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It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness. Components of Compensation System Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows: • Job analysis • Salary structures • Pay structure Need of Compensation Management A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and selfactualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards. Compensation offered by an organization can come both directly through base pay and variable pay and indirectly through benefits. Base pay: It is the basic compensation an employee gets, usually as a wage or salary. Variable pay: It is the compensation that is linked directly to performance accomplishments (bonuses, incentives, stock options). Benefits: these are indirect rewards given to an employee or group of employees as a part of organizational membership (health insurance, vacation, pay, retirement pension etc.).
Objectives of Compensation Planning: The most important objective of any pay system is fairness or equity. The term, equity has three dimensions 1) Internal equity: This ensures that more difficult jobs are paid more. 2) External equity: This ensures the jobs are fairly compensated in comparison to similar jobs in the labour market. 3) Individual equity: It ensures equal pay for equal work. i.e. Each individual’s pay is fair in comparison to others doing the same /similar jobs.
The ultimate goals of compensation administration (the process of managing a company’s compensation program) is to reward desired behaviours and encourage people to do well in their jobs. 1) Attract talent: Compensation needs to be high enough to attract talented people. Since many firms compete to hire the services of competent people, the salaries offered must be high enough to motivate them to supply. 2) Retain Talent: Compensation levels fall below the expectations of employees or are not competitive, employees may quit in frustration. 3) Ensure equity: pay should equal the worth of a job, similar jobs should get similar pay. Likewise more qualified people should get better wages 4) New and desired behaviour: Pay should reward loyalty commitment, experience, risk taking initiatives and other desired behaviours. Where the company fails to reward such behaviours employees may go in search of greener pastures outside. 5) Control costs: The cost of hiring people should not be too high. Effective compensation management
Theory of wages: The word ‟salary‟ is defined in the Oxford Dictionary as „fixed periodical payment to a person doing other than manual or mechanical work‟. The payment towards manual or mechanical work is referred to as wages. * external equity (or competitiveness). Guidelines for an effective compensation Compensation objectives are not rules. Then only will it promote understanding regarding pay related matters between employees’ unions and managers. Wages are commonly understood as price of labour. the more effective wage and salary administration will be. 4) Price each pay grade by using wage curves. This is achieved through the followings steps: 1) Find the worth of each job through job evaluation. Phase 2. * process equity. Conduct wage and salary surveys to determine external equity based on the rates paid in the labor market. allowance benefits etc. the major phases of compensation management include the following: Phase 1. * performance or productivity incentives. bonus. Benham defines wage as “„a sum of money paid under contract by an employer to a worker for services rendered. * individual equity. The principal ones are as follows: * internal equity. and * administrative efficiency. Objectives of a Base Pay Program . 7) Ease of operation: The compensation management system should be easy to understand and operate. The word pay refers to the payment for services done which would include salary as well as wages.ensures that workers are neither overpaid nor underpaid. * maximum use of financial resources. 2) Conduct a salary survey to find what other employees are paying for comparable jobs. Price each job to determine the rate of pay based on internal and external equity based on the rates paid in the labour market. 5) Fine tune pay rates. every organization's base pay program has certain objectives. using job analysis information to ensure internal equity based on each job's relative worth. Phase 3. In general. But the more the objectives are followed. In ordinary parlance. Evaluate every job. they are guidelines.” . Equity and Pay rates: The need for equity is the most important factor in determining pay rates. any remuneration paid for services is etymological wage. To meet these objectives. * compliance with laws and regulations. 6) Comply with legal rates: Compensational programs must invariably satisfy governmental rules regarding minimum wages. 3) Group similar jobs in to pay grades.
