fair wage depends on several factors like:

• The productivity of labour

• The prevailing rates of wage in the same or neighbouring localities.

• The level of national income and its distribution.

• The place of industry in the economy of the country.

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Thus, fair wage is determined based on capacity of the industry to pay and region in which industry
is located.

Living Wage:

It is the wage that provides some of the comforts of life. It provides certain amenities considered
necessary for the well-being of the worker.

The living wage should enable the male earner to provide for himself and his family not merely
the essentials of food, clothing, and shelter but also a measure of frugal (using only as much
money or food as is necessary) comfort including education for children, protection against ill
health, requirements of essential social needs and measure of insurance against the more
important misfortunes including old age.

Salary:

The term salary refers to remuneration paid to the employees appointed on monthly or annual
basis in return for the service rendered. Thus, it refers to monthly rate of pay irrespective of
number of hours put in by employees.

Take Home Salary:

It is the net amount of salary received by an employee after making all the deductions towards
the payment of income tax, LIC premium and contribution to P.F. etc.

Cost to the Company (CTC):

The concept ‘cost to the company’ includes payment made to the employee including pensions,
health insurance, death in service, gratuity, company car or own the car scheme, childcare
provisions, subsidized meals, etc. The CTC includes all the investments made by the employer
to the employee including the monetary and non-monetary benefits.

2) Dearness Allowance (DA):

DA is described as cost-of-living allowance. It is given to protect the real wages of workers during
inflation. In India it has become integral part of the wage system.

Along with DA other allowances like City Compensatory Allowance (CCA), House Rent Allowance
(HRA), Medical Allowance (MA), Education Allowance (EA), Conveyance Allowance etc., also
form the part of compensation package.

However, inclusion of all these allowances in the compensation depends on nature and type of
job, contents of job, place of job, terms and condition of appointment, capacity of employer etc.

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3) Incentives:

Incentive is a reward paid in addition to wages whether monetary or not that motivates or
compensates an employee for performance above the standard. Payment of incentive depends
on productivity, sales, and Profit of the organization.

4) Fringe Benefits and Perquisites:

Fringe Benefits:

It is a general term used to describe any of a variety of non-wage or supplemental benefits that
employees receive in addition to their regular wages. These include such employee benefits as
provident fund, gratuity, medical care, hospitalization, accident relief, paid holidays, health
and group insurance, pension etc.

Perquisites (Perks):

Perquisites also called perks are the special benefits made available only to the top executives
of an organisation. These may include company car, furnished house, stock option
scheme, club membership etc

Principles of Compensation Management

Development and administration of sound wages and salary policies are not only important but
also complex managerial functions. The complexities stem from the fact that on the one hand,
most union management problems and disputes relate to the question of wage payment and on
the other, remuneration is often one of the largest components of the cost of production. Thus, it
influences the survival and growth of an organisation to the greatest extent.

Some of the Important principles are:

• Wage and salary plan and policies should be sufficiently flexible.

• Job evaluation must be done scientifically.
• Wage and salary administration plans must always be consistent with overall
organisational plans and programmes.
• These plans and programmes should be in conformity with the social and economic
objectives of the country like attainment of equality in income distribution and controlling
inflationary trends.
• Both these plans and programmes should be responsive to the changing local and national
conditions
• These plans should simplify and expedite other administrative processes.

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Factors affecting Compensation in Organization
The amount of compensation received by an employee should consider several factors such as
the amount of effort put in, competitive rates prevailing in labour market, demand for and supply
of labour, the firm’s ability to pay, labour policy, etc.

Let’s investigate these issues more closely:

1. The Organisation’s Ability to Pay:

Wage increases should be given by those organisations which can afford them. Companies that
have good sales and, therefore, high profits tend to pay higher wages than those which running
at a loss or earning low profits because of the high cost of production or low sales. In the short
run, the economic influence on the ability to pay is practically nil. All employers, irrespective of
their profits or losses, must pay no less than their competitors and need pay no more if they wish
to attract and keep workers.

