Compensation Mangement

COMPENSATION
MANAGEMENT
Dr. SUVENDU DAS

Email: hiteiseeconsulting@gmail.com
Cell: 9937509666
COMPENSATION MANAGEMENT
•MBA 303C
•Credit: 3
•Class Hours: 30
•8 days @ 4 hours each day
•University Marks – 100
•Internal - 50
•Total - 150
2 December 2019 Dr. Suvendu Das, Hiteisee Consulting 2

Module I: Conceptual & Theoretical Aspects of
Compensation:
• Concept of compensation
• The 3P Compensation concept
• System of Compensation
• Compensation Dimensions
• Organizational Compensation policy
• Methods of Payment:
• TRS
• PBR
• MDW

Module I: Conceptual & Theoretical Aspects of
Compensation:
• New Trends in compensation
• Concept and Components of Wages
• Theories of wages:
• Subsistence theory
• Wage Fund Theory
• Marginal Productivity theory
• Residual Claimant Theory
• Surplus Value theory
• Bargaining theory
• Employment theory
• Competitive theory

Module II: Wage Administration and Wage
Determination
• Principles of Wage and Salary administration
• Job Evaluation: Concept, Scope, Methods and
Techniques,
• Merit based pay.
• Types of Incentive plans
• Wage differentials
• Wage Policy
• Socio-Economic objectives of Wage policy
• Criteria of wage fixation
• Broad-banding
• Executive Compensation.

Module III: Employees Benefits:
• Overview of Employee’s Benefits
• Components of Wage and Benefits Structure
• Employees Benefits planning
• Design and Administration
• Statutory Benefits:
• Health Care
• Employee Welfare and Retirement Benefits.
• Incentive Schemes:
• Pay for Performance:
• Types of Incentive Schemes
• Wage Incentive Plans
• Pre-requisites of Effective Incentive Schemes
• Merits and Demerits of Incentives.
Reference Book:
1. Compensation Management – Bhatia Kanchan, HPH
2. Compensation - Milkvich Jerry M Newman, C S Venkata
Ratnam, McGraw Hill.
3. Compensation and Reward Management - B. D. Singh,
Excel Books
4. Compensation Management in a Knowledge Based World
- Henderson, Pearson

Concept of Compensation

• The literal meaning of compensation is to
counter-balance.
• In the case of HRM, compensation is referred to
as money and other benefits received by an
employee for providing services to his employer.
• Money and benefits received may be in different
forms:
• base compensation in money form
• various benefits, which may be associated with
employee’s service to the employer like
• provident fund,
• gratuity,
• insurance scheme, and
• Any other payment which the employee
receives or benefits he enjoys in lieu of such
payment.
•Compensation - money and other benefits
received for providing services
•Cascio defined compensation as
• “Direct cash payments, indirect payments
(employee benefits) and incentives to motivate
employees to strive for higher levels of
productivity”
•Compensation management, also known as
• wage and salary administration,
• remuneration management, or
• reward management,
is concerned with designing and implementing
total compensation package.
•The traditional concept of wage and salary
administration emphasized on only
determination of wage and salary structures
in organisational settings.
•However, over the passage of time, many
more forms of compensation entered the
business field which necessitated to take
wage and salary administration in
comprehensive way with a suitable change in
its nomenclature.

3P Concept of Compensation
3 Ps:
•Pay for Position
•Pay for Person
•Pay for Performance

Pay for Position:
• Position based pay or Job-based pay, pays
employees for the job to which they are
assigned, regardless of the skills they possess
• In other words, pay is centered on the job or
position and not on the person
• More traditional pay structure in which each
position is assigned a pay range based on the job
duties and pay is based on education and
seniority.
• Employee compensation is set in broadband
based on qualifications, education, training &
experience
Pay for Position:
• Through broad banding, narrowly structured pay
grades determined through job evaluation, are
replaced by fewer and wider bands
• Employees progress up through broad band if
their performance ratings are good, rather than
through steps based on time in the grade
• It reduces different compensation categories to
broad compensation bands, grouping jobs
together by common characteristic
• Develop an equitable grading structure
• Create a reference salary structure
• Leverage compensation costs with market
survey information
Pay for Person:
• Person focused pay or Skill-based pay or Knowledge-based
pay or Competency-based pay structures link pay to the
depth or breadth of the skills, abilities, competency and
knowledge a person acquires and applies to the work.
• Structures based on skill, pay individuals for all the skills for
which they have been certified regardless of whether the
work they are doing requires all or just a few of those
particular skills.
• The wage is attached to the person.
• The pay increases are usually tied to three types of skills: -
horizontal skills, which involve a broadening of skills in terms
of the range of tasks - vertical skills, which involve acquiring
skills of a higher level - depth skills, which involve a high level
of skills in specialised areas relating to the same job.
• Because skill-based pay encourages and rewards a broad
range of skills, the employee becomes multi-skilled and more
flexible and valuable

Pay for Person:
• A job rotation is used to fill in temporary gaps in the
workforce.
• Takes into account the demonstrable characteristics of a
person, including knowledge, skills, competency and
behaviours, that enable performance
• Take into consideration the person’s capabilities &
experience in setting a pay level that is both equitable and
competitive
• It considers the market demand of a person’s unique skills
and experience
• It also incorporates market based pay approach
• Determine competency/skill requirements and employee
capabilities
• Pay individuals based on their competency/skill match with
position
• Identify and pay market premium for competencies/skill in
short supply in the market.
Pay for Performance:
• Performance related pay, Performance-based pay is a
financial reward system for employees where some or
all of their monetary compensation is related to how
their performance is assessed relative to stated
criteria.
• The criteria for performance-related pay scheme may
be based on individual, group or organizational
performance, or on a mixture of them.
• Individual-based criteria would require
• individual goal-setting,
• an appropriate performance appraisal system
• individual training to increase job knowledge & skills
• the individual should have a large measure of control
over his/her own performance
Pay for Performance:
•Team-based criteria are appropriate where
• individual performance is difficult to measure or
• there is a need for a corporate culture to
promote team values and cooperation.
•Design annual bonus and incentives plans
that motivate staff
•Shift from merit salary increases to variable
pay
•Create long-term reward plans - stock options
and deferred compensation
Compensation defined
•Refers to the methods of maintaining balance
between interests of company & attracting,
developing, retaining, and rewarding high
quality staff through wages and salaries
•Compensation is a systematic approach to
providing monetary value to employees in
exchange for their work performed.
•Compensation includes all forms of wages,
salaries, incentives, commissions, and
bonuses

Background
Compensation is one of the main functions of HR.
It is closely linked with the following:

•EQUITY
•MOTIVATION
•EMPLOYEE APPRAISAL

Goals of Compensation Admin.
•To design pay systems that elicit desired
behaviors by employee at work
•To motivate employees to join, stay and

perform at high levels
•For the organization to remain ethical and

legal in its compensation programs.

Goals of Compensation Admin.

System of Compensation
• Compensation system is the sum total of all
monetary & non-monetary benefits provided to
employees in exchange for their willingness to work.
• Direct financial compensation is monetary
compensation, e.g. wages, salaries, commission and
performance payments.
• Fair compensation system is one of the main tools
for motivating employees to reach the targets.
• It organizes work environment, set clear and just
system, unifies principles for determining
compensation for various job performers.
• Implementation of compensation system provides
managers with arguments when explaining the set
compensation to the employees and shareholders.
System of Compensation
•Aim: to set clear and understandable principles
for
• how much,
• to whom and
• for what to pay,
so that employees are motivated to improve
their performance, achieve the set targets
and at the same time receive fair
compensation, corresponding to the labour
market and organization capabilities..

Compensation Dimensions

Payment for Work & Performance
• Includes the disbursement of money within a short-
term period (weekly, monthly and bonus/annual
awards)
• The total amount of payment given to the employee
will depend on the following:
• Needs for the specified job.
• Results that meet or exceed the standards of quantity,
quality or time.
• Innovations that lead to the increase in productivity,
loyalty, trustworthiness and a combination of some or
all of these features.
• The components that are usually included in the
payment for work and performance are basic pay,
premium and premium differences, short-term
bonus, merit payment and certain allowances.
Payment for Non-working Days
•The past few years have seen a reduction in
working hours.
•In addition, employees today enjoy more official
non-working days and longer paid leave.
•Components of payment for non-working days
raise labour costs.
•On the other hand, such payment allows for
lifestyle change and enhancement of the quality
of life.

Loss of Job Income Continuation Benefit
• Job security has always been an important aspect of
employment.
• Employees need to be assured of their job and economic
security.
• Accidents, personal problems, work performances are some of
the reasons that will cause a temporary cessation of
employment or a permanent termination.
• The change in the current technological and economic climate
will limit, and at times eliminate, the need and demand for
certain products and services.
• This will lead to the reduction or disintegration of an
organisation.
• Various components, like unemployment insurance,
unemployment added-benefits and salary during the
severance period, have been generated to assist affected
employees who have neither been offered any alternative
position by the organisation, nor found other work.
Disability Income Continuation Benefit
•When an employee suffers from a disability due
to an illness or accident, he is unable to execute
his tasks effectively.
•In addition to paying for daily living expenses,
the employee also has to pay for the hospital
bills.
•Employee compensation, in the form of medical
leave and short-term and long-term disability
plans, exists to assist an employee who is
incapable of working due to poor health.

