COMPENSATION MANAGEMENT The term Compensation Administration or Wage and Salary Administration denotes the process of managing a companys

compensation programme. The goals of compensation administration are to design a cost effective pay structure that will attract, motivate and retain the competent employees. Concept of Compensation Compensation is what employees receive in exchange for their contribution to the organization. Generally, employees offer their services for three types of rewards. Pay refers to the base wages and salaries employees normally receive. Compensation forms such as bonuses, commissions and profit sharing plans are incentives designed to encourage employees to produce results beyond normal expectation. Benefits such as insurance, medical, recreational, retirement, etc., represent a more indirect type of compensation. So, the term compensation is a comprehensive one including pay, incentives, and benefits offered by employers for hiring the services of employees. Nature of Compensation Compensation offered by an organisation can come both directly through base pay and variable pay and indirectly through benefits. i. ii. iii. Base pay: It is the basic compensation an employee gets, usually as a wage or salary. Variable pay: It is the compensation that is linked directly to performance accomplishments (bonuses, incentives, stock options) Benefits: These are indirect rewards given to an employee or group of employees as a part of organisational membership (health insurance, vacation pay, retirement pension etc.)

Objectives of Compensation Planning a. Attract talent: Compensation needs to be high enough to attract talented people. b. Retain talent: If compensation levels fall below the expectations of employees or are not competitive, employees may quit in frustration. c. Ensure equity: Pay should equal the worth of a job. Similar jobs should get similar pay. Likewise, more qualified people should get better wages. d. New and desired behaviour: Pay should reward loyalty, commitment, experience, risks taking, initiative and other desired behaviours. Where the company fails to reward such behaviours, employees may go in search of greener pastures outside.

e. Control costs: The cost of hiring people should not be too high. Effective compensation management ensures that workers are neither overpaid nor underpaid. f. Comply with legal rules: Compensation programmes must invariably satisfy governmental rules regarding minimum wages, bonus, allowances, benefits, etc. g. Ease of operation: The compensation management system should be easy to understand and operate. Then only will it promote understanding regarding pay- related matters between employees, unions and managers. Factors Determining Pay Rates i. Job needs: Jobs vary greatly in their difficulty, complexity and challenge. Some need high levels of skills and knowledge while others can be handled by almost anyone. Simple, routine tasks that can be done by many people with minimal skills receive relatively low pay. On the other hand, complex, challenging tasks that can be done by few people with high skill levels generally receive high pay. Ability to pay: Projects determine the paying capacity of a firm. High profit levels enable companies to pay higher wages. This partly explains why computer software industry pays better salaries than commodity based industries (steel, cement, aluminium, etc.). Likewise, multinational companies also pay relatively high salaries due to their earning power. Cost of living: Inflation reduces the purchasing power of employees. To overcome this, unions and workers prefer to link wages to the cost of living index. When the index rises due to rising prices, wages follow suit. Prevailing wage rates: Prevailing wage rates in competing firms within an industry are taken into account while fixing wages. A company that does not pay comparable wages may find it difficult to attract and retain talent. Unions: Highly unionised sectors generally have higher wages because well organised unions can exert presence on management and obtain all sorts of benefits and concessions to workers. Productivity: this is the current trend in most of the industries when workers wages are linked to their productivity levels. State Regulation: Government regulates the laws in respect of minimum wages, bonus, dearness allowances etc. Demand and Supply of Labour: The demand for and the supply of certain skills determine prevailing wage rates.

