Compensation

Management
 Acquisition
Control
HRP
HR Audit
Recruitment
HR Accounting
Selection
HRIS
Placement

Scope of
HRM

Maintenance Development
Remuneration Training
Motivation Career development
Health & Safety Organizational Dev.
Social Security Internal Mobility
Employee Relations
Performance Appraisal
 Compensation and Rewards

Compensation is the sum total of all forms of payments

and rewards provided to employees for performing
tasks to achieve organizational objectives.

- Compensation and rewards management is a complex

process that includes decisions regarding benefits and
variable pay and is one of the most significant and
dynamic of HR practices.

- It suggests an exchange relationship between the

employee and the organization.

- The compensation an employee receives determines

one’s standard of living and purchasing power.
- Employees seek to maximize their rewards to meet
their aspirations.

- Employees also expect to be compensated fairly and

rewarded for the effort, skills and knowledge that
they contribute towards the achievement of
organizational goals.

- For the organization, pay and rewards are important

since these affect its profitability.

- Compensation constitutes the major cost of doing

business, since it determines the employee cost.
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
 Principles of Wage and Salary Administration

1. Wage and salary plans should be sufficiently flexible.

2. Job evaluation must be done scientifically.

3. Wage and salary administration plans must always be consistent with

overall organizational plans and programmes.

4. Wage and salary administration plans and programmes should be in

conformity with the social and economic objectives of the country.

5. Wage and salary administration plans and programmes should be

responsive to the changing local and national conditions.
 Process of Compensation and Reward Management

• Designing

• Development

• Communication

• Implementation

• Evaluation
Objectives CRM

Fair treatment of employees in line with

effort, skills, or competencies

Attract and retain high-performing

employees

Motivate employees towards higher

performance

Reinforce desirable employee behaviour

Communicate to the employee his or her worth
to the organization

Align employee efforts with achievement of

organizational objectives

Enhance co-operation and collaboration among

team members

Provide employee social status

 Types of Compensation

Total
Compensation

Financial Non-financial
(Extrinsic rewards) (Intrinsic rewards)

Direct Praise
Indirect Satisfaction
Wages, Salaries, And
Benefits Derived from job
Incentives, Bonus Recognition
- Direct financial compensation and rewards: These refer
to monetary payments made to employees in exchange
for work. These include (Basic salary, DA, Bonus ,
Incentives, Overtime payments, Variable Pay, and
Commission)

- Indirect financial compensation and rewards: These

include benefits such as pensions, gratuity, insurance,
etc. These rewards are received by all employees on
the basis of their membership in the organization.

Both direct and indirect financial compensation

are called extrinsic rewards.
Non-financial compensation is the satisfaction that an
individual derives from the job or from the environment
in which the employee works.

Factors:
- Challenging job
- Autonomy
- Responsibility
- Recognition & Praise for good performance
- Personal growth
- Superior-subordinate relationship
- Interpersonal relations
- Close friendships with colleagues
- Quality of Work life

These are also called intrinsic rewards.

 Components of Compensation and Rewards
Components of
Financial
Compensation

Direct Indirect

Variable Pay Mandatory Benefits

Voluntary Benefits
Base Pay
• Individual • Provident fund
• Paid holidays
incentives • Gratuity
• Wage • Family-friendly
• Group • Maternity leave
• Salary benefits
incentives • Health plans
• Retirement
• Organization • Medical leave
benefits
incentives
 Awards
- Cash
- Gift
- Movie tickets
- Parties
- Dinner coupons
- Travel award to popular destinations

Non-financial incentives have a higher motivational value than

financial incentives

Form of Awards
a) Recognition Awards (for performance)
Ex. ‘Employee of the year’ ‘Employee of the month’

b) Service Awards (for length of service)

 Determinants of Compensation and Rewards

External determinants
Internal determinants
• Labour market
conditions
• Compensation policy of
• Economic conditions
the organization
Pay levels • Area wage rates
• Employers ability to pay
• Government
• Worth of a job
regulations
• Employee’s relative worth
• Cost of living
• Union influences
• Wage Board
Approaches to Compensation and Rewards

Job-based pay

Traditional
Approach
Based on job
evaluation
Approaches
to
Compensation
Skill-based or
Competency based
pay
Contemporary
Approach
Rewards linked to
performance
 Methods of Wage Fixation

Legislation (Legal Enactments)

Govt. Policies

Collective bargaining

Job Evaluation

Wage boards
 Wage Influencing Variables

Stage 1 Govt. laws, Stage 2

Wage boards

Individual Collective Local area

workmen bargaining Going rates

Tribunal,
Courts

Mutually decide
on the wage Employees’
for the job Price for wage and
The job components
Philosophy of mgt.
Towards wages
Region-cum-industry
Employer settlements Capacity to pay

Intermixture of these variables Internal pricing

in a particular organizational through
context results in the wage job evaluation
structure in a particular plant
 Wage Determination Process

Job Analysis Wage Legislation

Wage Survey
And Analysis of Wage Structure
Job Description Job Relevant
And Evaluation Organizational
Job Specification problems
Rules of
administration

Differential
Performance Employee appraisal
Standards

Wage Payments
Minimum, Fair And Living Wage
• The Minimum Wages Act, 1948
• Indian Labour Conference, 15th Session, 1957
- 3 consumption units
- 2700 calories food
- Per capita consumption of 18 yards cloth per annum
(72 yards)
- Minimum housing rent
- Fuel, lighting and others (20 % of the total minimum
wage)
Fair Wage:
- Productivity of labour
- Prevailing wage rates in the localities
- Level of national income & its distribution
- Place of industry in the economy of the country
 Types of Wages

• Real wage
• Nominal or Money Wage

Basis of Payment

• Time rate
• Piece rate
• Balance or Debt Method
 Wage Differentials

Occupational differentials or differentials based on

skill

Intra – Industry differentials

Inter- firm differentials

Regional differentials

Sex differentials
 The industrial wage structure in India consists
of various components such as :

• Basic wage

• Dearness allowance

• Annual statutory bonus

• Fringe benefits

• Incentives
 General Allowances

House Rent Allowance

City Compensatory Allowance
Field/Special Compensatory Allowance (Where CCA is not
payable)
Shift Allowance
Vacation Allowance (LTC)
Acting Allowance (Because of extra assignment In case of leave
or absence of a person)
Retaining Allowance (In case of seasonal factories)
Clothing and Uniform Allowance
Tiffin Allowance
Conveyance Allowance
Washing Allowance
 Fringe benefits

Reimbursement of expenditure on children’s education

Grant of merit scholarship to the children
Incentive scheme for national awards
Incentive scheme for promoting small family norms
Incentive for acquiring proficiency in hindi
Incentive for acquiring higher qualifications

Group insurance scheme

Employees provident fund
Gratuity
Pension scheme