Deferred Income
• Most employees depend on programmes provided by
their employers to ensure a continuous income after
retirement.
• There are two main reasons why such programmes exist.
• First, most people do not have enough savings upon
retirement to enable them to continue enjoying the
comfortable lifestyle they were accustomed to when they
were working.
• Therefore, programmes like the retirement allocation
planning programme, savings and thrifty plans, annuities
and additional income plans are drawn up by
organisations to provide employees an ongoing income
after their retirement.
• Secondly, the laws and tax regulations make the deferred
income plans more attractive to the employees.

Spouse/Family Income Continuation Benefit
•Employees with families worry that they will
not be able to provide and care for and
support their dependants in the event of
their death or disability.
•To this end, certain plans have been created
to provide the dependants with the financial
means to go on if an employee dies or is
incapacitated due to temporary or
permanent disability.

Health, Accident and Liability Protection
•Apart from income to sustain a comfortable
lifestyle, income for products and services to
heal an illness or disability is also of great
concern to employees.
•Therefore, an organisation offers various
insurance plans to assist employees in paying
for their medical care and treatment.

Income Equivalent Payments
•Income equivalent payments are also known
as perquisites or perks.
•Some of these special benefits are exempted
from tax, and this is advantageous for
employers and employees.
•Examples of special benefits are provision of
credit cards, allowance to attend official
meetings, subsidised food and childcare
services.

Organizational Compensation Policy
•The Compensation policy is the basic document
•It drives the detail of the compensation practices
in the organisation.
•As the compensation strategy sets the high level
compensation goals of the organisation, the
compensation policy describes the details of the
individual compensation components, their
behaviour and their role in the compensation
scheme of the organisation.

Compensation policy
•The compensation policy describes
• the details of the compensation components in the
organisation,
• how they are used and
• the conditions for the employees as the
compensation component can be applied in their
specific situation.
•The compensation policy provides the basic
explanation of the compensation component
• how it is calculated,
• who is eligible for the usage and
• the approval procedure.
Compensation policy
•The compensation policy belongs to most read
and discussed internal policies of the
organisation as it drives the salaries of the
individual employees.
•Each employee is interested in the structure of
the salary and the potential total cash achievable
in the organisation.
•The compensation policy is the main tool to find
out the details about the compensation
components and the way, how to achieve the
highest total cash.
•The Policy has to be Transparent.
Compensation - Methods of Payment:
Time Rate System (TRS):
•Wages are paid on the basis of time spent by
workers on the job.
•Time may be spent in hours, days, weeks or
month, that is, wages may be paid per hour, per
day, per week or per month.
•Total wages are determined by multiplying wages
per unit of time with total time spent on the job.
•Wages = Rate per unit of time x Total units of
time spent

• Merits:
• Simple to understand. Workers can easily understand it and, therefore,
feel satisfied with the amount of wages they earn.
• Good system for doing quality work. Workers are not in a hurry to finish
their work. They work slowly and do not compromise with quality of
work. It does not emphasise on quantity of output at the cost of quality.
• Reduction in wastage & cost of supervision. This reduces overall
administrative costs. It also helps in predicting the labour costs as fixed
amount is paid to employees. Number of hours per day are usually
fixed and do not vary frequently.
• Promotes sense of unity amongst Workers working for same time get
same pay. Differences in pay are due to incremental scale or different
positions.
• Sense of guarantee: Unless a worker is absent from work, this method
assures wages irrespective of output. Even if he cannot produce the
desired units of output, his wages are not affected if he works for fixed
hours a day. There is, thus, stability of job. People know there will be
gradual increase in rewards within the grades.

• Limitations:
• Affects production - As workers are paid on the basis of time, they do not
hurry to complete their jobs. This negatively affects production.
• Affects efficiency - The system makes no distinction between efficient and
inefficient workers. As efficient workers are paid the same amount (who
produce more) as inefficient ones (who produce less) provided they work for
same time, the efficient workers tend to slow their speed of work. They have
no motivation to become more productive.
• Closed supervision: Workers tend to be slow and take time to complete the
work. This increases control and supervision over their activities. The cost of
supervision is, thus, high.
• High cost of labour: Labour cost fluctuates for same units of output. This
affects cost of products and their prices (and thereby profits).
• Employer-employee relations strained: Employers want employees to
complete the work fast but employees work slowly as they have no incentive
to produce more. This affects organisational efficiency.

Time Rate System (TRS) Suitability:
• Where quality of goods is to be maintained.
• Where artistic work like carving is to be performed.
• Where workers are new to the job. Beginners learn to
work without contributing much to output.
• Where skilled work (computer operations) needs to be
performed.
• Where work cannot be measured in terms of output like
wages to gate man, machine operator, typist etc.
• Where production is time consuming because of
frequent movement of goods from one machine to the
other.

Time Rate System (TRS) Suitability:
• Where quality of goods is to be maintained.
• Where artistic work like carving is to be performed.
• Where workers are new to the job. Beginners learn to
work without contributing much to output.
• Where skilled work (computer operations) needs to be
performed.
• Where work cannot be measured in terms of output like
wages to gate man, machine operator, typist etc.
• Where production is time consuming because of
frequent movement of goods from one machine to the
other.

Payment by Results (PBR):
• Remuneration method used to reward workers or employees in proportion
with the amount of work done or deliverables achieved.
• In this method, a staff member or worker or even an external service provider,
such as an agent or advertising agency or a consultant, is remunerated on the
basis of achievement of objectives.
• For a factory worker, it may be defined as wages based on the amount of
factory units produced;
• For a service agent, the number of customers serviced satisfactorily.
• For a sales person - compensated by sales commission on the basis of number
of units sold.
• The underlying principle behind ‘variable pay’ in most organisations is mostly
based on rewarding employees according to the amount of work done by
them in terms of predefined deliverables.
• The same evaluation, and hence, remuneration system may be used for
compensating external service providers/ agencies/ consultants also, by linking
their ‘pay’ with the requisite levels of desired ‘performance’.
• This kind of remuneration compensation method has increasingly gained
popularity in social, health and public sectors, and attracted both positive and
negative publicity.

Measured Day Work (MDW):
•Production standard or quota instituted as an
alternative to incentive payment or pay-for-
results schemes.
•Workers receive a regular, guaranteed rate of pay
in return for quantity and quality, based on work
measurement and capabilities of the equipment.
•Output falling below the required standards is
paid pro rata, output exceeding the standards is
rewarded with a bonus.

New Trends in compensation
• Group Medi-claim / Insurance Scheme,
• Personal Accident Insurance Scheme,
• Company Leased Accommodation,
• Recreation / ATM facilities,
• Corporate Credit Card,
• Club memberships,
• Cellular Phone
• Laptop,
• Personal Health Care,
• Loans

• Educational Benefits,
• Regular Get together and other cultural programs,
• Wedding Day / Birthday Gift,
• Employee Referral Scheme,
• Maternity Leave,
• Paternity Leave,
• Work-life Balance,
• Pay Transparency,
• Broad banding,
• Variable Pay (Incentive Pay),
• Flexible Benefits

Work-life Balance:

Pay Transparency:

Broadbanding:

Variable Pay:

ESOP:

Flexible Benefits:

Modular Plans:

Core Plus Plan:

Flexible Spending Accounts:

Flexible Spending Accounts @ Google:

Concept and Components of Wages
• Wage is referred to as remuneration to workers
particularly, hourly-rated payment.
• Salary refers to as remuneration paid to white -collar
employees including managerial personnel.
• Wages and salary are paid on the basis of fixed
period of time and normally not associated with
productivity of an employee at a particular time.
• According to economic theory, wages are defined
broadly as any economic compensation paid by the
employer to his labourers under some contract for
the services rendered by them. In its actual sense
which is prevalent in the practice, wages are paid to
workers which include basic wages and other
allowances which are linked with the wages like
dearness allowances, etc.

