3. WHAT IS COMPENSATION?
All forms of financial returns and
tangible services and benefits that an
employee receives as part of an
employment relationship
5. TYPE OF INDUSTRY
There are large compensation differentials across
industries–software, Financial institution, consultancies
and FMCG companies are top bracket paymasters while
at lower rung are manufacturing, consumer durables and
pharmaceutical companies.
In industry like software packages are to retain
employees as manpower is scarce
In industry like engineering there is heavy basic fixed
component.
In industry like financial services, and banking, high
variable component and paying for performance
In FMCG and financial sectors salaries are high
6. SIZE OF INDUSTRY
Larger size organizations’ characteristics are higher profits, a lower ratio of labor
costs to total cost.
These pay higher wages and benefits for a number of reasons :-
They usually are able to.
They have some financial surplus, which they can use in various ways.
To attract a pool of competent applicants.
Perceived to counter lower job satisfaction.
The high-wage employer may be part of a national organization whose major
compensation decisions are made at the corporate level.
For example, TCS often appear to pay higher than local competitors.
(IT INDUSRTY)
7.
8. LOW-COMPENSATION
EMPLOYERS
They have low-paying ability because of the constraints of their
product market.
Most of their compensation decisions may be explained by this low
ability to pay.
Using compensation surveys, they usually pay attention to rates
for specific jobs for which there is an active outside market.
Jobs on which attention is focused obviously varies by industry.
The minimum feasible compensation is one that will obtain just
enough employees to maintain desired employee levels for some
period, typically six months.
But often organizations pay above this minimum, hoping to obtain
employees of higher quality; lower their turnover rates; and lower
their recruitment, hiring, and training costs.
9. MARKET RATE EMPLOYERS
Most common compensation level strategy followed by
organizations is to "pay according to the market.
" These organizations wish to treat their employees fairly and
yet not to raise their costs significantly more than their
competitors.
To pay the market rate an organization collect compensation
data and determine from that data exactly what the market rates.
This strategy can be characterized as being reactive to the
market, so the organization keep constantly in touch with
other organizations to find out what changes are occurring in
employee pay.
10. LABOR MARKETS
Low-pay organizations adjust to changes in labor
demand by deciding how far they can lag behind high-
paying organizations.
During an economic upswing, high-pay employers will
be increasing wages, salaries, benefits, and employment.
Low-pay employers, to hold down turnover and to
increase employment, will have to raise compensation
more than high-paying firms.
The compensation gap between high-paying and low-
paying firms thereby narrows during an upswing.
11.
12. Compensating wage differentials
Matching of workers between workers
(trying to max utility) and employers
(trying to max profit)
some jobs are preferred to others at the
same wage
so if you cannot force workers to do the less
preferred jobs, then you must provide
incentives for people to do them
13. CONTD…
Compensating wage differentials act as a
individual rewards to workers who accept
“bad” jobs
compensating wage differentials then
become the price at which good working
conditions can be bought or bad working
conditions sold to workers
Manufacturing production employees earn
3% more for working nights…
14. CONTD….
Bottom-line: if a worker has the choice between a
“good” job and a “bad” job at the same wage then
he/she will choose the “good” job
So he/she must be provided with additional
incentives (monetary or otherwise) to undertake
the “bad” job
So holding worker characteristics constant,
workers in “bad” jobs will get paid more than
those in “good” jobs
15. CONTD….
What are those characteristics?
Skill level, age, experience, race, gender, union
status, region of the country and so forth.
Three assumptions:
(1) Utility maximization
(2) Worker information
(3) Worker mobility
16. UTILITY MAXIMIZATION
X says that workers are interested in maximizing
their utility and not merely income. If workers
always chose to maximize their income then they
would always choose the highest paying job
available
This behavior then would cause wages to be
equalized across jobs open to any set of workers
17. CONTD….
Continuing with x utility maximization
In contrast compensating wage differentials would
arise only if workers do NOT choose the highest
paying job offered but instead prefer a low paying
but more “pleasant” job.
This behavior allows employers paying lower
wages for more pleasant jobs to be competitive
Overall utility from the pay and the psychic
aspects of the job tend to equalize for the marginal
worker
18. WORKER INFORMATION
The assumption on worker information says that
workers are fully informed about the
characteristics of the job
Or the workers find out about the hazards of a
“bad” job by word of mouth or soon after joining
etc.
