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Lesson: 25 (Components of Compensation)

The following diagram gives an overview of the components of compensation:

Compensation an overview
External Environment Internal Environment Compensation Non-financial

Financial

Direct

Indirect

The Job

The Env.

Direct- Wages, Salaries, Commissions, Bonuses Indirect- Insurance plans, Social Assistance, Educational Assistance, Paid Absences The Job- Interesting Duties, Challenge, Responsibility, opportunity for recognition, feeling of advancement, achievement opportunity The Environment- Sound policies, Competent supervision, Congenial coworkers, Appropriate status symbol, Comfortable working conditions, flexitime, Job sharing, Cafeteria compensation Examples / Situations on different types of Compensation:

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1.

Nirmal and his wife are full of excitement and anticipation as they leave their home for a shopping trip. Nirmal recently found a job after several months of unemployment and the paycheck he received today will enable them to make a down payment on a much-needed refrigerator. Sonias anxiety over schedule minor surgery was somewhat relieved. Her supervisor has assured her that 80% of her medical and hospitalization costs will be covered by her firms health insurance plan. Anup Singh, Executive Director of local YMCA, returns home dead fixed from job each evening no earlier than 6 Oclock. His salary is small compared to the salaries of many other local managers who have similar responsibilities. Yet, Anup is on exceptionally happy person who believes that his work with youth, civic leaders, & other members of the community is extremely important & worthwhile. A large manufacturing firm has employed John for eight years. Although his pay is not what he would like to be, his job in the accounts payable department enables him to have contact with some of his best friends. He likes his supervisor & considers that overall working environment to be great. John would not trade jobs with anyone he knows.

2.

3.

4.

Wage Policy Now friends we will discuss about wages and its types: Wage policy deals with remuneration of work rendered by employees in any organization. Wages are that compensation given to employees done for work in return. Wages are given to the worker (blue color) who are the shop floor employees and salaries are given to executive cadre (white color) according to Public Policy, a good wage policy should look into the following: 1. 2. 3. 4. An equitable distribution of return between capital & labour. To establish justified wage differentials Equal pay for equal work To base wages on need basis

WAGES Minimum Wages

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These are the wages that ensure more than just adequate sustenance, these ensure certain medical & other essential requirements of individuals catered to ensure:1. 3 extra compensation unit to a family of a simple earning member. 2. 2700 calorie of food intake per member per day. 3. 18 yards of cloth per member and for an unit of four members i.e. 18 x 4 = 72 yards cloth per annum. 4. To ensure land, shelter equivalent of what is provided by industrial housing scheme. 5. Amenities catered to by wages 20% of minimum wage. LIVING WAGES Ensure more than adequate sustenance to the extent that certain greater needs like social needs, sanitations, health aspects, and protections from misfortunes. FAIR WAGES These are fixed on the basis of: 1. 2. 3. 4. Productivity of Labour Prevailing level of wages Industry Policy to wages & income distribution in the country. Contribution of industry to the economy

The upper limit is fixed on the basis of the above factors and ensures minimum wages. COMPENSATION & EQUITY Compensation affects the behaviour of people. Employing organization desires two things: 1. Attract & keep personnel in the organization. 2. Motivate them to higher level of compensation.

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Equity is concerned with felt justice according to natural law or right when an employee receives compensation from the employer, perceptions of equity are affected by two factors: 1. The ratio of compensation to ones inputs of effort, education, training, endurance of adverse working condition. 2. The compensation of their ratio with the perceived ratios of significant, other people with whom direct contact is made. Equity only exists when a person perceives that the ratio of outcomes to inputs is in equilibrium with respect of self and in relation to others. Equity & Trust Gross over reward (I) Modera te over reward Equity Moderate over reward (2) Equity Moderate under reward Equity

Moderate under reward Gross under reward

Relative Pay

Low (L) Med (M) High (H) Relative - Contribution RECARDOS SUBSISTENCE THEORY OF WAGES This stated that wages should be fixed at subsistence level if the wages were higher than the subsistence level; there would be an increase in supply of labour and consequent decrease in level of wages to a subsistence level. If wages were below subsistence level then labour employed i.e. demand for labour would increase and rise to subsistence level. According to this theory the wage should be the subsistence wage.

ADAM SMITHS WAGE FUND THEORY

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According to Adam Smith there is a corpus of funds from which wages are paid out and to increase wages efforts must be made to increase this corpus through greater productivity.

KARL MARKS THEORY Karl Marks propounded that labour would never be adequately compensated as the profits of capitalists could only be considered if labour was under paid. Wage and salary: Wages represent hourly rates of pay, and salary refers to the monthly rate of pay, irrespective of the number of hours put in by an employee. Wages and salaries are subject to annual increments. They differ from employee to employee, and depend upon the nature of job, seniority, and merit. Incentives: Also called payments by results, incentives are paid in addition to wages and salaries. Incentives depend upon productivity, sales, profit, or cost reduction efforts. There are: (I) Individual incentive schemes, and (ii) Group incentive programs. Individual incentives are applicable to specific employee performance. Where a given task demands group effort for completion, incentives are paid to the group as a whole. The amount is later divided among group members on an equitable basis. Fringe Benefits: These include such employee benefits as provident fund, gratuity, medical care, hospitalization, accident relief, health and group insurance, canteen, uniform, recreation and the like.

Perquisites: These are allowed to executives and include company car, club membership, paid holidays, furnished house, stock opinion schemes and the like. Perquisites are offered to retain competent executives.

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Non-monetary benefits: These include challenging job responsibilities, recognition of merit, growth prospects, competent supervision, comfortable working conditions, job sharing, and flextime. Rewards: People join organizations expecting rewards. Firms distribute money and other benefits in exchange for the employees availability, competencies and behaviours. Compensation is the most essential component of the individuals job in an organization that guides both the individual and the organization to perform their best. The below power point slide highlights the importance of compensation: CompensationPP Slide You can refer to the following link for the below inserted power point slide. For referring to the link please refer to the below mentioned address:((ffiille 2 %2 ett% ne errn ntte 0IIn 20 %2 y% arry orra po mp em Te s//T gs ng etttiin Se 0S 20 %2 all% ca oc Lo 2//L 22 12 s1 ms am sa s//s gs ng etttiin Se 0S 20 %2 d% nd an 0a 20 %2 s% ntts en me um cu oc Do C:://D e:://///C 0 s)) ms em stte ys Sy nS on attiio sa ns en pe mp om Co 2:: C 12 err 1 ptte ap ha Ch 1,,C 6,,1 56 25 J//2 HIIJ GH FG EF PE CP 5//C E5 ntt..IIE en ntte on Co s//C es Fiille 0F lides) o in t s ystemsPower P Compensation S ((Compensation slides) Point SystemsPower

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