Components of Wages
• In the Indian context, soon after the independence,
Government of India set up a Committee on Fair
Wages in 1948 which has defined various concepts
of wages which govern the wage structure in the
country specially in those sectors which can be
termed as underpaid and where workers do not
have bargaining power through unions.
• These concepts are: i) minimum wage, ii) living
wage, and iii) fair wage. Later, the concept of need-
based minimum wage was added. Let us have a brief
look at these concepts. Minimum Wage A minimum
wage is one which has to be paid by an employer to
his workers irrespective of his ability to pay.
According to the above committee,

Purpose of Compensation
Contribution based Ensure Equity

Remuneration
Attract talent Effective

Administratively
Compensation Efficient Legal
Institutionalized Compliance
Processes
Motivate &
Retain Staff Reward Valued
Behavior

The Pay Model
Business Goals
Compensation
Philosophy/ activities
CEO
serve Business
Business
Objectives
Strategy
Business Strategy – This defines the

direction in which organization is going in
relation to its environment in order to
achieve its objectives.
Compensation Philosophy – Consists of

a set of beliefs which underpin the
reward/compensation strategy of the
organization and govern the reward
policies that determine how reward
processes operate
2 December 2019 Dr. Suvendu Das, Hiteisee
Consulting 59
The Pay Model
Compensation activities
Business Goals serve Business
Objectives
CEO
Business
Strategy Compensation strategy is
periodically reevaluated and
the Compensation plan
periodically developed
HR Head
Compensation
Strategy
Org.Structure Non-Financial
Rewards
Compensation
Plan
Compensation Strategy – defines the

intentions of the organization on reward
policies, processes and practices required
to ensure that it has the skilled, competent
and well-motivated workforce it needs
to achieve its business goals
2 December 2019 Dr. Suvendu Das, Hiteisee 60
Consulting
The Pay Model
Business Goals Compensation activities
serve Business
CEO
Objectives
Business
Strategy
Compensation strategy is
periodically reevaluated and
the Compensation plan
HR Head
Compensation periodically developed

Strategy
Org.Structure Non-Financial
Rewards
Compensation
Plan
• A strategic perspective on compensation takes

the position that how employees are
compensated can be a source of sustainable
competitive advantage

Consulting
The Pay Model
Business Goals
Compensation activities
serve Business
CEO
Objectives
Business
Strategy
HR Head
Compensation
Strategy Non-Financial
Compensation
Org.Structure Rewards
strategy is periodically
reevaluated and the
Compensation
Compensation plan
Plan
periodically developed
C & B/S M
Performance Job Evaluation Market Surveys

Management
Unit Inputs
Pay levels /
structures Compensation
Contribution Manager, along with
Employee
/outputs team is responsible for

Total carrying out
remuneration compensation related
activities
Performance
linked Pay
Individual Pay
Internal Equity External Equity
Consulting
Employment Relationship
•TRANSACTIONAL – Emphasizing the

Cash & Benefit Forms
•RELATIONAL – Emphasizing the

“Family” / culture / Bonding Aspects

Employment Relationship
HIGH PAY – LOW HIGH PAY – HIGH
COMMITMENT COMMITMENT
TRANSACTIONAL
Low ----- High
Hired Guns Cult Like (Microsoft)

(Lehman Brothers)
LOW PAY – LOW LOW PAY – HIGH

COMMITMENT COMMITMENT
Workers as commodity Family (Starbucks)
RELATIONAL
2 December 2019 Low ----- High
Dr. Suvendu Das, Hiteisee
Consulting 64
How is Compensation used?
Compensation may be used to:
•Recruit and retain qualified employees.

•Increase or maintain morale/satisfaction.
•Reward and encourage peak performance.
•Achieve internal and external equity.
•Reduce turnover and encourage company
loyalty.
•Modify (through negotiations) practices of
unions.
Theories of Wages
Subsistence theory:
• Propounded by David Recardo (1772-1823).
• According to this theory, “The labourers are paid to enable them
to subsist and perpetuate the race without increase or
diminution”.
• This payment is also called as ‘subsistence wages’.
• The basic assumption of this theory is that if workers are paid
wages more than subsistence level, workers’ number will increase
and, as a result wages will come down to the subsistence level.
• On the contrary, if workers are paid less than subsistence wages,
the number of workers will decrease as a result of starvation
death; malnutrition, disease etc. and many would not marry.
Then, wage rates would again go up to subsistence level.
• Since wage rate tends to be at, subsistence level at all cases, that
is why this theory is also known as ‘Iron Law of Wages’.
• The subsistence wages refers to minimum wages.

Theories of Wages
Wage Fund Theory:
• This theory was developed by Adam Smith (1723-
1790).
• Adam Smith’s “Wealth of Nations" in 1776
• His theory was based on the basic assumption that
workers are paid wages out of a pre-determined
fund of wealth. This fund, he called, wages fund
created as a result of savings.
• According to Adam Smith, the demand for labour
and rate of wages depend on the size of the wages
fund.
• Accordingly, if the wages fund is large, wages would
be high and vice versa.
Theories of Wages
Marginal Productivity Theory:
•Propounded by Phillips Henry Wick-steed
(England) and John Bates Clark of U.S.A.
•According to this theory, wages is determined
based on the production contributed by the last
worker, i.e. marginal worker.
•His / her production is called ‘marginal
production’.

Theories of Wages
Residual Claimant Theory:
•Developed by Francis A. Walker (1840-1897).
•According to Walker, there are four factors of
production or business activity, viz.,
• land,
• labour,
• capital, and
• entrepreneurship.
•He views that once all other three factors are
rewarded what remains left is paid as wages to
workers.
•Thus, according to this theory, worker is the
residual claimant.
Theories of Wages
Surplus Value Theory:
•Developed by Karl Marx (1849-1883).
•This theory is based on the basic assumption
that like other article, labour is also an article
which could be purchased on payment of its
price i e wages.
•This payment, according to Karl Marx, is at
subsistence level which is less than in proportion
to time labour takes to produce items.
•The surplus, according to him, goes to the owner.
Karl Marx is well known for his advocating in the
favour of labour.

Theories of Wages
Bargaining Theory:
•John Davidson was the propounder of this
theory.
•According to this theory, the fixation of wages
depends on the bargaining power of
workers/trade unions and of employers.
•If workers are stronger in bargaining process,
then wages tends to be high.
•In case, employer plays a stronger role, then
wages tends to be low.

Theories of Wages
Employment Theory:
• Simple Classical theory of employment is based on two
fundamental postulates.
• 1st: “wage is equal to the marginal product of labour”.
• 2nd:“the existing real wage is equal to the marginal
disutility of employment”.
• Accepting the law of Diminishing Marginal Productivity as
employment increases, any increase in employment is
necessarily associated with lower real wage rates.
• If, however, unemployment still persists, it must be due to
the refusal of the workers to accept the lower real wage
rate which corresponds to the reduced marginal product
of their labour.
• That is, “the utility of the wage when a given volume of
labour is employed is equal to the marginal disutility of
that amount of employment”.

Theories of Wages
Employment Theory:
(1) W/P, i.e. the average money
wage deflated by price level is
shown on the vertical axis, while
the horizontal axis measures the
various amounts of employment or
N.
(2) DD curve represents the

demand for labour indicating that
more labour is hired at lower real
wage rates, ON < ON0; SS is the
supply curve showing that more
labour is offered at higher real
wage rates ON being > 0No
(3) When the wage rate is (W/P1)

the system is in disequilibrium, so
that workers bid down money
wages relatively to prices to the
level of W/P0 eliminating
unemployment to the extent of by
NN0. At the real wage rate (W/P1)
the quantity of labour demanded is
ON, while workers offer ON’ units
of labour.

Theories of Wages
Employment Theory:
It is based on the following assumptions:
• The supply of labour is an increasing function of real
wage rates, i.e., more labour will be offered for
higher real wage rates.
• The demand for labour is a decreasing function of
real wage rates i.e., less labour will be hired for
higher real wage rates and more at lower real wage
rates.
• There are no imperfections or institutional rigidities
in the labour market, i.e. labour is perfectly mobile.
• Aggregate demand (for goods and services) remains
constant and no changes are anticipated.
• Population, tastes, technology, etc. are given.

Theories of Wages
Employment Theory:
•Supply and demand theory
•It is based on the inter-relation between wages
and employment.
•Unemployment would disappear, if workers were
to accept a voluntary cut in wages, pleaded for
wage flexibility for promoting employment at a
time of organisation depression.
•The lowering in prices would cause additional
demand, which will increase production, and will
increase employment of workers.
Theories of Wages
Competitive Theory:
• Wages were fixed in accordance with demand
and supply, workers would be attracted by high
wages to industries, occupations and localities.

