ASSIGNMENT ON COMPENSATION

MANAGEMENT
SUBMITTED TO: -

Dr. GITANJALI UPADHYAY

SUBMITTED BY: -

RAHUL SHARMA

ROLL NO.

CUHP18MBA50

School of Business & Management Studies

Central University of Himachal Pradesh

Chaudhary Campus - 2 Dharamshala, District Kangra – 176215,

Himachal Pradesh.
 UNIT I Introduction to Compensation Management

• Meaning of Compensation
• objectives of Compensation
• Factors influencing Compensation Decisions
• Theories of wage determination
• Process of Compensation Management
• components of Compensation
• Types of wages
• Methods of wage payment
• Methods of wage fixation
• National wage policy and its objectives
 1.Meaning of Compensation
Compensation is the total cash and non-cash payments that you give to
an employee in exchange for the work they do for your business. It is
typically one of the biggest expenses for businesses with employees.
Compensation is more than an employee’s regular paid wages. It also
includes many other types of wages and benefits.

Compensation refers to the remuneration given to an employee in

exchange for their services. The level of compensation offered is
dependent on a number of factors, including salaries paid by similar
companies for similar roles, the employee’s skill set and productivity
and the company’s current and projected financial strength.

It can be said that compensation is the “glue” that binds the

employee and the employer together and in the organized sector, this
is further codified in the form of a contract or a mutually binding legal
document that spells out exactly how much should be paid to the
employee and the components of the compensation package., The art
and science of arriving at the right compensation makes all the
difference between a satisfied employee and a disgruntled employee.

DIFFERENT DEFINITIONS OF COMPENSATION:

As described by “I. Kessler”
“Compensation management refers to the payment system which
determines employee wages or salary, direct and indirect rewards.”

As described by “Topomoy Deb”

“It’s a system of compensating individuals for the work they perform
in such a way that the organization is able to attract, retain and motivate
them, to perform well, keeping in view organization and market
factors.”
As described by “Stephen P. Robbins”
“It is a process of determining cost-effective pay structure, designed to
attract and retain, provide an incentive to work hard and structured to
ensure that pay levels are perceived as fair.”

Objectives of Compensation Management

The compensation paid to employees is agency consideration. Each
party to agency tries to fix this consideration in its own favor. The
employers want to pay as little as possible to keep their costs low.
Employees want to get as high as possible. The compensation
management tries to strike a balance between these two with following
specific objectives:

1. Attracting and Retaining Personnel

From organisation’s point of view, the compensation management aims
at attracting and retaining right personnel in the organisation. In the
Indian corporate scene, there is no dearth of personnel at operative
levels, but the problems come at the managerial and technical levels
particularly for growing companies. Not only they require persons who
are well qualified, but they are also retained in the organisation. In the
present day context, managerial turnover is a big problem particularly
in high knowledge-based organizations.
2. Motivating Personnel
Compensation management aims at motivating personnel for higher
productivity. Monetary compensation has its own limitations in
motivating people for superior performance. Alfie Kohn (an American
author and lecturer who has explored a number of topics in education,
parenting, and human behavior.) has gone to the extent of arguing that
corporate incentive plans not only fail to work as intended but also
undermine the objectives they intend to achieve. He argues that this is
due to inadequate psychological assumptions on which reward systems
are based. His conclusions are as follows:
Rewards punish people-their use confirms that someone else is in
control of the employee.
Rewards rupture relationships-they create competition where
teamwork and collaboration are desired.
Rewards ignore reasons-they relieve managers from the urgent need to
explore why an employee is effective or ineffective.
Rewards discourage risk taking-employees tend to do exactly what is
required to earn the reward, and not any more.
Rewards undermine interest-they distract both manager and the
employee from consideration of intrinsic motivation.
Notwithstanding these arguments, compensation management can be
designed to motivate people through monetary compensation to some
extent.

3. Optimizing cost of compensation

Compensation management aims at optimizing cost of compensation
by establishing some kind of linkage with performance and
compensation. It is not necessary that higher level of wages and salaries
will bring higher performance automatically but depends on the kind
of linkage that is established between performance and wages and
salaries. Compensation management tries to attempt at this.
4. Consistency in compensation
Compensation management tries to achieve consistency-both internal
and external-in compensating employees. Internal consistency involves
payment on the basis of criticality of jobs and employees’ performance
on jobs. Thus, higher compensation is attached to higher-level jobs.
Similarly, higher compensation is attached to higher performers in the
same job. Level of jobs within an organization -is determined by job
evaluation. External consistency involves similar compensation for a
job in all organisations. Though there are many factors involved in the
determination of wage and salary structure for a job in an organisation
which may result into some kind of disparity in the compensation of a
particular job as compared to other organisations, compensation
management tries to reduce this disparity.

