COMPENSATION

MANAGEMENT
RANJIT KUMAR MUKHERJI

INTRODUCTION

:
The term compensation is a substitute word for
wages and salaries, is of recent origin. Wages is
now considered as a cost factor. Therefore,
strategic management of wages and salaries is
very important for organisations.
It has become imperative for organisations to
balance the cost of compensation and employee
motivation (for retention) to survive in a
competitive world.
Employee compensation is a better term than
employee benefits or wages or salaries. What the
employee provides the employer is a labor
service, usually known as work.

COMPENSATION

MANAGEMENT

Pay or compensation represents an exchange between

the employee and the organization. Each gives something
in return for something else. In the past, the
compensation issue was often confidential and governed
by individual employers preference and choice.
However, in todays competitive world, compensation
issues are more transparent.
Different scholars in different countries, have defined the
world compensation from different perspectives.
Globally, almost every country views compecompensation
as a measure of justice. Also, some countries
(particularlydeveloped ones) consider compensation as a
means of protection against potential job loss.

 Compensation should be fair,

irrespective of economic
consideration. Many scholars
believe that compensation is the
outcome of productivity.
In India, right from Vedic Age, the
volume of work and the time
required to perform the work were
considered to decide compensation.

COMPENSATION

MANAGEMENT

I n Europe, the Church advocated the

principles of just wage or compensation. The
word compensation may be defined as all
forms of financial returns, tangible; services
and benefits that an employee receives in
his/her tenure of employment.
The modern definition of compensation,
however, considers both intrinsic and extrinsic
components of compensation. While extrinsic
compensation covers both monetary and nonmonetary rewards,, intrinsic compensation
reflects the employees mental satisfaction
with their job accomplishments.

COMPENSATION

MANAGEMENT

Wages and Compensation :

A wage is a basic compensation for labour and for
Labour per period of time referred to as the wage rate.
Other frequently used terms for wages are payment
per unit of time (typically an hour or year) Total
compensation representes earnings and other benefits
for labour.
Wage Income represents total compensation and
unearned income. Wages are also referred to as
economic rent, which is the figure of total
compensation, after reducing the opportunity cost.
Opportunity cost represents the cost of something in
terms of an opportunity forgone (and the benefits
which could be received from that opportunity) or the
most valuable forgone alternative.

COMPENSATION

MANAGEMENT

The term wages has emerged from

French Word wagier or gagier meaning
to pledge or promise. The term wage is
thus meant ;to indicate making a
promise in monetary form.
payment to a person for service
rendered, the amount paid periodically,
by the day or week or month for the time
during which workman or servant at the
employers' discretion- Oxford english
dictionary

 Under Sec. 2(m) wages includes Wages

for leave period, holiday pay, overtime
pay, bonus, attendance bonus etc. Any
award of settlement and production
bonus if paid, constitutes wages. But
under Payment of Wages Act, 1948
Retrenchment compensation , payment
in lieu of notice and gratuity payable on
discharge constitute wages.

 SALARY: A periodic payment to

persons to persons doing a job other
than mechanical usually to white
collared employees remuneration
paid monthly

TYPES OF WAGES :-

TIME RATE- oldest and most common method- worker

is paid according to the work done during a certain
period of time.( hour, day, week, month etc)
PIECE RATE Payment for each item produced,
payment by result system.
BALANCE OR DEBT METHOD- Combination of time
and piece rates, If the earnings of a worker calculated
at piece rate exceeds the amount , which he could
have earned if paid on time basis, he is credited for the
balance( the excess piece rate earnings over time rate
earnings)where piece rate earnings are less than time
rate earnings , he is paid on the basis of time rate , but
the excess which he is paid is carried forward as debt
against him to be recovered from any future balance of
piece work earnings over time work earnings.

COMPENSATION

MANAGEMENT

From financial perspective, wages are

defined as the cash paid for some
specified quantity of labor, in contrast
with salaries. Wages are paid based on
wage rate (based on units of time) while
salaries are paid periodically without
reference to a specified number of hours
worked. Given an established job
description , wages can often be
negotiated by workers through collective
bargaining.

 Differences between Wages and

Compensation :
The term labour cost is best understood from the
International Labour Organisation (ILO) Geneva.
Labour cost is the cost incurred by the employer
in the employment of labour. This also includes
payments in respect of time paid for but not
worked, bonuses, 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, miscellaneous items, such as transport
of workers, work clothes and cost of recruitment
and taxes paid by the employers on
employment .