Module - II
Wage Administration
&
Wage Determination

Principles of Wage & Salary Administration
•Wage policy should be developed keeping in view

the interests of all concerned parties viz.,
employer, employees, the consumers and the
society.
•Wage and salary plans should be sufficiently
flexible or responsive to changes in internal and
external conditions of the organisation.
•Efforts should be made to ensure that differences
in pay for jobs are based on variations in job
requirements such as skill, responsibility, efforts
and mental and physical requirements.
•Wage and salary administration plans must always
be consistent with overall organizational plans and
programmes.
•Wage and Salary administration plans must
always be in conformity with the social and
economic objectives of the country like
attainment of equality in income distribution
and controlling inflation, etc.
•These plans and programmes should be
responsive to the changing local and national
conditions.
•Wage and salary plans should expedite and
simplify administrative process.
•Workers should be associated, as far as
possible, in formulation and implementation
of wage policy.
•An adequate data base and a proper
organizational set up should be developed for
compensation determination and administration.
•The general level of wages and salaries should be
reasonably in line with that prevailing in the
labour market.
•There should be a clearly established procedure
for hearing and adjusting wage complaints. This
may be integrated with the regular grievance
procedure, if it exists.
•The workers should receive a guaranteed
minimum wage to protect them against
conditions beyond their control.
•Prompt and correct payments to the employees
should be ensured and arrears of payment
should not accumulate.
•The wage and salary payments must fulfil a wide
variety of human needs including the need for
self-actualization.
•Wage policy and programme should be reviewed
and revised periodically in conformity with
changing needs. For revision of wages, a wage
committee should also be preferred to the
individual judgment however unbiased of a
manager.
Job Evaluation
Concept:
• The basic binding factor for an employee with the organisation
is the compensation & recognition he gets for the
contribution/services he renders to accomplish the desired
output or goals of the enterprise.
• Salary (including allowances) or wages is the prime
compensation to an employee in primarily associating and
motivating him to work.
• Being a social animal, he also compares his take home-pay
with others working along at the work-place and expects an
equitable compensation in relation to similar tasks performed
within his organisation.
• The approach is also to compare the compensation levels of
similar jobs/tasks in the industry or the region or locality.
• Concept of Internal Equity and External Equity have come
about. The basic tenets of Taylor's Scientific Management with
respect to human resource management centre around.
• RIGHT MAN FOR THE RIGHT JOB
• RIGHT PAY FOR THE RIGHT JOB
Job Evaluation
Definition:
• Job evaluation is over 100 years old.
• According to a source first attempts at the job evaluation were
made in 1871 by US Civil Services Commission. (Patton, little Field
& Self, 1964).
• With the advent of Scientific management and Industrial
engineering it is used widely till today, for purposes of
determining differentials in remuneration, particularly for
manual jobs and related activities. Defined by British Standard
Institution (1969) Job Evaluation is "A generic term covering
methods of determining the relative worth (Equity) of jobs."
• Job Evaluation is a systematic (Quantitative and qualitative)
method, for determining the relative worth of a job in
comparison with in and outside organisation . It helps to
eliminate wage inequities and to establish a basis for sound salary
and wage-structure.
Job Evaluation
Job Evaluation consists the following:
• Job analysis: the process of examining the content of a job,
breaking it down into it's task, functions, processes, operation &
elements.
• Job Description: description of a job based on job analysis.
• Job Specification: the statement of the content of job based on
job description and job grading.
• Job Grading: ranking of job as a result of job analysis
• Job Classification: grouping jobs according to their worth
• Job Assessment: the ascription of a monetary value on the basis
of job. grading.

Merit based pay
• Merit pay, also known as pay-for-performance, is defined
as a raise in pay based on a set of criteria set by the
employer.
• Merit pay is a type of pay for performance incentive. The
employee is rewarded for his performance by having his
salary increased permanently.
• This usually involves the employer conducting a review
meeting with the employee to discuss the employee's
work performance during a certain time period.
• A difference between incentives and merit increases is
that incentives are temporary. When an employee
receives another kind of pay for performance, that pay is
temporary. The bonus received by a salesperson for
meeting his sales quota for the quarter is applicable only
for that quarter.

Merit based pay
Differences:
MERIT BASED PAY PAY FOR PERFORMANCE
• Based on individual • Based on individual,

performance team or even
organizational
performance
• Salary increase is • Salary increase is
Permanent Temporary

Merit based pay
ADVANTAGES
• Communicates company objectives: Merit pay sends a powerful message
about how you want to see employees perform and what you want to see
them contribute. It confirms what you most value from employees. Merit
pay also provides a vehicle for an employer to recognize individual
performance on a one-time basis. This is useful for rewarding employees
who may have participated in a one-time project.
• Let's employees know where they stand: Making the range of the available
merit pay public allows employees to see where their increase falls in the
merit pay ranges established by your company pay plan. It can be a good
way to reward the employees that you most want to keep. When employees
receive less than the top increase, supervisors have an opportunity to
describe and discuss exactly how the employees will need to improve their
performance to qualify for the top merit increase during the next cycle of
raises.
• Aids in employee retention: Merit pay can help an employer differentiate
between the performance of high and low performing employees and
reward the performance of the higher performers. This can aid in retention
because no employer wants to lose the organization's best performers.
Merit based pay
DISADVANTAGES
• Concerns about favouritism: The value of any particular employee is subjective and
ultimately determined by a supervisor. Without clear measurable, others easily
could dispute the outcomes when merit pay is determined. Even in offices where
there are measurable, outcomes can be challenged. For example, some might argue
that the salesperson with the best sales had an advantage because he had the best
sales territory.
• Uses time and resources better spent elsewhere: The amount of time and energy
that organizations invest in an attempt to make performance measurable for merit
pay, including developing competencies, measurements, baselines for performance,
and so forth, is better spent on delivering service for customers. Organizations have
generated documents with several hundred pages that lay out what merit means in
various jobs. Often, the benefits just aren't worth all that time and effort.
• Communication troubles: Given the limitations of metrics, the ability of a supervisor
to communicate to each employee the value of his or her contribution, and what
superior performance entails that makes it worthy of merit pay consideration, is an
ongoing challenge. Some supervisors communicate better than others, and this
means the effectiveness of merit pay sometimes can vary wildly from one
department to the next based on the communications skills of supervisors.

Wage differentials
•Wage differential is a term used in labour
economics to analyse the relation between the
wage rate and the unpleasantness, risk, or other
undesirable attributes of a particular job
•Wage differential refers to the difference in
wages
• between people with similar skills within differing
localities or industries.
• between employees who have dissimilar skills within
the same industry.

Wage differentials
Causes:
• Nature of Employment.
• Wage differentials maybe on account of acceptance or non-
acceptance of the employment. People may accept a job with low
remuneration with attractive working and living conditions while
may not accept high Paid employment with bad living and working
conditions and tiresome Jobs. The nature of employment will affect
the wages.
• Profitability of Success.
• Where the probability of success is uncertain, wages will be high
while in case of an employee having risk and failures the wage rate
will be low
• Training and Education.
• A job with the low level of training and education will have low wage
rates Higher Education and Training required high wages rates.
People generally accept the easy jobs rather than difficult job
despite the low wage rates.
• Security and Stability of Employment.
• secured and stable employment has low wage rates while temporary
and seasonal employment will have High wage rate.
Wage differentials
Causes:
• Geographical Differences.
• Wage differentials are on the basis of geographical differences based
on Industrial and occupational differences. In cities, wage rates are
high while rural labour is available at low wage rates.
• Market Imperfection.
• Wage Differentials are also found on account of market imperfect
competition in factor market. Inertia, family attachment, language,
religion, caste are the factors by which labour has Limited mobility
from one region to another. from one occupation to another. from
one industry to another. On account of it, wage differentials are
found.
• Responsibility and Accountability of a Job.
• If a job presupposes responsibility and accountability the wage rate
will be high while the wage rate will be low in those cases where
responsibility and accountability are rare.
• Strong and Organised Trade Union.
• Wage differentials are also found on account of the bargaining
power of the trade union. If Trade union is well organized and strong
the wage rates will be high in comparison to those organizations
wherein the trade unions are weak and have weak bargaining power.
Wage Policy
• Wage policy is a complex and sensitive area of public policy.
• The relative status of workers in the society, their
commitment to industry and attitude towards management,
their morale and motivation towards productivity, their
living standards an in fact their way of life are all conditioned
by wages.
• A policy has to reckon with the realities of economy, multi-
dimensional social phenomenon, in which besides the
workers and the management, the consumer and the
society at large, and in consequences the state, are all vitally
interested.
• Wage policy is a determinant of the shares of the rival
claimants to the product of industry and national dividend,
but there may often be a conflicts between private and
social interest.
Wage Policy
• Theoretical generalisations or principles that may
provide scientific guidelines for framing wage policy.
• Concrete social facts must be taken into account in its
formulation at any given time.
• NO principles of wage policy can ever be applied in
vacuum and in disregard of the realities of a situation.
• Wage policy has to be pragmatic though it does not
follow that it has to be unscientific and remain simply a
matter of expediency.
• Wage policies are principles acting as guidelines for
determining a wage structure
• Wage policy refers to all systematic efforts of the
government in relation to national wage and salary
system.
Socio-Economic objectives of Wage Policy
• One of the objectives of economic planning is the raising of the standard of living of the
people. This means that the benefits of planned economic development should be
distributed among the different sections of the society.
• The term “wage policy” here refers to 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.
1. To eliminate malpractices in the payment of wages.
2. To set minimum wages for workers, whose bargaining position is weak due to the fact
that they are either un-organised or inefficiently organised. In other words, to reduce
wage differential between the organised and unorganised sectors.
3. To rationalise inter-occupational, inter-industrial and inter-regional wage differentials
in such a way that disparities are reduced in a phased manner.
4. To ensure reduction of disparities of wages and salaries between the private sector
and public sector in a phased manner.
5. 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.
6. To provide for the promotion and growth of trade unions and collective bargaining.