Factors influencing compensation decisions

A number of factors influence the remuneration payable to employees.
They can be categorized into (i) internal and (ii) external factors.
Internal Factors
These factors include the following:
Ability to pay
This is one of the most significant factor influencing employee
compensation. Generally, a firm, which is prosperous and successful,
has the ability to pay more than the competitive rate. This way it can
attract a superior caliber of personnel. Often the labour unions also
demand an increase in compensation on the grounds that the
organisation is prosperous and is able to pay more.
Employee
Numerous employees related factors also influence his or her
compensation. These include the following:
Performance—It is always rewarded with pay increase and as a result
it motivates the workers to do better in future.
Experience—This makes a person perfect by providing valuable
insights and thus rewarded also. Today companies are demanding for
10 to 20 years’ experience candidates especially for the executive
positions. The companies presume that experience candidate possess
leadership skills which influence the other behavior and performance.
Generally, experience candidate perform the job without need of
training which is time consuming and deals with matter of cost to
company. Hence the experience candidates demand more pay than an
unexperienced candidate.
Seniority—In today's environment seniority of employee making
difference in payment of compensation compared to Jr employees.
Naturally senior employees demand for more salary than fresher
because of their hold on related job and its functions. Today many
companies are demanding senior employees for key positions by
offering fat pay and even sometimes retired employees are offered with
handsome salary for key positions which deals with multitasking in
organisation. Trade unions always prefer this objective criterion for pay
rises.
Job Requirements
Wages arc also influenced by the requirements of a job such as physical
and mental requirement. Jobs, which demand more skill, responsibility,
efforts and are of hazardous in nature, will carry high wage tag with
them.
Job Evaluation
Job evaluation establishes a consistent and systematic relationship
among base compensation rates for all jobs. In other words, it
establishes the satisfactory wage differentials.

Organisation's Strategy
The organisation's strategy regarding wages also influences employee
compensation. For example, an organisation, which wants rapid
growth, will set higher wages than competitors. On the other hand,
organisations that want smooth going and just maintain the current
earning will pay average or below average.

External factors
These factors include the following:

Laws and Regulations

 Laws and regulations impact the remuneration of employees in
many areas, such as:
 Work hours and compulsory time-off (paid and unpaid)
 Minimum wage
 Overtime
 Compulsory bonuses
 Employment at will

Labor Market
Official laws on wage and salary, labor contract, payment time, wage
payment delay, working insurance, and so on.
People’s standard of living in the areas where the offices of the
company are.
People’s living and consuming customary.

Economy
The state of economy also influences the wage and salary-fixation.
Wage rates will he different in a stable economy than in a depressed
economy. In case of depressed economy there may be increase in
supply of labour and this results in the fixation of lower wage rates.

Inflation
Increase in the prices of commodities and decrease in value of the
money is called as inflation. The causes of inflation are many which
are raising costs, fall in the currency value in international markets,
raising taxes by government and stagnation in the development of
economy, etc. In India year 2012, due to the inflation nearly 22 listed
companies had increased salary of its employees ranging between 12%
to 27% compared to last year. Example Reliance Industries Ltd had
paid nearly13% increase in salaries to its employees compared to last
year salaries and HDFC (Housing Development Finance Corporation)
Bank had paid nearly 21% increase in salaries to its employees
compared to last year salaries.
Technological Changes
Technological changes also influence the fixation of wage levels. Due
to the advancements in the technology there may be shortage of skilled
manpower in that area. So, the organisation will provide high wages for
skilled personnel. For example, information technology (IT) industry
in India and abroad is suffering from the shortage of IT experts.

Academic Institutions
Having good academic qualifications from Reputed and standard
educational institution influence the compensation of the potential
candidate in their recruitment in companies. Example, Indian Top
Business schools like Indian Institute of Management, and IIT (Indian
Institute of Technology) graduates demands higher pay packages
compared to other normal institutions. Candidates seeking admission
into theses institution requires to qualify tests conducted on domain
knowledge. Candidates those who admit in these institution are
determined, having competence and good domain knowledge which
companies require.

Theories of wage determination

1. Subsistence Wage Theory: This theory was propounded by

David Ricardo and called this theory as an “iron law wages.”
According to this theory, the labor is paid the minimum amount
of wage that is sufficient to subsist and perpetuate their race
without either increase or decrease. It is based on the assumption
that the law of diminishing returns applies to the industry, and the
population tends to increase. If the labor is paid below the
subsistence level, they will die out of malnutrition, disease or
 hunger and therefore, the number of workers gets reduced. On the
other hand, if the wage increases above the subsistence level, the
number of workers will get attracted to procreate and thus, with
the increase in labors the wage rate comes down. Thus, there is a
subsistence level, which is maintained and is not either increased
or decreased.

2. Wage Fund Theory: This theory was developed by Adam Smith

and is based on the assumption that the wage is paid out of the
pre-determined wealth or fund, which lays surplus with the
wealthy persons, as a result of savings. The amount of wage to be
paid to the worker depends on the size of the fund. Larger the
fund, more labor would be employed and given higher wages,
whereas in the case of less funds, the wage would reduce to the
subsistence level. This theory was further expounded by J.S.Mill,
and according to him the wage fund is fixed, and the wages can
be determined on the basis of demand for and supply of labor.
And thus, the fund size decides the demand for the labor. To have
an increased wage, the number of labors is to be reduced, and the
fund is to be enlarged.

3. Surplus Value Theory: This theory is given by Karl Marx, and

according to him, like other articles, labor is also an article of
commerce and could be purchased by paying a subsistence price.
The price of a product is determined by the amount of time; a
labor devotes for its production. And the proportion of time spent
by the labor on work is much less and, therefore, paid a minimum
price and the surplus amount is utilized for the other expenses.

