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Compensation Management : Compensation is the remuneration received by an employee in return for his/her contribution to the organization.

It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness. Components of Compensation System Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows: Job analysis Salary structures Pay structure Need of Compensation Management A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and selfactualization needs to fulfill. Thus, compensation serves the purpose. The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards. Compensation offered by an organization can come both directly through base pay and variable pay and indirectly through benefits. 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 organizational membership (health insurance, vacation, pay, retirement pension etc.).

Objectives of Compensation Planning: The most important objective of any pay system is fairness or equity. The term, equity has three dimensions 1) Internal equity: This ensures that more difficult jobs are paid more. 2) External equity: This ensures the jobs are fairly compensated in comparison to similar jobs in the labour market. 3) Individual equity: It ensures equal pay for equal work. i.e. Each individuals pay is fair in comparison to others doing the same /similar jobs.
The ultimate goals of compensation administration (the process of managing a companys compensation program) is to reward desired behaviours and encourage people to do well in their jobs. 1) Attract talent: Compensation needs to be high enough to attract talented people. Since many firms compete to hire the services of competent people, the salaries offered must be high enough to motivate them to supply. 2) Retain Talent: Compensation levels fall below the expectations of employees or are not competitive, employees may quit in frustration. 3) Ensure equity: pay should equal the worth of a job, similar jobs should get similar pay. Likewise more qualified people should get better wages 4) New and desired behaviour: Pay should reward loyalty commitment, experience, risk taking initiatives and other desired behaviours. Where the company fails to reward such behaviours employees may go in search of greener pastures outside. 5) Control costs: The cost of hiring people should not be too high. Effective compensation management

ensures that workers are neither overpaid nor underpaid. 6) Comply with legal rates: Compensational programs must invariably satisfy governmental rules regarding minimum wages, bonus, allowance benefits etc. 7) 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. Equity and Pay rates: The need for equity is the most important factor in determining pay rates. This is achieved through the followings steps: 1) Find the worth of each job through job evaluation. 2) Conduct a salary survey to find what other employees are paying for comparable jobs. 3) Group similar jobs in to pay grades. 4) Price each pay grade by using wage curves. 5) Fine tune pay rates. Objectives of a Base Pay Program . In general, every organization's base pay program has certain objectives. The principal ones are as follows: * internal equity. * external equity (or competitiveness), * individual equity, * process equity, * performance or productivity incentives, * maximum use of financial resources, * compliance with laws and regulations, and * administrative efficiency.

Guidelines for an effective compensation


Compensation objectives are not rules; they are guidelines. But the more the objectives are followed, the more effective wage and salary administration will be. To meet these objectives, the major phases of compensation management include the following: Phase 1. Evaluate every job, using job analysis information to ensure internal equity based on each job's relative worth. Phase 2. Conduct wage and salary surveys to determine external equity based on the rates paid in the labor market. Phase 3. Price each job to determine the rate of pay based on internal and external equity based on the rates paid in the labour market.

Theory of wages:
The word salary is defined in the Oxford Dictionary as fixed periodical payment to a person doing other than manual or mechanical work. The payment towards manual or mechanical work is referred to as wages. The word pay refers to the payment for services done which would include salary as well as wages. Wages are commonly understood as price of labour. In ordinary parlance, any remuneration paid for services is etymological wage. Benham defines wage as a sum of money paid under contract by an employer to a worker for services rendered.

Labour was always looked upon as a commodity governed by the law of supply and demand. Certain theories were propounded for determination of wages but these could not stand the test of time. A few theories are discussed below: Subsistence theory: This theory, also known as Iron Law of Wages, was propounded by David Ricardo (1772-1823).
According to this theory, wages tend to settle at a level just sufficient to maintain the workers and his family at minimum subsistence levels. The theory applies only to backward countries where labourers are extremely poor and are unable to get th eir share from the employers.

Standard of living theory: This theory is a modified form of subsistence theory. According to this theory, wages are determined
not by subsistence level but also by the standard of living to which a class of labourers become habituated.

Residual claimant theory: Francis A. Walker (1840-1897) propounded this theory. According to him, there were four factors of
production/ business activity viz., land, labour, capital and entrepreneurship. Wages represent the amount of value created in the production which remains after payment has been made for all these factors of production. In other words, labour is the residual claimant.

The wage fund theory: According to this theory, after rent and raw materials are paid for, a definite amount remains for
labour. The total wage fund and the number of workers determine the average workers share in the form of wages.

