Compensation

Every organization must offer good wages & fringe benefits to attract & retain talented employees with the organization. Compensation to workers varies depending upon the nature of job, skills required, risk involved, nature of working conditions, paying capacity of the employer, wages & benefits offered by the other units in the industry etc. Compensation refers to the wide range of financial & non-financial rewards to employees for their services rendered to the organization. It is paid in the form of wages, salaries and employee benefits like paid vacations, insurance, maternity leave, free travel facility, retirement benefits etc. Compensation is what employees receive in exchange for their contribution to the organization. Compensation is a comprehensive term which includes pay, incentives and benefits offered by employers for hiring the services of employees. Pay refers to the basic wages and salaries employees receive. Incentives normally include the bonuses, commissions and profit sharing plans designed to encourage employees to produce results beyond normal expectations. Benefits in the form of insurance, medical, recreational, retirement etc represent a more indirect form of compensation.

Objectives of a fair compensation system

1) Capable employees are attracted towards the organization. 2) The employees are motivated for better performance. 3) The employees do not leave the employer frequently.

Elements of compensation (benefits)

1) Monthly wage & salary or total pay including basic wage, house rent allowance,

dearness allowance & city compensatory allowance. 2) Bonus at the end of the year. 3) Economic benefits like paid holidays, leave travel concession. 4) Contribution towards insurance premium. 5) Contribution towards retirement benefits like employee PF. 6) Transport & medical facilities.

Compensation is basically of 2 types 1) Base Compensation It involves monetary benefits to employees in the form of wages or salaries. The term wage is used to denote remuneration to workers doing manual or physical work. Wages are based on hourly, daily, weekly or even monthly basis. Salary means the compensation given to office employees, foremen, manager & professional & technical staff. It is paid on weekly, monthly or yearly basis. So, the time period for which salaries are paid is generally higher as in case of wage payments. Wages may be based on the number of units produced (i.e. piece wage system) and salaries on the time spent on the job. Salary is always based on time spent on the job since in this case, it becomes difficult to measure the production of the employee. Base compensation is a fixed & non-incentive payment and is calculated on the basis of time expended on the job.

Factors affecting wage/compensation (Criteria for wage / salary determination)

a) Demand for and supply of labour

Wage or salary is the price for the services rendered by a worker. Forces of demand & supply of labour determine the going wage rate. If there is a decrease in the supply of labour due to any reason like restriction by a particular labour union, there will be a tendency to increase the wage. If the demand of labour from the employers end is more (due to any reason) then also the wages will have to be increased. The revenue of each situation will obviously lead to a decrease in the wages.
b) Ability to pay -- An organisations ability to pay its employees is an important

determinant of wage level. Ability to pay depends on the profit earnings capacity of the organization. If the firm is small and can not pay competitive rates, its employees will tend to leave it for better paying jobs in other organizations. MNCs pay relatively higher salaries due to their higher paying capacity. A financially sound company is in a better position to pay fair wages to its employees as compared to a company facing financial problems which would have to struggle to pay even the minimum wages and in case the position worsens, the company would suspend the payment of wages.

The capacity to pay helps in the fixation of the upper limits of wages, the lower limits being set by the minimum wages. The actual wage level is in between these two limits.

c) Productivity of workers. Wages have to be productivity based so as to achieve the best result from the worker and to motivate him to increase his efficiency. In most of the companies today annual increment in wages is based on merit. Productivity refers to the output per man-hour or man-day. Higher productivity should result in higher remuneration wheras lower remuneration should be paid when productivity declines. However, using productivity for fixing remuneration has certain limitations There is no precise and accurate measure of productivity acceptable to all. The reported percentage increase is generally a long-term average that cannot be achieved every year. Not all the industries participate equally in productivity gains. However, productivity may be used to determine fair wages and the minimum and maximum limits may be set by the going rates and the ability to pay respectively. d) Cost of living Due to inflation, the real wages decline affecting the purchasing power of workers. Therefore dearness allowance is given according to changes in consumer price index. Labour agreements generally have a clause providing for automatic increase in pay as cost of living rises. e) Prevailing wage rates. Wages in a form are fixed in accordance with the general wage level or the wages paid for similar occupations in the industry / region. This is necessary to retain & attract qualified workers.

f) Government

Laws on minimum wages, house of work, equal pay for equal work, payment of dearness and other allowances, payment of bonus etc. have been drafted & enforced by the government to bring about fairness in compensating the working class. The laws & policies are taken into account when wages & salaries are paid by the employers. Wages & salaries can not be fixed below the level prescribed by the government g) Job Requirement Basic wages depend on the difficulty level & physical & mental effort required in a particular job. The relative worth of a job can be estimated by job evaluation. h) Labour Unions Well-organised trade unions exert pressure for higher wages & allowances. This pressure is exercised through collective bargaining, strikes & other methods. In addition to the above factors which have a general influence on the wage rate, there are some factors that influence the individual differences in wage rates. These are:1. 2. 3. 4. 5. 6. 7. 8. Workers capacity (potential) Educational Qualifications Work experience Hazards involved in work Promotion possibilities Stability of employment Demand for special skills Profits / Surplus earned by the organization

2) Supplementary Compensation Supplementary compensation involves fringe benefits offered through various employee services & benefits like housing, subsidised food, medical aid, crche etc. It is used to retain the employees on a long-term basis. It is also referred to as service programmes, employee benefits, non-wage payments or employee services. These are also at times referred to as the hidden payroll. The basic objective is:1) to attract & maintain efficient human resources with the organization. 2) to motivate the human resources

Supplementary compensation consists of incentive & variable payments, based on either the individual output or output of the group as a whole. Types of Supplementary Compensation:Supplementary compensation includes all the expenditures by an employee designed to benefit employees over & above regular base pay & direct variable compensation related to output. Fringe benefits include the following are:a) Payment for time not worked Eg: Paid rest periods, paid lunch periods, clothes change time, get-ready time, vacations, holidays, sick leave, personal leave, voting time, maternity leave etc. b) Hazard Protection To protect against the hazards of illness, injury, debt, unemployment, permanent disability, old age & death. c) Employee Services Good organizations offer employee services on a continuous basics like housing, food, medical, recreation etc. Fringe benefit programs include cafeterias, career counseling, educational tuition, medical service, housing aid, low cost loans, day care centers for children, organization vehicles for personal use, paid memberships in professional organizations etc. d) Legal Payments These have been laid down by the Govt. which involve unemployment or lay-off compensation, employees insurance, old-age benefits etc. The list of fringe benefits has increased tremendously now & the expenditures are now mostly equal or exceeding the base wage compensation to the employees. e) Perquisites These are the additional benefits given to the employees by the employees (basically meant for the executives). They are also referred to as the perks. These include chauffer driven car, corporate aircraft, home security, company apartment, paternity leave, club membership, company credit card, entertainment etc.

Differences between Base and Supplementary Compensation Base Compensation Supplementary Compensation

1. It denotes payments to workers in the 1) It refers to fringe benefits to workers form of wages & salaries over and above their regular wages and salaries 2) Wage & salaries are paid in cash 2) Fringe benefits are offered in the form of employee services & benefits like housing, medical aid, crche, canteen tec.

3) Wages & salaries are paid to compensate 3) Fringes or non-wage payments are made employees for their services to increase the efficiency of employees & to retain them in the organization on a long-term basis. 4) Wages & salaries are determined by job evaluation, demand & supply of labour, organizations capacity to pay, trade unions bargaining power, productivity, Govt. regulations etc. 4) It is determined by the history of the organization philosophy of management, organisations capacity to spend on employee benefits, need to retain talented employees, desire to enhance public image etc.