4. Residual Claimant Theory: Francis. A Walker propounded this

theory, and according to him there four factors of production viz.
 Land, labor, capital and entrepreneurship. The wage is the amount
given in return for the amount of production and thus is paid after
the payment of all other factors. Thus, the wage is considered to
be a residual claimant, and is computed as: Wage= Whole
production- (Rent+ Interest+ Profit)

5. Marginal Productivity Theory: This theory is given by Phillips

Henry Wicksteed and John Bates Clark, and it is based on the
assumption that wage is determined on the basis of last worker’s
contribution in the production i.e. the marginal production. This
theory assumes that wage depends on demand for and supply of
labor. As far as, the marginal productivity is equal to the wages
paid, a firm will continue employing more labor.

6. Bargaining Theory: John Davidson has given this theory, and

according to him, the wages are determined on the basis of a
bargaining capacity of workers or their unions and employers. If
the trade union is stronger, then the wages will be high, and if the
employer is powerful, the wages tend to be low.

7. BEHAVIORAL THEORY:
 Employee acceptance of wage level:
There are many factors which affect an employee intention
to join or leave an organization. These factors include size
and prestige of organization. Bargaining power of trade
union, wage level in proportion to the performance made by
employees etc. therefore wage is viewed as more then
providing organization have to provide for satisfaction of
employees along with financial or non-financial rewards.
 The internal wage structure:
According to this theory the internal wage structure of an
organization is influenced by the social norms, traditional
customs prevailing in the organization, psychological
pressures on management, norms of span of control,
maintaining wage preferential, demand for specialized labor
etc. Therefore, this theory implies that wage is an internal
structural issue of the organizational which is influenced by
a number of social factors.

 Wage and motivator theory:

According to this theory money is often looked upon as
means of fulfilling the most basic need of man like food,
clothing, shelter, transportation, insurance, pension plans,
education and other requirements. But every individual has
some aspiration depending upon his life circumstances
which he want to achieve. These aspirations for example:
increased recognition, job satisfaction, better amenities etc.
are the motivators which stimulate an individual to improve
his productivity and performance to achieve those
aspirations. Performance based rewards such as merit
increases, bonus, commission; stock options etc are
required to motivate employers.

 Tournament theory:
It focuses on an organization hierarchy as an incentive
instrument. This model compares life in an organization to
a supporting match for example: golf tournament. Each
round in the tournament represents a competition for a
position at a higher job level or contestants are ranked based
on their performance the winners will go on to next round.
The ultimate reward or carrot in tournament theory is the
 possibility to become chief executive officer. Thus
tournament theory provides for the high wage for higher
performance.

Compensation Management Process

In order to achieve the objectives of compensation management,

it should proceed as a process. The compensation management
process has various sequential steps as shown:

1. Organisation’s Strategy
Organisation’s overall strategy, though not a step of
compensation management is the starting point in the total human
resource management process including compensation
management. Companies operating in different types of
market/product having varying level of maturity, adopt different
strategies and matching compensation strategy and blend of
different compensation methods. Thus, it can be seen that
organisations follow different strategies in different market
situations and align their compensation strategy and contents with
these strategies. In a growing market, an organisation can expand
its business through internal expansion or takeover and merger of
other organisations in the same line of business or a combination
of both. In such a growing market, the inputs, particularly human
resources, do not grow in the same proportion as the business
expands. Therefore, in order to make the growth strategy
successful, the organisation has to pay high cash to attract talents.
For example, information technology is a fast-growing business
presently and we find maximum merger and higher managerial
compensation in this industry. In mature market, the organisation
does not grow through additional investment but stabilizes and
the growth comes through making the present investment more
effective, known as learning curve growth. In such a situation,
average cash and moderate incentives may work. The benefits
which have been standardized have to be maintained. In the
declining market, the organisation has to harvest profit through
cash generation and cost cutting and if this cannot be sustained
over the long run, the possible retrenchment of business to invest
somewhere else. In such a case, compensation strategy involves
cost control with below average cash and incentive payments.

2. Compensation Policy
Compensation policy is derived from organisational strategy and
its policy on overall human resource management. In order to
make compensation management to work effectively, the
organisation should clearly specify its compensation policy,
which must include the basis for determining base compensation,
incentives and benefits and various types of perquisites to various
levels of employees. The policy should be linked with the
organisational philosophy on human resources and strategy.
Besides, many external factors which impinge on the policy must
also be taken care of Job Analysis and Evaluation. Job analysis
provides basis for defining job description and job specification
with the former dealing with various characteristics and
responsibilities involved in a job and the latter dealing with
qualities and skills required in job performer. Job analysis also
provides base for job evaluation which determines the relative
worth of various jobs in the organisation. The relative worth of
various jobs determines the compensation package attached with
each job.

3. Analysis Of Contingent Factors

Compensation plan is always formulated in the light of various
factors, both external and internal, which affect the operation of
human resource management system. Various external factors are
conditions of human resource market, cost of living, level of
economic development, social factors, pressure of trade unions
and various labor laws dealing with compensation management.
Various internal factors are organisation’s ability to pay and
employees’ related factors such as work performance, seniority,
skills, etc. These factors may be analysed through wage/salary
survey.

4. Design And Implementation Of Compensation Plan

After going through the above steps, the organisation may be able
to design its compensation plan incorporating base compensation
with provision of wage/salary increase over the period of time,
various incentive plans, benefits and perquisites. Sometimes,
these are determined by external party, for example, pay
commissions for Government employees as well as for public
sector enterprises. After designing the compensation plan, it is
implemented. Implementation of compensation plan requires its
communication to employees and putting this into practice.

