This document provides an overview of compensation and reward management concepts. It discusses topics such as the concept of compensation, different compensation systems, economic theories of wages, wage administration at the micro level, and various wage concepts. It also covers the roles of employees, employers, unions and the government in compensation and reward management. Finally, it lists some key legislations in India that affect compensation.

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INTRODUCTION
TO
COMPENSATION & REWARD
MANAGEMENT

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Topics covered after the learning:
1. Concept of Compensation,
2. System of Compensating,
3. Concept of Reward and Reward System,
4. Economic Theory of Wages,
5. Limitations of Economic Theories,
6. Wage and Salary Administration at micro level,
7. Wage concepts,
8. Role of various parties – Employees, Employers,
Unions & Government,
9. Overview of Legislations affecting Compensation

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CONCEPT OF COMPENSATION
Compensation is what employees receive
in exchange for their contribution to the
organization
An employee’s standard of living, status
in the society, Motivation, Loyalty and
Productivity depend upon the
compensation he/she receives
For the employer to employee
remuneration is significant because of it’s
contribution to cost of production

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NATURE OF COMPENSATION
Compensation can be offered by an
organization both directly( Base Pay &
Variable Pay) and Indirectly (Benefits)
1. Base Pay -Basic compensation an
employee gets usually as a wage or salary
2 Variable Pay -Compensation linked
directly to the performance
3. Benefits- Indirect rewards given as a
part of organizational membership.

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MAIN OBJECTIVES OF COMPENSATION
1. Internal Equity- Ensures that more difficult
jobs are paid more.
2. External Parity- Aims to compensate fairly in
comparison to similar jobs in labor market.
3. Individual Equity-Equal Pay for equal work.

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SOME OTHER OBJECTIVES
To attract talent
To retain talent
Ensure equity
To motivate new & desired behavior
Control cost
Comply with legal rules
Ease of operation

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FACTORS INFLUENCING EMPLOYEE
COMPENSATION
I. External Factors
i. Labor Market
ii. Cost of Living
iii. Labor Laws
iv. Society
v. Economy

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Contd./
II. Internal Factors:
i. Business Strategy
ii. Job Evaluation & Performance
Appraisal
iii. Employee

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SYSTEM
OF
COMPENSATING

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Dimensions School
• Pay for Work & Performance
• Pay for Time not Work
• Disability Income Continuation
• Deferred Income
• Spouse (Family) Income Continuation
• Health, Accident & Liability Protection
• Income Equivalent Payments – Perks
• Organizations Develop Compensation Policy

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HOW IS COMPENSATION USED?
Compensation may be adjusted according the
business needs, goals, and available resources
Compensation may be used to:
recruit and retain qualified employees.
increase or maintain morale/satisfaction.
reward and encourage peak performance.
achieve internal and external equity.
reduce turnover and encourage company loyalty.
modify (through negotiations) practices of unions.

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WHAT ARE THE COMPONENTS OF A
COMPENSATION SYSTEM?
The components of a compensation system
include:
Job Descriptions
Job Analysis
Job Evaluation
Pay Structures
Salary Surveys
Policies and Regulations

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WHAT ARE DIFFERENT TYPES OF
COMPENSATION?
Different types of compensation include:
Base Pay
Commissions
Overtime Pay
Bonuses, Profit Sharing, Merit Pay
Stock Options
Travel/Meal/Housing Allowance
Benefits including: dental, insurance, medical,
vacation, leaves, retirement, taxes...

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COMPENSATION PLAN
Develop a program outline
Designate an individual to oversee
Develop a compensation philosophy
Conduct a job analysis of all positions
Evaluate jobs
Determine grades
Establish grade pricing and salary range
Determine an appropriate salary structure
Develop a salary administration policy
Obtain top executives' approval of the basic salary program
Communicate the final program to employees and managers
Monitor the program

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CONCEPT
OF
REWARD

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Reward is a composite of all
organizational mechanism and
strategies used to finally acknowledge
employees behavior and performance.

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OBJECTIVE OF REWARD
To motivate employees to perform effectively
To motivate employees to join the organization
To motivate employees to continue to work
Enhance Loyalty
Satisfaction

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Financial Rewards
+
Non Financial Rewards
=
Total Reward

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FINANCIAL REWARDS
A number of monetary benefits offered to
employees to obtain short term and long term
commitment.
Types of financial rewards given are; base
pay, variable pay, share ownership, bonus, etc.

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NON FINANCIAL REWARDS
Non-financial rewards cater mainly to fulfill
the psychological needs of the employees
Types of non financial rewards given to
employees are; recognition, opportunities to
develop skills, quality of work life, etc.

