AMITY GLOBAL

BUSINESS SCHOOL Chandigarh

Compensation
Management

Module I
Prof. Neha Walia

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BUSINESS SCHOOL Chandigarh

Module I: Overview of Compensation

Management
• Nature, Importance & Objective of Compensation Management
• Philosophy, Scope and wage concepts
• Principles & Machinery for wage determination
• Management Thinkers & critical evaluation
• Acts related to Compensation management

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Introduction :
Human Resource Management

• The most important "products" in today's economy

are services provided by people; there is, therefore,
considerable interest in the field of human resources.

• By gaining an understanding of appropriate

principles and procedures, strategies can be developed
to meet the human resource management challenge
presented by reinvention initiatives.

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Need for Compensation Management as

well as Management of Change:
(a) The managerial environment,
(b) The acquisition, allocation, development, and
sanction of human resources, and
(c) Change and the future.

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Major Concepts:
1. Compensation
2. Rewards
3. Incentives
4. Benefits

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Do we all need rewards and

incentives to be motivated for
work?

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• Motivation is very personal and stems primarily

from the interaction between an employee and his or
her manager.

• What is motivating to an individual also varies from

person to person.

• The best motivation comes from daily positive

reinforcement by management of desired performance
with as many employees as possible - not something
that occurs once a month for a single employee.
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Compensation Management
What is Compensation?

• The word Compensation means something, such as

money, given or received as payment or reparation, as
for a service or loss.
• Compensation may be defined as, “Money received
in the performance of work, plus the many kinds of
benefits and services that organizations provide their
employees.”

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Types of Compensation :
Compensation can be classified into:
(1) Direct compensation.
(2) indirect compensation.

• Money (popularly known as basic salary or wage, i.e. gross

pay) is included under Direct Compensation

• Benefits (life, accident, and health insurance, the employer’s

contribution to retirement (pensions), pay for vacation or illness,
and employer’s required payments for employee welfare as social
security, etc.) come under Indirect Compensation.

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Basic purpose for establishment of a sound

Compensation and Reward administration

• To establish and maintain an equitable compensation

structure.

• The establishment and maintenance of an equitable

labor-cost structure, an optimal balancing of conflicting
personnel interests so that the satisfaction of employees
and employers is maximized and conflicts minimized.

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Objectives of Compensation Management

1. Incentives
- Performance
- Job assignments
- Retention
- Training
2. Cost
3. Fairness
4. Legal compliance
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Objectives of a sound Compensation

Management Plan:
(a) For Employees:
(1) Employees are paid according to requirements of their
jobs, i.e., highly skilled jobs are paid more compensation than low
skilled jobs. This eliminates inequalities.
(2) The chances of favoritism (which creep in when wage
rates are assigned) are greatly minimized.
(3) Job sequences and lines of promotion are established
wherever they are applicable.
(4) Employees' morale and motivation are increased because a
wage programme can be explained and is based upon facts.
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(b) For Employers:

(1) They can systematically plan for and control their labor costs.
(2) In dealing with a trade union, they can explain the basis of their wage
programme because it is based upon a systematic analysis of job and wage facts.
(3) A wage and salary administration reduces friction and grievances over wage
inequities.
(4) It enhances an employee's morale and motivation because adequate and fairly
administered wages are basic to his wants and needs.
(5) It attracts qualified employees by ensuring and adequate payment for all the
jobs.

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Other Objectives of Compensation Management

(1) To recruit qualified personnel for a firm;
(2) Retain current employees
(3) To control payroll costs;
(4) Reward desired behavior
(5) To satisfy people to reduce the occurrence of quitting
grievances, and fractions over pay
(6) To motivate people to perform better.
(7) Comply with legal regulations
(8) Further enhance administrative efficiency-making optimal
use of the HRIS 14
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Components of employee remuneration

Remuneration

Financial Non-financial

Incentives,
Basic wages Individual plans Job context
Group plans Challenging job
Responsibilities
Growth prospects
Fringe benefits
Perquisites Supervision
P.F.
Car Working conditions
Medical care
Club membership Job sharing etc
Accident relief
Health and Paid holidays
Group insurance Furnished house
Stock option scheme 15
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Components of compensation
• Basic wages / Salaries:-

These refer to the cash component of the wage structure

based on which other elements of compensation may be
structured. It is normally a fixed amount which is
subject to changes based on annual increments or
subject to periodical pay hikes. It is structured based on
the position of an individual in the organization and
differs from grades to grades.

