COMPENSATION AND

BENEFITS
 LEARNING OBJECTIVES AND OUTCOMES

LEARNING OBJECTIVES LEARNING OUTCOMES

This is an introductory presentation on After attending this session the student should be able to
Compensational and Benefits for
Understand the meaning of compensation management , the
students of HRM
need and objectives
The presentation is aimed at making the
Differentiate between wages and salary
learner familiar with the basic concepts
related to Compensation Management Identify the various components of a salary or wage.
as well as the need and objectives.

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 • refers to the establishment and implementation of sound
policies, programmes and practices of employee
compensation.

MEANING OF • It is essentially the application of a systematic and scientific

COMPENSATI approach for compensating the employees for their work in
a fair, equitable and logical manner.
ON
MANAGEMEN • concerned with the compensation to employees for their
T work and contribution for attaining organisational goals.

• Obviously, it is concerned with designing and implementing

total compensation package. It is also known as wage and
salary administration or remuneration management.

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 • An organization's goals or objectives can be achieved when its
employees put in their best efforts in the right direction. Hence, they
should be nurtured properly and paid well for their work,
performance, services, etc. Besides wages or salaries, organisations
provide different kinds of incentives, benefits and services to their
employees.
• Money paid to employees for their work in the form of gross pay is
included under direct compensation;
Compensation • Benefits come under indirect compensation and they may consist of
Management  life, accident and health insurance, the contribution of an
organisation to retirement i.e. retirement benefits, expenses
– Concept incurred for employee welfare as social security etc.
• All these things are nothing but the compensation the employees
receive in return for their contribution to their organisation.
• From the viewpoint of an organisation, compensation management
is a major function. Compensation Management is one of the most
important topics in HRM.
• This is one area which needs all the attention as it can have a
direct impact on all others. 4
Compensation Management
• concerned with the compensation to employees for their work and
contribution for attaining organisational goals. Obviously, it is concerned
with designing and implementing total compensation package. It is also
known as wage and salary administration or remuneration management.

• Every organisation requires suitable human resources to achieve its

objectives. To get the effective results, the employees must be paid and
compensated properly even though this is not the only motivator for the
employees to work. Any unjustifiable inequality or an unacceptably low
level of reward definitely causes great dissatisfaction among employees.

• Hence, sound wage and salary policies and programmes are very
essential to attract, induct, retain and develop the employees working in
the organisation in order to get the best results from them. Wage and
salary administration or compensation management is considered as
one of the vital areas of “Human Resource Management”.
 Compensation Management
• Compensation Management refers to the establishment and implementation
of sound policies, programmes and practices of employee compensation.
• It is essentially the application of a systematic and scientific approach for
compensating the employees for their work in a fair, equitable and logical
manner.
• The factors affecting the determination of fair and equitable compensation are
many and are very complex.

• Compensation Management includes various areas such as job evaluation,

surveys of wages and salary analysis of relevant organisational problem,
development of suitable wage structure, framing of rules for administering
wages and salaries, wage payment, incentive, control of compensation cost
etc.
• Hence, in the era of globalisation, privatisation, liberalisation, compensation
management has become very complex and depending upon the size of the
organisation, it may be helpful to induct a specialist to handle this specific
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portfolio under HRM.
 1. To attract competent and qualified persons towards organization by
offering fair wage and incentive.
2. To retain present employees by paying competitive remuneration.
3. To establish fair and equitable remuneration so as to avoid pay
disparities.
Compensation 4. To improve production, productivity and profitability of the
organization.
Management  5. To minimise un-necessary expenditure and to control cost through a

– Objectives
device of internal check and establishment of standard.
6. To improve and maintain good human relation between employer and
employee through a process of payment of bonus, profit sharing and
other fringes benefits.
7. To enhance the name and fame of the company through a proper
system of wage payment.
8. To ensure prompt and regular payment of wage and salary to all the
employees.

