This document provides an overview of compensation management. It defines compensation as financial and non-financial rewards provided to employees. It discusses base compensation including wages and salaries, and supplementary compensation such as benefits. It also covers topics such as living wages, minimum wages, fair wages, wage differentials, and compensating differentials.
2. Prepared By
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Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com
3. • “If you pick the right people and give them the
opportunity to spread their wings - and put
compensation and rewards as a carrier behind
it - you almost don’t have to manage them.”
— Jack Welch
4. Compensation in organization
• Compensation is a wide
range of financial and
non financial rewards to
employees for their
services rendered to the
organization.
5. Compensation in organization
• It is paid in form of wages,
salary, other benefits such
as vacations, maternity
leave, medical facilities
etc. compensation helps in
motivating the employees
and reduce labor turnover.
8. Base compensation
• it involves monetary benefit
to the employees in the form
of wages and salaries. It is
giving the remuneration to
the workers for doing the
work.
9. Base compensation
• Wages are generally given to
the workers based on hourly,
daily, weekly or monthly
basis. But salary is the
compensation given to the
office employees.
10. Base compensation
• Wages may be based on the number of
units produced i.e. piece wage system or
the time wage system i.e. the time spent
on the job. But salary is always based on
the time spent on the job. When it is
difficult to judge the production of the
company then the compensation is paid
in form of salary.
12. Supplementary compensation
• Now days the organizations use
supplementary compensation
over and above the base
compensation. It helps in
satisfying the employees as well
as retaining them for long time.
13. Supplementary compensation
• It can be given in form of
various services like housing,
medical, educational facility.
Supplementary compensation
is also called fringe benefit as
well as hidden payroll.
14. Supplementary compensation
• The basic purpose of fringe
benefit is to maintain
efficient human resources
in the organization and to
motivate the employees.
15. Supplementary compensation
• Supplementary compensation is
again divided into following
types:
– Protection against hazards.
– Employee services.
– Payment for time not worked.
– Legal payments.
16. Supplementary compensation
• Protection against hazards:
supplementary compensation
helps in protecting against the
hazards of illness, injury, old
age, death, permanent
disability.
17. Supplementary compensation
• Employee services: some big
organizations provide housing,
low-cost loan, food, medical,
and day care centre for children,
educational facilities to their
employees for their services.
18. Supplementary compensation
• Payment for time not
worked: the employees are
also paid for the time they are
not working like wash up
time, lunch period, vacations,
holidays, sick leave etc.
19. Supplementary compensation
• Legal payments: payment
under this category
involves unemployment;
layoff compensation, old
age benefits etc.
21. Wages
• Wages is best associated with
employee compensation
based on the number of
hours worked multiplied by
an hourly rate of pay.
22. Wages
• For example, an employee working
in an assembly plant might work 40
hours during the work week. If the
person's hourly rate of pay is $15,
the employee will receive a
paycheck showing gross wages of
$600 (40 x $15).
23. Wages
• If the employee had
worked only 30 hours
during that week, her or
his paycheck will show
gross wages of $450 (30 x
$15).
24. Wages
• Because the paycheck needs to
be computed based on the
actual hours worked, the
employee earning wages will
likely receive her or his paycheck
five days after the work period.
26. Salary
• Salary is best associated
with employee
compensation quoted
on an annual basis.
27. Salary
• For example, the manager
of the assembly plan might
earn a salary of $120,000
per year. If the salaried
manager is paid semi-
monthly (perhaps on the
15th and last day of each
month), her or his paycheck
will show gross salary of
$5,000 for the half-month.
28. Salary
• Since the salary is the
same amount for each pay
period, the salaried
employee's paycheck will
likely cover the work
period through the date of
the paycheck.
29. Salary
• Since the salary is the
same amount for each pay
period, the salaried
employee's paycheck will
likely cover the work
period through the date of
the paycheck.
30. Wages and Salary
• Generally, the hourly-paid
employees will earn wages
at the rate of time and one-
half for the hours in excess
of 40 per week.
31. Wages and Salary
• The salaried employees in
high pay positions are not
likely to receive additional
pay for the hours in excess
of 40 per week. However,
employees with low salaries
are entitled to overtime pay.
33. Living Wages
• Living wages has been
defined differently by
different people in different
countries. The best definition
is given by Justice Higgins
which reads "Living wage is a
wage sufficient to ensure the
workman food, shelter,
clothing, frugal comfort,
provision for evil days etc. as
regard for the skill of an
artisan, if he is one".