Socio-Economic objectives of Wage Policy
7. To obtain for the workers a just share in the fruits of economic development.
8. To avoid following a policy of high wages to such an extent that it results in
substitution of capital for labour thereby reducing employment.
9. To prevent high profitability units with better capacity to pay a level of wages
far in excess of the prevailing level of wages in other sectors.
10.To permit bilateral collective bargaining within national framework so that
high wage islands are not created.
11.To encourage the development of incentive systems of payment with a view
to raising productivity and the real wages of workers.
12.To bring about a more efficient allocation and utilisation of man-power
through wage differentials and appropriate systems of payments. In order to
achieve the above objectives under the national wage policy, the following
regulations have been adopted by the state:
• Prescribing minimum rates of wages.
• Compulsory conciliation and arbitration.
• Wage boards.

Criteria of wage fixation

Executive Compensation
• Executive compensation or pay is composed of the
financial compensation and other non-financial awards
received by an executive from their firm for their service
to the organization.
• It is typically a mixture of salary, bonuses, shares or call
options on the company stock, benefits, and perquisites,
ideally configured to take into account government
regulations, tax law, the desires of the organization and
the executive, and rewards for performance
• Executive Compensation program serves three main
purposes.
• It must attract executives with the skills, experiences, and
behavioural profile necessary to succeed in the position.
• It must be sufficient to retain these individuals, so they do
not leave for alternative employment.
• It must motivate them to perform in a manner consistent
with the strategy and risk-profile of the organization and
discourage self-interested behavior..
Principles of the Executive Compensation:
• Clear focus on
• Profits generation,
• Long-term orientation of the compensation scheme
• Motivation of manager by high bonuses
• Non-cash focus of the compensation (stock options, shares, share phantom
schemes)
• Risk Management
• Balanced Scorecard
Executive compensation consists usually from two main parts:
• Short Term Pay: Base salary and short term bonuses, which are paid on the
basis of the immediate performance of the organization. The bonuses are
usually deferred over a period of time. The short term pay is usually fully
cash based executive compensation component.
• Long Term Pay The long term pay is about the stock options, shares,
restricted stocks and pay based on the performance against the index. The
shareholders use these long term compensation components to protect the
value of the organization and betting of the top executives on the growing
value of the organization on the market. The long term compensation
components can be realized just in case, the stock price of the organization
grows. The long term pay component is usually non-cash based.

Types of Executive Compensation:
• Cash Compensation – This is the sum of all standard cash salary compensation
that the executive receives for the year.
• Deferred Compensation – This is compensation that is deferred until a later
date, typically for tax purposes. However, changes in regulations have lessened
the popularity of this type of compensation. Examples of deferred
compensation include pensions, retirement plans, etc.
• Long-Term Incentive Plans (LTIPs) – encompass all compensation that is tied to
performance, for tax purposes. Current tax laws favour pay for performance-
type compensation.
• Stock options- ESOP is commonly viewed as a complex call option on the
common stock of a company, granted by the company to an employee as part
of the employee's remuneration package
• Restricted stock - Outright grant of shares that are restricted in transferability
and are subject to vesting. Once vested, they are economically equivalent to
outright ownership of stock.
• Retirement Packages – These are packages given to executives after they
retire from the company. These are important to watch because they can
contain so-called "golden parachutes" for corrupt executives.
• Executive Perks – These are various other perks given to executives, including
the use of a private jet, travel reimbursements and other rewards.

Executive Compensation Benefits: indicate the non-wage part
of remuneration consisting of a broad range of special payments
or benefits in kind. Typical Employee Benefits are:
• Insurance,
• Pension/retirement benefits,
• Income protection/social security,
• Maternity pay / day care/ child care,
• Profit sharing
• Employee Stock Option Plan,
• Holiday / vacation,
• Relocation assistance / benefits,
• Legal assistance,
• Company car,
• Company computer/internet access,
• Company mobile phone,
• Membership of sport and health clubs
• Leisure activities during work time,
• Education/personal development,
• staff discounts,
• industry-related benefits.
Executive Compensation Benefits:
• Golden Handcuff: a (substantial) bonus is built into an
executive's contract, subject to continuous employment for a
certain number of years. In case of leaving the employment
premature there would be substantial financial penalties or the
entire amount may have to be repaid.
• Golden Handshake: a large payment made by a company to a
senior executive is done upon termination of employment
(retirement) before his / her contract ends.
• Golden Hello: a signing bonus is given to an executive to
induce him to leave a previous employment in order to take up
a new employment by the payment of a large sum of money or
other considerable remuneration. Such welcome arrangement
could be in cash or in shares or in options.
• Golden Parachute: the executive is provided with a lucrative
severance package in the event of job termination, for example
in case of a takeover by an acquiring company. A GP may
include a continuation of salary, bonus and/or certain benefits
and perquisites, as well as accelerated vesting of stock options.
Module – III
Employees Benefits

Overview of Employee’s Benefits
• An employee benefits package is a standard and expected
part of an employee total compensation package.
• Smaller employers tend to offer fewer components in the
employee benefits package—and sometimes, no benefits
at all.
• However, the majority of large companies and virtually all
public sector government employers provide an extensive
employee benefits package.
• Small businesses that are growing and expanding need to
plan a careful phase-in of employee benefits so they can
continue to attract and retain talent for further growth
and expansion. Employers can expand this employee
benefits package, as resources allow.
• Employers can customize an employee benefits package to
the needs and desires of its employees, but there are
several standard offerings that should be included.,
Components of Wage & Benefits Structure
•Health Insurance
• Health insurance is the foundation of any
comprehensive employee benefits package that
employees want and need, and it is the preferred
employee benefit of the majority of people who work.
• Quality health insurance marks an employer as an
employer of choice when desirable candidates select
job opportunities. If you can afford to offer only one
employee benefit, make that benefit health insurance
for employees and their families.

• Paid Time Off (PTO)
• No comprehensive employee benefits package would be
complete without employer paid time off from work.
• As part of an employee benefits package, employers
provide a variety of options for PTO that are classified in
ways that make sense for employers and employees.
• Types of PTO that regularly appear in an employee
benefits package include:
• Paid holidays
• Paid vacation days
• Paid sick days
• Paid personal days
• Bereavement or funeral leave
• For reasons that include simplicity and a lack of desire for
employees to account for time off, an increasing number
of employers are moving toward utilizing PTO policies that
eliminate separate classifications.
• Short-Term Disability Insurance
• Short-term disability insurance ensures that employees will
still receive a percentage of income if they cannot work due
to sickness or a disabling injury.
• Short-term disability insurance, as part of a comprehensive
employee benefits package, is recommended.
• Long-term disability insurance (LTD)

• An insurance policy that protects employees from loss of
income if they are unable to work due to illness, injury, or
accident for a long period of time.
• Some estimates state that the average employee with a
long-term disability misses 2.5 years of work. Others
estimate that an employee has a one in five chance of
becoming disabled and unable to work for a period of time.
• Long-term disability insurance is one of the most significant
components of an employee benefits package.
• Life Insurance
• Life insurance provides an appreciated safety net for
employees and their families.
• Life insurance is an appreciated component in a
comprehensive employee benefits package. Sought-after
employees expect life insurance as a component in an
attractive employee benefits package.
• Other Retirement Plan
• Competitive base pay, health insurance plan are the must-
have benefits necessary to attract and keep talent in your
company.
• According to a study by Watson Wyatt Worldwide, related in
"The Human Capital Edge: 21 People Management Practices
Your Company Must Implement (or Avoid) to Maximize
Shareholder Value," companies that emphasize better
employee benefits packages and use them to attract and
retain high-calibre staff add 7.3% in additional profit to their
bottom line.
Employees Benefits planning
•Remember your employees are an investment.
•While you will be met with initial expenses when
setting up your employee benefits plan, you will
profit with improved employee retention and
productivity.
•Employees who are offered comprehensive
benefits packages are more likely to be
committed to their jobs and be satisfied overall
in their positions.

• If you are considering employee benefits planning options, here is what
you should know.
• Employee Benefits Law
• There are certain laws that employers must consider when conducting
employee benefits planning. Businesses must legally provide employees
with basic benefits to protect workers’ income, health, and well-being.
These mandated benefits include:
• Social Security:
• PF
• Gratuity
• ESI
• Superannuation
• Maternity benefit
• Workers Compensation. Employers must legally provide workers
compensation benefits to employees who become injured or ill in the
workplace. Employees who qualify for workers compensation may
receive coverage for medical treatments, time off of work, and possibly
additional compensation for any permanent disability incurred.
• Family and Medical Leave.
• Time Off to Vote.
• If you are considering employee benefits planning options, here is what
you should know.
• Employee Benefits Law
• There are certain laws that employers must consider when conducting
employee benefits planning. Businesses must legally provide employees
with basic benefits to protect workers’ income, health, and well-being.
These mandated benefits include:
• Social Security:
• PF
• Gratuity
• ESI
• Superannuation
• Maternity benefit
• Workers Compensation. Employers must legally provide workers
compensation benefits to employees who become injured or ill in the
workplace. Employees who qualify for workers compensation may
receive coverage for medical treatments, time off of work, and possibly
additional compensation for any permanent disability incurred.
• Family and Medical Leave.
• Time Off to Vote.
Employees Benefits Design & Admin.