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Compensation Management – Need and Significance

1. Compensation refers to the rewards, an employee gets after offering his/her mental and physical efforts, wherein he/she
compares his/her worth. Any dissatisfaction may result into a conflict or a dispute.
• As such it is a most sensitive issue in any organization or HRM as employers, employees and the government have
observed that 95% of the industrial disputes in any organization in India are related to wage/salary or method of
payments.
• Compensation decisions have become more complex in this competitive age because of an unbalanced demand and
supply ratio. The HRM of every organization is required to make some systems to scrutinize the wage and salary
differentiations or disparities to ensure a motivated environment in the organization.
• The perceptions of employees and employers about compensation are changing and the emphasis is being laid on how
important is pay for the employees and how it affects investment to hire competitive employees and how it compares
with three main factors, namely, job contents, work environment, and pay attraction to retain an employee.
• The expensive growth of some of the sectors like IT, Telecom, BPOs and financial institutions has triggered off huge
demand for talent at all levels. The consultants and HR professionals are continuously surveying and studying the
paradigm shifts of concepts, perceptions and the need for revising the compensation systems.
2. Secondly, the compensation policy and the structure must be made attractive and adjustable so as to attract the talents,
motivate the employees to use their hidden potentials, emphasize the need of self-improvement, and most importantly to
retain the employees as they are the valuable asset to the organization.

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 Compensation is the reward or remuneration
compensation package includes both monetary and
non-monetary components.

In India compensation or pay structure generally

consists of the following components:
Main Componen
ts of 1. Wage or Salary

Compensation
2. Dearness and other allowances

3. Incentives

4. Fringe benefits and perquisites.

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 Wage:
• The term wage refers to the remuneration paid
to the workers appointed on hourly, daily or
weekly basis in return for the service rendered.
Wage or • It varies according to physical and mental
requirement of the job. Wage may be
Salary i. Minimum Wage:
ii.Fair wage
iii. Living Wage:

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Minimum Wage:

It is that wage which is sufficient to meet the basic need of a worker and his family.

This minimum wage has to be paid to the worker irrespective of the capacity of the industry to
pay.

The Committee on fair wage has defined minimum wage as – “the wage must provide not only
for the bare sustenance of life, but for the preservation of the efficiency of the workers.

For this purpose, minimum wage must provide some measures of education, medical
requirements and amenities”.

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 • “fair wage is the wage which is above the minimum wage but,
below the living wage”.
• It is fixed between the minimum wage and capacity to pay by the
industry.
• The lower limit of the fair wage is the minimum wage; the upper
limit is set by the capacity of the industry to pay.

Fair wage • Fair wage depends on several factors like:

(a) The productivity of labour
(b) The prevailing rates of wage in the same or neighboring
localities.
(c) The level of national income and its distribution.
(d) The place of industry in the economy of the country.
• Thus, fair wage is determined on the basis of capacity of the
industry to pay and region in which industry is located.

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Living Wage:

It is the wage that provides some of the comforts of life. It provides certain
amenities considered necessary for the well-being of the worker.

According to Fair Wage Committee “the living wage should enable the male
earner to provide for himself and his family not merely the bare essentials of
food, clothing and shelter but also a measure of frugal (using only as much
money or food as is necessary) comfort including education for children,
protection against ill health, requirements of essential social needs and measure
of insurance against the more important mis-fortunes including old age”.

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 WAGE
• The dictionary meaning of the term ‘wage’ is the pay of artisans or labourers
receiving a fixed sum by hour, day, week or month, or for a certain amount of
work. In a narrow sense ‘wage’ is the remuneration paid to blue-collar workers
for their services, usually on hourly rate or daily rate.
• Thus we find that –
i. Wage is remuneration
ii. It is paid to workers, especially maintenance and production workers
iii. It is payment in exchange for service / labour
iv. It is paid generally on fixed hourly / daily rate.
• Wages may be expressed in terms of money called nominal wages, or in terms of
purchasing power with reference to some base year called real wages.
• In broad sense, ‘wage’ refers to economic compensation paid by the employer to
his workers in exchange for their labour / service, under some contract. So, wage
includes basic wage and also allowance like overtime pay, holiday pay etc.

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 • The term salary refers to remuneration paid
to the employees appointed on monthly or
annual basis in return for the service
rendered. Thus it refers to monthly rate of
pay irrespective of number of hours put in
Salary: by employees.
• Take Home Salary:
• It is the net amount of salary received by an
employee after making all the deductions
towards the payment of income tax, LIC
premium and contribution to P.F. etc.