5. Evaluation And Review

A compensation plan is not a rigid and fixed one but is dynamic
since it is affected by a variety of factors which are dynamic.
Therefore, compensation management should have a provision
for evaluating and reviewing the compensation plan. After
implementation of the plan, it will generate results either in terms
of intervening variables like employee satisfaction and morale or
in terms of end-result variable like increase of productivity.
However, this latter variable is more important. The evaluation of
compensation plan must be done in this light. If it does not work
as intended, there should be review of the plan necessitating a
fresh look.
COMPONENTS OF COMPENSATION
There are different components of compensation. Some of them
are as follows:
1. Base Pay/ Basic Wage
2. Add-ons/ Allowances
3. Incentives
4. Benefits

1. Basic Wage: Basic wage is the fixed component paid to the

employees. It is determined through job evaluation and
wage surveys. Demand for and supply of labor, prevailing
wage rates, statutory requirements, ability of employees to
pay etc. are also considered to deciding the basic pay. This
Normally 40% of the compensation is base pay and the rest
is paid under various other categories. This breakage of
compensation is governed by the tax law of the land in
India. For instance if everything is given to employees in
the form of base pay the whole shall be taxed whereas if the
base pay is broken into sub-components like HRA certain
exemption may be obtained.

2. Add-ons: When the company’s pay something apart from

the basic wage. Allowances are paid in addition to basic pay
to ensure that the value of basic wages does not fall over a
period of time. Some allowances are statutory, most are
voluntary. Most of organization pay allowances such as
HRA, DA, Overtime Pay, CCA, TA, Medical Allowances,
Educational Allowances, Uniform Allowances, and Tiffin
Allowances etc.
 3. Incentives: Compensation is performance linked
remuneration paid with a view to inspire employees to work
hard and do better. Both individual incentives and group
incentives are used. Incentives are paid in various forms like
bonus, like commission on sale, profit sharing, stock option
etc.

4. Benefits: Fringe benefits are the various extra benefits

provided to employees in addition to compensation paid in
the form of wage or salary. Fringe benefits includes
company cars, membership of social and cultural clubs,
recreational activities, paid vacation, low cost or free meals,
entertainment tickets, discounted travel tickets, family
vacation packages, reimbursement, retirement benefits,
insurance, health insurance etc.

Wage and salary administration in india

The term wage in its narrower sense means the price paid for the service
of labor in the process of production. It is composed of two parts
• The basic pay and
• Allowances
In wider sense wage refer to any economic compensation paid by the
employer under some contract to his worker for the service rendered by
them. It includes allowances and other benefits. However in India
different Act include different items under wages. Though all act
include basic pay and dearness allowances under the term wages.
For example under Workman Compensation Act, 1923 ,sec 2(m)
“wages for leave period, Holiday pay, overtime pay, bonus attendance
bonus, good conduct bonus form part of wages”.
Under the Payment of Wages Act, 1936, sec 2(iv) “any award of
settlement and production bonus if paid, constitute bonus”
But under the Payment of Wages Act, 1948, “Retrenchment
compensation payment in lieu of notice and gratuity payable on
discharge, constitute wages.
Types of wages:
The concept of wages came in three forms
• Minimum wage
• Fair wage
• Living wage
Minimum Wage: It is the lowest wage provided by the employer to
insure bare subsistence of life by worker.
Although the idea was also to preserve the efficiency of the worker
provide for education, medical and other requirements of employees
and their family.
In India Minimum Wages Act 1948 provides for taxation and
enforcement of minimum wages in respect of all the employment
mention in the schedule.
Fair Wage: wage is fair when it is equal to the rate prevailing in the
same rate for similar work throughout the industry or country.
According to the “committee of the fair wages” it is the wage which is
above the minimum wage but below the living wage. As regards of the
fixation of fair wage is concern it can be fixed only by comparison with
an accepted standard of wages. And this standard of wages can only be
determine with reference to those industries where in labor is well
organized and is being able to bargain with the employer as part of a
collected bargaining process
Living Wage: It is the highest category in the concept of wage and the
ultimate purpose of a wage policy. It is higher than fair wage. This wage
can be termed as a comfortable wage providing the employees and his
family not only food clothing and shelter but also some additional
measures of comfort including education for children health schemes
fulfilling social need and also some kind of insurance for the old age.
 Fixation: living wage fixed on the bases of general economic condition
prevailing in the country. The concept of wage varies from country to
country. In some of the advance country living wage itself forms the
bases for the minimum wages. The living wage may also provide scope
for recreation for family and their employees.