2. Supply of and Demand for Labour:

The labour market conditions, or supply and demand forces operate at the national, regional, and
local levels, and determine organisational wage structure and level.

If the demand for certain skills is high and the supply is low, the result is a rise in the price to be
paid for these skills. When prolonged and acute, these labour-market pressures probably force
most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job
evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower
wages when it is excessive.

Similarly, if there is great demand for labour expertise, wages rise; but if the demand for
manpower skill is minimal, the wages will be relatively low.

3. Prevailing Market Rate:

This is also known as the ‘comparable wage’ or ‘going wage rate’ and is the most widely used
criterion. An organisation’s compensation policies generally tend to conform to the wage rates
payable by the industry and the community. This is done for several reasons. First, competition
demands that competitors adhere to the same relative wage level. Second, various government
laws and judicial decisions make the adoption of uniform wage rates an attractive proposition.

Third, trade unions encourage this practice so that their members can have equal pay, equal work
and geographical differences may be eliminated. Fourth, functionally related firms in the same
industry require essentially the same quality of employees, with the same skills and experience.
This results in a considerable uniformity in wage and salary rates.

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4. The Cost of Living:

The cost of living pay criterion is usually regarded as an automatic minimum equity pay criterion.
This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of
living index. In recognition of the influence of the cost of
living, “escalator clauses” are written into labour contracts.

When the cost-of-living increases, workers and trade unions demand adjusted wages to offset
the erosion of real wages. However, when living costs are stable or decline, the management
does not resort to this argument as a reason for wage reductions.

5. The Living Wage:

The living wage criterion means that wages paid should be adequate to enable an employee to
maintain himself and his family at a reasonable level of existence. However, employers do not
generally favour using the concept of a living wage as a guide to wage determination because
they prefer to base the wages of an employee on his contribution rather than on his need. Also,
they feel that the level of living prescribed in a worker’s budget is open to argument since it is
based on subjective opinion.

6. Productivity:

Productivity is another criterion and is measured in terms of output per man-hour. It is not due to
labour efforts alone. Technological improvements, better organisation and management, the
development of better methods of production by labour and management, greater ingenuity and
skill by labour are all responsible for the increase in productivity. Productivity measures the
contribution of all the resource factors — men, machines, methods, materials, and management.

7. Trade Union’s Bargaining Power:

Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union,
the higher the wages. A trade union’s bargaining power is often measured in terms of its
membership, its financial strength, and the nature of its leadership. A strike or a threat of a strike
is the most powerful weapon used by it.

Sometimes trade unions force wages up faster than increases in productivity would allow and
become responsible for unemployment or higher prices and inflation. However, for those
remaining on the payroll, a real gain is often achieved because of a trade union’s stronger
bargaining power.

8. Job Requirements:

Generally, the more difficult a job, the higher are the wages. Measures of job difficulty are
frequently used when the relative value of one job to another in an organisation is to be

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ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job
conditions required

9. Managerial Attitudes:

These have a decisive influence on the wage structure and wage level since judgement is
exercised in many areas of wage and salary administration — including whether the firm should
pay below average, or above average rates, what job factors should be used to reflect job worth,
the weight to be given for performance or length of service, and so forth, both the structure and
level of wages are bound to be affected accordingly. These matters require the approval of the
top executives.

10. Psychological and Social Factors:

These determine in a significant measure how hard a person will work for the compensation
received or what pressures he will exert to get his compensation increased. Psychologically,
persons perceive the level of wages as a measure of success in life; people may feel secure;
have an inferiority complex, seem inadequate or feel the reverse of all these. They may not take
pride in their work, or in the wages they get.

Therefore, these things should not be overlooked by the management in establishing wage rates.
Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages
should be commensurate with their efforts,” that “they are not exploited, and that no distinction is
made based on caste, colour, sex or religion.”

11. Skill Levels Available in the Market:

With the rapid growth of industries, business trade, there is shortage of skilled resources. The
technological development, automation has been affecting the skill levels at faster rates. Thus,
the wage levels of skilled employees are constantly changing, and an organisation must keep its
level up to suit the market needs.