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Components of Pay Structure in India Wages In India, different Acts include different items under wages, though all the Acts include basic wage and dearness allowance under the term wages. Under the Workmens Compensation Act, 1923, wages for leave period, holiday pay, overtime pay, bonus, attendance bonus, and good conduct bonus form part of wages. Under The Payment of Wages Act, 1936, Section 2 (vi), any award of settlement and production bonus, if paid, constitutes wages. Basic Wage

The basic wage in India corresponds with what has been recommended by the Fair Wages Committee (1948) and the 15th Indian Labour Conference (1957). The various awards by wage tribunals, wage boards, pay commission reports and job evaluations also serve as guiding principles in determining basic wage. While deciding the basic wage, the following criteria may be considered: (i) Skill needs of the job; (ii) Experience needed; (iii) Difficulty of work: mental as well as physical; (iv) Training needed; (v) Responsibilities involved; (vi) Hazardous nature of job. Dearness Allowance

It is the allowance paid to employees in order to enable them to face the increasing dearness of essential commodities. It serves as a cushion, a sort of insurance against increase in price levels of commodities. Instead of increasing wages every time there is a rise in price levels, DA is paid to neutralise the effects of inflation. Other Allowances

Different allowances given by the employers in India are city compensatory allowance, credit card, car, club membership, leave travel, driver, education, family, lunch, medical, paternity, overtime, night shifts, servant, transport, telephone, uniform allowance etc.

Job Evaluation Job evaluation is a systematic way of determining the value/worth of a job in relation to other jobs in an organisation. It tries to make a systematic comparison between jobs to assess their relative worth for the purpose of establishing a rational pay structure.

Features of Job Evaluation i. ii. iii. iv. v. vi. It tries to assess jobs, not people. The standards of job evaluation are relative, not absolute. The basic information on which job evaluations are made is obtained from job analysis. Job evaluations are carried out by groups, not by individuals. Some degree of subjectivity is always present in job evaluation. Job evaluation does not fix pay scales, but merely provides a basis for evaluating a rational wage structure.

Process of Job Evaluation The process of job evaluation involves the following steps: i. Gaining acceptance: Before undertaking job evaluation, top management must explain the aims and uses of the programme to the employees and unions. To elaborate the programme further, oral presentations could be made. Letters, booklets could be used to classify all relevant aspects of the job evaluation programme. Creating job evaluation committee: It is not possible for a single person to evaluate all the key jobs in an organisation. Usually a job evaluation committee consisting of experienced employees, union representatives and HR experts is created to set the ball rolling. Finding the jobs to be evaluated: Every job need not be evaluated. This may be too taxing and costly. Certain key jobs in each department may be identified. While picking up the jobs, care must be taken to ensure that they represent the type of work performed in that department. Analysing and preparing job description: This requires the preparation of a job description and also an analysis of job needs for successful performance . Selecting the method of evaluation: The most important method of evaluating the jobs must be identified now, keeping the job factors as well as organisational demands in mind.

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Benefits: The pay offs from job evaluation may be stated thus: i. It tries to link pay with the requirements of the job.

ii. It offers a systematic procedure for determining the relative worth of jobs. Jobs are ranked on the basis of rational criteria such as skill, education, experience, responsibilities, hazards, etc., and are priced accordingly.

iii. An equitable wage structure is a natural outcome of job evaluation. An unbiased job evaluation tends to eliminate salary inequities by placing jobs having similar requirements in the same salary range. iv. Employees as well as unions participate as members of job evaluation committee while determining rate grades for different jobs. This helps in solving wage related grievances quickly. v. Job evaluation, when conducted properly and with care, helps in the evaluation of new jobs.

vi. It points out possibilities of more appropriate use of the plants labour force by indicating jobs that need more or less skilled workers than those who are manning these jobs currently. Wage policy in India Wage policy is an important issue and recognizing its importance the constitution of India guaranteed equal pay for equal work for both men and women (Article 39) and reiterated that state must endeavour to secure for all workers a living wage and condition of work which ensures a decent standard of life (Article 43). After Independence the Government realized that the wages of workers cant be left to the fluctuations (demand and supply of labour) in labour market. It has decided to fix statutory minimum wages. Minimum wage: Minimum wages is that wage which must invariably be paid whether the company, big or small, makes profit or not. It is that bare minimum that a worker can expect to get for services rendered by him. Fair wage: It is that wage which is above the minimum wage but below the living wage. According to the committee on Fair Wage, 1948, fair wage should be determined taking the following factors in account: The productivity of labour Prevailing rates of wages Level of national income The employers capacity to pay Living Wage: living wage is highest among three. It must provide Basic amenities of life Efficiency of worker Medical, education and retirement benefits etc. Institution involved in Fixation of Wages 1) Employer 2) Collective Bargaining: Its a procedure through which employee problems relating to various issues including wages are settled through the process of joint consultation, in an atmosphere of give and take, trust and mutual confidence.