34. Living Wages
• According to Fair Wages
Committee Report: "The living
wage should enable the male
earner to provide himself and his
family not merely the basic
essentials of food, clothing and
shelter but a measure of frugal
comfort including education for
the children, protection against ill-
health, requirement of essential
social needs and measures of
insurance against old age."
35. Living Wages
• Thus living wages means
the provision for the bare
necessities plus certain
amenities considered
necessary for the
wellbeing of the workers
in terms of his social
status.
36. Living Wages
• Article 43 of the Constitution of
India states that the state shall
endeavor to secure by suitable
legislation or economic
organisation or in any other way to
all workers a living wage,
conditions of work ensuring a
decent standard of life and full
enjoyment of pleasure and social
and cultural opportunities. Thus,
Government of India has adopted
as one of the directives of the
principle of slate policy to ensure
living wages.
38. Minimum Wages
• The minimum wage may
be defined as the lowest
wage necessary to
maintain a worker and his
family at the minimum
level of subsistence,
which includes food,
clothing and shelter.
39. Minimum Wages
• When the government fixes
minimum wage in a
particular trade, the main
objective is not to control
or determine wages in
general but to prevent the
employment of workers at
a wage below an amount
necessary to maintain the
worker at the minimum
level of subsistence.
40.
41. Minimum Wages
• Minimum wage in a country is
fixed by the government in
consultation with business
organizations and trade unions.
The authority entrusted with the
task of fixing of minimum wage
should consider such factors as
local economic conditions,
transportation cost and the size of
the units in the industry in fixing
minimum wages.
42. Minimum Wages
• The law relating to the minimum
wage either states definitely the
wage considered to the minimum
or the determination of the wage
left to an administrative
commission which from time to
time determines the minimum
wage according to the varying
economic conditions, e.g.,
variation in the price level should
be compensated with the variation
in the wage rates because the
prime aim of the minimum wage
low is just to cover "minimum
living cost."
43. Minimum Wages
• The Government of India
passed a Minimum Wage Act in
1948 under which farm
labourers were to be paid a
minimum wage between 66
paise and Rs. 1.50 per day,
keeping in view local costs and
standards of living. Since
conditions in various parts of
the country were different, the
law allowed different rates of
wages to be fixed in a poor
country such as India.
44. Minimum Wages
• Minimum wages legislation is
supposed to have the following
benefits:
– (i) These laws prevent
unscrupulous employers from
exploiting ignorant persons
who possess very little
bargaining power.
– (ii) These abolish the
competition of the lower
strata of workers with the
upper grades and tend to
prevent depressing of wages.
45. Minimum Wages
• Minimum wages legislation is
supposed to have the following
benefits:
– (iii) The productivity of industry is
increased by foreign employers to
use the most efficient production
methods and the most modern
equipment, in order lo enable
employees to earn the living wage.
But at the same time, the workers
are stimulated to increase his
efficiency in order to hold his job.
– (iv) Employers with high standards
are protected against underselling
by competitors with low standards.
48. Fair Wages
• A fair wage is something
more than the minimum
wages. Fair wage is a
mean between the living
wage and the minimum
wage.
49. Fair Wages
• While the lower limit of the
fair wage must obviously be
the minimum wage, the
upper limit is the capacity of
the industry to pay fair wage
compares reasonably with
the average payment of
similar task in other trades
or occupations requiring the
same amount of ability.
50. Fair Wages
• Fair wage depends on
the present economic
position as well as on its
future prospects.
51. Fair Wages
• The fair wages depends
upon the following factors :
– (1) Minimum Wage
– (2) Capacity of the industry to
pay
– (3) Prevailing rates of wages in
the same or similar
occupations in the same or
neighboring localities
52. Fair Wages
• The fair wages depends
upon the following factors :
– (4) Productivity of labor.
– (5) Level of national income
and its distribution.
– (6) The place of the industry in
the economy of the country.
54. Wage policy in India
• A national wage policy aims
at establishing wages at the
highest possible level, which
the economic conditions of
the country permit and
ensuring that the wage
earner gets a fair share of
the increased prosperity of
the country as a whole
resulting from the economic
development.
55. Objectives of Wage policy in India
• To eliminate malpractices in
the payment of wages.
• To set minimum wages for
workers, whose bargaining
position is weak due to the
fact that they are either un-
organized or inefficiently
organized. In other words, to
reduce wage differential
between the organized and
unorganized sectors.