Incentive Schemes
Meaning of Incentive
•Incentive may be defined as any reward or
benefit given to the employee over and above
his wage or salary with a view to motivating him
to excel in his work.
•Incentives include both monetary as well as non-
monetary rewards.
•A scheme of incentive is a plan to motivate
individual or group performance

Incentive Schemes
Definition of Incentive
• “Wage incentives are extra financial motivation. They are
designed to stimulate human effort by rewarding the
person, over and above the time rated remuneration, for
improvements in the present or targeted results”
– The National Commission on Labour.
• “It refers to all the plans that provide extra pay for extra
performance in addition to regular wages for a job”
– Hummel and Nickerson.
• “It is any formal and announced programme under which
the income of an individual, a small group, a plant work
force or all the employees of a firm are partially or wholly
related to some measure of productivity output” – Scott.

Incentive Schemes
Pay for Performance
• Monetary compensation does constitute very important
reason for the working of an employee.
• But this compensation alone cannot bring job satisfaction
to the workers. One cannot expect effective performance
from a worker who is dissatisfied with its job, even if he is
well paid
• Sociologists and industrial psychologists also view that the
financial aspect is not the only dominant motivating force.
• Confidence in the management, pride in the job and in
firm and concern for the overall good cannot be brought
by a bonus.
• Hence the modern authorities on management science
have recognized the need for the provision of incentives to
build up good morale.
Incentive Schemes
Forms of Incentives:
According to Z. Clark Dickinson the important
forms of incentives for work can be listed as
follows:
•Desire for livelihood and fear of want.
•Desire for approval of master and fear of
punishment.
•Desire for praise and fear of being dismissed.
•Impulse to activity or joy in work and dislike of
inactivity.
•The moral command and fear of conscience.

Incentive Schemes
Forms of Incentives:
Robert E. Salton has mentioned the following nine
factors as the Motives for work.
• Doing something worthwhile (Good).
• Trust in leadership.
• Doing my share (Participation)
• I count for something (Recognition).
• A decent living (Fair Wages).
• A chance to get somewhere (Opportunity).
• A safe future (Security).
• Know what's going on (Communication).
• Conditions at work (Environment)

Incentive Schemes
Types of Incentives:
INCENTIVES
FINANCIAL NON-FINANCIAL
DIRECT INDIRECT
• Wages • Job Security

• Salary • Recognition
• Premium • Participation
• Bonus • Pride in Job
• Delegation of
• Other incentives Responsibility
directly given to • Quick Promotion
the workers in
the form of cash. • Facilities for Development
• Labour Welfare Amenities
• Medical expenses

Incentive Schemes
Wage Incentive Plans
INCENTIVE
PLANS
INDIVIDUAL GROUP
TIME BASED OUTPUT BASED
• Hasley's Plan • Taylor's Differential Piece

• Rowan's Rate Plan Plan
• Emerson's Plan
• Merrick's Multiple
Piece Plan
• Bedeaux's Rate
Plan
• Gnatt's Task Plan

Incentive Schemes
Individual Incentive – Time based Plans
Hasley's Plan
• F.A.Halsey, an American engineer, introduced this plan.
• Under this plan, standard time is determined for each job. A worker who completes the
job by taking the standard time or even exceeding it is paid normal wages calculated at
the time rate. In case, he completes the job in less than the standard time, he is given
bonus equal to 50% of the money value of the time saved.
• The bonus payable to the worker and his total earnings, under the Halsey's plan, are
calculated as follows:
• Bonus = 50% (Time Saved x Time Rate)
• Total Earnings = Time Rate x Time Taken + Bonus Merits of Halsey's Plan
• Merits of Halsey's plan:
1. It is simple to understand.
2 The workers are assured of a minimum wage.
3. The employer and the worker share equally the benefit resulting from savings in
time.
4. The plan encourages workers to be more efficient in their work.
• Demerits of Halsey's plan:
1. The efficiency of the worker is rewarded to the extent of50% only.
2. The time saved is wholly due to the efficiency of the worker but the management
grabs 50% of the resulting benefit.
3. The plan does not say anything about, the quality of the work.

Incentive Schemes
Individual Incentive – Time based Plans
Rowan's Plan
• Manner of calculating bonus is slightly different from that under the
Halsey's plan.
• Bonus = % of Time saved x Time Wage Standard
• Time Total Earnings of the worker = Time Wage + Bonus
• Merits:
1. Minimum wage is guaranteed to all workers.
2. When compared with Halsey's plan, bonus under Rowan's plan is more
although the basic time wage is the same under both the plans.
3. The plan provides a check against over-speeding by workers. As the worker
saves more time, his bonus and total earnings only begin to decline. In the
above illustration, suppose, the worker completes his task within one hour,
i.e. he saves 4 hours, his bonus will only be Rs.16. He earns the same bonus
of Rs.16 by completing the task in 4 hours, saving just one hour.
• Demerits:
1. It is not as easy as Halsey's plan is.
2. The earnings of the worker become less as he saves more time. This
discourages efficient workers.

Incentive Schemes
Emerson's Efficiency Plan:
• Minimum wage is guaranteed to all workers.
• Payment of bonus, however, is related to the efficiency of the
workers. Efficiency is determined by the ratio of time taken to
standard time. Usually, a worker is given bonus only when his
level of efficiency, in terms of percentage, is above 66.67%.
• Merits:
1. Minimum wage is guaranteed.
2. It pays bonus to workers based on their level of efficiency.
3. The 66.67% or two-third efficiency criterion is within the
reach of many workers.
• Demerits:
1. It is not a straight-forward approach to determining bonus.
2. If the standard time allowed itself is low, it may not be possible
for many workers to fulfil the efficiency criterion laid down under
the plan.

Incentive Schemes
Bedeaux's Plan:
• Under this plan, the standard time and time taken for each job is
reduced to minutes, and each minute is referred to as "B", i.e., one
hour is the same as 60 B's.
• The bonus and total earnings of the worker, under the plan, are
calculated as follows:
• Bonus = 75% (Standard Time - Time Taken) x Time Rate
• Total Earnings = Time Wage + Bonus Merits
• Benefits:
1. It guarantees minimum wages to the workers.
2. It enables efficient workers to earn more.
3. The benefit of three-fourth of the time saved is given to the
worker.
• Demerits:
1. The unit name of 'B' in place of the 'minute' does not make the plan
altogether different.
2. The entire benefit of time saved by the worker is not passed on to him.

Incentive Schemes
Taylor's Differential Piece Rate Plan
• F. W. Taylor, who is known as the Father of Scientific Management, developed the
differential piece rate plan.
• Under the plan, two piece rates are laid down
(i) A lower rate for those workers who are not able to attain the standard output
within the standard time; and
(ii) A higher rate for those who are in a position to produce the standard output
within or less than the standard time. Under the plan, minimum daily wage is not
guaranteed.
• Taylor's differential piece rate plan has the following components: (i) Standard
Output. (ii) Standard Time (iii) A Lower Piece Rate and (iv) A higher Piece Rate
• Merits:
1. It is easy to understand and simple to operate.
2. It enables efficient workers to earn more.
3. Workers not reaching the standard are paid at a lower rate. Such people, thus, are
punished for their inefficiency. This protects the interests of the organisation.
• Demerits:
1. It does not guarantee minimum wage. This creates a sense of insecurity for the
workers. .
2. There may be ill-feelings among workers in view of the differential piece rates.
3. The quality of the output is ignored.

Incentive Schemes
Merrick's Multiple Piece Rate Plan:
• A standard task is set for the workers.
• But unlike Taylor's plan that provides for two differential rates,
Merrick's plan contemplates three rates as shown below:
(i) Workers producing less than 83% of the standard output are paid at a
basic rate.
(ii) Workers producing between 83 % and 100% of the standard output will
be paid 110% of the basic piece rate.
(iii) Those producing more than the standard output will be paid at 120% of
the basic piece rate.
• Merits:
1. It is an improvement over Taylor's plan.
2. It has greater flexibility.
3. It offers greater scope for efficient workers to earn more.
• Demerits:
1. It is a complicated plan.
2. Even a worker achieving 83% target is branded as a poor performer.

Incentive Schemes
Gantt's Task Plan:
• This plan guarantees minimum daily wage. Its special feature is that it
combines time rate, piece rate and bonus. A worker who is unable to
produce the standard output receives only the time wage. He becomes
eligible for bonus only when he attains or exceeds the standard output
within the standard time. The rate of bonus varies between 20% to 50%
of his wages.
• Merits:
1. It has, as mentioned above, time wage, piece rate and bonus. It is,
therefore, a three-in-one scheme.
2 It guarantees daily minimum wage.
3. It provides enough opportunities for efficient workers to earn more.
• Demerits:
1. It is not easy to understand.
2. The fluctuations in the output levels, of different workers not attaining the
standard, are ignored and they all receive the same daily minimum wage. In
the illustration given above, if two workers produce 6 units and 8 units
respectively (against standard output of 10), each is assured a daily wage of
Rs.50.