Methods of wage payment

1.Time
wage
system

Methods
of Wage
Payment
3. 2. Piece
Balance/ wage
Debt system
method

1. Time Wage System:

Wages are paid on the basis of time spent on the job irrespective
of the amount of work done. The unit of time may be a day or
week or a month, this system is also called a day wage system.
Advantages:
1. Time wage is simple and oldest method.
 2. Earning of workers is regular and fixed.
3. No pressure to speed up production, quality of work can be kept
high.
4. This method avoids wasteful handling of material and tools.
Therefore maintenance expenditure is low and positive effects on
workers.
5. Workers can adjust the pace of work so that there is no injury to
their health.
6. Learners can concentrate on learning the cost methods of work as
their earning are not dependent on the amount of work.
7. Unions prefer time wage as it does not differentiate between
efficient in efficient – inefficient workers. This creates a sense of
quality and satisfaction among them.
8. Where work is done is intangible nature or services, mental work
and non- repetitive jobs, and it more equitable and convenient
method
Disadvantages:
1. This method provides no incentives for better performance as
reward is not proportion.
2. Guaranteed remuneration makes workers in efficient and
complement.
3. Calculation of labor cost per unit is difficult.
4. In absence of incentive to hard work, productivity of labor
becomes low unless closed supervision is used. Therefore cost of
supervision is high.
5. Control over labor cost becomes difficult as more payment is made
for losses amount of work.
6. There is no basis for finding merit of different employees and
promotions may have to be made on the basis of seniority.
Suitability:
1. Where the units of output are non-measurable.
2. a) Where the employees have little control over the quantity of
output.
b) There is no clear cut relation between effort and output like
assembly line jobs.
 3. When quality of work is especiallyimportant.
E.g. artistic furniture fine jewelry.
4. When supervision is good and supervisor know what constitute a
fair day work.
5. Where machinery and material used are very sophisticated and
expensive.
6. When workers are new and learning job.

2. Piece wage system:

Under this system remuneration are based on the amount of work
done or output of worker. A greater number of pieces produced
by a worker, higher the productivity – higher is his remuneration.
Therefore, a worker as paid in direct proportion to his output.
Advantages:
1. There is direct relationship between effort and reward. there this
provides an incentive to increase productivity.
2. Ambitious and efficient workers are provided ample
opportunities to utilize their talent and increase their earnings.
3. This method is fair to all because efficient workers.
4. Management can distinguish between efficient workers for the
purpose of promotion etc.
5. Cost of supervision.
6. As workers themselves have a stake in maximum of efficiency,
they put in more efforts to increase their productivity.
7. Workers are more likely to cooperate with schemes designed to
improve efficiency of operations.
8. If benefits of lower cost are passed to consumers in form of lower
prices or better quality, the society as whole stands for gain.
Disadvantages:
1. The earnings of workers are not stable so they feel insure and
dissatisfied.
2. In order to maximize their earnings, workers work with excessive
speed this may affect their health.
3. It also increases the wastage of material and wear tear of
machinery.
 4. This method is not suitable for work of artistic and delicate nature.
5. Employees may not stress on quality of product, so rigid quality
control measures become necessary.
6. This system may create jealousy between efficient and inefficient
workers therefore this method is not liked by the trade unions as it
affects its solidatory.
7. Detail records of production have to be kept, so that the clerical
work is increased.
8. This method may lead to industrial disputes.
9. Fixation of piece rate may create controversy.
10. Workers may reset upon loss of output and earnings due to
breakdown of machinery or power non- availability of material
and such factors beyond their control.
Suitability:
1. When work is done by an individual worker can measure
accurately.
2. When quantity of output depends directly upon the skills and
efforts of the worker.
3. Where the flow of work is regular and interruptions are minimum.
4. Where quality is not very important.
5. Where competitive conditions require that labor cost per unit has
to be fixed in order.
6. When methods of production are Sstandardized.

3. Balance method/ Debt method:

This method is a combination of time wage and piece wage system, the
worker is guarantee a time wage rate an alternative piece rate.If the
wages calculated at piece wage, exceed time wage the workers get
credit. On the other hand, if time wage exceed piece wages the worker
is paid time wage and the deficit is carried forward as debt to be recon
served in future.
Piece wage > time wage = credit
Piece wage < time wage = debit
Example: Suppose Time rate is Rs. 250/week and piece rate is 2/unit,
the wages of workers to produce.
150, 100, 125, in weeks will be calculated as under:
Week Piece Time Credit Debit Balance
wage wage

1 150*2= >250 50 - 50
300

2 100*2= 250 - 50 -
200

3 125*2= 250 - - -
250

This method provides a sense of security to the employees at the same

time, as an employee given the opportunity to increase his earnings
beyond the guaranteed time wage.
This method is appropriate where the flow of work is minimum. E.g.
dock workers
But the rate in this method has to be fixed on the most scientific manner.

Methods of wage fixation

1. Unilateral
2. Bipartite- Collective Bargaining
3. Tripartite (Wage Boards)
4. Pay Commissions
5. Arbitration or Adjudication Legal framework
6. Legislations

Unilateral: -
 Wages are fixed unilaterally by the employer.
 Generally, wage levels are low when fixed unilaterally.
  Applicable to the unorganized sector employment.

Bipartite: -
 Collective Bargaining-
 Process of negotiation
 Representatives from employer and employees
 Determine the terms and conditions of employment

WAGE BOARD: -
In 1950’s and 1960’s, when the organized labor sector was at a nascent
stage of its development without adequate unionization or with the
trade union without adequate bargaining power, govt. in appreciation
of the problems which arise in the arena of wage fixation due to absence
of such bargaining power, constituted various WAGE BOARDS.
In 1931 the royal commission on labor recommends the setting up of
wage board for determination of wages.
Wage boards are also known as Trade Boards, Wage Council, wage
committee, wage commission.
The first wage board was setup in 1957 by cotton textile industry.
30 wage boards have been setup by the govt. so far in respect of 19
industries.
It covers private sector employees.