56. Objectives of Wage policy in India
• To rationalize inter-
occupational, inter-industrial
and inter-regional wage
differentials in such a way
that disparities are reduced
in a phased manner.
• To ensure reduction of
disparities of wages and
salaries between the private
sector and public sector in a
phased manner.
57. Objectives of Wage policy in India
• To compensate workers for
the raise in the cost of living
in such a manner that in the
process, the ratio of
disparity between the
highest paid and the lowest
paid worker is reduced.
• To provide for the promotion
and growth of trade unions
and collective bargaining.
58. Objectives of Wage policy in India
• To obtain for the workers a
just share in the fruits of
economic development.
• To avoid following a policy of
high wages to such an extent
that it results in substitution
of capital for labor thereby
reducing employment.
59. Objectives of Wage policy in India
• To prevent high profitability
units with better capacity to
pay a level of wages far in
excess of the prevailing level
of wages in other sectors.
• To permit bilateral collective
bargaining within national
framework so that high
wage islands are not
created.
60. Objectives of Wage policy in India
• To encourage the
development of incentive
systems of payment with a
view to raising productivity
and the real wages of
workers.
• To bring about a more
efficient allocation and
utilization of man-power
through wage differentials
and appropriate systems of
payments.
62. Wage differentials
• The wage paid to workers
varies greatly. These wage
differentials are mostly the
result of differences in
worker ability and the
workers' effort in performing
the job.
63. Wage differentials
• There are also wage
differentials across
occupations, because of
differences in the demand
and supply of laborers for
particular job or occupation.
These differences arise
primarily because of
differences in the amount of
education or training
required and in the
desirability of the job itself.
65. Occupational Wage Differentials
• Obviously, certain
occupations pay more than
others. Surgeons make more
than teachers, who make
more than retail
salespeople. Most of these
wage differentials are the
result of educational and
training requirements, what
is often referred to as
human capital.
66. Occupational Wage Differentials
• Surgeons require more
than a decade of
education and training
after high school before
they can earn a living as
surgeons, while retail
salespeople can get a job
right of the high school,
or even while they are
still in school.
67. Occupational Wage Differentials
• Education and training limit the
supply of labor in that they take a
certain amount of time to
complete and require a certain
level of skill. In many cases,
people who attend college or
training school do not have the
time to work a full-time job.
Therefore, they also incur an
opportunity cost which is equal
to the amount of money that
they could have earned had it not
been for the educational or
training requirement.
68. Occupational Wage Differentials
• Another primary factor that
determines wages is the
demand for the worker,
which is a derived demand
for the product or service
that the worker provides. If
the worker provides a
product or service that is
highly desirable, then a
higher wage will prevail for a
given supply of workers who
could do that job.
69. Occupational Wage Differentials
• Sometimes, ability makes a
very large difference in wage
potential that far outweighs
the differences in ability. The
winning horse earns a lot more
than the one that comes in
2nd even though it is only a
little faster. There are only so
many jobs for professional
athletes, so only the very best
are going to be chosen for
those high-paying jobs.
70. Occupational Wage Differentials
• Likewise, only the best
musicians or those
producing the most
desirable music will become
wealthy. People only have so
much time and money for
entertainment, so they tend
to select entertainment
performed by the best
people, especially
entertainment package for
mass consumption.
72. Compensating Differentials
• Some jobs pay more
because they are less
desirable. They may be
hazardous, dirty, and
employment may be
sporadic or seasonal.
73. Compensating Differentials
• For instance, construction
pays more than retail sales
because of these
compensating differentials,
which are nonmonetary
differences between jobs
where higher or lower wages
are paid because of
differences in the desirability
of the job itself.
74. Compensating Differentials
• Most retail jobs take place in air-
conditioned or heated stores where the
worker can wear nice clothing, stay
clean, engage in friendly conversations
with customers, and expend little
physical effort. By contrast, construction
workers may perform hazardous work,
will become dirty during the job
requiring them to spend additional time
cleaning up afterwards, and will often
have to work long hours to get the job
finished, and they may not get work
during the winter months. Hence, to
attract enough workers to construction,
the industry has to pay more.
75. Compensating Differentials
• In many cases, status or
power, or the lack thereof,
may also be a compensating
differential. After all, you
never hear a kid saying I
want to grow up to be a
garbage collector.
