COMPENSATION

INTRODUCTION
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.
 NATURE 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.
 OBJECTIVES OF
COMPENSATION PLANNING

 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
 In addition, there are other objectives also.
1. Attract Talent
2. Retain Talent
3. Ensure Equity
4. New and Desired Behaviour
5. Controls Costs
6. Comply with Legal Rules
7. Ease of Operation
 COMPONENTS OF PAY
STRUCTURE IN INDIA
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
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:
1. Skills needs of the job.
2. Experience needed.
3. Difficult of work:. mental as well as physical
4. Training needed .
5. Responsibilities involved.
6. 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.
 FACTORS INFLUENCING
COMPENSATION LEVELS
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 Straight Differential Guaranteed

Time
Rate System Rate 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.
Demerits:

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.
Merits:
• 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.
Demerits:
• 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
Introduction:

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:
Introduction: