COMPENSATION

MANAGEMENT
MEANING OF THE WORD COMPENSATION IS TO
COMPETE i.e., TO PAY FOR .
Provision for compensation management is a
conceptual flow with the force of law where you pay
without choice.
In reward management you pay for performance
where employee give up their best and become part
of the organization.
MEANING OF COMPENSATION

“Compensation refers to a wide range of financial and non-

financial rewards to employees for their services rendered to the
organization.”
It is paid in the form of wages ,salaries and employee benefits
such as paid vacation, insurance, maternity leave, free travel
facility, retirement benefits, etc. Monetary payments are a direct
form of compensating the employee and have a great impact in
motivating employees. The system of compensation should be
designed that it achieves the following objectives :
Capable employees are attracted towards the organization.
The employees are motivated for better performance.
The employees do not leave the employer frequently.
ELEMENTS OF COMPENSATION
Direct and Indirect compensation

Monthly wages and salary or total pay including basic wage,

house rent allowance, dearness allowance, and city
compensatory allowance.
Bonus at the end of the year.
Long term incentives
Perks and perquisites
Economic benefits such as paid holidays, leave travel
concession.
Contribution towards insurance premium.
Contribution towards retirement benefits.
Transport and medical facilities.
Direct Employee compensation
Direct compensation refers to monetary benefits offered and
provided to employees in return of the services they provide to
the organization. The monetary benefits include basic salary,
house rent allowance, conveyance, leave travel allowance,
medical reimbursements, special allowances, bonus,
Pf/Gratuity, etc. They are given at a regular interval at a
definite time.
Basic Salary
Salary is the amount received by the employee in lieu of the
work done by him/her for a certain period say a day, a week, a
month, etc. It is the money an employee receives from his/her
employer by rendering his/her services.
HRA
HRA stands for House Rent Allowance, it is an allowance that almost
every salaried employee receives as part of there salary package from
there employer to meet the cost of rent that they pay for their home.
In other words, HRA is a compulsory part of salary of an individual
which every salaried person receives irrespective of the type of property
he resides in. Which means, if your employer chooses to offer HRA then
you will get this as part of your salary whether you stay in a rented
house or reside in your own house.
As being a taxable part of salary, HRA gets special treatment in income
tax law and is exempt from income tax to a certain extent.
Conveyance
Organizations provide for cab facilities to their employees. Few
organizations also provide vehicles and petrol allowances to their
employees to motivate them.

Holidays and Leave

Payment for holidays and leave is also included in direct
compensation. Leave includes sick time, funeral leave, maternity
leave, military duty or other paid time away from work.
Bonuses
All forms of bonuses are included in direct compensation.
Bonuses are compensation for employees for work performed;
they are paid in addition to salary or wages.
Bonuses are considered compensation if (per the IRS) they "arise
out of an employment relationship or are associated with the
performance of services." Bonuses are considered taxable to
employees, but are considered an expense of doing business
and are, in most cases,
Other Allowances
Other paid or reimbursed allowances are included in direct
compensation, including ravel (including meals) and some
medical care when it is paid by the employee and reimbursed.
Special Allowance
Special allowance such as overtime, mobile allowances, meals,
commissions, travel expenses, reduced interest loans; insurance,
club memberships, etc are provided to employees to provide them
social security and motivate them which improve the
organizational productivity.
INDIRECT EMPLOYEE COMPENSATION
What doesn't fall under direct compensation is indirect
compensation, of which the employee is the beneficiary, but
does not receive directly.

Indirect compensation refers to non-monetary benefits offered

and provided to employees in lieu of the services provided by
them to the organization. They include Leave Policy, Overtime
Policy, Car policy, Hospitalization, Insurance, Leave travel
Assistance Limits, Retirement Benefits, Holiday Homes.
Leave Policy
It is the right of employee to get adequate number of leave while
working with the organization. The organizations provide for
paid leaves such as, casual leaves, medical leaves (sick leave),
and maternity leaves, statutory pay, etc.
Overtime Policy
Overtime is the amount of time someone works beyond normal
working hours.
Normal hours may be determined in several ways:Employees
should be provided with the adequate allowances and facilities
during their overtime, if they happened to do so, such as
transport facilities, overtime pay, etc.
Overtime pay rates can cause workers to work longer hours than
they would at a flat hourly rate. Overtime laws, attitudes
toward overtime and hours of work vary greatly from country
to country and between different economic sectors. Overtime
means extra productivity from employee that should be equal
or more than the overtime payment made.
Hospitalization

The employees should be provided allowances to get their regular

check-ups, say at an interval of one year. Even their dependents
should be eligible for the medi-claims that provide them emotional
and social security.
Insurance