Incentive Schemes
Group incentive plans:
• Profit sharing is the most popular method rewarding the employees. Under it, the employees are paid in addition
to the regular wage, a particular share of the net profits of the business as incentive.
• Characteristics of Profit Sharing The key features of profit sharing may be stated as follows:
1. It is based on an agreement between the employer and the employees.
2. It is a payment made after ascertaining the net profits of the business. It is not therefore, a charge on profits.
3. The amount paid to the employees is over and above their normal pay.
4. The amount to the paid is determined based on some agreed formulas.
5. The payments based on seniority and wage level of individual workers.
• Merits:
1. Better employer-employee relations - This is possible, as the employer is ready to share the profits of the
enterprise with his employees.
2. Increase in productivity -The employees make every possible effort to increase productivity because they
know very well that higher profits for the enterprise would mean higher bonus for them.
3. Better living standards - It helps to increase the living standards of the employees as the amount received is in
addition to the usual wages.
4. Reduced costs of supervision - The workers themselves are duty conscious and, therefore, they need no close
supervision. Thus, costs of supervision are reduced. 5. Promotion of team spirit - The employees know the
importance of Teamwork, as only such an effort would result in higher output.
• Limitations:
1. Regular income not assured: Payment to workers, by way of profit sharing, at a particular rate depends upon
the profits of the enterprise. If the enterprise makes low profits or incurs losses, it will not be in a position to pay
bonus as agreed.
2. Suppression of profits: Attempts may also be made to suppress true profits so that the employees need not
be paid their share. This is done by manipulating accounts.
3. No inducement: Payment under the profit sharing scheme will be made to the employees once or twice a
year when accounts are closed. Such, payments at longer intervals may not really motivate employees. Daily or
weekly incentive payments are far more superior to profit sharing.
4.All workers paid alike: Payment to workers under profit sharing is made without considering their relative level
of efficiency. This amounts to doing injustice to those who have really made target attainment possible.
Incentive Schemes
Pre-requisites of Effective Incentive Schemes
• Trust and confidence – The success of any incentive plan depends on the existence of an
atmosphere of trust and confidence between the workers and the management. In the absence of
such an atmosphere, the workers may resist any such proposal by the management.
• Consensus required – The management should not take a unilateral decision while evolving an
incentive scheme. Consensus between the workers and the management is necessary for the
success of the plan.
• Assured minimum wage – Payment to any worker should not be totally related to his
performance. Every worker should be assured of a minimum wave notwithstanding performance.
Only then the workers would have a sense of security.
• No scope for bias or favouritism- The standards set under the incentive plan should be based on
objective analysis. It should not expect too much out of the employee nor should it give scope for
bias or favouritism.
• Simple to operate - The incentive plan should not involve tedious calculations. It should be so
simple that the worker will be in a position to work out his total earnings himself.
• Beneficial to both the workers and the management - The incentive plan should be beneficial to
both the workers and the management. From the management's point of view, it should be cost
effective. From the workers' point of view, it should offer return, at a rate higher than the normal
rate of wages, for the extra efforts made by them.
• Sound system of evaluation - A perfect system of evaluating the employees performance should
be created in the organisation. The results of evaluation should be made known to the employees
at the earliest.
• Redressing grievances - Grievances and complaints are bound to arise whenever any incentive
plan is in vogue in the organisation. Proper machinery should be installed for the quick handling of
all such complaints.
• Review - The progress of the incentive scheme should be periodically reviewed. Only then it would
be possible to notice and remove defects, if any, in the plan.

Incentive Schemes
Merits of Incentives
• Higher output: By providing incentives to his employees, the
employer is able to induce them to work better. This leads to
higher output.
• Greater profits: Needless to say, higher output results in
greater profits for the business. This happens in two ways.
First, the cost per unit becomes less and second, the enterprise
is able to keep the selling price low and this results in greater
sales.
• No problem of idle time: In an organisation where no proper
incentives are available for the workers, the tendency will be to
while away the time. When suitable incentives are available,
the workers become time conscious. They begin to see every
minute in terms of money.
• Supervision does not pose any problem: When suitable
incentives are available, the workers become duty conscious.
The need for close supervision, thus, does not arise.

Incentive Schemes
Merits of Incentives
• Efficient workers are able to earn more: Such of those workers
who are highly efficient are able to earn more by way of
performance bonus, higher commission and so on.
• Possible to identify inefficient and dull workers: If, in spite of
the incentive schemes, some workers are able to earn only
their normal wage, it should mean that they are basically dull.
The employer, therefore, has to decide whether to retain them
or subject them to rigorous training.
• Rate of labour turnover is bound to be low: If adequate
incentives are available to the workers, they may not have a
feeling of dissatisfaction. Such workers are sure to have greater
work commitment and therefore may not leave the
organisation. The rate of labour turnover, as a result, is bound
to be low.
• Reduction in complaints and grievances: As the organization
makes available suitable incentives to the workers, they may
not have anything to complain about. This leads to reduction in
complaints and grievances.
Incentive Schemes
Demerits of Incentives
• Quality of work may suffer: The workers, those in the production
department in particular, may give undue importance to the quantity of
output produced neglecting the quality of output. Such a problem can
be overcome only if the organization has a perfect system of quality
control.
• Inter-personnel relationships may suffer: Only those employees who
are really efficient will be benefited out of incentives. This may promote
ill-feelings among the employees of an organization.
• Wear and tear of machines may be more: As the employees are keen
on increasing the output all the time, they may handle the machines
carelessly. This increases the wear and tear of machines.
• Health of the workers may get affected: Some workers tend to
overwork in order to earn more and this may affect their health.
• Increase in accidents: There is always a preference to step up output
disregarding even safety regulations and this may increase the rate of
accidents in the workplace.
• Increase in paper work: Proper administration of any incentive scheme
involves lot of paper work. It necessitates the maintenance of proper
records and books.

Development of Compensation Plan
•Develop a program outline

•Designate an individual to oversee the
compensation program
•Develop a compensation philosophy
•Conduct a job analysis and Evaluation
program
•Determine grades
•Establish grade pricing and salary range

Development of Compensation Plan
•Determine an appropriate salary structure
•Develop a salary administration policy
•Obtain top executives' approval of the
program
•Communicate the final program to
employees and managers
•Monitor the program

Components of Compensation System
•Job Analysis
• Job descriptions
• Job evaluation
•Pay Structures
•Salary Surveys
•Policies and Regulations

Concept of Total Compensation
Organizational
Reward
Intrinsic Extrinsic
Rewards Rewards
Financial Non Financial
Indirect Direct
Compensation Compensation
Employee Merit /
Protection Pay for time Base Wage / COLA / Bonus /
Services / Incentives /
Programs Not Worked Salary Gain sharing
Security Plans Commissions

Protection Programs- Do they work..

Main Issues In Compensation
•How much should companies pay to attract,
retain, and motivate employees?
•Should they pay salaries or variable rewards?
•Should they provide benefits, and if so, to what
extent?
•What's an appropriate discrepancy between
the pay for high and low performers?
•Organizations have to consider for job seekers
it's not just getting a job that matters - it's
getting a job that can fulfill them both
financially and personally.
Main Issues In Compensation - Internal Equity..

Factors affecting levels of pay
Intrinsic value
•Responsibility, employee owns his / her
contribution
•Greater the responsibility, span , scope of job –
more the pay
•Dependent on the Knowledge, Skills and
competencies
Internal relativities
•In an organization, job values are determined
by perceptions of the worth of one job
compared with others
•An added certification, qualification, skill will
make the difference
External relativities
• External value of a job – market rate – is determined
by the laws of supply and demand
• Individual rates and differentials have to be adjusted
according to changing market pressure
• Employable individual has a price which other
organizations are willing to pay for services
Inflation and market movement

• Organizations have been accustomed to taking into
account inflation when adjusting their pay structures
• CPI Index, Growth Rate, Inflation Rate, increasing /
decreasing trends
Business Performance / financial
circumstances
•Strategic aims and plans of organization
provide the basis for developing pay
strategies & policies
•Business performance of the organization will
influence the amount it can pay to employees
Trade union pressures

•Depending on bargaining power trade unions
pressurize to increase pay – at least inflation

Facts about Compensation practices
•Similar in many respects to developing plans
for any employee.
•More emphasis on paying on ability
•Salary is taxable to an individual at a high
individual rate.
•In a typical modern corporations top
executives are paid with a mixture of cash
and shares of the company.
•More complex
•Fixed or variable
•Pay for performance doesn’t work

Future trends in Compensation
• Link to business performance, cost control, flexi
compensation
• According to Haygroup survey worldwide:
• 13 % of organizations planned to bring team pay
• 30% were making changes in benefits structure
• 17% planning to introduce a broad banded pay structure
• 40% intended to introduce a formal performance
management process
• Well developed career management program, well
validated salary surveys, strong information
management systems.
• Treating employees stakeholders, use variable pay,
employee benefits scheme

Principle of Compensation
Compensation will be perceived as fair if it
is comprised of a system of components
developed to maintain internal and external
equity.