productivity and progress of industry depend on there being sufficient demand to ensure the sale of its products and pocketing of reasonable profits. 4. The Committee. The fatigue involved. land.Labour was always looked upon as a commodity governed by the law of supply and demand. has given a considerable thought to wage differentials and has stated that the following factors should be taken into consideration for fixation of wages: 1. basic wages. According to this theory. Wages are determined by the value of the net product of the marginal unit of labour employed. Wages represent the amount of value created in the production which remains after payment has been made for all these factors of production. The wage fund theory: According to this theory. The strain of work. According to this theory. 6. was propounded by David Ricardo (1772-1823). wages are determined not by subsistence level but also by the standard of living to which a class of labourers become habituated. A few theories are discussed below: Subsistence theory: This theory. if wages and the purchasing power of the workers are low. 2. Demand and supply theory: According to this theory. According to him. Residual claimant theory: Francis A. According to him. The experience involved. However. The Tribunals and Wage Boards have generally followed the-principles laid down in the Fair Wages Committee‟s Report on fixing wages. there were four factors of production/ business activity viz. 7. Walker (1840-1897) propounded this theory. in its report. The mental and physical requirements. The responsibility undertaken. The training involved. wages are classified as: Minimum wage . A large pact of the products of industry is consumed by workers and their families and if wages are high. and 9. The amount necessary for health and decency. The amount necessary to provide a standard of comfort. also known as ‘Iron Law of Wages’. In other words.. demand will be good. and 3. The amount necessary for mere subsistence. labour. The disagreeableness of the task. Classification of wages: The classified wages as under: 1. fringe benefits. 8. 5. after rent and raw materials are paid for. which will result in unemployment. some of the goods will remain unsold. labour is the residual claimant. Standard of living theory: This theory is a modified form of subsistence theory. In India. The hazard attendant on the work. wages depend upon the demand and supply of labour . Purchasing power theory: According to this theory the prosperity. 2. International Labour Organization (ILO) in one of its publications. wages tend to settle at a level just sufficient to maintain the workers and his family at minimum subsistence levels. job differentials and individual differences tend to be determined by the relative strength of the organization and the trade union. The bargaining theory of wages: John Davidson propounded this theory. a definite amount remains for labour. wages are determined by the relative bargaining power of workers or trade unions and of employers. When a trade union is involved. Marginal productivity theory: This is an improved form of demand and supply theory. capital and entrepreneurship. The degree of skill. 3. The total wage fund and the number of workers determine the average worker’s share in the form of wages. output will go down. Certain theories were propounded for determination of wages but these could not stand the test of time. The theory applies only to backward countries where labourers are extremely poor and are unable to get th eir share from the employers.
for the education of his family members. decreasing corporate motivation to delve into these economic areas. industry to industry and from worker to worker. It defined a Living Wage as “one which should enable the earner to provide for himself and his family not only the bare essentials of food. So the focus will be on creating products to meet customer’s basic needs. the principles for determining minimum wages were evolved by the Government and have been incorporated in the Minimum Wages Act. It maintains that paying higher wages increases employee investment in the overall market. 1948. This theory ignores the motivational benefits of higher wages and the potential buying power of individuals in nonessential markets. Fair Wage: According to the Committee on Fair Wages. clothing and shelter but a measure of frugal comfort. the important principle being that minimum wages should provide not only for the bare sustenance of life but also for the preservation of the efficiency of the workers by way of education. “it is the wage which is above the minimum wage but below the living wage. for their medical care and for some amenities. and Living wage Minimum wage: A minimum wage has been defined by the Committee as “the wage which must provide not only for the bare sustenance of life. iii) The level of the national income and its distribution. Subsistence Theory Subsistence theory focuses on the basic needs of employees and states that an individual must make enough income to support her basic needs and the needs of her family. Under this theory an individual who does not make enough to support his basic needs will seek employment elsewhere or be unable and unwilling to continue in his current employment. . ii) The prevailing rates of wages in the same or neighbouring localities. the actual wages should depend on considerations of such factors as: i) The productivity of labour. but for the preservation of the efficiency of the worker. the minimum wage must provide for some measure of education. the upper limit is set by the “capacity of the industry to pay”.” The lower limit of the fair wage is obviously the minimum wage. requirements of essential social needs and a measure of insurance against the more important misfortunes including old age”. In other words. It also focuses on the consumption power of employees and their ability to manipulate the demand for products if they have the individual buying power to increase their consumption. medical requirements and amenities”. comfort. medical care and other amenities. This theory focuses on the supply side of labor while neglecting the employee‟s desire to earn more than his basic needs. Purchasing Power Theory The purchasing power theory focuses on the buying power of employees and their effect on the overall economic environment. a minimum wage should provide for the sustenance of the worker‟s family. and his family as well as a measure of decency. General Theory The general theory of wages states that a decrease to the overall wages of all employees allows employers to hire more employees. a living wage was to provide for a standard of living that would ensure good health for the worker. protection against ill-health. for his efficiency. and iv) The place of industry in the economy. and protection against misfortunes. education for his children. says the Scarlett website. Living Wage: This wage was recommended by the Committee as a fair wage and as ultimate goal in a wage policy. In other words. thereby creating employment opportunities. An employee who earns too little is unlikely to spend the money she does not have to purchase luxury items and items of convenience. Fair wage. However. For this purpose. Between these two limits. including education for his children. thereby creating more employment options elsewhere in society. It is very difficult to determine the minimum wage because conditions vary from place to place.
. This theory sets a competitive bargaining environment in companies and suggests that an employee should seek to increase his effective bargaining potential to earn higher wages. The Bargaining Theory The bargaining theory states that the wages paid are equivalent to the bargaining ability of the employees. This difference is often referred to as the rate of exploitation and indicative of a system that rewards employers for the mistreatment of their employees.Surplus Value Theory Surplus value theory identifies a gap between the production of employees to their wages earned. This theory became the foundation for collective bargaining systems. says the Scribd website. The theory states that individual employees tend to not earn wages equal to the value of their performed work.
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