Organizations also provide for accidental insurance and life insurance

for employees. This gives them the emotional security and they feel
themselves valued in the organization.
Leave Travel
The employees are provided with leaves and travel allowances to
go for holiday with their families. Some organizations arrange
for a tour for the employees of the organization. This is usually
done to make the employees stress free.
Retirement Benefits
Organizations provide for pension plans and other benefits for
their employees which benefits them after they retire from the
organization at the prescribed age.
Holiday Homes
Organizations provide for holiday homes and guest house for
their employees at different locations. These holiday homes are
usually located in hill station and other most wanted holiday
spots. The organizations make sure that the employees do not
face any kind of difficulties during their stay in the guest
house.
Flexible Timings
Organizations provide for flexible timings to the employees who
cannot come to work during normal shifts due to their personal
problems and valid reasons.
Objective of Compensation

The objective of the compensation function is to create a

system of rewards that is equitable to the employer and
employee alike. The desired outcome is an employee who is
attracted to the work and motivated to do a good job for the
employer. Patton suggests that in compensation policy there
are seven criteria for effectiveness.
Compensation should be:
Adequate Minimal governmental, union, and managerial
levels should be met.
Equitable Each person should be paid fairly, in line with his or
her effort, abilities, and training.
Balanced Pay, benefits, and other rewards should provide a
reasonable total reward package.
Cost-effective Pay should not be excessive, considering what
the organization can afford to pay.
Secure Pay should be enough to help an employee feel secure
and aid him or her in satisfying basic needs.
Incentive-providing Pay should motivate effective and
productive work.
Acceptable to the employee The employee should understand
the pay system and feel it is a reasonable system for the
enterprise and himself or herself.
Factors effecting employee compensation
There are number of factors influencing the compensation
package payable to employees. They can be categorizing
into
External factors
Internal factors
External factors
Demand and supply of labour
Cost of living
Society
Labour unions
Legislation
The economy
Compensation survey
Internal factors
Compensation polices
-pay leaders
-the market rate
-pay followers
The organisational ability to pay
Job analysis and job description
Employee
Trade union’s bargaining power
The stronger and more powerful the trade union in any organisation , the
higher the wages. Trade union’s bargaining powers are often measured
in terms of its membership , its financial strength and the nature of its
leadership.
Compensation: an overview
Compensation management is one of the most challenging
human resource areas because it contains many elements and
has a far-reaching effect on the organisation's goals. The
purpose of providing compensation is to attract, retain and
motivate employees. There are two main types of financial
compensation.
Direct financial compensation - the pay that a worker receives
as wages, salaries, commissions and bonuses, and
Indirect financial compensation - all financial rewards that are
not included in direct compensation (i.e. benefits).
An example of direct financial compensation is the money
the worker receives as wages at the end of the week, or as a
salary paid at the end of the month. Many companies pay
salaries straight into the employee's bank account.
An example of indirect financial compensation is when the
company contributes to an employee's housing subsidy or a
pension plan.

Not all compensation is financial. A worker can get great

satisfaction from his work and enjoy the environment in which
he works. This is called non-financial compensation and cannot
be counted in terms of money. For example, a veterinarian
might enjoy working outside, going to farms to treat animals
and deliver calves. A publisher might enjoy the challenge of
producing books that will enrich people's lives.
It is not always possible to provide a perfect pay package (the
agreement between the organisation and the employee about
how much money and other benefits the employee will
receive). Because of this, some companies allow their
employees to work out their own compensation packages.
Employee salary : Basic pay + Grade pay + Dearness
Allowance (DA) + House Rent Allowance (HRA) + City
Compensatory Allowance (CCA)
The details of above said components of salary of government
employees are as follows.
Basic pay: The primary component of employee salary which
is bases for calculation of other components in the employee
salary.
Grade pay: An amount which is fixed by the government on
the range of employee in government hierarchy. (for example;
Group A officers have high grade pay than Group B officers.)
Dearness Allowance: Certain percentage of the amount on
basic pay. This percentage varies from state government to
Central government employees. An allowance paid to
employees on the basis of consumer Price index. Consumer
price index denotes the cost of the products which influences
by the inflation. (in simple terms cost of living) At present,
41%  is for state government employees and 72 % is for
Central government employees as dearness allowance on their
basic pay.
House Rent Allowance (HRA): Certain percentage of the amount
on basic pay. This percentage varies from state government to
Central government employees. This allowance is paid to
employees are meeting house rent expenditure.
City Compensatory Allowance (CCA): An allowance paid
according to the city or town where employee do the job and the
purpose of this allowance is to compensate high cost of living
especially in cities like Mumbai, Delhi, Calcutta and Hyderabad et
cetera . Government decides the amount of allowance to be paid to
employees on basis of city or town.
Minimum Wages Act (1947)
The Minimum Wages Act was passed in 1947 to secure the
welfare of organized workers in certain industries by fixing the
minimum rates of wages.