Nature of Wage Board: -

Wage board is tripartite in nature and is a non-statutory body. In April
2009, a wage board was setup for working journalist and other
newspaper employees under the “Working Journalist and Other
Newspaper Employees (conditions of service) & Miscellaneous
Provision Act 1955 except for the wage boards for journalist newspaper
and news agency employees which are a statutory wage board, all other
wage boards are non- statutory in nature. Therefore, recommendations
made by these wage boards are not enforceable under the law.
 Constitutions of Wage Boards: -
 Wage board is tripartite in nature, consist of chairperson, an equal
member of representatives of employers and employees (2 members
each).2 independent members (an economist and a consumer’s
representative)
 Appropriate govt. appoints the chairman in consultation with chief
justice of the high court or Supreme Court. It has been practiced to
nominate a member of parliament to represents the interest of public.
 The members of employer and employees should be appointed by
appropriate govt. on the recommendation of most representative
organizations of the employers and employees in the sector.
 The total no. of members of wage boards constituted so far has varies
from 7-9.

Procedures of Wage Boards: -

 To prepare a comprehensive questionnaire to collect information on
the prevailing wage rates and is sent out the labor union, employee
associations.
 Making an assessment of the views of the parties.
 It involves recommendations regarding wage structure and convenes
secret sessions at which members of the board make proposals,
regarding the related issues.

Objectives: -
 Improve conditions for better industrial relations in the country.
 Standardize wage structure uniformly across a given industry
 To align the wage settlements with the social and economic
policies of the govt.
 To represent consumer interests.
 To deal comprehensively with all aspects of the questions of
wages.

Primary Functions Of Wage Board: -

PRIMARY FUNCTION is to determine the wages payable to
employees in the concerned industry. The appropriate govt. or the
recognized organizations of employers and employees, by mutual
agreement, may refer to the wage board any other matter for
determination.
CRITERIA FOR AWARDS OF WAGE BOARDS: -
The wage board is required to consider these factors to construct wage
structure.
1) NEEDS OF THE INDUSTRY
2) PREVALENT RATES OF WAGES
3) CATEGORIES OF WORKERS
4) CAPACITY TO PAY
5) LEVEL OF EMPLOYMENT
AWARDS OF WAGE BOARDS: -
a) Shall be based on the majority opinion and shall be in writing and
signed by all the members.
b) Shall be final and shall not be questioned by any court.
c) Shall be come into force with effect from such date as may be
specified.
d) Shall remain in operation for 3 years and it may be extended for
such further period as may be decided by mutual agreement between
the parties.

Criticism of Wage Boards: -

 Single machinery for wage fixation in all types of industries are
not suitable.
 Non- implementation of unanimous recommendations.
 The question of linking wages with productivity has not been
considered.
 Serious procedural delays.

Recommendations of national commission of labor 1969

Five Recommendations
 There is no need of independent person and that the chairman
should preferably be appointed by common consent of both employer
& employees.
 Wage board should be required to submit their recommendations
within 1 year of their appointments.
 The recommendations of wage boards should remain enforce for
a period of 5 years.
 The unanimous recommendations of the wage board should be
made statutorily binding.
 Central wage board division should be setup on permanent basis
to service all the wage boards.

However, the importance of wage boards has consequently declined

over a period of time and no non-statutory. Wage board has been setup
after 1966 except of sugar industry, where last such wage boards was
constituted in 1985. The trade union has been grown in strength in these
industries; with the mgt. this trend is likely to continue in future.
The second national labor commission of labor n(2002),referred to
wage board taking a back seat. It did not recommend the revival of
wage board.

PAY COMMISSION
 Pay commission is an administrative system or mechanism that
the Government of India set up in 1956 to determine the salary of
employees.
 Compensation level, structure, and system is based upon the
recommendation of pay commission being setup by the central
government, although some of the state governments also set up
their own pay commissions.
 Also cover compensation of employees working in the public
sectors such as national banks and industrial establishments.
 Pay commission set up from time to time seeks to study current
compensation of the employees and collect data from the market
through external surveys.
 These surveys use questionnaire method and expert
person/agency is appointed to collect and process the data and the
report.
Types of pay commission
FIRST PAY COMMISSION: -
 Established in early stage of independent India
 It was felt that compensation of government employees cannot be
set solely based on the classical economic reasoning of demand
and supply.
 It was felt that for fairness, justice and adequacy, the government
employees should be paid a ‘living wages’ to ensure minimum
standard of quality of employees.
 Pay commission also recommended dearness allowance to
government employees to prevent any economic hardship caused
due to rise in cost of living.
 The idea was based on government acting as a ‘model employer’.
 The Fair Wage Committee, 1948 also submitted is report on wage
policy to be adopted and their report differentiated between living
wage, fair wage and minimum wage.
 So, it’s clear that pay commissions living wage was actually
minimum wage.

SECOND PAY COMMISSION: -

 the second pay commission took the concept of living wage
(model employer premise) further as a matter of social policy.
 It argued that living wage is essential for attracting competent
employees and maintaining efficiency.
 Minimum wage should be considered in view of economic
concerns only, but to satisfy the principles of social justice also.
 It reached the conclusion that government should compensate
above minimum wages and provide fair wages to the public
servants.