3) Legislation Minimum Wages Act, 1948: The act prescribes minimum rates of wages for certain unorganized sectors covered under the act. The acts provides for setting up a tripartite body consisting of employees, unions and the government, to advise and assist in fixing and revising the minimum wage rates. The payment of Wages Act, 1936: The main objective of the act is to provide for regular payment of wages without any unauthorized deductions to persons who are employes in any industrial establishment or factory or railway whose payment is less than Rs 1600. The acts provides for following permissible deductions to be made from employees salary; fines, deduction from absence, deduction for loss of goods, house given by employer, advances given to the worker etc. Adjudication of Wage Disputes: If issues related to wages are not settled through collective bargaining, they may be settled through voluntary arbitration or adjudication. 4) Wage Boards: This is one of the important institution set up by the Government of India for fixation and revision of wages. Separate wage boards are set up for separate industries. Wage boards are not governed by any legislations but are appointed by the central government on an ad hoc basis. Each wage board is consist of one neutral chairman, two independent members and two or three independent members of workers and management each. The Wage Board fix and revise various components of wages like basic pay, dearness allowance, incentive earnings, overtime pay, house rent allowance and all other allowances. 5) Pay Commissions: Wages and allowances of Central and State level employees are determined through the pay commissions appointed by the appropriate government. So far the Central Government has appointed six pay commissions. Wage Differentials It means different wages for the employees doing different jobs. It performs important economic functions like labour productivity, attracting the people to different jobs. Attracting efficient workers, maximization of employee commitment, development of skills, knowledge, utilization of human resources, maximization of productivity cab be fulfilled through wage differentials. Wage differential plays a pivotal role in a planned economy in the regulation of wages and development of national wage policy by allocating the skilled human force on priority basis. Development of new skills, knowledge etc are essential part of human resource development. Shortage of technical and skilled personnel is not only a problem for industries but also creates bottleneck in attainment of planned goals. Thus wage differentials, to certain extent are desirable

from the viewpoint of national interest. As such they probably become an essential part of national wage policy. Complete uniform wage policy is impracticable and undesirable.

Reasons for Wage Differentials i. ii. iii. iv. Interpersonal Differentials: differentials in gender, age, skill, knowledge and experience. Inter- occupational Differentials: varying requirements of skill, knowledge, demand supply situation Inter-area Differentials: cost of living, ability of employer to pay, demand and supply situation, extent of unionization Inter-firm Differentials: ability of employer to pay, employees bargaining power, degree of unionization, skill needs etc.

Are Wage Differentials Justified? Wage differentials on the basis of occupations, units and areas (when real wages are taken into account) can be justified on the basis of equal pay for equal work among workers. They can also be justified in view of varying conditions of demand and supply and varied job requirements like skill, knowledge, aptitude and ability. But the object of Government is to minimize income inequalities and inequalities in the distribution of wealth. Thus, wage differentials are not desirable in a socialistic pattern of society. However, formulating uniform wage policy ignoring differences in individual skills, knowledge, etc. are constrained by limitations in a units ability to pay varying living costs in different regions, varying demand and supply conditions, differences in occupations etc. rendering uniformity impracticable. Interpersonal, inter-unit, inter-occupational wage differentials are more predominant in unorganized sector of Indian Economy. But even in organized sectors and public sector units, wage differentials are quite common. Wage differentials on the basis of gender are however common in unorganized sector of the economy. However it is felt that further steps should be taken in order to minimize wage differentials