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Published by: Aditya on Feb 01, 2010
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Compensation is what employees receive in exchange for their contribution to the organization. Compensation forms such as bonuses, commissions, and profit sharing plans are incentives designed to encourage employees to produce results beyond normal expectation. Benefits such as insurance, medical, recreational, retirement, etc., represent a more indirect type of compensation.

BASIC PAY: It is the basic compensation an

employees gets, usually as a wage or salary. VARIABLE PAY: It is the compensation that is directly to performance accomplishments (bonuses, incentives, stock options) BENEFITS: These are indirect reward given to employees like health insurance, vacation pay.

 The most important objectives of any pay

system is fairness or equity. The term equity has three dimensions. 1. Internal Equity 2. External Equity 3. Individual Equity

 1. 2. 3. 4. 5. 6. 7.

In addition, there are other objectives also. Attract Talent Retain Talent Ensure Equity New and Desired Behaviour Controls Costs Comply with Legal Rules Ease of Operation

The pay structure of a company depends upon several factors such as Labour market conditions, company’s paying capacity and legal provisions:  Wages: In India, different Acts include different items under wages , though all the Acts includes basic wage and dearness allowance under the term Wages. However, the following types of remuneration are: a) Bonus or other payments b) Value of any house accommodation c) Any sum paid to defray expenses d) Any contribution to pension

 Basic Wage: The basic wage in India corresponds with what has 1. 2. 3. 4. 5. 6. 

been recommended by the Fair Wages Committee (1948) and the 15th Indian Labour Conference (1957). While deciding the basic wage, the following criteria may be considered: Skills needs of the job. Experience needed. Difficult of work:. mental as well as physical Training needed . Responsibilities involved. Hazardous nature of job. Dearness Allowance (DA): It is allowance paid to employees in order to enable them to face the increasing dearness of essential commodities. DA is linked in India to three factors:

All India consumer price index (AICPI). Time factor. Point factor. Other allowances.

1. Job needs 2. Ability to pay 3. Cost of living 4. Prevailing wage rate 5. Unions 6. Productivity 7. State regulations 8. Demand and supply of Labour

Choices in Designing a Compensation System
The compensation system that is followed by a firm should be in tune with its own unique character and culture and allow the firm to achieve its strategic objectives. 1. Internal and External pay 2. Fixed vs. Variable pay 3.

Wage System

Characteristics of Wage System
☺Simple ☺Beneficial ☺Equitable ☺Guaranteed minimum wage ☺Balanced ☺Incentive-oriented ☺Quality output ☺Certainty ☺Cost-effective ☺Flexible

Methods of Remuneration

Time Rate System

Piece Rate System

Flat Time High Wage Graduated Time System Rate Rate

Straight Differential Guaranteed Piece work Piece Work Piece Rate

Methods of Wage System
Generally speaking, there are two basic methods of wage payment Time Wage System Piece Rate System

Time Wage System
In this system, the worker is paid on the basis of time spent on work irrespective of the amount of the work done. The basis of time basis may be hour, day, week or month. This method is applicable where:  Quality of work is more important than the volume.  Measurement of work is not convenient.  Where the works requires a high degree of skill and dexterity.

a) It makes no distinction between efficient and inefficient workers. b) It offers very little to capable and efficient workers in the form of incentives to increase production. c) The system is unfair since wages and productivity are not correlated.

Piece Rate System
Under this system, the workers are paid at a stipulated rate per piece or unit of output. Here speed is the basis of payment, instead of time. In this system, the rate is fixed per piece of work and the worker is paid according to the number of pieces completed or the volume of work done by him. The method is applicable where:  Quality of work is not important.  Work is of a repetitive nature.  Job rate can be fixed satisfactory.  The job is a standardized one.

• It provides encouragement for higher production by rewarding efficient workers in a suitable way. • Idle time will be reduced to the minimum, as workers are not paid for wasted time on the job. • Since wage rate is fixed per unit, it is easy to prepare quotations, estimates, and budgets.

• • •

Quantity will be over-emphasised at the cost of quantity unless close supervision is maintained. Piece rates are unsuitable in circumstances where work is intermittent and job cannot be standardised. Since capacities of work differs widely, their earnings as per piece rates also vary widely causing dissatisfaction among them.

Incentives Plans

Incentives plans envisage a basic rate usually on time basis applicable to all workers and incentives rates payable to the more efficient among them as extra compensation for their meritorious performance in the time, costs and quality. The incentives rates may take the form of bonus or premium.

Features of Incentives Plans:
• Minimum wages are guaranteed to all workers. • The standard time is fixed and the worker is expected to perform the given work within the standard time. • Incentives by way of bonus, etc., are offered to efficient workers for the time saved.

Individual Incentives:


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