SMU Learning Centre, Alwar LC Code 03034

UNIT 8 COMPENSATION MANAGEMENT

Book Code: MB 0043(HRM)
Dr.Smita Choudhary Faculty HR & OB
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CONTENTS
Introduction Wage & salary administration Managing compensation Designing and administering benefits

SMU Learning Centre, Alwar LC Code 03034

WHAT IS COMPENSATION?
Direct and indirect monetary and non monetary rewards given to employees on the basis of the value of the job. Compensation is what employees receive in exchange for their contribution to the organization . Compensation is a comprehensive one including1. Pay (Salary) 2. Incentives 3. Benefits 4. Bonuses 5. Commissions

INTRODUCTION
The terms wage and salary are used as synonyms. Compensation given to employees whose pay is calculated on the basis of number of hours worked is commonly known as wage. Uniform compensation given to employees for a fixed period of time and does not depend on the number of hours worked is commonly known as salary.

SMU Learning Centre, Alwar LC Code 03034

LEARNING OBJECTIVES
After studying this unit, you will be able to understand Concepts in compensation Managing compensation Benefits disbursement

SMU Learning Centre, Alwar LC Code 03034

WAGES AND SALARY ADMINISTRATION

Compensation management or wage and salary administration is the field related to the establishment and implementation of sound policies and methods of employee compensation. Areas included in wage and salary administration are

SMU Learning Centre, Alwar LC Code 03034

Job evaluation Development and maintenance of wage structures Wage surveys Wage incentives Wage changes and adjustments Supplementary payments Profit sharing Control of compensation costs

The term wages is used for employees whose pay is calculated according to the number of hours worked. Weekly pay may vary as according to the change in number of hours worked. Salary is the uniform pay given to employees from one period to the next and does not depend on the number of hours worked. Salary is an indication of good status because salaried people are normally while-collar, administrative, professional, and executive employees. Wage earners are normally hourly, non-supervisory, or blue-collar workers.

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SMU Learning Centre, Alwar LC Code 03034

job is defined as a collection of tasks, duties and responsibilities assigned to an individual employee. A job may include many positions. A position is a job performed by an individual. Thus, an employee has his position. The job is impersonal but the position is personal.
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SMU Learning Centre, Alwar LC Code 03034

MANAGING COMPENSATION
The basic purpose of wage and salary administration is to establish and maintain an impartial or unbiased wage and salary structure. The wage and salary administration deals with financial aspects of needs, motivation and rewards. Managers understand the needs of their employees and give rewards that satisfy these needs. According to the Oxford Dictionary, the word salary is defined as fixed periodical payment to a person doing other than manual or mechanical work.

SMU Learning Centre, Alwar LC Code 03034

 The

payment for manual or mechanical work is known as wages. Wages are defined as the price of labor. According to Benham, wages is defined as a sum of money paid under contract by an employer to a worker for services rendered.

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SMU Learning Centre, Alwar LC Code 03034

THEORIES OF WAGES
Subsistence Theory This theory was proposed by David Ricardo (1772-1823). It is also known as Iron Law of Wages. According to this theory, the level of wages is just sufficient to maintain the worker and his family at minimum survival level. The theory is applicable only to backward countries where laborers are very poor.

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SMU Learning Centre, Alwar LC Code 03034

Standard of living theory It is a modified form of subsistence theory. According to this theory, wages are not decided by survival level but also by the laborers standard of living. Residual claimant theory This theory was proposed by Francis A. Walker (1840-1897). According to this theory, there are four factors of production or business, namely: land, labor, capital and entrepreneurship. Wages is the amount of value created in the production that is left after paying for all these factors of production. In other words, labor is the residual claimant.

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SMU Learning Centre, Alwar LC Code 03034

The wage fund theory According to this theory, after paying for rent and raw materials, a definite amount remains for labor. The total amount left and the number of workers determine the average workers wages. Demand and supply theory According to this theory, wages depend upon the demand and supply of labor. Marginal productivity theory This is an improved form of demand and supply theory. According to this theory, wages are determined by the net product of the marginal unit of labor employed.

