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Compensation (Wage & Salary Administration)



Compensation is the total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required.

Compensation also includes payments such as bonuses, profit sharing, overtime pay, recognition rewards and checks, and sales commission. Compensation can also include nonmonetary perks such as a company-paid car, stock options in certain instances, company-paid housing, and other non-monetary, but taxable, income items.


1. Job satisfaction: Your employees would be happy with their jobs and would love to work for you if they get fair rewards in exchange of their services. 2. Motivation: We all have different kinds of needs. Some of us want money so they work for the company which gives them higher pay. Some value achievement more than money, they would associate themselves with firms which offer greater chances of promotion, learning and development. A compensation plan that hits workers needs is more likely to motivate them to act in the desired way. 3. Low Absenteeism: Why would anyone want to skip the day and watch not-so-favorite TV program at home, if they enjoy the office environment and are happy with their salaries and get what they need and want? 4. Low Turnover: Would your employees want to work for any other boutique if you offer them fair rewards. Rewards which they thought they deserved?

Advantage to Employees:

1. Peace of Mind: your offering of several types of insurances to your workers relieves them from certain fears. Your workers as a result now work with relaxed mind. 2. Increases self-confidence: Every human being wants his/her efforts to get acknowledgment. Employees gain more and more confidence in them and in their abilities if they receive just rewards. As a result, their performance level shoot up.



The term compensation Administration or wage and salary administration denotes the process of managing a company's compensation program:

v The goal of compensation administration is to design cost effective pay structure that will attract, motivate, and retain competent employees. v Employee compensation may be classified into two typesbase compensation and supplementary compensation v Base compensation refers to monitory payments to employees in the form of wages and salaries v Wages implies remuneration to workers doing manual work. v Salaries is usually defined to mean compensation to office, managerial, technical and professional staff. v Base compensation should be noted here is a fixed and non incentive payment on the basis of time spent by an employee on the job v Supplementary compensation signifies incentive payments based on actual performance of an employee or a group of employees

Compensation administration is a segment of management or human resource management focusing on planning, organizing, and controlling the direct and indirect payments employees receive for the work they perform. Compensation includes direct forms such as base, merit, and incentive pay and indirect forms such as vacation pay, deferred payment, and health insurance. Compensation does not refer, however, to other kinds of employee rewards such as recognition ceremonies and achievement parties. The ultimate objectives of compensation administration are: efficient maintenance of a productive workforce, equitable pay, and compliance with federal, state, and local regulations based on what companies can afford.

The basic concept of compensation administration compensation management: employees perform tasks for employers and so companies pay employees wages for the jobs they do. Consequently, compensation is an exchange or a transaction, from which both partiesemployers and employeesbenefit: both parties receive something for giving something. Compensation, however, involves much more than this simple transaction. From the employer's perspective, compensation is an issue of both affordability and employee motivation. In addition, some employers and managers believe pay can influence employee work ethic and behavior and hence link compensation to performance. Moreover social, economic, legal, and political forces also exert influence on compensation management, making it a complicated yet important part of managing a business.

A sound plan of compensation administration seeks to achieve the following objectives: To establish a fair and equitable remuneration offering similar pay for similar work To attract qualified and competent personnel To retain the present employees by keeping wage levels in tune with competing units To control labor and administrative cost in line with the ability of the organization to pay To improve motivation and morale of employees and to improve union management relations To project a good image of the company and to comply with legal needs relating to wages and salaries


Principles of Wage and Salary Administration

There are several principles of wage and salary plans and practices. 1.Wage and salary plans should be sufficiently flexible. 2.Job evaluation must be done scientifically 3.Plans must always be consistent with overall organizational plans and programmes. 4.These plans and programmes should be in conformity with the social and economic objectives of the country like attainment of equality in income distribution and controlling inflationary trends. 5.These plans and programmes should be responsive to the changing local and national conditions 6.These plans should simply and expedite administrative processes. 7. Measuring the actual performance 8. Comparing the performance with the salary received 9. Measuring the job satisfaction of the employees 10. Evaluating the unsatisfied wants and unrealized goals aspirations of the employees 11. Finding out the dissatisfaction arising from unfulfilled 12. needs and unattained goals. 13. Adjusting the salary levels accordingly with a view to enabling the employees to reach undetached goals and fulfill the unfulfilled needs 11 and aspirations.