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 • Salary is a periodic, fixed payment for services, especially
for official or professional services. It usually refers
payment to weekly or monthly rated employees like
clerical, technical, supervisory and managerial employees.
• From the above it is observed –
i. Salary is economic compensation
ii. It is a periodic fixed payment
Salary iii. It is paid to white-collar employees like office staff,
technical staff, managerial staff, professional staff
• iv. It is paid by employer in exchange for services rendered
by above categories of employees
• Thus, ‘Salary’ is defined as economic compensation paid
by employer to his monthly / weekly rated white-collar
employees for their services, under any contract /
agreement.

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 • Under section 3 of the Minimum Wages Act, DA is
described as cost of living allowance. It is given to
protect the real wages of workers during inflation.
Dearness In India it has become integral part of the wage
system.
Allowance • Along with DA other allowances like City
Compensatory Allowance (CCA), House Rent
(DA): Allowance (HRA), Medical Allowance (MA),
Education Allowance (EA), Conveyance Allowance
etc., also form the part of compensation package.
• However, inclusion of all these allowances in the
compensation depends on nature and type of job,
contents of job, place of job, terms and condition
of appointment, capacity of employer etc.

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Incentives:

Incentive is a reward paid in addition to wages whether monetary or

not that motivates or compensates an employee for performance
above the standard.

Payment of incentive depends on productivity, sales and Profit of the

organization.

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 Fringe Benefits:

• It is a general term used to describe any of a

variety of non-wage or supplemental benefits
that employees receive in addition to their
. Fringe regular wages. These include such employee
benefits as provident fund, gratuity, medical care,
Benefits hospitalization, accident relief, paid holidays,
health and group insurance, pension etc.
and
Perquisites (Perks):
Perquisites
• Perquisites also called perks are the special
benefits made available only to the top executives
of an organisation. These may include company
car, furnished house, stock option scheme, club
membership, paid holidays etc.  

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11 Major Factors
Influencing
Compensation

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1. The Organisation’s Ability to Pay

Wage increases should be given by those organisations which can afford them.
Companies that have good sales and, therefore, high profits tend to pay higher
wages than those which running at a loss or earning low profits because of the
high cost of production or low sales. In the short run, the economic influence on
the ability to pay is practically nil. All employers, irrespective of their profits or
losses, must pay no less than their competitors and need pay no more if they wish
to attract and keep workers.

In the long run, the ability to pay is very important. During the time of prosperity,
employers pay high wages to carry on profitable operations and because of their
increased ability to pay. But during a period of depression, wages are cut because
funds are not available. Marginal firms and non-profit organisations (like hospitals
and educational institutions) pay relatively low wages because of low or no profits.

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 • The labour market conditions or supply and demand forces
operate at the national, regional and local levels, and determine
organisational wage structure and level.
• If the demand for certain skills is high and the supply is low, the

2. Supply of
result is a rise in the price to be paid for these skills. When
prolonged and acute, these labour-market pressures probably
force most organisations to “reclassify hard-to-fill jobs at a higher
and Demand level” than that suggested by the job evaluation. The other
alternative is to pay higher wages if the labour supply is scarce;

for Labour
and lower wages when it is excessive.
• Similarly, if there is great demand for labour expertise, wages rise;
but if the demand for manpower skill is minimal, the wages will
be relatively low. Mescon says- “The supply and demand
compensation criterion is very closely related to the prevailing
pay, comparable wage and ongoing wage concepts since, in
essence, all of these remuneration standards are determined by
immediate market forces and factors.”

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 Also known as the ‘comparable wage’ or ‘going wage rate’, and is the most widely
used criterion. An organisation’s compensation policies generally tend to conform to
the wage rates payable by the industry and the community.
1. Competition demands that competitors adhere to the same relative wage
level.
2. Various government laws and judicial decisions make the adoption of uniform

3. Prevailing 3.
wage rates an attractive proposition.
Trade unions encourage this practice so that their members can have equal

Market Rate
pay, equal work and geographical differences may be eliminated.
4. Functionally related firms in the same industry require essentially the same
quality of employees, with the same skills and experience. This results in a
considerable uniformity in wage and salary rates.
5. if the same or about the same general rates of wages are not paid to the
employees as are paid by the organisation’s competitors, it will not be able to
attract and maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe- “Some companies pay on the high side of the market
in order to obtain goodwill or to insure an adequate supply of labour, while other
organisations pay lower wages because economically they have to, or because by
lowering hiring requirements they can keep jobs adequately manned.”