Demand and supply theory: According to this theory, wages depend upon the demand and supply of labour . Marginal productivity theory: This is an improved form of demand and supply theory. Wages are determined by the value of
the net product of the marginal unit of labour employed. Purchasing power theory: According to this theory the prosperity, productivity and progress of industry depend on there being sufficient demand to ensure the sale of its products and pocketing of reasonable profits. A large pact of the products of industry is consumed by workers and their families and if wages are high, demand will be good. However, if wages and the purchasing power of the workers are low, some of the goods will remain unsold; output will go down, which will result in unemployment.

The bargaining theory of wages: John Davidson propounded this theory. According to him, wages are determined by the
relative bargaining power of workers or trade unions and of employers. When a trade union is involved, basic wages, fringe benefits, job differentials and individual differences tend to be determined by the relative strength of the organization and the trade union.

The Tribunals and Wage Boards have generally followed the-principles laid down in the Fair Wages Committees Report on fixing wages. The Committee, in its report, has given a considerable thought to wage differentials and has stated that the following factors should be taken into consideration for fixation of wages: 1. The degree of skill. 2. The strain of work. 3. The experience involved. 4. The training involved. 5. The responsibility undertaken. 6. The mental and physical requirements. 7. The disagreeableness of the task. 8. The hazard attendant on the work, and 9. The fatigue involved.

Classification of wages: The


classified wages as under: 1. The amount necessary for mere subsistence;

International Labour Organization (ILO) in one of its publications,

2. The amount necessary for health and decency; and 3. The amount necessary to provide a standard of comfort. In India, wages are classified as: Minimum wage

Fair wage; and Living wage

Minimum wage: A minimum wage has been defined by the Committee as the wage which must provide not only for
the bare sustenance of life, but for the preservation of the efficiency of the worker. For this purpose, the minimum wage must provide for some measure of education, medical requirements and amenities. In other words, a minimum wage should provide for the sustenance of the workers family, for his efficiency, for the education of his family members, for their medical care and for some amenities. It is very difficult to determine the minimum wage because conditions vary from place to place, industry to industry and from worker to worker. However, the principles for determining minimum wages were evolved by the Government and have been incorporated in the Minimum Wages Act, 1948, the important principle being that minimum wages should provide not only for the bare sustenance of life but also for the preservation of the efficiency of the workers by way of education, medical care and other amenities. Fair Wage: According to the Committee on Fair Wages, it is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage; the upper limit is set by the capacity of the industry to pay. Between these two limits, the actual wages should depend on considerations of such factors as: i) The productivity of labour; ii) The prevailing rates of wages in the same or neighbouring localities; iii) The level of the national income and its distribution; and iv) The place of industry in the economy. Living Wage: This wage was recommended by the Committee as a fair wage and as ultimate goal in a wage policy. It defined a Living Wage as one which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of frugal comfort, including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against the more important misfortunes including old age. In other words, a living wage was to provide for a standard of living that would ensure good health for the worker, and his family as well as a measure of decency, comfort, education for his children, and protection against misfortunes.

Purchasing Power Theory

The purchasing power theory focuses on the buying power of employees and their effect on the overall economic environment. It maintains that paying higher wages increases employee investment in the overall market, thereby creating more employment options elsewhere in society. It also focuses on the consumption power of employees and their ability to manipulate the demand for products if they have the individual buying power to increase their consumption.

Subsistence Theory

Subsistence theory focuses on the basic needs of employees and states that an individual must make enough income to support her basic needs and the needs of her family, says the Scarlett website. Under this theory an individual who does not make enough to support his basic needs will seek employment elsewhere or be unable and unwilling to continue in his current employment. This theory focuses on the supply side of labor while neglecting the employees desire to earn more than his basic needs.

General Theory

The general theory of wages states that a decrease to the overall wages of all employees allows employers to hire more employees, thereby creating employment opportunities. This theory ignores the motivational benefits of higher wages and the potential buying power of individuals in nonessential markets. An employee who earns too little is unlikely to spend the money she does not have to purchase luxury items and items of convenience, decreasing corporate motivation to delve into these economic areas. So the focus will be on creating products to meet customers basic needs.

Surplus Value Theory

Surplus value theory identifies a gap between the production of employees to their wages earned. The theory states that individual employees tend to not earn wages equal to the value of their performed work. This difference is often referred to as the rate of exploitation and indicative of a system that rewards employers for the mistreatment of their employees, says the Scribd website.

The Bargaining Theory

The bargaining theory states that the wages paid are equivalent to the bargaining ability of the employees. This theory sets a competitive bargaining environment in companies and suggests that an employee should seek to increase his effective bargaining potential to earn higher wages. This theory became the foundation for collective bargaining systems.