Factors influencing compensation levels

The amount of compensation received by an employee should reflect the effort put in by the employee and also the degree of difficulty experienced while expending his energies. a) Job needs: Jobs vary greatly in their difficulty, complexity and challenge b) Ability to pay: Projects determine the paying capacity of a firm c) Cost of living: Inflation reduces the purchasing power of the employees d) Prevailing wage rates : Competent firms within an industry are taken into account while fixing wages, otherwise it is difficult to attract and retain the talent e) Unions : High unionized sectors can exert presence on management and obtain all sorts of benefits and concessions to workers. . f) Productivity :If your job performance is good you get good wages. g) State regulation : The legal stipulations determine the wage structure in an industry. h) Demand and supply of labor : The demand for and the supply of certain skills determine prevailing wage rates.


Wage Policy
A wage bill is an important part of the production cost. If the wage bill increases beyond the paying capacity of an employer, the very survival of the firm becomes difficult. And from the employees point of view wages determines his standard of living, so its an important issue.

Recognising this the constitution of India guaranteed equal pay for equal work for both men and women which ensure a decent standard of life

Fair Wage :
This is the wage which is above the minimum wage but below the living wage, lets see the factors, - The productivity of labor The prevailing rates of wages in the same or similar occupations The level of national income and its distribution The place of industry in the economy of the country The employers capacity to pay.

Living Wage :
Living wage is the highest among the three, it is dynamic concept and grows in line with growth of the national economy. It must provide, - Basic amenities of life - Efficiency of the worker - Satisfy social needs of the workers such as, medical, education, retirement etc. Legislations regarding wages


Wage & Salary AdministrationIntroduction

As money is the prime need for human beings to meet their basic needs, everyone tries to earn as much money as possible A clerk earning less than a driver may have a vague grievance, but when he earns less than another clerk of comparable qualifications and experience he will show his unhappiness more bitterly. This shows that people have the tendency to compare themselves with others who are in a similar profession and/or with similar qualifications

Wage & Salary AdministrationIntroduction

The main objective of wage and salary administration is to have a scientific, rational, and balanced wage & salary structure In salary administration, the employer should not feel that the employees are paid more than they deserve and the employees should not feel that they are underpaid. Unless there is a scientific approach /method we cannot solve this conflict Here wage and salary administration includes allowances, leave facilities, housing, travel, etc and non-cost rewards such as recognition, privileges and symbols of status

Wage & Salary AdministrationIntroduction

In India the question of wages assumes paramount importance because of acute poverty, large scale unemployment and a high population. No fixed norms and means are followed in fixing wages and salaries, so a lot of ad-hocism and expediencies are found in fixing wages. The compensation has to be viewed from economic, psychological, legal and growth points of view

Meaning of Wage and Salary Administration

Wage and Salary Administration is the group of activities involved in the development, implementation and maintenance of a pay system It can also be called the ongoing process of managing a wage and salary structure


Difference between Wage, Salary and Compensation

Wage: Paid to blue-collar workers-paid daily, weekly or monthly-paid for the jobs which can , to some extent, be measured in terms of moneys worth Salary: Paid to white collar workers-paid monthly-paid to employees whose contribution cannot be easily measured Compensation: a comparative term- includes wage and all other allowances and benefits like allowances, leave facilities, housing, travel and non-cost such as recognition, privileges and symbols of status


Factors influencing Wages and Salary

Wage policy of the company- The company may have a policy to fix the wages externally competitive and internally compatible, i.e. they pay according to the competition and maintain equity among various employees in the company. Sometimes the company may have a wage policy that it should be above the industry average or below it or comparable to it

Factors influencing Wages and Salary

Prevailing wages in the region Financial position of the company Trade Unions pressure on the Management Government policy on wages and salaries Relative worth of job done Demand and supply of labour Economic conditions of the nation

Time-Rate and Piece-Rate Wages

Employees prefer time-rate while employers prefer piece-rate Both have their own merits. In time-rate, quality can be maintained, but the expected level of production may not be delivered by the employees. In piece-rate, the quality may be compromised but the workers may get extra income that will motivate them If an employees production exceeds the standard production, he should be given incentives for the extra production

Time-Rate and Piece-Rate Wages

When production is not amenable to measure the time taken to complete the job can be considered to fix the wage on time-rate basis. E.g. A person who takes only 60% of the standard time to complete a job can be paid incentive for the 40% time saved, since he spends that 40% time for doing another job Whether piece-rate or time-rate, the management should provide all facilities and keep the working conditions conducive for better production, otherwise the system will be a failure

Time-Rate and Piece-Rate Wages

Taylors Differential Piece-wage system If the actual output exceeds or equals the standard output then the employee will be paid higher rate (as incentive). If the actual output is less than the standard output, then the employee will be paid lower rate (as disincentive)


Taylors Differential Piece-wage system

e.g. Std output for an employee- 10 units Higher wage rate - Rs 3per unit Lower wage rate - Rs 2.5per unit When an employees actual output is 10 units, his wage will be 10*Rs3=Rs 30. When it is only 8 units, the wage will be 8*Rs2.5=Rs 20.