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 • The cost of living pay criterion is usually regarded
as an automatic minimum equity pay criterion.
• This criterion calls for pay adjustments based on
increases or decreases in an acceptable cost of
4. The Cost living index.
• In recognition of the influence of the cost of
of Living living, “escalator clauses” are written into labour
contracts.
• When the cost of living increases, workers and
trade unions demand adjusted wages to offset the
erosion of real wages.
• However, when living costs are stable or decline,
the management does not resort to this argument
as a reason for wage reductions.
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5. The Living Wage

The living wage criterion means that wages paid should be adequate to
enable an employee to maintain himself and his family at a reasonable
level of existence.

However, employers do not generally favour using the concept of a living

wage as a guide to wage determination because they prefer to base the
wages of an employee on his contribution rather than on his need.

Also, they feel that the level of living prescribed in a worker’s budget is
open to argument since it is based on subjective opinion.

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 • Productivity is another criterion, and is measured in terms of
output per man-hour. It is not due to labour efforts alone.
• Technological improvements, better organisation and
management, the development of better methods of production
by labour and management, greater ingenuity and skill by labour
6. are all responsible for the increase in productivity.
• Actually, productivity measures the contribution of all the resource
Productivity factors — men, machines, methods, materials and management.
• No productivity index can be devised which will measure only the
productivity of a specific factor of production.
• Another problem is that productivity can be measured at several
levels — job, plant, industry or national, economic level.
• Thus, although theoretically it is a sound compensation criterion,
operationally many problems and complications arise because of
definitional measurement and conceptual issues.

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 A trade union’s bargaining
power is often measured in
Trade unions do affect rate
terms of its membership, its
of wages. Generally, the
7. Trade stronger and more
powerful the trade union,
financial strength and the
nature of its leadership. A
strike or a threat of a strike
Union’s the higher the wages.
is the most powerful
weapon used by it.

Bargaining
Power Sometimes trade unions
force wages up faster than
However, for those
remaining on the payroll, a
increases in productivity real gain is often achieved as
would allow and become a consequence of a trade
responsible for union’s stronger bargaining
unemployment or higher power.
prices and inflation.

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 Generally, the more difficult a job,
the higher are the wages.

8. Job
Requirement Measures of job difficulty are
frequently used when the relative
s value of one job to another in an
organisation is to be ascertained.

Jobs are graded according to the

relative skill, effort, responsibility,
and job conditions required.

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9. Managerial Attitudes

Should the firm pay below average, or above average rates?

What job factors should be used to reflect job worth?
Should we give weightage for performance or length of service?

Lester observes “Top management’s 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-calibre 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.”

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 These determine in a significant measure how hard a person will
work for the compensation received or what pressures he will
exert to get his compensation increased.

10. Psychologically, persons perceive the level of wages as a

measure of success in life; people may feel secure; have an
Psychological inferiority complex, seem inadequate or feel the reverse of all
these. They may not take pride in their work, or in the wages

and Social they get.

Sociologically and ethically, people feel that “equal work should

Factors carry equal wages,” that “wages should be commensurate with
their efforts,” that “they are not exploited, and that no
distinction is made on the basis of caste, colour, sex or religion.”

To satisfy the conditions of equity, fairness and justice, a

management should take these factors into consideration.

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11. Skill Levels Available in the Market

With the rapid growth of industries, business trade, there is shortage

of skilled resources.

The technological development, automation has been affecting the

skill levels at faster rates.

Thus, the wage levels of skilled employees are constantly changing and
an organisation has to keep its level upto suit the market needs.

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 Compensation management’s objective is
to hire competent persons, to ensure

(1) The Equity Function

Functions of
Compensatio (2) The Welfare Function
n
Management (3) The Motivation Function

(4) The Retention Function.

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 (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.
Functions of • This function ensures that more difficult jobs are paid
more and that they are fairly compensated in
Compensatio comparison to similar jobs in the market.

n 2) The Welfare Function –

• This function is to take care of their psychological and
Management 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.

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Functions of Compensation Management
(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. 34