THIRD PAY COMMISSION: -gave criteria of a sound pay system

 Inclusiveness: - the pay structure adopted for the civil service
should be broadly implemented by autonomous, quasi-
governmental organizations also. The large-scale appointment of
temporary employees should be discouraged and brought down
to minimum.
  Comprehensibility: - the pay structures should provide
compensation to all employees and at all levels in a
comprehensive manner. Equal payment should be made for equal
work.
 Adequacy: - the pay level and structure should be internally and
externally equitable so that government employees are not put in
any disadvantageous position with respect to other employees.

FOURTH PAY COMMISSION: - focused on the criteria for fixing pay

levels and structures for government employees.
 Market comparison cannot be relied upon for determining pay
system for employees in public service as compared to employees
working in private sector.
 It recommended that the government should pay ‘fair wages’ to
the public servants. The fairness concept is based on two
premises: fairness to the employees as well as people they serve.
 Pay commission concurred, that dearness allowance should be
treated as part and parcel of compensation structure of employees
and recommended that full neutralization of rise in cost of living
should be paid @80% to employees drawing basic pay up to Rs.
3,500 p.m. 75% to employees drawing basic pay between Rs.
3500 and Rs. 6000 p.m. And 65% for employees with basic pay
above Rs. 6000 p.m.

FIFTH PAY COMMISSION: - pay commission recommended for pay

revision based on work organization and manpower planning.
 It also recommended that 40% increase in pay with 30%
reduction in manpower over a three-year period.
 It emphasized new means of recruitment including contract
employment and bringing about innovation in training,
performance appraisal, career progression, transfer policies and
greater accountability of government employees.
 Sixth pay commission: - the Government of India has been
considering for some time past the changes that have taken place
in the structure of emoluments of Government employees over
the years.
  The appointment of Sixth Central Pay Commission comprises
of:-

CHAIRMAN Mr. Justice B.N.Srikrishna

MEMBER Prof. RavindraDholakia
MEMBER Mr. J.S.Mathur
MEMBER SECRETARY Smt. SushamaNath

TERMS OF REFERENCE
 To examine the principles, the date of effect thereof that should
govern the structure of pay, allowances and other
facilities/benefits whether in cash or in kind to the following
categories of employees:
 Central government employees-industrial and non-industrial;
 Personnel belonging to the All India Services.
 Personnel belonging to the Armed Forces.
 Personnel to the Union Territories
 To transform the Central Government organization into modern,
professional and citizen-friendly entities that is dedicated to the
service of the people.
 To examine desirability and the need to sanction any interim
relief till the time the recommendation of the Commission are
made and accepted by the Government.
 To work out a comprehensive pay package for the categories of
Central Government employees for promoting efficiency,
productivity and economy through rationalization of structure,
organization, systems and processes within the government, with
a view to leveraging economy accountability, responsibility,
transparency, assimilation to technology and discipline.
 To harmonize the functioning of the Central Government
organizations with the demand of emerging global economic
scenario. This would also take into account, among other relevant
 factors, the totality of available to the employees, need of
rationalization and simplification, therefore the prevailing pay
structure and retirement benefits available under the central
public sector undertakings, the economic conditions in the
country, the need to observe fiscal prudence in the management
of the economy, the resources of the central government and the
demands on account of economic and social development,
defense, national security and the global economic scenario,
impact upon the finances of the states if the recommendations are
adopted by the states.
 To make recommendations with respect to the general principles,
financial parameters and conditions which should govern
payment of bonus and the desirability and feasibility of
introducing productivity linked incentive scheme in place of the
existing ad hoc bonus scheme in various departments and to
recommend specific formulae for determining the productivity
index and other related parameters.

Recommendations of Sixth Pay Commission

 The sixth central pay commission submitted its report under the
chair of Justice B.N. Srikrishna in March 2008. The commission
has increased the pay of central government employees on an
average of 40% and abolished the position of Grade D in the
services. It has recommended for a minimum pay of Rs. 6,660
p.m. and max. of Rs. 80,000 p.m.

Pay Formed Report Financial Burden

Commission On Submitted (Rs. in Crores)
FIRST May May 1947 Unavailable
1946
SECOND August August 39.62
1957 1959
 THIRD April March 1973 144.60
1970
FOURTH June May 1987 1282
1983
FIFTH April January 17,000
1994 1997
SIXTH July March 2008 20,000(expected)
2006

 For secretary level positions, fixed/consolidated pay has been

suggested rather than pay scales.
 The pay between junior employees and senior officers has
increased from 1:10 to 1:12. The commission has justified huge
increases in compensation of the employees on the ground that it
intends to encourage performance of the employees. If the
recommendations of the sixth pay commission are to be accepted
by the government, then its financial burden is likely to be to the
tune of Rs. 12,561 Cr. and will benefit 45 lakh central government
employees.
Previous five commissions indicate that sixth pay commission
recommendations entail max. Increase in financial liability of the
government.
Rejected Recommendations
 Three closed holidays for government employees, flexi-hours for
women and flexi-weeks for disabled has been rejected.
 The proposal to provide a liberal severance package to those
employees who wish to leave service between 15 yrs and 20 yrs
without taking pension has been rejected.
 The proposal to outsource the process of commutation of pension
to a public sector bank or institution will also be looked into
separately. No time frame has been specified for the same.
  The government has also notified the improved and modified
three pay bands, and changed grade pays. It has also notified the
additional increment of 3 percent to Indian Administrative
Service and Indian Foreign Service officers over other services in
three grades. The dearness allowance has been made effective
from January 1, 2006.
NATIONAL WAGE POLICY
• The importance are of wage policy is obvious as it forms a highly
sensitive and complex dimension on labor policy and influence
employees level of motivation,moral,productivity and standard of
living
• According to ILO The wage policy means
“Legislation or government action calculated to affect the level or
structure of wages or both, for the purpose of attaining specific
objectives of social and economic policy”.