76. Compensating Differentials
• On the other hand, much
more money is spent to
elect someone to the
presidency of the United
States than they will ever
earn at the job, and many
lawyers make more than
Supreme Court justices, yet
few lawyers would turn
down an appointment to the
Supreme Court.
78. Wage Differentials Due to Locality
• For any given type of job,
wages are usually higher in
one locality than in others.
Much of this difference is
because of differences in the
cost-of-living.
79. Wage Differentials Due to Locality
• However, most people are
reluctant to move because
they do not want to leave
their friends, sell their
house, be subjected to the
cost and uncertainty of a
new job in a new
community, and the children
may not want to change
schools.
80. Wage Differentials Due to Locality
• People may also be unwilling
to give up pension plans,
health insurance, or seniority
at their current job. Hence,
wage differentials in different
localities may persist, even if
people know that higher
wages can be earned
elsewhere.
81. Wage Differentials Due to Locality
• The requirement for
occupational licensing may
also be an impediment to
moving to a different area
for higher wages. Many
occupations require state
licensing, such as law and
medicine, so if a licensed
worker wanted to move to a
new state, she would have
to obtain a new license and
may have to satisfy
additional requirements.
83. Wage Differentials Due To Market
Imperfections
• In economics, there is a
presumption that people will
migrate to higher paying
jobs from lower paying jobs
of the same type and with
the same requirements.
However, this can only
happen if people know
about the jobs.
84. Wage Differentials Due To Market
Imperfections
• People tend to look for jobs
in their own locality by
searching the local
newspaper or local Internet
listings. Moreover, many
people get jobs from their
network of friends and
acquaintances, who tend to
live in the same area.
85. Wage Differentials Due To Market
Imperfections
• Hence, the lack of
information can lead to
persistent differences in
wage differentials for the
same type of job.
87. Performance Pay
• Many occupations pay a wage
rate that is commensurate
with performance, such as
sales or managerial
occupations. The purpose of
performance pay is to attract
the most highly qualified and
productive workers, or as
economists like to say, workers
with highest marginal revenue
productivity.
88. Performance Pay
• Performance pay is also used
to motivate workers to work.
Many employees paid a flat
wage rate often linger or
dawdle, which lowers their
productivity and the
employer's marginal revenue
product. Dawdling employees
can also lower morale, since
harder working employees
resent being paid the same as
the dawdling employees.
89. Performance Pay
• Performance pay helps to
solve this principal-agent
problem by aligning the
interests of the employees
with that of the owners of
the firm — both want to
make more money.
90. Performance Pay
• There are various types of
performance pay. Piece
rates are paid according to
the amount of work
accomplished. Many
factories use piece rates to
prevent dawdling.
91. Performance Pay
• Commissions are often paid
as a percentage of sales, in
such industries as real
estate, insurance, securities,
and retail sales.
92. Performance Pay
• Royalties are paid to artists
who actually create a
product and, like
commissions, is usually a
percentage of the sales price
of the product. For instance,
authors may receive 10% of
the price of a book for each
book that they sell.
93. Performance Pay
• Bonuses and stock
options are often paid to
executives of the
company so that they
work harder to ensure
that the company will
succeed
94. Performance Pay
• Bonuses are lump sum
payments which are
often paid at the end of
the year after the
employee's performance
can be assessed.
95. Performance Pay
• Stock options align the
interests of executives of
the company with those
of the shareholders — if
their shareholders profit,
then they will too.
96. Performance Pay
• Profit-sharing plans are
often used to pay a
percentage of the firm's
profits to employees so
that they work harder.
97. Performance Pay
• Firms may also pay
efficiency wages, which
are higher than market
wages, to attract more
productive workers.
98. Performance Pay
• Efficiency wages may
lower the firm's cost of
labor by hiring only
productive individuals and
lower turnover, which can
result in a more
experienced workforce.
99. Performance Pay
• Consequently, recruiting and
training costs are also lower.
Good employees also
require less supervision and
monitoring.
101. Drawbacks to Pay Incentives
• Piece rates may result in
sloppy work as workers
rush to make more
money.
102. Drawbacks to Pay Incentives
• Commissioned salespeople
often exaggerate claims, or
even lie, to make a sale, and
oftentimes, the product is
not in the best interest of
the customer.
103. Drawbacks to Pay Incentives
• Bonuses may disrupt
teamwork and cause
envy among coworkers.
