Compensation

Management
Chapter 9
Compensation
• Compensation: Set of rewards that organizations provide to
individuals for willingness on tasks performed
• Benefits: Various items of value beyond wages that employees receive
from the organization • Rewards • Incentives

• Linking compensation to strategic objectives

• Strategic compensation:
• Motivation and growth of employees, aligning their efforts with the objectives
of organization (e.g mission, growth projections, core competencies)
Basic Purposes of Compensation
• Reward past performance of employees
• Maintain salary equity
• link future performance of employees with organizational goals
• Attract new employees
• Reduce unnecessary turnover
• Control compensation budget
• Motivating employees (through pay equity)
• Pay for performance (reduce labour cost, raise productivity)
Basic Purposes of Compensation

• To provide appropriate and equitable rewards to employees

• To help employees focus on activities that the organization considers
important
• To increase employee efforts along desired lines
• Internal equity: Comparisons made by employees to other employees
within the same organization
• External equity: Comparisons made by employees to others employed by
different organizations performing similar jobs
• Pay surveys: Survey of compensation paid to employees by other
employers in a particular geographic area, industry, or occupational group
Nature of Benefits Programs
• Most organizations provide their employees with an array of benefits
• The cost of benefits programs
• Organizations spend huge amounts on benefits
• Employees are asked to bear more of the costs
• Purposes of benefits programs
• Attracts better qualified people
• Affects job satisfaction
Wages and salary

• Wages generally refer to hourly compensation paid to operating

employees. The basis for wages is time.
• Salary is income paid to an individual on the basis of time.
Additional Benefits
• Wellness programs concentrate on keeping employees from
becoming sick rather than simply paying expenses when they do
become ill.
• Child care programs assist parents with child care expenses.
• Cafeteria-style benefits allow employees to choose the benefits they
really want.
• Pay secrecy refers to the extent to which the compensation of any
individual in an organization is secret or the extent to which it is
formally made available to other individuals.
• Job evaluation is a method for determining the relative value or worth of a
job to the organization so that individuals who perform that job can be
compensated adequately and appropriately.
• Classification system attempts to group sets of jobs together into clusters,
which are often called grades.
• The point system requires managers to qualify, in objective terms, the value
of the various elements of specific jobs.
• Pay-for-knowledge involves compensating employees for learning specific
information.

• Skill-based pay rewards employees for acquiring new skills.

Job evaluation
• Job evaluation is a formal and systematic comparison of jobs to determine
the worth of one job relative to another.
• Job evaluation aims to determine a job s relative worth.
• Job evaluation eventually results in a wage or salary structure or hierarchy
(this shows the pay rate for various jobs or groups of jobs).
• The basic principle of job evaluation is this: Jobs that require greater
qualifications, more responsibilities, and more complex job duties should
receive more pay than jobs with lesser requirements.
• The basic job evaluation procedure is to compare jobs in relation to one
another for example, in terms of required effort, job complexity, and skills.
Job Evaluation Methods:
Job Ranking system: ranks each job relative to all other jobs, usually
based on some overall factor like job difficulty
• Obtain job information. Job analysis is the first step. Here job
descriptions for each job are prepared, and the information they
contain about the job s duties is usually the basis for ranking jobs.
(Sometimes job specifications are also prepared)
• Select and group jobs. It is usually not practical to make a single ranking
for all jobs in an organization. The usual procedure is to rank jobs by
department or in clusters (such as factory workers or clerical workers).
• Rank jobs. Jobs are ranked from highest to lowest.
Job Classification:
• raters categorize jobs into groups; all the jobs in each group are of
roughly the same value for pay purposes.
• Groups are called classes if they contain similar jobs or grades if they
contain jobs that are similar in difficulty but otherwise different.
• Descriptions of each job class constitute the scale against which the
specifications for the various jobs are compared. Managers then
evaluate the jobs by comparing job descriptions with the diferent
wage grades
Point Method:
• The point method’s overall aim is to determine the degree to which
the jobs you are evaluating contain selected compensable factors.
• It involves identifying several compensable factors for the jobs, as well
as the degree to which each factor is present in each job.
• Once the evaluation committee determines the degree to which each
compensable factor (like responsibility and effort ) is present in a job,
it can calculate a total point value for the job by adding up the
corresponding degree points for each factor.
Wage curve
• Wage curves play a central role in assigning wage rates to jobs.
• The wage curve typically shows the pay rates paid for jobs, relative to
the points or rankings assigned to each job by the job evaluation
• The purpose of the wage curve is to show the relationships between
the value of the job (expressed in points) as determined by one of the
job evaluation methods and the pay rates for the job
Drawing the wage curve: internal wage curve
Drawing the wage curve: market/external wage curve
Rate Ranges
Pay structures in India: Govt regulation for compensation

Payment of wages act (1936): It applies to payment of wages to-

• persons employed in any factory
• by railway administration
• either directly or through a sub-contractor
• in an industrial or other establishments
Objectives: to pay wages t at proper time and prevent unauthorized deductions
Provisions:
• Responsibility for payment of wages- with employer
• Fixation of wage periods: shall not exceed 1 month
• Time of payment of wages: before the expiry of 7th day of following wage period ( for less
than 1000 persons employed), before the expiry of 10th day of following wage period (for
more than 1000 persons employed)
• Payment on working day: wages to be paid on working day
• Mode of payment: currency/cheque/crediting to bank account
• Deductions from wages: Deductions only for those who are authorized under the act
• Maintenance of registers and records
The minimum wages act, 1948- provisions
• Objectives: to provide minimum wages to the workers, to empower government to take
steps, to stop exploitation of working workers in organized sector for fixing minimum wages
• Broad features of act: it lays down principles for fixation of a minimum time rate of wages ,
minimum piece rate, guaranteed time rate, overtime rate for different occupations,
localities, classes of people
• It includes Basic pay, dearness allowance and HRA ( basic rate revised in every 5 yrs, DA
changes every 6 months)

• Responsibility for fixation of minimum rate of wages: appropriate government is

responsible for fixing wage rate for any industry that has atleast 1000 workers
• Minimum rates : for piece work, time work, guaranteed time rate
• Fixing of hours for a normal working day: decided by appropriate government
• Overtime: employer shall pay for every hour worked in excess
Payment of bonus act 1965
• Additional compensation given to an employee by his employer in addition to
his normal wage is referred to bonus
• Payable to all categories of employees drawing salary/wages upto Rs 10, 000
p.m. The amendments have increased the wage threshold for determining
applicability of the Act from INR 10,000 to INR 21,000 per month. (Year 2015)
• Act applies to every factory or establishment in which 20 or more persons are
employed on any day of accounting year
• Bonus will be paid from the closure of accounting year
• Every employee is entitled for a minimum bonus which shall be 8.33% of the
salary or wage earned by him during the accounting year or Rs 100 whichever
is higher.
The employee’s compensation act 1923
• Employer’s liability: Employer is liable to pay compensation for
personal injury caused by accident in course of employment
• Act does not apply to members of armed forces, unions and workmen
who are covered under ESI act.
• Amount of compensation: sum payable to an injured employee
depends on nature of the injury, monthly wages and relevant factor
Pay equity: Equal remuneration act, 1976
• It mandates employers not to discriminate between men and women
employees for same work or work of similar nature in compensation
plans
• There shall be no discrimination while recruiting men and women