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SMU Learning Centre, Alwar LC Code 03034

Purchasing power theory

According to this theory, the prosperity, productivity and progress of industry depends on demands and sale of products and profit. A large part of the products are consumed by workers and their families. If wages are high demand for products will be good. But, if wages of the workers are low, some part of the products will remain unsold which will lead to decrease in output and hence increase in unemployment.

SMU Learning Centre, Alwar LC Code 03034

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Bargaining Theory of Wages This theory was proposed by John Davidson. According to him, wages are determined by the bargaining power of workers or trade unions and employers.

The Tribunals and Wage Boards follow the principles mentioned in the Fair Wages Committees Report on fixing wages. According to this report, the following factors should be considered for fixing wages:

SMU Learning Centre, Alwar LC Code 03034

The The The The The The

degree of skill stress involved in the work experience of the employee training involved responsibility of the employee mental and physical requirements of the job

Hazards involved in the work Fatigue involved in the work

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CLASSIFICATION OF WAGES

Labor Organization (ILO) has classified wages as follows

SMU Learning Centre, Alwar LC Code 03034

The amount just necessary for survival The amount necessary for health and decency The amount necessary to provide a standard of comfort

In India, wages are classified as

Minimum wage Fair wage Living wage

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MINIMUM WAGE

It is the wage which provides not only for the survival of the worker, but also for maintaining the efficiency of the worker. The minimum wage must provide for some education, medical requirements and facilities for the worker and his family. The principles for determining the minimum wage have been included in the Minimum Wages Act, 1948. The important principle for fixing minimum wage is that the minimum wage should provide not only for survival of the worker but also care for the efficiency of the worker with the help of education, medical care and other facilities.
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FAIR WAGE
It is higher than the minimum wage but lower than the living wage. The lower limit of the fair wage is the minimum wage. The upper limit of the fair wage depends on the capacity of the industry to pay. The actual wages depend on the following factors

SMU Learning Centre, Alwar LC Code 03034

The productivity of labor The current rates of wages in the same or nearby localities The level of national income The place of industry in the economy

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LIVING WAGE

Living wage is the wage that helps the earner to provide for himself and his family not only the essential things like food, shelter and clothing but also some comfort like education for his children, protection against sickness, fulfill his social needs, and give him insurance against hardships like old age. The living wage should provide a standard of living to make sure that the worker and his family are in good health, provide education for his children, and protection against trouble or disaster.

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DESIGNING AND ADMINISTERING BENEFITS

People who manage businesses fix wages of the labor. The following factors are considered while fixing wages:

SMU Learning Centre, Alwar LC Code 03034

The state of the labor market Affordability of the manager Value of the worker to the manager

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Collective bargaining It is still a new concept in India. It helps in maintaining relations between management and labor. It cannot be forcefully applied on either side. It is natural. Voluntary arbitration In voluntary arbitration, both parties agree to refer their dispute to third party (arbitrator) and decision is final and binding.

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SMU Learning Centre, Alwar LC Code 03034

Wage legislation In some industries, wages are fixed according to law. The Central or State Government may fix minimum wages under the Minimum Wages Act, 1948. This is done to protect exploitation of workers and take care of their interests. For fixing wages, the Governments appoint Minimum Wages Committees and the Advisory Boards. The committee and the Advisory Boards consist of equal number of workers and employers representatives and some independent members. The number of independent members should not be more than one-third of the total number of members.

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Conciliation The Industrial Disputes Act, 1947, provides ways to settle disputes between employers and workers. If both the parties reach an agreement during conciliation process, it becomes binding on both the parties. The agreement becomes binding on the parties from the agreed date or date of signing the agreement. If no agreement is reached, the Conciliation Officer sends a report to the Government. The Government may then decide to refer the case to Industrial Tribunal for award.

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