Unit 2:

COMPENSATION ADMINISTRATION
Introduction
 Compensation is what employees receive in exchange
for their contribution to the organisation.
 Generally, employees offer their services for three types
of rewards. Pay refers to the base wages and salaries
employees normally receive.
 Compensation forms such as bonuses, commissions and
profit sharing plans are incentives designed to
encourage employees to produce results beyond normal
expectation.
 Benefits such as insurance, medical, recreational,
retirement, etc., represent a more indirect type of
compensation.
 Cont…
 So, the term compensation is a comprehensive one
including pay, incentives, and benefits offered by
employers for hiring the services of employees.
 In addition to these, managers have to observe legal
formalities that offer physical as well as financial
security to employees.
 All these issues play an important role in any HR
department's efforts to obtain, maintain and retain an
effective workforce.
Nature of Compensation
 Compensation offered by an organisation can
come both directly through base pay and variable
pay and indirectly through benefits.
 Base pay: It is the basic compensation an
employee gets, usually as a wage or salary
 Variable pay: It is the compensation that is linked
directly to performance accomplishments
(bonuses, incentives, stock options)
 Benefits: These are indirect rewards given to an
employee or group of employees as a part of
organisational membership (health insurance,
vacation pay, retirement pension etc.)
Objectives of Compensation Planning
 The most important objective of any pay system is
fairness or equity. The term equity has three
dimensions.
a. Internal equity: This ensures that more difficult jobs
are paid more.
b. External equity: This ensures that jobs are fairly
compensated in comparison to similar jobs in the
labour market.
c. Individual equity: It ensures equal pay for equal work,
i.e., each individual's pay is fair in comparison to
others doing the same/similar jobs.
 Cont…
 The ultimate goal of compensation
administration (the process of managing a
company's compensation programme) is to
reward desired behaviours and encourage
people to do well in their jobs.
 Cont…
 Some of the important objectives that are sought to be
achieved through effective compensation management
are listed below:
a. Attract talent: Compensation needs to be high enough
to attract talented people. Since many firms compete to
hire the services of competent people, the salaries
offered must be high enough to motivate them to apply.
b. Retain talent: If compensation levels fall below the
expectations of employees or are not competitive,
employees may quit in frustration.
c. Ensure equity: Pay should equal the worth of a job.
Similar jobs should get similar pay. Likewise, more
qualified people should get better wages.
Components of Pay Structure in India
 The pay structure of a company depends on several
factors such as labour market conditions, company's
paying capacity and legal provisions:
 Wages: - In India, different Acts include different items
under wages, though all the Acts include basic wage
and dearness allowance under the term wages. Under
the Workmen's Compensation Act, 1923, "wages for
leave period, holiday pay, overtime pay, bonus,
attendance bonus, and good conduct bonus" form part
of wages.
 Cont…
 However, the following types of remuneration,
if paid, do not amount to wages under any of
the Acts:
 Bonus or other payments under a profit-
sharing scheme which do not form a part of
contract of employment.
 Value of any house accommodation, supply of
light, water, medical attendance, travelling
allowance, or payment in lieu thereof or any
other concession.
 The Elements of Wage and Salary System
 Wage and salary systems should have a relationship with
the performance, satisfaction and attainment of goals of
an individual. Henderson identified the following
elements of a wage and salary system:
 Identifying the available salary opportunities, their costs,
estimating the worth of its members, of their salary
opportunities and communicating them to employees.
 Relating salary to needs and goals.
 Developing quality, quantity and time standards related
to work and goals.
 Determining the effort necessary to achieve standards.
 Measuring the actual performance.
 Comparing the performance with the salary received.
 Cont…
 Measuring the job satisfaction of the employees.
 Evaluating the unsatisfied wants and unrealised
goals aspirations of the employees.
 Finding out the dissatisfaction arising from
unfulfilled needs and unattained goals.
 Adjusting the salary levels accordingly with a view
to enabling the employees to reach unreached
goals and fulfilled needs and aspiration.
Wage policy in India
 Minimum Wage, Fair Wage and Living Wage
1. Minimum Wage: - Minimum wage is that wage
which must invariably be paid whether the
company, big or small, makes profits or not.