11.COMPENSATION

MANAGEMENT

From the employers perspective, therefore, the

compensation consists of all payments (in kind or in
cash) and all contributions to employees social
security, pension, insurance etc.
Labor cost and the compensation of employees are
thus closely-related concepts, with many common
elements. The major part of labor cost comprises
compensation of employees. However, definition of
labor cost and the compensation of employees
differ from country to country. For example, some
items of labor cost such as vocational training are
borne not by employers but by respective
government s. In India, the Central Board for
Workers Training and the Regional Labor Institutes
provide either free or subsidized training for
industrial workers.

12.COMPENSATION

MANAGEMENT

The States 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 as labour
costs.
In Human Resource Management we consider the term
from a broader perspective, that is, the strategic use of
wages paid to employees. Some organizations refer to
use the term rewards instead of wages or
compensation.
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 the
most dynamic form of negotiation to decide wage
structure in a particular organization.

COMPENSATION

MANAGEMENT

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. The declaration
in effect, assured labor that where they were not
able to secure a living wage for themselves, the
government, through legislation or means will
come to their aid.

COMPENSATION

MANAGEMENT

Two aspects of the States role prevent employers from

taking undue advantage of workers-strong bargaining
strength and direct participation of the state in the
economic life of the nation.
Wage Components :
Although the term wage is an encompassing and includes
any form of financial support and benefits , in a narrower
sense wages are the price paid for the services of labour.
Broadly, there are two wage components the base or
basic wages and other allowances. The basic wage is the
remuneration, by way of basic salary and allowances which
are paid or payable to an employee in terms of the
contract of employment` for the work done.
Allowances are paid in addition to the basic wage to ensure
that the value of basic wages does not fall over a period of
time. Some allowances are statutory , while others are
voluntary.


Compensation

management
Compensation is what employees receive in
exchange for their contribution to the organisation.
Total compensation =Direct + Indirect Compensation
Base Pay Incentives Benefits

Components

of employee remuneration
Remuneration Financial Non-financial Basic wages
Incentives, Individual plans Group plans
Fringe benefits, P.F. Medical care, Accident relief,
Health and Group insurance, Perquisites, CarClub
membership, Paid holidays, Furnished house, Stock
piton scheme, Job context, Challenging job,
Responsibilities, Growth
prospects,SupervisionWorking conditions, Job
sharing etc.

Objectives

of compensation

planning
Internal equity
External equity
Individual equity
Attract talent
Retain talent
Ensure equity

New and desired behavior

Control costs
Ease of operation

 Objectives of Compensation :
The objectives of compensation or wages can be
classified under four broad categories
Equity,
Efficiency,
Macro-economic stability
and Optimum allocation of labor
Equity : The first category is equity, which may
take several forms. It includes income
distribution through narrowing of inequalities,
increasing the wages of the lowest paid
employees, protecting real wages (purchasing
power ) and the concept of equal pay for work of
equal value. Compensation management strives
for internal and external equity.

 Efficiency : It is often closely related to

equity, because two concepts are not
antithetical. The objectives of efficiency are
reflected in attempts to link a part of wages
to productivity or profit, group or individual
performance acquisition and application of
skills and so on.
Macro-economic stability It can be
achieved through high employment levels
and low inflation. For instance, an inordinately
high minimum wage would have an adverse
impact on levels of employment.
Efficient allocation of labour : The
efficient allocation of labor in the labour market
implies that employees will move to wherever
they receive a net gain.

 Determinants of Wage Rates : Wage rates

are either the products of market forces
(supply and demand). In the United States,
market forces determine wage rates. In Japan,
seniority is still the dominant factor for wage
determination. Several countries, including
India have enacted a statutory minimum wage
rate that fixes the price of certain kinds of
labour.
While market forces determine the wage rate
in most developed countries, workers often
negotiate their wage rate in most developed
countries, workers often negotiate their wage
rate through collective bargaining wherever
Unions are present.

 Theories of Wage Determination : There

are two key theories to determine wages
the traditional theory of wage determination
and the theory of negotiated wages.
Traditional Theory of Wage
Determination : This theory assumes that
market forces, that is, demand and supply
determine wages. Computer programmers
are in short supply, so they are able to
command higher salaries. In our country,
many organisations pay very high salaries to
entry-level IT professionals, who sometimes
get more than senior managerial employees
in other sectors. This is because of demand
and supply gap .