104. Drawbacks to Pay Incentives
• Because profit sharing plans
apply to all workers at a firm, less
productive employees will
receive the same pay incentive as
more productive ones, which may
cause resentment by the
productive workers and anger
that they are not making as much
money as they could be, since
how much they are ultimately
paid depends on how hard the
others work.
106. Market theories
• Classical economists
argue that wages—the
price of labor—are
determined (like all
prices) by supply and
demand. They call this
the market theory of
wage determination.
107. Market theories
• When workers sell their
labor, the price they can
charge is influenced by
several factors on the
supply side and several
factors on the demand
side.
108. Market theories
• The most basic of these
is the number of workers
available (supply) and
the number of workers
needed (demand). In
addition, wage levels are
shaped by the skill sets
workers bring and
employers need, as well
as the location of the
jobs being offered.
109. Market theories
• The interplay between all of
these factors will eventually
cause wages to settle—that
is, the number of workers,
the number of jobs, the skills
involved, and the location of
the jobs will eventually lead
workers and employers to
reach a series of wage
agreements.
110. Market theories
• If employers (demand) cannot
find enough workers to meet
their needs, they will keep
raising their wage offers until
more workers are attracted. If
workers are in abundance
(supply), wages will fall until
the surplus labor decides to go
elsewhere in search of jobs.
When supply and demand
meet, the equilibrium wage
rate is established.
111. Market theories
• If employers (demand) cannot
find enough workers to meet
their needs, they will keep
raising their wage offers until
more workers are attracted. If
workers are in abundance
(supply), wages will fall until
the surplus labor decides to go
elsewhere in search of jobs.
When supply and demand
meet, the equilibrium wage
rate is established.
113. Human Capital theories
• A particular application of
marginalist analysis (a
refinement of marginal-
productivity theory)
became known as human-
capital theory. It has since
become a dominant means
of understanding how
wages are determined.
114. Human Capital theories
• It holds that earnings in
the labour market depend
upon the employees’
information and skills. The
idea that workers embody
information and skills that
contribute to the
production process goes
back at least to Adam
Smith.
115. Human Capital theories
• It builds on the recognition
that families make a major
contribution to the
acquisition of skills.
Quantitative research during
the 1950s and ’60s revealed
that aggregate growth in
output had outpaced
aggregate growth in the
standard inputs of land,
labour, and capital.
116. Human Capital theories
• Economists who explored this
phenomenon suggested that
growth in aggregate
knowledge and skills in the
workforce, especially those
conveyed in formal education,
might account for this
discrepancy.
117. Human Capital theories
• In the early 1960s the
American economist Theodore
W. Schultz coined the term
human capital to refer to this
stock of productive knowledge
and skills possessed by
workers.
119. Bargaining theories
• John Davidson
propounded this theory.
Under this theory, wages
are determined by the
relative bargaining power
of workers of their union
and of employers.
120. Bargaining theories
• The bargaining theory of
wages holds that wages,
hours, and working
conditions are determined
by the relative bargaining
strength of the parties to
the agreement.
121. Bargaining theories
• Smith hinted at such a
theory when he noted that
employers had greater
bargaining strength than
employees. Employers
were in a better position to
unify their opposition to
employee demands, and
employers were also able
to withstand.
122. Bargaining theories
• Limitations on the scope of
bargaining are also
suggested by theory.
Collective bargaining can
be seen as the reduction of
two risks to which the
worker is exposed through
individual bargaining.
123. Bargaining theories
• here is first the risk that
the worker will be merely
one of a number of
applicants for a single
vacancy and that
competition between
them will force the pay
down.
124. Bargaining theories
• In the bargaining theory of
wages, there is no single
economic principle or
force governing wages.
Instead, wages and other
working conditions are
determined by workers,
employers, and unions,
who determine these
conditions by negotiation.
126. Behavioral theories
• Many behavioural scientists
— notably psychologists and
sociologists- like March and
Simon, Robert Dubin, Eliot
Jacques—have presented
their views on wages and
salaries on the basis of
research studies and action
programmes conducted by
them.
127. Behavioral theories
• It has been found that wages
are determined by such factors
as . size and prestige of the
company, strength of the
union, the employer’s concern
to maintain the workers,
contribution by different kinds
of workers, etc.
128. Behavioral theories
• Wage differentials are
explained by social norms,
traditions, customers prevalent
in the organisation
psychological pressures on the
management, prestige
attached to certain jobs in
terms of social status, need to
maintain internal consistency
in wages at the higher levels,
the wages paid for similar jobs
in other firms, etc.