 In calculating the minimum wage, the standard
working class family should be taken to comprise
three consumption units for one earner, the
earnings of women, children.
 Minimum food requirements should be
calculated on the basis of a set intake of calories
as recommended
 Cont…
 Clothing requirements should be estimated on the
basis of per capita consumption of 18 yards per
annum which would give for the average worker's
family of four a total of 72 yards; In respect of
housing, the rent corresponding to the minimum
area provided for under Government Industrial
Housing Scheme should be taken into
consideration in fixing the minimum wage;
 Fuel, lighting and other miscellaneous items of
expenditure should constitute 20 per cent of the
total minimum wage.
Range of Minimum Wage per
day for the Lowest Daily
Paid Unskilled Worker by
States
Fair wage:
 It is that wage which is above the minimum wage
but below the living wage. According to the
Committee on Fair Wages, 1948, fair wage should
be determined taking the following factors into
account:
 The productivity of labour;
 The prevailing rates of wages in the same or
similar occupations in the same region or
neighbouring regions;
 The level of national income and its distribution;
 The place of industry in the economy of the
country; and the employer's capacity to pay.
 Living wage:
 According to the Committee on Fair Wages,
the living wage is the highest among the
three.
 It must provide (i) basic ameneties of life, (ii)
efficiency of worker and (iii) satisfy social
needs of workers such as medical, education,
retirement, etc.
 'Living Wage' is dynamic concept, which
grows in line with the growth of the national
economy.
Minimum Wages Act, 1948
 The Act prescribes minimum rates of wages for
certain unorganised sectors covered under the
Act.
 The minimum wages can be fixed by hour, day,
month or any other longer period.
 The Act provides for setting up a tripartite body
consisting of employees, unions and the
government, to advise and assist in fixing and
revising minimum wage rates.
 The rates could be subjected to revision at
intervals not exceeding 5 years.
 Cont…
 The Supreme Court has held (in 1992) that the
appropriate authorities should take into
consideration the components such as
children's education allowance, medical needs,
minimum recreation, provision for marriage,
old age etc., while calculating minimum wages.
 The Payment of Wages Act, 1936
 The main objective of the Act is to provide for regular
payment of wages without any unauthorised reductions
to persons who are employed in any industrial
establishment or factory or railway or by a railway
contractor whose monthly wages are less than Rs 1600.
 The Act prescribes the following permissible deductions
to be made from the employee's salary: fines,
deductions for absence, deductions for (i) loss of goods
entrusted to worker, (ii) house given by employer, (iii)
services provided by employer, (iv) advances given to
worker, (v) tax payable by employer, (vi) deductions
under court orders, cooperative society. PF, insurance
premium, etc.
Adjudication of Wage Disputes
 Collective bargaining is a procedure through which
employee problems relating to various issues
including wages are settled through the process of
joint consultation, in an atmosphere of 'give and
take', trust and mutual confidence.
 If these problems are not settled through
collective bargaining, they may be settled through
voluntary arbitration or adjudication.
 The awards given or reached by or through the
arbitrator or adjudicator or collective bargaining
agreements form the basis for fixing wages in
various organisations.
Wage Boards
 This is one of the important institutions set up by
the Government of India for fixation and revision of
wages.
 Separate wage boards are set up for separate
industries. Government of India started instituting
Wage Boards in accordance with the
recommendations of Second Five-year Plan, which
were reiterated (perform again) by the Third Five-
year Plan.
 Wage Boards are not governed by any legislation
but are appointed on an adhoc basis by the
Government.
 Cont…
 Each Wage Board consists of one neutral
Chairman, two independent members and two
or three representatives of workers and
management each.
 The Wage Boards have to study various
desirability, (vii) Government's objectives
regarding social justice, social equality,
economic justice and economic equality, (viii)
Place of the industry in the economy and the
society of the country and the region, (ix) Need
for incentives, improvement in productivity, etc.
 Cont…
 The Wage Boards fix and revise various
components of wages like basic pay, dearness
allowance, incentive earnings, overtime pay,
house rent allowance and all other allowances.