Different types of industries provide different type of wage rate.

Category Wise Payment (acc to skills)

Skilled.
Unskilled
Semi-skilled
Highly skilled
Clerical
Graduate
Supervisory
Basic wage is linked with cost of living index. Cost Of Living
Index is an all India series deciding on the inflation. Inflation is
issued from Shimla.

Different stages to form their own minimum wages keeping in

view
competition,
cost of living index,
impact of regional factors,
and other variable factors.
TYPES OF COMPENSATION
BASE COMPENSATION
It involves
• Wages
• Salaries
The term ‘wage’ is used to denote remuneration to workers doing
manual or physical work. Thus, wages are given to compensate the
unskilled workers for their services rendered to the organization.
Wages may be based on hourly, daily, weekly or even monthly basis.
The term ‘salary’ is usually defined to mean compensation to office
employees, foreman, managers and professional and technical staff.
It is generally paid on weekly, monthly, or yearly basis.
SUPPLEMENTARY COMPENSATION:

Supplementary compensation involves ‘fringe benefits’ offered

through several employee services and benefits such as housing,
subsidized food, medical aid, crèche, etc.
Supplementary compensation has been given different titles in
industry such as ‘service programmes’, ‘employee benefits’, and
‘non-wage payments’. Because of the increasing costs of fringe
benefits, it is also labeled as ‘hidden payroll’.
The basic purpose of fringe benefits are :
to attract and maintain efficient human resources.
To motivate the human resource.
TYPES OF SUPPLEMENTARY COMPENSATION

Payment for time not worked Hazard protection

Employee services Legal payments

BASE COMPENSATION SUPPLEMENTARY

It denotes payments to workers in the form of wages It denotes fringe benefits to workers over and above
and salaries. their regular wages and salaries.

Wages and salaries are paid in cash. Fringe benefits are offered in the form of employees
services and benefits such as housing, medical aid
crèche, canteen etc .

Wages and salaries are paid to compensate Fringes or non-wage payments are made to increase
employees for their services. the efficiency of employees and to retain them in the
organization on a long-term basis.

Supplementary compensation is determined by the

Wages and salaries are determined by job
history of the organization, philosophy of
evaluation, demand and supply of labour,
management, organization’s capacity to spend on
organization’s capacity to pay, trade union’s,
employee benefits, need to retain talented
bargaining power, productivity, government
employees, desire to enhance public image, etc
regulations, etc.
PERQUISITES

Several new benefits have been initiated by industrial

giants particularly for the executives. Such benefits re
referred to as ‘perquisites’ or ‘perks’.

Home security
Chauffer driven cars
Corporate
aircraft

Company
apartment Club membership

entertainment
Co. credit card Paternity leave
EXECUTIVE COMPENSATION
Compensation or remuneration for the executive managers is
different from compensation for other employees in most the
organizations. Executive compensation covers employees that
include presidents of company, chief executive officers
(CEOs), chief financial officers (CFOs), vice presidents,
occasionally directors of the company, and other upper-level
managers. These high level employees are paid executive
compensation.
Usually only those members of your most senior management
team qualify for executive pay. It is usual the members of the
“C-Suite.” (A widely-used slang term used to collectively refer
to a corporation's most important senior executives. C-Suite
gets its name because top senior executives' titles tend to start
with the letter C, for chief, as in chief executive officer, chief
operating officer and chief information officer.)
What Are the Components of Executive
Compensation?
Base salary
Incentive pay, with a short-term focus, usually in the form of a bonus
Incentive pay, with a long-term focus, usually in some combination
of stock awards, option awards, non-equity incentive plan
compensation
Enhanced benefits package that usually includes a Supplemental
Executive Retirement Plan (SERP)
Extra benefits and perquisites, such as cars and club memberships
Deferred compensation earnings
Executive Compensation
Many organizations, especially large ones, administer executive
compensation somewhat differently than compensation for
lower-level employees.
An executive typically is someone in the top two levels of an
organization, such as Chief Executive Officer (CEO),
President, or Senior Vice-President. The common components
of executive compensation are salaries, annual bonuses, long-
term incentives, supplemental benefits, and perquisites.
Apple CEO Tim Cook's salary doubled in 2014
Apple CEO Tim Cook got a fat cash bonus that brought his
total compensation to $9.2 million in 2013. That's more than
double what he received in the previous year (2013), as the
company enjoyed a upsurge in sales and profit fueled by the
popularity of its new, oversized iPhone 6 models.

