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COMPENSATION
ADMINISTRATION

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ANNOTATED OUTLINE
INTRODUCTION
Compensation is what employees receive in exchange for their contribution
to the organization. Generally speaking, employees offer their services for
three types of rewards
Base pay
Variable pay
Benefits
The most important objective of any pay system is fairness or equity, generally
expressed in three forms
Internal equity: where more difficult jobs are paid more
External equity: where jobs are fairly compensated in comparison to
similar jobs in labour market

Individual equity: where equal pay is ensured for equal work

Compensation Administration

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Objectives of compensation planning

Attract talent

Retain talent

Ensure equity

Reward appropriately(loyalty, commitment, experience, risk raking and other

desired behaviours)

Control costs

Comply with legal rules

Ease of operation

Compensation Administration

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Components of Pay Structure

The two essential components of pay structure are; basic wages and
dearness allowance .the basic wage rate is fixed taking the skill
needs of the job, experience needed, difficulty of work, training
required, responsibilities involved and the hazardous nature of the
job. Dearness allowance it paid to employees in order to compensate
them for the occasional or regular rise in the price of essential
commodities.

Components of pay structure in India

Under the Workmen's Compensation Act

Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus
and good conduct bonus
Under the Payment of Wages Act
Retrenchment compensation, payment in lieu of notice , gratuity payable on
discharge

Compensation Administration

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Components of Pay Structure

The following, however, do not come under the term wages
Bonus
Payments made under a profit sharing scheme
Value of house accommodation
Medical allowances
Travelling allowances
Any other sum paid to defray special expenses incurred by
the worker
Contribution to pension, provident fund
Any amenity or service excluded from the computation of
wages

Compensation Administration

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Wage And Salary Administration

It is the process of managing a companys compensation (base
compensation as well as supplementary) programme Base
compensation, here, refers to monetary payments to employees in
the form of wages and salaries. It is a fixed, non-incentive kind of
payment calculated on the basis of time spent by an employee on
the job. Supplementary compensation signifies incentive payments
based on the actual performance of an employee.

Compensation Administration

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Wage And Salary Administration

Objectives
To establish a fair and equitable remuneration
To attract competent personnel
To retain present employees
To control labour cost
To improve motivation and morale of employees
To project a good image of the company
Principles
Wage and salary plans be sufficiently flexible
Job evaluation being done scientifically
Wage and salary plans be always consistent with overall
plans
Wage and salary plans being responsive to changing
conditions
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Factors affecting compensation

levels
Factors influencing compensation levels

Job needs

Ability to pay

Cost of living

Prevailing wage rates

Unions

Productivity

State regulation

Demand and supply of labour

Compensation Administration

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Wage Policy In India

A wage policy offers certain guidelines for determining a wage
structure. The term wage structure refers to various pay scales
showing rages of pay within each grade. Three important elements of
wage policy in India need to be elaborated here
Minimum wage: Wage sufficient to sustain and preserve the
efficiency of the worker and offer basic amenities of life
Fair wage: It is above the minimum wage but below the living
wage. It is fixed, taking into account factors such as the
productivity of labour, prevailing wage rates, level of national
income and its distribution, the employers capacity to pay etc.
Living wage: This is the highest amount of wages proposed by
the government, offering basic amenities of life and satisfying
the social needs of worker.
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State regulation of wages

Institutions involved in fixation of
wages

E m p lo y e r

C o ll e c t i v e B a r g a in in g

L e g is la t io n

M in im u m W a g e s A c t

W a g e B o a rd s

P a ym e nt of W ages A ct

P a y C o m m is s io n s

A d ju d i c a t io n M a c h in e r y

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Wage differentials
Differences in wage rates are inevitable in any industry and the
reasons are fairly obvious

Reasons for wage differentials

W a g e d iffe r e n tia ls

R easons

In te r p e r s o n a l d iff e r e n tia ls

D if f e r e n t ia ls in s e x , s k ill s , a g e , k n o w l e d g e , e x p e r i e n c e

I n t e r - o c c u p a t io n a l d i ff e r e n t ia ls

V a r y in g r e q u ir e m e n ts o f s k ill, k n o w le d g e , d e m a n d - s u p p l y s it u a t io n

In te r - a r e a d iffe r e n tia ls

C o s t o f li v in g , a b ilit y o f e m p lo y e r s t o p a y, d e m a n d a n d s u p p ly s i t u a ti o n , e x t e n t
o f u n io n is a t i o n

I n t e r - f ir m d i ff e r e n t ia l s

A b i l i t y o f e m p l o y e r t o p a y , e m p l o y e e s b a r g a i n i n g p o w e r, d e g r e e o f
u n io n is a t io n , s k i ll n e e d s , e t c .

Compensation Administration