If the “hazard” is an obscure one such as long term
impacts on health then we may not perceive any
compensating wage differentials and our
predictions may not be correct
19. WORKER MOBILITY
Workers have a range of jobs to choose from
This would require some degree of mobility on the
part of the workers.
20. EMPIRICAL TESTS FOR
COMPENSATING WAGE
DIFFERENTIALS
While the idea of compensating wage differentials
seems there has been a lack of empirical evidence
Empirical work is of recent Life.
Two problems:
(1) The prediction of wage differentials can be
tested while holding other characteristics constant
which is a difficult task
(2) How to specify job characteristics?
21. EMPIRICAL TESTS FOR
COMPENSATING WAGE
DIFFERENTIALS
Some of the earlier tests for compensating wage
differentials were done with respect to injury or
death in the workplace since these are
unambiguously “bad
Other things equal wages ARE HIGHER in riskier
jobs
Wages are 1% - 2% higher in jobs with 1 death in
10,000 per year than for jobs in industries with
half that level of risk.
22.
23. EMPLOYER
CONSIDERATIONS
Employers are faced with a risk/reward
trade-off of their own which derives from
three assumptions:
1. It is costly to reduce the risk of injury
facing employees.
2. Competitive pressures will force many
firms to operate at zero profit
All OTHER job characteristics are given
24. EMPLOYER
CONSIDERATIONS
Thus forces on the employer side of the
market tend to cause low risk to be
associates with low wages and high risk to
be associated with high wages, holding
other things constant
If a firm spends more on safety then it
spends less on other things etc.
Consider the profit curves for an employer
25. OFFER CURVE
The above job matching process can be
generalized to more than two employers and
employees.
26. MAJOR BEHAVIORAL
INSIGHTS
From the perspective of “positive economics” our
model generates two major insights
The first is that wages rise with risk all are equal
According to this prediction, there will be
compensating wage differentials for job
characteristics that are viewed as undesirable by
workers who employers must attract
Second, workers with a strong preference for
safety will tend to take jobs in firms with “safer”
jobs
27. MAJOR BEHAVIORAL
INSIGHTS
Risk averse workers then seek out jobs which are
safer but lower paying
Workers who are not so averse to risk will seek
out jobs that are higher risk and higher paying
The second insight is then that the job matching
process – if it takes place under the conditions of
knowledge and choice – is one in which firms and
workers offer and accept jobs in a fashion that
makes the most of their strengths and preferences
29. RISK AND GOVERNMENT
REGULATION
How can one estimate, in a practical way, how
much wage loss workers would be willing to bear
in exchange for a reduction in the risk and still feel
at least as well off as they are currently?
The answer lies in estimating compensating wage
differentials in markets that appear to work.
30. RISK AND GOVERNMENT
REGULATION
The workers are benefitted by the policies which
are framed by government.
However the use of compensating wage
differentials should not be oversold because of the
difficulties of figuring out which markets are
properly functioning and which not
Since one cannot rule out the possibility that one
way or another workers will pay for increased
workplace safety, economists suggest conducting
studies to estimate whether the value that workers
place on reducing risk is commensurate with the
costs of the program - benefit-cost analysis
31. RISK AND GOVERNMENT
REGULATION
Consider two alternative standards doe limiting
exposure of chemical workers to acryl onitrile
which is believed to be different from each other
32. EMPLOYEE PREFERENCES
Both payments in kind and deferred compensation
are usually non-taxable
Two opposing forces are at work here
On one hand these benefits are non-taxable
On the other hand, benefits involve a loss of
control over one’s total compensation – most
workers would prefer to receive all their benefits
in currently spendable cash now.
33. EMPLOYER PREFERENCES
The easiest way to depict the willingness of a firm
to offer employee benefits is through the use of is-
profit curves.
Suppose a firm must pay X Rs in total as
compensation.
The various compensation packages that a firm is
willing to offer fall along the zero profit iso-profit
curve drawn between wages and benefits
Any combination of wages and benefits along the
line are the same profit to the firm
34. EMPLOYER PREFERENCES
However the trade-off between wages and
benefits may not necessarily be 1 for 1.
For one thing by increasing compensation
in the form of benefits rather than wages
employers may be able to avoid taxes that
are levied on them as a fraction of the
payroll. This would tend to flatten the iso-
profit curve
35. CONLUSION
So the whole topic is all about the
differences of Compensations where all the
industry follows in today's world which is
the most aspect of running a business
towards to achieve its goal.