Cook's pay for fiscal 2014 included $1.7 million in salary and
$6.7 million in incentive pay that was awarded by Apple's
board after he beat the performance goals that directors had set
for him, according to a regulatory filing. He also received
$774,176 in other compensation, including a 401k contribution
, company-paid insurance premiums and security expenses.
Apple reported $182.8 billion in revenue for the fiscal year that
ended September 27 of 2014 and $39.5 billion in profit, after
seeing record sales last fall. Sales of iPhones rose 21% in the
company's fourth quarter, which made up for a decline in sales
of iPads.
Importance of employees compensation
or reward system 

Compensation or reward system of the organisation is most

influencing factor for employee motivation, must remember.
If we observe history of causes of industrial disputes,
employee compensation a reward system issues were the
main reason in most cases.
good compensation system of rewards system in the
organisation will minimise industrial disputes and helps in
maintaining peace and harmony within the organisation.
Compensation system plays a key role in employee attrition.
Compensation system mostly influences retention of employee
in the organisation.
Most of employee satisfaction depends upon compensation a
reward system of organisation.
Effective compensation system builds employer brand, which
plays a key role in attracting talent.
Effective compensation system makes employee to put his full
efforts for achievement of organisation's goals and objectives.
Effective compensation system builds initiative towards work,
which in turn enhances the productivity of organisation.
Effective compensation makes employees feel belongingness
towards the organisation.
International Labour Organisation (ILO) made conventions on
labour welfare especially on regularly in payment of wages &
salaries with minimum pay for stipulated working hours.
In accordance with the conventions & recommendations of
ILO every country has established labour laws and enforced,
who ever contravene them shall be liable for penalty or
punishment under serious cases both may be awarded.
Naturally judiciary of the concern country is watchdog for
dealing labour issues.
India is one of the countries with very high population and stands
second in place followed by china. In the India, parliament has
enforced four key laws on wages of workers that are Payment of
wages act 1936 and Minimum wages act 1948 for the purpose of
ensuring minimum payment for particular type of jobs in different
sectors and industries according to stipulated working hours
prescribed by the law.  Normally eight hours is  stipulated
working time in almost all countries,  above stipulated time if any
worker is made to work, his employers has to compulsory pay
overtime,  if not it shall be treated as unlawful by the court of law
for which it may impose penalty.
Other side of coin it may create serious dissatisfaction among
workers and make them feel that they are  being exploited
which may lead to  agitations eventually may lead strikes
which is ultimate weapon in hands of workers,  ultimately
organisations may chose for lockout which is the weapon in
 hands of employers altogether may create industrial disputes.
On this law may support worker agitation for not complying
payment of wages by their employer in accordance with wage
laws and in some cases law may support employer if workers
agitation causes serious damages to organisation. 
The third key law is workmen's compensation act 1923, the
primary objective of this law is to have any compensation by
an employee from his employer if any accident occurs, which
make permanent or partial disablement. This law defines under
schedules various types of accidents certain to happen to
worker and percentage of compensation paid to him in
accordance with his age. 
The fourth key law is Equal Remuneration Act, 1976, according
to the section 4 it is the  DUTY OF EMPLOYER TO PAY
EQUAL REMUNERATION TO MEN AND WOMEN
WORKERS FOR SAME WORK OR WORK OF A SIMILAR
NATURE. According to Section 3, a settlement arrived at
between the management and the employees cannot be a valid
ground for effecting discrimination in payment of remuneration
between male and female employees performing the same work
or work of a similar nature; Mackinnon Mackenzie and Co. v.
Audrey D’ Costa, (1987) 2 SCC 469.
"The most important thing is to note that compensation plays a
major role in attracting talent from the market and
compensation system of the organisation is Key factor for
creating employer brand, which is most important factor for
attracting talent people. Having talent people for the
organisation is a major asset for the organisation development"
The HR Compensation Analyst assists with producing the
organization's compensation program. Their primary
responsibility is the research and study to determine
appropriate employee compensation. In addition, they evaluate
predicted market trends, recommend revisions to company
compensation plans, review job descriptions, and assist the
Compensation Manager.
The HR Compensation Manager directs the organization's
compensation program. Their responsibilities include
developing job descriptions, analyzing jobs, conducting salary
surveys and job evaluations, and establishing a salary structure.
They suggest revisions to the compensation plan and
procedures, administer bonus and incentive programs, and
manage the performance appraisal system.
A Brazilian firm, Semco,( best known for its radical form of
industrial democracy and corporate re-engineering.) has 3,000
employees, a turnover of over $200 million and has been
growing at 20-30% every year.

