EMPLOYEE

COMPENSATION
Submitted by -
RADHIKA CHANDAN (1921111024)
SAHITYA PAUL (1921111031)
CONTENT
⦁ Concept of Compensation
⦁ Aims of Compensation
⦁ Job Evaluation and Compensation
⦁ Concept of Wage and Salary
⦁ Compensation Determinants
⦁ Principles of Salary Formulation
⦁ Components of Compensation
⦁ Compensation Policies
⦁ Salary Structures
⦁ Salary Progression
⦁ Salary Administration Procedures

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CONCEPT OF COMPENSATION
• Compensation: Employees’ gross earnings in the form of financial
rewards and benefits as a part of employee relationship.

• Compensation may be viewed as:

i. A system of rewards that motivates employees to perform
ii. A tool used by organisations to foster the values, culture and
the behaviour they require
iii. An instrument that enables organisations to achieve their
business objectives.

• Compensation Management – assist an organisation in achieving its

strategic goals in conjunction with internal as well as external equity.

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AIMS OF COMPENSATION
⦁ To Attract Qualified applicants to the
Organization.

⦁ To Retain competent employees in the

Organization.

⦁ To motivate employees to perform better.

Serves as an incentive.

⦁ To increase the overall Organizational

Effectiveness.

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 JOB EVALUATION & COMPENSATION
⦁ Leads to establishment of a satisfactory
compensation level and thereby
Job Evaluation
promotes employees’ goodwill.

⦁ Frame a satisfactory, rational and Weighing / Job

balanced compensation system within Value
an organisation.

⦁ Makes promotion and transfers more Salary structure

easily acceptable and enables the
adjustment of existing job positions
within the existing compensation Salary of Employee
structure.

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CONCEPT OF WAGE & SALARY
⦁ Salary – Refers to remuneration paid on monthly basis (generally
to white collar workers and managers)
⦁ Wage – Usually refers to remuneration paid on hourly basis
(generally to blue collar workers or non-skilled workers)

⦁ System of Wage Determination –

⦁ Time wage system –

Wages = No. of hours of work x Rate per hour

⦁ Piece Wage system –

Wages = No. of units produced x Rate per unit

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COMPENSATION DETERMINANTS

• Organisations in a particular industry “encounter similar constraints of technology,

raw materials, product demand and pricing”.
Product Market • An organisation will find it at a competitive disadvantage in the product market if
its labour costs exceeds those of its competitors.

• A pay level that is too low relative to the competitors could lead to difficulties in
attracting and retaining sufficient number of quality employees. (labour market
Labour Market competition)
• In order to avoid such a situation many companies emphasize that their total
compensation is equal to or better than other companies in the market.

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PRINCIPLES OF SALARY FORMULATION

EXTERNAL INTERNAL INDIVIDUAL

RELATIVITIES RELATIVITIES WORTH

• Market rates as • Salary relativities

affected by between jobs • The value of the
supply and within the
individual's
demand and organisation
performance to
general depending on the
the organisation.
movements in values attached to
pay levels. different jobs.

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PRINCIPLES OF SALARY FORMULATION
⦁ Wage that an employer is willing to pay depends upon his or her
philosophy, capacity to pay, competitive position and ability to
attract and retain a workforce by factors other than wages.

⦁ Government’s role:
⦁ Number of laws to ensure payment of a minimum wage and
payment on time.
⦁ Given the imbalanced positions of the employer and the
employee, the government has had to often appoint wage
boards to determine the wages in particular industries.
⦁ Labour courts and industrial tribunals set up by the
government to settle wage disputes by adjudication.

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 FRINGE BASIC WAGE
BENEFITS

COMPONENTS
INCENTIIVE OF DEARNESS
SYSTEM COMPENSATION ALLOWANCE

ANNUAL BONUS
OVERTIME
PAYMENT

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1. Basic Wage
⦁ Concept – contained in the report of Fair Wages
Committee.

⦁ Minimum wage – which provides “not merely for the

bare sustenance of life but for the preservation of the
efficiency of the workers by providing some measure of
education, medical requirements and amenities.”

⦁ Most stable and fixed as compared to dearness

allowance and annual bonus.

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2. Dearness Allowance
⦁ The real wages of the workmen are required to be protected when there
is a rise in prices and a consequent increase in the cost of living by
suitable adjustments in their wages.
⦁ In India - several systems of paying dearness allowance - differ from
place to place and industry to industry.