Consideration for your Job
•Compensation
•Pay
•Overtime
•Taxes
•Cost of Living
•Benefits
•Insurance
•Health care
•Retirement
•Leave Time
•Other Benefits

Employee Compensation
•Salary
• Annual rate of pay
• Set amount of pay per paycheck
• Work until the job is done; no overtime pay
• Often referred to as exempt employees
•Wage
• Hourly rate of pay
• Minimum wage
• Paid based on the number of hours actually worked
• Paid overtime if over 48 hours worked per week
• Overtime = 2 x wage
• Often referred to as non-exempt employees
Compensation Glossary
• Gross Pay – total amount of your pay before any
deductions
• Take-Home (Net) Pay – pay actually received by an
employee after deductions, including taxes, health
insurance premiums, retirement contributions, etc.
• Commission – payment based on employee meeting
certain sales goals; usually a percentage of those sales
• Bonus – money given to an employee in addition to
the employee’s usual compensation
• At-Will Employee – Most employees are “at will”
meaning that your employment can be terminated at
any time for any lawful reason
•Pay Periods
•How often are you paid?
• Monthly (12 pay periods/year)
• Bi-weekly (26 pay periods/year)
• Weekly
• Other
•Cost of Living
•How much it costs to meet your basic
needs where you live

•Cost of Living
•If you make Rs.30 lakh in Bhubaneswar, to have
the same standard of living in Mumbai, you
would need to make Rs.45 lakh
•Groceries will cost 17% more
•Housing will cost 148% more
•Utilities will cost 20% more
•Transportation will cost 26% more
•Healthcare will cost 22% more
•Children Education will cost 40% more

Employee Benefits
•Non-wage compensation offered to employees
• Health Insurance
• General Life Insurance
• Flexible Spending Accounts
• Retirement
• Leave
• Travel consessions
• Other Benefits
•On average employee benefits provide a 31%

boost to employee compensation

Health Insurance
Enrollment is often allowed only within 30 days of hire, during
open enrollment periods, or if there is a qualified change in
family status
 Qualified change = change in marital status, change in number of family
members (birth, adoption, child reaches age 25 years, etc), change in
coverage to spouse or dependent
Types of Health Insurance Plans

 HMO (Health Maintenance Organization) – coverage is limited to doctors
who contract with the HMO, a primary care physician (PCP) oversees your
care and refers you to specialists as needed
 PPO (Preferred Provider Networks) – allows subscribers to use doctors,
hospitals, and providers outside of network for a fee, no PCP required
 High Deductible Health Care Plan – high deductible plan with low monthly
premiums designed to offer minimal day-to-day coverage but protect you
in the event of a catastrophe
 Point of Service Plans – combines aspects of HMOs and PPOs; generally
requires
2 December 2019 a PCP to make referrals toHiteisee
Dr. Suvendu Das, other doctors within the network 150
Consulting
Health Insurance Terms
•Health Insurance Premium – the employee’s cost
of the insurance, often withheld from each
paycheck
•Co-Pay/Co-Insurance – your share of the
healthcare cost
•Deductible – the amount you have to pay out of
pocket before the insurer covers costs

Other Insurances
•Employers may offer other forms of
insurance
•Vision
•Dental
•Disability – pays a portion of your salary if you
become disabled or unable to work due to
injury or illness
•Life – Pays an amount to your beneficiary if you
die
• You must choose (and update) your beneficiary or
beneficiaries

Benefits – Cafeteria / a la carte
• A Cafeteria Plan is a plan that offers flexible benefits
using pre-tax income
• Employees choose their benefits from a selection
offered by the employer.
• Free Medical care,
• Group term life insurance (GPAIS),
• Employee Deposit Linked Insurance (EDLI)
• Reimbursement for child care
• Reimbursement of medical expenses
• Transportation / Vehicle
• Reimbursement of Drivers salary
• Reimbursement of Fuel / Mileage expenses

Benefits – Cafeteria / a la carte
• Club membership
• Reimbursement of membership fees of Professional
bodies
• Reimbursement of expenses for Professional
development (magazine, newspaper, journals, etc.)
• Reimbursement of salary of Domestic help
• Tuition Fees Reimbursement
• Fitness Centre Access
• Parking Fees
• Childcare
• Once you opt in to a Cafeteria Plan, you may not
change until the end of the plan year unless you have
certain special circumstances
Retirement Benefits
• Defined Benefit Plan – pays an amount based on a pre-
determined formula; often called a pension
• NPS
• Defined Contribution Plan – retirement amounts are
based on the contributions of employee and employer,
and any investment earnings on the account
• Superannuation Fund (5% - 20% of Basic)
• Employer Match – many employers match a portion of
the contributions employees make to their accounts
(CPF / VPF )
• Vesting – your right to the money in your account
• You are always 100% invested in the money you contribute
• Employers may have a vesting schedule that outlines how
much of their contributions you own
Leave Time Benefits
• The amount of time off you may take from your job
• Vacation, Personal, and/or Sick Leave
• Some employers divide your time off into these categories
• Paid Time Off (PTO)
• Bank of leave time not allotted to any specific category
• Unpaid Leave of Absence
• Time off that is not paid; employer’s discretion whether
allowed, unless it is FMLA
• Family Medical Leave (FMLA)
• Mandates unpaid, job-protected leave for up to 12 weeks a
year to care for a sick or injured family member (spouse, child,
or parent) or recover from your own illness or injury
• Does not apply to small businesses (less than 50 employees);
part-time workers, or for short-term illnesses
Getting Paid
•Employers use different methods of paying
their employees:
•Paycheck with a paycheck stub
• a physical check with attached information to show
deductions; the employee is responsible for
handling the check
•Direct Deposit
• Pay is directly deposited into your bank account
•Payroll Card
• A prepaid card that has money electronically
loaded on it, used similar to a debit card
• There may be fees associated with using a payroll
card
Understanding Your Paycheck
Included on every paycheck stub:
• Pay Period – time period covered by the check (weekly,
bi-weekly, twice a month, monthly)
• Gross Pay – total amount earned before deductions
• Net Pay – amount the employee “takes home” after
deductions
• TDS – amount withheld to pay Income taxes
• Professional Tax – amount withheld to pay professional
taxes
• Year-to-date (YTD) – totals of pay and/or deductions
made for the year up to the pay period on the paycheck

Understanding Your Paycheck
Included on every paycheck stub:
• Insurance Deductions– amount withheld for medical
benefit premiums
• Retirement – amount you contribute to your retirement
plan
• Childcare Assistance/Dependent Care Deduction
• Leave Time – vacation hours or sick hours used to date
and remaining
• Other Voluntary Deductions from your paycheck
(parking, donations, gym membership)
• Important Notices – a portion of the paycheck may be
designated to communicate important information like
wage increases or tax information
Negotiating your C&B (CTC)
• Do not immediately accept: ask for time to consider the offer
• Consider the entire job package – not just the wages/salary
• Think about responsibilities, benefits, perks, hours, work environment,
flexibility, and other preferences you may have
• Research the typical pay for similar jobs (remember cost of living
adjustments) and your level of education and experience
• Try not to discuss salary until you have an offer; if pressed, say
you are flexible or provide a range, not a specific amount
• Even if you are not able to get the salary you wanted, you can
negotiate some benefits, such as signing bonus, education,
vacation time, flexibility, etc.
• Keep your goals reasonable: Remember a new graduate will not
have the same negotiating power as someone who has been
working in the field for many years
Negotiating your C&B (CTC)
• References & Credentials Check
• Education, Employment, Licenses, Military Service Record,
Workers Compensation Claims
• Criminal Records Check
• Central, State Criminal Record Searches, Civil Record Search,
Sex Offender Registry, Fingerprinting
• Identity and Credit Check
• Confirm identity and right to work in this country
• Provide insight into personal responsibility & reliability
• Can check up to 10 years into your past
• Driving Records Check
• If required to operate a vehicle for business purposes
• Can check the past 3-7 years
• Physical / Substance Abuse Tests
Compensation Taxes
•Income Tax – as per provisions
•Professional Tax

CONTACT:
Dr. SUVENDU DAS
Cell: 9937509666
e-mail: hiteiseeconsulting@gmail.com
THANK YOU

Compensation Mangement

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COMPENSATION

Dr. SUVENDU DAS

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It is closely linked with the following:

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•To motivate employees to join, stay and

•For the organization to remain ethical and

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Contribution based Ensure Equity

Attract talent Effective

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Business Strategy – This defines the

Compensation Philosophy – Consists of

Compensation Strategy – defines the

Compensation periodically developed

• A strategic perspective on compensation takes

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Performance Job Evaluation Market Surveys

/outputs team is responsible for

•TRANSACTIONAL – Emphasizing the

•RELATIONAL – Emphasizing the

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