Semco does have managers but employees have more freedom

than elsewhere. They can choose their hours of work, decide
their salaries and pick their bosses. Managers are anonymously
evaluated every six months by their subordinates. Semco has
practised this philosophy for 25 years now.
WAGE AND SALARY DIFFERENTIALS
The personnel may belong to different occupations and
functional areas carrying different grades of skills, knowledge,
duties, responsibilities, assignments and workloads. They have to
be remunerated differently according to various considerations.
Hence, differentials in pay for various jobs constitute the core
of wage and salary administration and structure.
Differentials reflect not only job content and difficulty, but
numerous other factors also such as occupational, geographical,
shift, age, handicapped workers, older workers, methods of
payment, unionization, size of the company and the industry.
Wages and differentials serve many useful purposes:
To induce employees to change jobs.
To get employees to learn and acquire new skills,
To shift employees from declining industries to new
industries,and
To get employees to accept more responsible positions.
WAGE ADMINISTRATION
Wages and salaries represent a substantial part of total costs
in most of the organization. Although to the economist these
are variable costs, but to the businessmen, they are
becoming ever increasing in view of the ability of unions to
win upward adjustments.
The control of wage and salary levels is of paramount
importance, even though the amount of control which can be
exerted may vary among organization and within an
organization from time to time.
The general objectives of the wage and salary
administration are as follows:
Control of costs
Establishment of fair and equitable remuneration
Maintenance of a satisfactory public relations image.
The functions of wages and salary committee or any other
person or any other person connected with wage and salary
administration are:
To approve the system of job description and job
evaluation.
To check all activities of the salary administration group
against the company policies.
To recommend to top management the wage policies and in
the salary or wage level.
To review wage and salary schemes department wise.
To recommend to top management specific raises for
executives above a specified limit.
 Sequential Steps of the Process: Organization’s Strategy,
Compensation Policy, Job Analysis and Evaluation
In order to achieve the objectives of compensation
management, it should proceed as a process. This process has
various sequential steps.
Step 1. Organization’s Strategy:
Organization’s overall strategy, though not a step of
compensation management, is the starting point in the total
human resource management process including compensation
management.
Companies operating in different types of market/product
having varying level of maturity, adopt different strategies and
matching compensation strategy and blend of different
compensation methods.
Thus, it can be seen that organizations follow different strategies in
different market situations and align their compensation strategy and
contents with these strategies. In a growing market, an organization
can expand its business through internal expansion or takeover and
merger of other organizations in the same line of business or a
combination of both.
In such a growing market, the inputs, particularly human resources, do
not grow in the same proportion as the business expands. Therefore, in
order to make the growth strategy successful, the organization has to
pay high cash to attract talents. For example, information technology is
a fast growing business presently and we find maximum merger and
higher managerial compensation in this industry.
In mature market, the organization does not grow through
additional investment but stabilizes and the growth comes
through making the present investment more effective, known as
learning curve growth. In such a situation, average cash and
moderate incentives may work.
The benefits which have been standardized have to be
maintained. In the declining market, the organization has to
harvest profit through cash generation and cost cutting and this
cannot be sustained over the long run, the possible retrenchment
of business to invest somewhere else. In such a case,
compensation strategy involves cost control with below average
cash and incentive payments.
In viewing the compensation from strategic point of view, the
companies do the following:
(i) They recognize remuneration as a pivotal control and incentive
mechanism that can be used flexibly by the management to attain
business objectives.
(ii) They make the pay system an integral part of strategy
formulation.
(iii) They integrate pay considerations into strategic decision-making
processes such as those that involve planning and control.
(iv) They view the company’s performance as the ultimate criterion
of the success of the strategic pay decisions and operational
remuneration programmes.
Step 2. Compensation Policy:
Compensation policy is derived from organizational strategy
and its policy on overall human resource management. In order
to make compensation management to work effectively, the
organization should clearly specify its compensation policy,
which must include the basis for determining base
compensation, incentives and benefits, and various types of
perquisites to various levels of employees.
The policy should be linked with the organizational philosophy
on human resources and strategy. Besides, many external
factors which impinge on the policy must also be taken care of.
Step 3. Job Analysis and Evaluation:
Job analysis provides basis for defining job description and job
specification with the former dealing with various
characteristics and responsibilities involved in a job and the
latter dealing with qualities and skills required in job
performer. Job analysis also provides base for job evaluation
which determines the relative worth of various jobs in the
organization. The relative worth of various jobs determines the
compensation package attached with each job.
Step 4. Analysis of Contingent Factors:
Compensation plan is always formulated in the light of various
factors, both external and internal, which affect the operation of
human resource management system. Various external factors are
conditions of human resource market, cost of living, and level of
economic development, social factors, pressure of trade unions,
and various labour laws dealing with compensation management.