Halsey Premium Plan

A bonus is paid for the time saved apart from a minimum base rate for each unit produced Standard time- 20 hrs Hourly rate per unit- Re 1(base rate) Incentive per hour- Re 0.5 In case the worker has taken only 14 hours, then his wage will be 14*1+6*0.5=17 Rs Totally Rs 17 will be paid. Hence 6 hours savings gets incentive of 50% of base rate In case he takes more than the standard hours, then there is no bonus, only the base rate will be paid.

Minimum Wages, Living Wages and Fair Wages

Minimum wages- It must provide not only for the bare sustenance of life but for the preservation of the efficiency of the workers by providing some measures of education, medical care, etc. Criteria: It must be calculated for a family of 4 units (numbers) It must be able to provide 2700 calories per adult per day It should be sufficient for 18 yards of cloth per unit per annum There should be a provision for reasonable house rent, light, fuel and miscellaneous items


Minimum Wages, Living Wages and Fair Wages

Living wages- It is not only for the bare essentials for the worker and his family, but also for comfort, protection against illhealth, decency, social needs and insurance for old age Fair wages- It is in-between minimum wages and living wages, but below the living wage

Legal framework on wages

The Government has enacted various laws to regulate and govern the wages. They are: The payment of Wages Act 1936 The payment of Bonus Act 1965 The Equal Remuneration Act The Minimum Wages Act The Companies Act 1956

1. 2. 3. 4. 5.

Dearness Allowance
The main objective of DA as a component of wage is to neutralize the increase in price. In certain cases the DA is more than the basic pay or double the basic pay. The DA is computed according to changes in consumer price index and sometimes the DA is linked to pay slabs also, i.e., as the basic pay goes up, the rate of DA will come down

Arguments against DA
1. 2. 3. It has nothing to do with the amount of work performed, i.e., DA is increased without proportionate increase in production Price rise leads to increase in DA, and DA increase in turn, leads to price increase. Ultimately it leads to spiralling inflation Most of the industrially developed countries dont have the DA system. They have the Gross Wage System. Price rise is taken care of by increasing the gross wage. So psychologically the employees feel that the wage has been increased, so the production also should be increased. But in Indian conditions, the employees feel that the DA increase is only to neutralize the price rise. So, they dont increase the productivity and demand for more and more wages. People are trying to get more wage through DA increase rather than Basic wages increase in order to avoid increase in production


Development of a Pay System

Review Job description

Conduct Job evaluation Pay Structure

Gather Wage Survey information

Administer individual Pay adjustments

Monitor and Update The Pay System


Development of a Pay System

Before developing a pay system the organization must develop policies as general guidelines to govern the pay system. Uniform policies are needed for co-ordination, consistency and fairness in compensating employees Job Analysis is used in developing a pay system through the activities of job evaluation and wage/salary surveys Job Evaluation is to ensure internal equity whereas wage survey is to ensure that the pay is externally competitive Using the Job Evaluation details, the pay structure (Grades) and minimum and maximum wage ranges are determined. Then individual jobs must be placed in the appropriate pay grades and employees pay adjusted based on length of service and performance. Finally the pay system must be monitored and updated as needed

Any Pay System should create a feeling of equity in the minds of the employees. Otherwise it will demoralize and demotivate the employees. But in Indian conditions it is very difficult to practice. For e.g. we can see wage disparity among employees of Indian banks. In certain cases, the disparity can be justified and in certain cases it cannot be justified. Another feature of Indian Pay System is that the Govt subsidies to PSUs and SSIs, Compulsory bonus, etc. make the salary and wage system unscientific. The present trends in the wage pattern are that the gap between the officers pay and workers pay is narrowing down, and the difference between organized sector and unorganized sector, women and men, casual and regular workers pay is on the rise. The public policy is to reduce the disparity, but it cannot be done overnight. The modern trend in wage in organized sectors is linking it with productivity. Nowadays the productivity-linked bonus and incentives are quite common in the 35 companies including public sector undertakings