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REWARD SYSTEM

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Rate of Pay
Level of skill
Adopted from Banfield Paul and Kay Rebecca Introduction to HRM. Oxford University Press Vol. 4 Page No. 308

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WHY REWARD SYSTEMS?
Attracting, retaining & motivating employees
To get desired behavior
To achieve stretch standards
To cater individual needs

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REWARD MECHANISMS
Praise/recognition from supervisors
Challenging work assignments
Promotions and lateral moves
Paid leave to employees

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GETTING MORE OUT OF REWARDS
Aligning rewards with objectives
Outcome-based evaluation of employee
Agreeing what behaviors and capabilities
will be rewarded

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Designing Reward System
Whom to Reward?
• Individual Employees
• Teams
• Organization
• Outsiders

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Designing Reward System
What to Reward?
• Performance
• Organizational Level
• Unit / Departmental Level
• Speed and Efficiency
• Loyalty
• Innovation
• Upholding Values

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• Technical Solution
• Learning
• Good Behavior
• Sense of Humor
• Teaching
• Publications
• Event Management
• Social Concern

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Characteristics of rewards
Rewards must have the following characteristics
• Value
• Relevant
• Purpose
• Behavioral effect
• Recognition

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Concept of Total Reward System
Total Reward Strategies should include
• Direct Financial
• Indirect Financial
• Identification
• Work Content
• Career Opportunities

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Rewards can fail in the form of incentives
– Kohn
• Pay is not a motivator
• Rewards punish
• Rewards rupture relationships
• Rewards ignore reasons
• Rewards discourage risk taking
• Rewards undermine interest

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ECONOMIC THEORY
OF WAGES

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ECONOMIC THEORIES
1.Social Subsistence Wage fund Residual Claimant
Wage Theory Theory Theory
Theories
Marxian Theory
2.Justification Marginal Supply and Competitive
Theories Bargaining
Productivity Demand Theory
Theory
Theory Theory
3.Behavioral Employee’s Internal Wage Wage and
Acceptance Structure Motivation
Theories
level

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LIMITATIONS OF ECONOMIC THEORY
Wages and Prices are either fully fixed or
fully flexible.
Assumption of Full Employment
Wages could be influenced by factors other
than wages too.
Wage and Benefits reflect Industry
characteristics and personal characteristics.
Interference by government
Technology and Productivity are major
determinants
Pressure for linking labour standards with
International Trade.

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WAGES AND SALARY
ADMINISTRATION
AT
MICRO LEVEL

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Policies Techniques Objectives
Work Description INTERNAL EFFICIENCY
ALIGNMENT analysis STRUCTURE
-Performance
-Quality
COMPETITVENESS Market Surveys PAY STRUCTURE -Customers
-Costs
Seniority Performance/ INCENTIVE
CONTRIBUTION FAIRNESS
Based Merit Based PROGRAMS
MANAGEMENT Costs Communication EVALUATION COMPLIANCE

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INTERNAL ALIGNMENT
Dependent of Internal Pay Structure
Levels
Differentials
Criteria
-Content and Value
-Use Value and Exchange Value
-Job and Person Based

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EXTERNAL COMPETITIVENESS
Factors Shaping External Competitiveness
Labour Market
•Nature of Demand
•Nature of Supply
Product Market Factors EXTERNAL
•Degree of Competition COMPETITIVENESS
•Level of Product Demand
Organisation Factors
•Industry, Strategy, Size
•Individual Manager

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CONTRIBUTION
Seniority Based
Performance Based Pay
Merit Guidelines

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MANAGEMENT
Managing Labour Cost
-Controlling Employment
-Controlling av. Cash Compensation
Communication
-Managing the Massage
Pay
-Change Agent in Restructuring

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WAGE CONCEPT

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WAGE AND SALARY
Wage: Index of productivity
Definition of Wage
Wage vs Salary

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ROLE OF VARIOUS
PARTIES IN
COMPENSATION &
REWARD
MANAGEMENT

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ROLE OF EMPLOYERS
Ability to pay
Cost effect
Wage costs
Unit labour costs
Cost reduction

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ROLE OF EMPLOYEES
Ability to live and work
Price effect
Wage levels
Effort put in
Wage maximization

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ROLE OF THE GOVERNMENT
Five Year Plans & Wage Policy
Legal Framework
-Payment of Wages Act 1936
-Minimum Wages Act 1948
-Payment of Bonus Act 1965
-Equal Remuneration Act 1976
Unilateral Pay Fixation
Pay Commissions
Wage Boards
Adjudication

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ROLE OF UNIONS
Collective Bargaining (Levels)
Sectoral Bargaining at National Level
Industry-cum- Region wide Agreements
Decentralized Firm/ Plant Level
Agreements

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LEGISLATIONS
AFFECTING
COMPENSATION

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ACTS AFFECTING COMPENSATION
Payment of Gratuity Act, 1972
The Workmen’s Compensation Act, 1923
The Contract Labor (R & A) Act,
Article 43 of Constitution Of India
All acts with Wage or Salary or any compensation between
the Employer and Employee

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THANK YOU!