Various internal factors are organization’s ability to pay and
employees’ related factors such as work performance, seniority,
skills, etc. These factors may be analyzed through wage/salary
survey.
Step  5. Design and Implementation of Compensation Plan:
After going through the above steps, the organization may be
able to design its compensation plan incorporating base
compensation with provision of wage/salary increase over the
period of time, various incentive plans, benefits and perquisites.
Sometimes, these are determined by external party, for example,
pay commissions for Government employees as well as for
public sector enterprises. After designing the compensation plan,
it is implemented. Implementation of compensation plan requires
its communication to employees and putting this into practice.
Step  6. Evaluation and Review:
A compensation plan is not a rigid and fixed one but is dynamic
since it is affected by a variety of factors which are dynamic.
Therefore, compensation management should have a provision for
evaluating and reviewing the compensation plan.
After implementation of the plan, it will generate results either in
terms of intervening variables like employee satisfaction and
morale or in terms of end-result variables like increase of
productivity. However, this latter variable is more important. The
evaluation of compensation plan must be done in this light. If it
does not work as intended, there should be review of the plan
necessitating a fresh look.
Compensation Management – 4 Main Functions: Equity,
Welfare, Motivation and Retention Function
Compensation management’s objective is to hire competent
persons, to ensure the internal and external equity concept to
improve employee’s satisfaction and to retain these valuable
human resources or assets.
The main functions of compensation management are:
(1) The Equity Function
(2) The Welfare Function
(3) The Motivation Function
(4) The Retention Function.
(1) The Equity Function – It is the first and foremost
important function of compensation which ensures that the
employees are fairly paid and that their worth is
appropriately compared. This function ensures that more
difficult jobs are paid more and that they are fairly
compensated in comparison to similar jobs in the market.
(2) The Welfare Function – This function is to take care of
their psychological and social need satisfaction. The
employees worry about the family, and the liability should
be reduced and their self-esteem needs should be met to
allow them to work without tension or unwanted stresses.
(3) The Motivation Function – The motivational function is to
encourage an employee to take further challenges, perform better
and develop oneself for superior positions. This function, therefore,
takes care of career plans and training and development activities.
(4) The Retention Function – Today, human resources are being
considered as a valuable asset to the organization and because of
retaining and developing the knowledge bank, the retention of
employees has become an important function of compensation
management.
HRM manager thus endeavour to take care of above functions in
managing the compensation to develop employees satisfaction and
to fulfil employer’s objective.
The generally accepted principles governing the fixation of
compensation are as follows:
(i) There should be definite plan to ensure that differences in
pay for jobs are based upon variations in job requirements,
such as skill, effort, responsibility, working conditions, mental
and physical requirements.
(ii) The general level of wages and salaries should be
reasonably in line with that prevailing in the labour market.
The labour market criterion is most commonly used.
(iii) The plan should carefully distinguish between jobs and
employees. A job carries a certain wage rate, and a person is
assigned to fill it at that rate. Exceptions sometimes occur in
very high level jobs in which the job holder may make the job
(iv) Equal pay for equal work, i.e., if two jobs have equal
difficulty requirements, the pay should be the same, regardless
of who fills them.
(v) An equitable practice should be adopted for the recognition
of individual differences in ability and contribution.
(vi) 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.
(vii) The employees and the trade union should be informed
about the procedure used to establish wage rates. Every
employee should be informed of his own position, and of the
wage and salary structure. Secrecy in wage matters should not
be used as a cover up for haphazard and unreasonable wage
programme.
(viii) The wage should be sufficient to ensure for the worker
and his family reasonable standard of living. Workers should
receive a guaranteed minimum wage to protect them against
conditions beyond their control.
(ix) The wage and salary structure should be flexible so that
changing conditions can be easily met.
(x) Prompt and correct payments of the dues of the employees
must be ensured and arrears of payment should not accumulate.
(xi) For revision of wages, a wage committee should always be
preferred to the individual judgment.
(xii) The wage and salary payment must fulfill a wide variety of
human needs, including the need for self-actualization. It has been
recognized that money is the only form of incentive which is
wholly negotiable, appealing to the widest possible range of
seekers. Monetary payment often acts as motivation and satisfies
interdependently of other job factors.
Desire to maintain or enhance the company’s prestige has been a
major factor in the wage policy of a number of firms. Desires to
improve or maintain morale, to attract high caliber employees, to
reduce turnover, and to provide a high living standard for
employees as possible also appear to be factors in management’s
wage policy decisions.
 Theories
 Traditional and Contemporary Theory
There are various theories of compensation, also known as
theories of wages or employee remuneration. These theories
may be put into two broad categories- traditional theories and
contemporary theories.
I. Traditional Theories:
Traditional theories are based on mostly economic
considerations. Though there are many traditional theories of
wages, major traditional theories are subsistence theory,
wages fund theo9ry, and residual claimant theory, Let us have
a brief discussion of these theories.
1. Subsistence Theory:
According to this theory, wages in the long term would be equal to
what is required for subsistence of workers- food, clothing, and