LINKAGE WITH
GRADUATED SCALES
FLAT RATE CONSUMER PRICE
ACCORDING TO SLABS
INDEX NUMBER
• Workers are divided into
• A fixed amount is paid to all • The index shows the rise or groups according to the slabs
categories of workers, fall in the cost of living due of wage scales to whom
irrespective of their wage a rise or fall in consumer fixed amounts of dearness
scale. prices. allowance are paid on a
graduated scale.

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3. Overtime Payment
⦁ Reasons for Overtime:
 Inappropriate allocation of manpower and improper scheduling;
 Absenteeism;
 Unforeseen situations created due to genuine difficulties like breakdown of
machines;
 To meet urgent delivery dates;
 Sudden upswings in production schedules;
 To give management a degree of flexibility in matching labour capacity to
production demands.

⦁ The payment of overtime allowance to the factory and workshop employees is

guaranteed by law. All employees who are deemed to be workers under the Factories
Act or under the Minimum Wages Act are entitled to it at twice the ordinary rate of
their wages for the work done in excess of 9 hours on any day or for more than 48
hours in any week. The major benefit of overtime working to workers is that it offers an
increase in income from work.

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4. Annual Bonus
⦁ Bonus Component - a statutory status only with the enactment of the
Payment of Bonus Act, 1965.
⦁ The Act is applicable to factories and other establishments employing 20 or
more employees.
⦁ The Act has statutorily imposed an obligation on the employer to pay bonus
to employees at the minimum rate of 8.33 per cent of the salary earned. The
maximum is fixed at 20 per cent.
⦁ The Act has restricted payment of bonus to employees drawing wages or
salaries up to rupees 21,000 per month. In cases of those eligible employees
whose salary is more than rupees 21,000 per month, it is computed at rupees
7,000 per month or the minimum wage for schedule employment, as fixed
by the appropriate government, whichever is higher (as per amendment in
2015).
⦁ The quantum of bonus under the Act is dependent upon “available surplus”.

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5. Incentive System
⦁ It is recommended that wage incentives should be used for effective
utilisation of manpower, which is the cheapest, quickest and surest
means of increasing productivity.

⦁ It is the only practicable and self-sustaining means of improving

manpower utilisation.

⦁ A wage incentive scheme, is the payment for work of an acceptable

quality produced over and above a specified quantity or standard.

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5. Incentive System (Cont’d.)
Incentive System

Individual Wage Group or Area Incentive Organisation-Wide

Incentive Plan Scheme Incentive System

Gains-
Piece-work Group
sharing
Standard Plans
Plans

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(i) Individual Wage Incentive Plan
⦁ Individual Incentive Systems are based upon certain norms established
by work measurement techniques such as past performance, bargaining
between union and the management, time study, standard data,
predetermined elemental times and work sampling.

PIECE-WORK GAINS-SHARING
GROUP PLANS
STANDARD PLANS
• A guaranteed base
• Most simple and • As the gains are
rate to the workers in
frequently used. shared with the
which the
entrepreneurs, the
• An individual’s performance over
worker gets less than
earnings are direct standard is rewarded
1% increment in
and proportionate to by a proportionate
wage for every 1%
their output premium over base
increase in output.
pay.

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(ii) Group or Area Incentive Scheme
⦁ Payment of a incentive either equally or proportionately to
individuals within a group or area.

⦁ Incentive is related to the output achieved over an agreed standard

or to the time saved on the job – the difference between allowed
time and actual time.

⦁ Most appropriate where:

 People have to work together and teamwork has to be
encouraged
 High levels of production depend a great deal on the
cooperation existing among a team of workers as compared
with the individual efforts of team members.

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(iii) Organization-Wide Incentive System
⦁ Involves cooperation among employees and the management and claims
to accomplish broader organisational objectives such as:
 To reduce labour, material and supply costs;
 To strengthen loyalty to the company;
 To promote harmonious labour-management relations;
 To decrease turnover and absenteeism.

⦁ One of the aspects of this system is profit sharing under which an

employee receives a share of the profit fixed in advance under an
agreement freely entered into.

⦁ Major objective of the profit sharing system - To strengthen the unity of

interest and the spirit of cooperation.

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(iii) Organization-Wide Incentive System (Cont’d)
⦁ Advantages of Organisation-Wide Incentive Scheme:
 It inculcates in employees’ a sense of economic discipline as regards
wage costs and productivity.
 It engenders improved communication and increased sense of
participation.
 It is relatively simple and its cost of administration is low.
 It is non-inflationary, if properly devised.