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• Bonus:-

The bonus can be paid in different ways. It can be fixed

percentage on the basic wage paid annually or in
proportion to the profitability. The Government also
prescribes a minimum statutory bonus for all employees
and workers.

There is also a bonus plan which compensates the

Managers and employees based on the sales revenue or
Profit margin achieved. Bonus plans can also be based on
piece wages but depends upon the productivity of labour.

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• Commissions:-

Commission to Managers and employees may be based

on the sales revenue or profits of the company. It is
always a fixed percentage on the target achieved. For
taxation purposes, commission is again a taxable
component of compensation.

The payment of commission as a component of

commission is practiced heavily on target based sales.
Depending upon the targets achieved, companies may
pay a commission on a monthly or periodical basis.
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• Dearness allowance:-
The payment of dearness allowance facilitates employees
and workers to face the price increase or inflation of  prices
of goods and services consumed by him. The onslaught of
price increase has a major bearing on the living conditions
of the labour.
The increasing prices reduce the compensation to nothing
and the money's worth is coming down based on the level
of inflation.
The payment of dearness allowance, which may be a fixed
percentage on the basic wage, enables the employees to
face the increasing prices.

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• Mixed plans:-

Companies may also pay employees and others a

combination of pay as well as commissions. This plan is
called combination or mixed plan. Apart from the salaries
paid, the employees may be eligible for a fixed
percentage of commission upon achievement of fixed
target of sales or profits or Performance objectives.

Nowadays, most of the corporate sector is following this

practice. This is also termed as variable component of
compensation.
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• Piece rate wages:-

Piece rate wages are prevalent in the manufacturing
wages.The laborers are paid wages for each of the
Quantity produced by them. The gross earnings of the
labour would be equivalent to number of goods produced
by them.

Piece rate wages improves productivity and is an

absolute measurement of productivity to wage structure.
The fairness of compensation is totally based on the
productivity and not by other qualitative factors.

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• Sign-on Bonuses:-

The latest trend in the compensation planning is the

lump sum bonus for the incoming employee. A person
who accepts the offer, is paid a lump sum as a bonus.

Even though this practice is not prevalent in most of the

industries, Equity research and investment banking
companies are paying this to attract the scarce talent.

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• Profit sharing payments:-

Profit sharing is again a novel concept nowadays. This
can be paid through payment of cash or through ESOPS.
The structuring of wages may be done in such a way
that, it attracts competitiveness and improved
productivity.

Profit sharing can also be in the form of deferred

compensation at the time of retirement. At the time of
retirement the employees may be paid a lump sum or
retiral benefits.

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• Fringe benefits:-

a) Company cars
b) Paid vacations
c) Membership of social/cultural clubs
d) Entertainment tickets/allowances.
e) Discounted travel tickets.
f) Family vacation packages.

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• Reimbursements:-
Employees, depending upon their gradations in the
organization may get reimbursements based on the Expenses
incurred and substantiated. Certain expenses are also paid
based on expenses incurred during the course of business.
In many cases, employers provides advances to the
employees for incurring  certain expenses that are incurred
during the course of the business.
Some examples of Reimbursements
(a) Travel expenses.
(b) Entertainment expenses
(c) Out of pocket expenses
(d) Refreshments expenses during office routine outside office premises.

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• Sickness benefits:-
The increasing social consciousness of corporate had
resulted in the payment of sickness benefit to the
Employees of companies. This also includes payments
during pregnancy of women employees.
The expenses incurred due to injury or illness are
compensated or reimbursed to the employees. In certain
companies, the death of an employee is compensated
financially. Companies are also providing supporting
financial benefits to the family of the deceased employees.
However, companies cover these cost through appropriate
insurance policies like, Medical and life insurance.
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Influencing factors of Remuneration

Remuneration

External Internal

Labour Market Business Strategy

Cost of Living Job evaluation & PA
Labour Unions The Employee
Govt. Legislations
Society
Economy

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Challenges of remuneration

Salary
Skills-based
reviews
pay

Remuneration Pay
Employee secrecy
participation

Comparable
worth
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Wages Vs Salary
Wages Salary
1. Quantum of service 1. Quantum of service
can be measured cannot be measured
2. Shorter Service 2. Longer service
period period
3. Payment based on 3. Paid uniformly
actual production. generally on
monthly basis

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