shelter. This is also known as the Iron Law of Wages. David
Ricardo, who propounded this theory, believed that if wages were
more than what was required for mere subsistence, it would be
temporary because prosperity of the workers would soon increase
the population and, hence, the labour supply.
This would depress wages and bring them down to the level of
subsistence. Similarly, wages below the subsistence level would
starve certain workers; others would not marry. This will reduce the
supply of workers and raise wages.
The subsistence theory is criticized on the following
grounds:
i. The theory assumes that the supply of labour is inelastic
which is wrong.
ii. The assumption that increase in wages will increase the size
of the labour force is wrong because there is no direct
relationship between level of income and family size.
2. Wages Fund Theory:
J.S. Mill, who propounded this theory, has maintained that a
certain fixed proportion of the capital of a country is set apart
for payment to labourers as wages. He called this proportion as
wages fund. Thus, according to him, wages at any moment are
determined by the amount of money in the wages fund and the
total number of labourers in the country.
If the fund remains constant and the supply of labour increases,
wages would fall, and vice versa. It is implied that if wages are
forced up, capital will leave the country.
This theory is criticized on the following grounds:
i. The theory does not explain how the wages fund is created.
ii. It does not explain differences in wages in different
occupations.
iii. According to this theory, there is always conflict between
amount of wages and profit. This is not true because in
prosperity, amount of both wages and profit increases.
3. Residual Claimant Theory:
Residual claimant theory, propounded by Francis Walker, states
that wages are the remainder of total industrial revenue after
deduction of amount of rent, interest, and profit. Thus, wages are
determined after rent, interest, and profit.
This theory is criticized on the following grounds:
i. It is not the worker who is the residual claimant but the
entrepreneur is the residual claimant. Therefore, profit is
determined after deducting the amount of wages, rent, and interest.
ii. This theory does not explain how trade unions are able to raise
wages.
II. Contemporary Theories:
Contemporary theories of wages take into consideration human
behaviour in determining wages. There are four major
contemporary theories- reinforcement theory, expectancy
theory, equity theory, and agency theory. Let us go through
these theories.
1. Reinforcement Theory:
Reinforcement theory, based on Skinner’s behaviour
modification model, suggests that people’s behaviour that has
positive consequences is repeated while the behaviour that has
negative consequences is not repeated. Reinforcement is
anything that strengthens or encourages someone’s behavioural
response in a given situation.
In the case of employee remuneration, reinforcement is the
amount of remuneration (including financial incentives) is the
reinforcement. Therefore, amount of remuneration should be
such that motivates the employees to engage in productive
behaviour.
2. Expectancy Theory:
Like reinforcement theory, expectancy theory also relates effort and
reward though process is different. Vroom, who has proposed
expectancy theory, states that people will be motivated to do things
to achieve some goals on the expectation that their certain actions
will help them to achieve the goals. This theory is built around the
concepts of valence, instrumentality, and expectancy.
Valence means the strength of an individual’s preference to a
particular outcome. For example, higher remuneration (in terms of
performance-based pay or skill-based pay) is an outcome which is
valuable to an employee. Instrumentality is the first-level outcome
in obtaining a derived second-level outcome.
For example, assume that the employee desires higher remuneration and
feels that acquiring superior skills is a very strong factor in achieving
higher remuneration.
In this case, acquiring superior skills is the first-level outcome and
higher remuneration is the second-level outcome. Expectancy is the
probability that a particular action will lead to a particular first-level
outcome. For example, the employee may find out the probability of
acquiring superior skills.
If he perceives that there is high probability that he may be able to
acquire superior skills, he will be willing to put those efforts. In the
alternative case, he will not be willing to put the efforts. Generally,
organizations design their remuneration systems based on the precepts
of this theory.
3. Equity Theory:
Equity theory is based on the social exchange process. Adams,
who has propounded equity theory, points out that people are
motivated to maintain fair relationship between their
performance and reward in comparison to others.
There are two assumptions on which the theory works- (i)
Individuals make contributions in the form of job performance
for which they expect certain rewards in the form of
remuneration. (ii) They analyze whether a particular exchange
is satisfactory or not by comparing their contributions and
rewards with those of others and try to rectify any inequality.
This comparison may be either internal (within the
organization) or external (outside the organization). Equity is
calculated through dividing contributions by rewards. If there
is equity, the person concerned remains satisfied. In case of
inequity (contributions being more than rewards), he tries to
find out means to overcome inequity. “Equal pay for equal
work” principle is based on this theory. Thus, employee
remuneration should be fair and equitable.
4. Agency Theory:
In general terms, an agency is the relationship between two
parties in which one is a principal and the other is an agent
who acts on behalf of the principal. For performing agency
work, the principal pays remuneration to the agent which is
known as agency cost. In the context of wage determination,
employer is the principal and employee is the agent.
Wage paid to the employee is his remuneration while it is
agency cost to the employer. In the exchange process between
employer and employee, the employer tries to minimize
agency cost while employee tries to maximize it. The
equilibrium is reached through negotiation between the
employer and the employee keeping in view the relevant
Challenges or Problems of Compensation Management