Objective of National Wage Policy

• National wage policy, thus aims at establishing wages at the
highest possible level, which the economic conditions of the
country permit and ensuring that the wage earner gets a fair share
of the increased prosperity of the country as a whole resulting
from the economic development.
• To eliminate malpractices in the payment of wages
• To encourage the development of incentive systems of payment
with a view to raising productivity and the real wages of workers
• To bring about a more efficient allocation and utilization of man-
power through wage differentials and appropriate systems of
payments
• To compensate workers for the raise in the cost of living in such
a manner that in the process, the ratio of disparity between the
highest paid and the lowest paid worker is reduced
• To set minimum wages for workers, whose bargaining position is
weak due to the fact that they are either un-organized or
 inefficiently organized. In other words, to reduce wage
differential between the organized and unorganized sectors.
• To ensure reduction of disparities of wages and salaries between
the private sector and public sector in a phased manner.
• To provide for the promotion and growth of trade unions and
collective bargaining
At present no national wage policy exists in India. However some
norms have been laid down by the following:
Committee on Fair Wages (1948): This committee introduced the
concept of minimum wage, fair wage and living wage. These concepts
have been explained above. The committee pointed out that “any
attempt to evolve principles for governing the fixation of wages must
be made against the background of general economic condition of the
country and the level of national income”.
National Commission on Labor (1969): The commission suggested
“that the wage policy has to be framed taking into account such factors
as the price level which can be sustained, the employment level to be
aimed at, requirement of social justice and capital formation need for
growth”. According to commission a national minimum wage is not
feasible due to widespread regional differences in the country.
Chakraborty Committee (1974): The committee stressed the need for
uniformity in wage payments across regions, industries and
occupations. It suggested that the National Wage Commission and a
National Board should be set up. These authorities will evaluate all
jobs, workout the grade structure on the basis of skill differential and
fix wages for each grade.
Bhoothalingam Study Group (1978): The Group recognized
widespread disparities and anomalies in wages in the country. It
suggested that appropriate guidelines should be evolved to reduce such
disparities and raise gradually the areas of unduly depressed wages.
Trade unions strongly opposed the recommendations of the study
group. Therefore government shelved its report.
Fifth Pay Commission (1996): The commission prescribed the
minimum and maximum salary. The recommendations of the
Committee helped to widen disparities between A Grade and B, C and
D grade service groups.
National Commission on Labor (2002): The commission recommended
that a national minimum wage may be notified by the Central
Government. Every employee must pay each worker his one-month’s
pay as bonus before an appropriate festival. The commission also
recommended that the system of two wage ceilings for reckoning
entitlement should be suitably enhanced to Rs.7, 500 and Rs.3, 500 for
entitlement and calculation respectively.
SOUND WAGE POLICY MUST CONTAIN...
• Wage levels in different occupations and region should be equitable.
The principle of equal pay for equal work must be followed.
• The system of wage payment is such that the advantages of both time
wage and piece wage systems are available.
• A minimum wage for every employee in the form of social security
or unemployment insurance.
• Incentive for better performance should be paid.
• It should be simple and flexible.
• An ideal wage policy should fit well in to wider consumptions,
investment and other economic policies of the country
WAGE POLICY AT COMPANY LEVEL
Attraction and retention:
• An enterprise endeavors to recruit and retain the best people
available.
• One of the ways of attracting and retaining the best and brightest
is to pay more than what they get anywhere for similar skills and
level
Internal equity:
• Compensation policy should be taking into account the
differential in skills and levels in respect of both responsibility
and authority.
• Job evaluation is used as a tool for ensuring the internal equity.
External equity:
• The simplest and most widely used criteria to consider what is
generally known as the going rate in the labor market for
comparable jobs in industry/region
 • Compensation survey provide the basis for external equity

Personal equity:
• Based on the concept of expectancy theory
• A person may be un happy not only when he gets less but also
when he gets more
• Employees satisfaction surveys provide the basis for assessing
personal equity
Ability to pay:
• The enterprises should pay minimum wages irrespective of their
capacity to pay
• Over and above the minimum wages, enterprises pay more
depending upon their ability to pay.
Pay and performance:
• Linking pay to performance is sound and makes good sense
• The main problem in linking pay with performance is the absence
of criteria and tool to measure performance and inability to evolve
mutually satisfaction norms of sharing the fruits of performance
between labor and capital
Labor cost and productivity:
• wages and salaries can be linked to the productivity and
profitability of an enterprise
• Growing and profit earning enterprise find it easier to pay more
than stagnant and loss incurring enterprise
Cost of living:
• Dearness allowance and city compensation allowance form the
integral part of most wage structure
• The general principle underlying these allowances is to neutralize
at least a portion of the increase in the cost of living
Motivation:
• Company compensation policy can be an effective tool to
motivate people for superior performance
• A wide variety of non-monetary incentive, rewards sustain and
improve superior performance
Merit progression:
• Refers to the practice of rewarding a person according to one’s
contribution
• It’s usually based on annul performance appraisal
• When person performance is outstanding, the organization may
like to reward him with extra increment