⦁ One of the essentials of a sound profit sharing system is that it should not
be treated as a substitute for adequate wages but provide something extra
to the participants.

⦁ Full support and cooperation of the union is to be obtained in

implementing such a scheme.

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6. Fringe Benefits
Characteristics of Fringe Benefits:

i. Distinctly additional to the regular wages paid to the workers - not provided as a
substitute for wages or salaries of the employees.
ii. Meant primarily to be of advantage to the employees.
iii. Advantages accrued to the employees through the provision of fringe benefits
are as such they cannot be secured through their own individual efforts.
iv. Only those benefits fall within the purview of fringe benefits which are or can
be expressed in cash terms.
v. Different from that of welfare services – Fringe Benefits are provided by the
employers alone whereas Welfare Services may be provided by other agencies as
well. Benefits that have no relation to employment should not be regarded as
fringe benefits.

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6. Fringe Benefits (Cont’d.)

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COMPENSATION POLICIES
⦁ Aims of Compensation Policies
 To recognize the value of all jobs in a company.
 To take account of wage rates paid by similar
companies.
 To ensure Stable Earnings
 To enable individual to reach full earning potential.
 To ensure employees’ share in the company’s
prosperity.

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COMPENSATION POLICIES (Cont’d)
⦁ The Compensation Policy of a
corporation has to consider:
 Community Concerns
 Company’s Objectives &
Plans
 Employees’ Concerns.
⦁ Corporate Compensation
Policy & Community Concerns
⦁ Strategy of Wage Increases
⦁ Rationality and Hygiene
Factors
⦁ Internal Equity
⦁ External Equity
⦁ Payroll Analysis & Policy
Correctives
⦁ Wage & Salary
Administration Function
⦁ Corporate Compensation
Structure
⦁ Managerial Compensation.
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COMPENSATION POLICIES (Cont’d)
⦁ Wage Policy in the Indian context is influenced by ‘forces’.
⦁ Government to take into account interests of laborer,
consumers and the entire economy.
⦁ Generation of employment and Need-based minimum
wage.
⦁ Aspects of wage determination at various levels have to be
constantly reconsidered.
⦁ Prices, wages & profits must be balanced for better
economic functioning.

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SALARY STRUCTURES
⦁ The salary structure consist of a company’s salary grades or
ranges and its salary levels for single jobs or groups of jobs.

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(i) Graded Salary Structure
⦁ Features of Graded Salary Structure:-
 All jobs are allocated into a salary grade.
 Each grade consist a salary range.
 The ranges can be adjusted based on external conditions.
 Salary Grades should be wide to recognize performance.
 A differential should be maintained between the mid-
points of each grade.
 The mid point of each grade is target salary for the grade.
 There can be an overlap between the salary grades.
 Jobs in a same salary grade should be of the same level.
 Progress depends on performance

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(i) Graded Salary Structure (Cont’d)
⦁ Number of Salary Grades or Ranges depends on:

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(i) Graded Salary Structure (Cont’d)
⦁ Make up of a Salary Grade:

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(i) Graded Salary Structure (Cont’d)
⦁ Designing the Salary Structure.

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(ii) Salary Progression Curve
⦁ Known as Maturity Curve or
Career Curve.
⦁ Increases in Salaries are linked
to Increased Maturity or
Experience.
⦁ Progression Curves are mostly
used for Professional/Scientific
staff.

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(ii) Salary Progression Curve (Cont’d)
⦁ Salary Progression relates ⦁ Incremental Systems
Increases in salary to merit.  Incremental Systems vary in
⦁ The salary ranges are divided into their rigidity & flexibility.
zones. Individual progresses  Between the two extremes there
through these zones. are mid-ranged, semi-flexible
⦁ There should be Incremental systems.
Systems which shows individual’s  The Choice of approach depends
progress. on Organizational climate and
⦁ Managerial Styles.
There must be guidelines for merit
 It is important to ensure
increments & planning salary
progression individuals are correctly placed
in their ‘range’.

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SALARY ADMINISTRATION PROCEDURE
⦁ Salary Budget: Financial statement of planned
allocation and use of resources. A forecast has to
be made for the various level of activities.

⦁ Salary Reviews: There are 2 types:-

⦁ General Salary Review: This takes place
when all or most salaries has to be increased.
⦁ Individual Salary Reviews: These are used to
decide on the merit increments that should
be given to staff.

⦁ Fixing Salaries on Appointment or Promotion:

⦁ Control over Starting Salaries
⦁ Increase should be meaningful.

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Thank
You!
Any questions?

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