Even the most rational methods of determining pay must be tempered by

good judgment when challenges arise.
The implications of these demands may cause analysts to make further
adjustments to compensation.
Strategic Objectives.
Prevailing Wage Rates.
Union Power.
Government Constraints.
Comparable Worth and Equal Pay.
Compensation Strategies and Adjustments.
International Compensation Challenges.
Productivity and costs.
1. Strategic Objectives
Compensation management is not limited to internal and external equity. It also
can be used to further an employer’s strategy. Employee compensation might have
been initially anchored by the relative worth of jobs and the prevailing wage rates
in the local market.
2. Prevailing Wage Rates
Market forces may cause some jobs to be paid more than their relative worth.
Demographic shifts and relative supply and demand relationships affect
compensation.
3. Union Power
When unions represent a portion of the workforce, they may be able to obtain wage
rates that are out of proportion to the relative worth of the jobs.
Unions may also limit management’s flexibility in administering merit increases
since unions often argue for raises that are based on seniority and are applied
across the board equally.
4. Government Constraints
The government sets minimum wage, overtime pay, equal pay, child labor, and
record-keeping requirements. The minimum-wage and overtime provisions require
employers to pay at least a minimum hourly rate regardless of the worth of the job.
5. Comparable Worth and Equal Pay
Beyond “equal pay for equal work” is the idea of “comparable pay for comparable
work” called comparable worth. It requires employers to pay equal wages for jobs of
comparable values.
Comparable worth is used to eliminate the historical gap between the incomes of
men and women.
6. Compensation Strategies and Adjustments
Most organizations have compensation strategies and policies that cause wages and
salaries to be adjusted.
A common strategy is to give nonunion workers the same raises that are given to
unionized employees; this often is done to prevent further unionization.
7. International Compensation Challenges
The globalization of business affects compensation management.
Compensation analysts must focus not only on equity but on
competitiveness too. The growing globalization of business also means a
greater movement of employees among countries.
As employees are relocated, compensation specialists are challenged to make
adjustments that are fair to the employee and the company while keeping
competitiveness in mind.
8. Productivity and costs
Regardless of the company or social policies, employers must make a profit to
survive. Without profits, they cannot attract enough investors to remain
competitive.
Therefore, a company cannot pay its workers more than the workers give
back to the firm through their productivity.
 Compensation Vs Remuneration
In general usage  language compensation and
remuneration are used interchangeably but from the legal
perspective there is difference between payment of
compensation and payment of remuneration to the
employee. The below table  distinguish the difference
between compensation and remuneration  from the legal
perspective.
Compensation is paid to the
employee in case of death of
employee, physical injury, or
mentally suffered during the
course of employment.
Payment of the compensation is
compulsory only in case of the
death of employee, injury or
mentally suffered during the
course of employment.
There is separate and dedicated
law for payment of compensation.
Workmen's Compensation Act, 19
23
Remuneration is paid to the
employee for the work done for his
employer
Remuneration is paid periodically
to the employee on daily basis,
weekly basis, fortnightly or
monthly basis for the work done.
There is separate and dedicated
law for payment of Remuneration.
Payment of Wages Act, 1936
Payment of the
Compensation to the
employee is depended on the
gravity of the injury he
suffered but not according to
the job position or job grade.
Payment of the compensation
is one time settlement or for a
certain period of time to the
employee unitll He or she
recovers from suffering .
Remuneration of the
employee depends on the
position of the job or grade
of the job  positioned  in
the organization hierarchy.
Payment of the
remuneration is paid to the
employee as long as he/she
works for the organization
starting from appointment
to retirement.
Payment of the Compensation
varies from injury to injury
suffered by the employee.
Payment of the compensation
provisions are same for all
employees.
Payment of the compensation  employee depends and varies from
depends on age of the
employee and the injury he or
she suffered.
There is no other name for the
word employee compensation
Payment of the Remuneration varies
from job to job position held by the
employee in the organization.
Payment of the remuneration
provisions are different from job to
job.
Payment of the remuneration of the
the job title, job position or job
experience
Other names for employee
remuneration are   wages or salaries.