 Theory of Negotiated Wages : Union employees

can negotiate salaries. This is done through
collective bargaining . Normally, in any
unionised organisations Unions periodically
submit their memorandum to the
management, asking for wage raises to keep
pace with market standards and organisational
profitability.
ECONOMIC THEORY OF WAGES
Subsistence Theory : David Ricardo (1817)
advocated this theory. In Ricardos words,
workers ; should be paid To enable them to
subsist and perpetuate the race . The theory
is based on the notion that if workers are paid
more than the subsistence wage their numbers
will increase as they would procreate more

 and this would bring down the rate of wages. If

wages fell down below the subsistence level, the
number of workers would decrease, as many would
die of hunger, malnutrition, disease, cold etc and
many would not marry. When this happened wages
would increase again. In economics, the subsistence
theory of wages states, that in the long run, wages
will be reduced to the minimum level needed to keep
workers alive.
Wages Fund Theory : This theory was developed by
Adam Smith (1723-1790) on the assumption that
wages are paid out of a predetermined fund of
wealth, the surplus savings of the wealthy. This fund
could be utilized for employing laborers for work. If
the fund was large, wages would be high; if it was
small , wages would be reduced to subsistence level.
The demand for labor and the level of wages were
determined by the size of the fund.

 Surplus Value Theory : The surplus value theory

owes its developments to Karl Marx (1818-1883)
According to this theory, labour was an article of
commerce, which could be purchased on payment
of the subsistence price . The price of any product
was determined by labor and time needed for
producing it. The labour was not paid in proportion
to the time spent on work, but was paid much less,
and the surplus was utilised for paying other
expenses.
Residual Claimant Theory : The residual claimant
theory advocated by Francis Walker (1840-1897)
assumes that there are four factors of
production/business activity land, labour, capital
and entrepreneurship. Wages represent the amount
of value created in the production, which remains
after payment has been made for all these factors
of production. In other words, labour is the residual
claimant.

 Marginal Productivity Theory

( Henry Philips and Bates Clark ) :
This theory assumes that wages are
based upon an entrepreneurs
estimate of the value that will
probably be produced by the last or
marginal worker.
Bargaining theory of wages:(John
Davidson): wages determined by
relative bargaining power of labours
Compititive theory : employers
compete among themselves by
offering a higher a higher wage to
attract employees.

 Types of Wages in India :

Any minimum rate of wages or revised
may consist of a basic rate of wages and a
special allowance
The Central Government appoints a
Central Advisory Board to advise the
central and state governments on the
fixing and revising of the minimum rate of
wages.
Wages in Kind : Minimum wages payable
under this Act are to be paid in Cash.
However, the payment of minimum wages
can be made partly in cash and partly in
kind.

 Minimum Wage: ( committee on fair wages,

1948)
A minimum wage is one which has to be paid by
an employer to his workers irrespective of his
ability to pay. According to the above committee,
"Minimum wage is the wage which must
provide not only for the bare sustenance of life,
but for the preservation of the efficiency of
the workers. For this purpose, minimum wage
must provide some measure of education,
medical requirements and amenities. "
The Supreme Court has ruled that minimum
wage must be paid in any event, irrespective of
any extent of profits, the financial condition of
the establishment or the availability of workers
at lower wages.

 For the calculation of wages, the Conference suggested

the following guidelines:
The standard working class family should be taken to
consist of three consumption units for the earner; the
earnings of women, children and adolescents should be
disregarded.
The minimum food requirements should be calculated
on the basis of the net intake of 2.700 calories per
adult.
The clothing requirements should be estimated at a per
capita consumption of 18 yards per annum per person.
In respect of housing. the norms should be the
minimum rent charged by the Government in any area
for houses provided under subsidized housing scheme
for low-income groups.
Fuel,Lighting and other miscellaneous items of
expenditure should constitute 20 per cent of the total
minimum wage.

 Living Wage : Living wage is defined as One

which should enable the earner to provide for
himself and his family not only the bare
essentials of food, clothing and shelter but a
measure of comfort, including education for
his children, protection against ill-health,
requirements of essential social needs and a
measure of insurance against more important
misfortunes, including old age.
Living wage is more than the concept of
minimum wage. Such a wage is determined
keeping in view the national income and
paying capacity of industrial sector.

35.Fair

Wage: The concept of fair wage is linked with the

capacity of the industry to pay. The Committee has
defined fair wage as follows: "Fair wage is the wage
which is above the minimum wage but below the living
wage. The lower limit of the fair wage is obviously the
minimum wage: the upper limit is to be set by the
capacity of the industry to pay. " Thus, fair wage
depends on different variables affecting wage
determination. Such factors are labor productivity
prevailing wage rates, the level of national income and
its distribution and the capacity of industry to pay.
36.Factors Affecting Wages:

Demand for and supply of labor:

Labor unions:
Cost of living:
Prevailing wage rates
Ability to pay
Job requirements:
State regulation:
Increment system