Compensation Fundamentals

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Module 1- Introduction

What is Rewards

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

 What is Rewards?

For some Rewards is

about financial security

Rewards refers to all forms of

For some financial returns and tangible
Rewards is a services and benefits employees
measure of justice receive as part of an employment
relationship

For some For some Rewards is

Rewards is about about profitability
recognition

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

The Rewards Landscape : The Evolution

Increasingly organizations are changing their view of

“Total Compensation” to “Total Rewards”
Total Rewards comprises four distinct elements. Each
element of Total Rewards plays a critical role in meeting
the strategic objectives of an organization
Transactional
Transactional Rewards:
• short term focus
Benefits & • critical to attracting top talent
Compensation
Perquisites

Learning & Work Relational Rewards:

Development Environment • long term focus
• critical to retaining top talent

Relational

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

 Total Rewards Design Process

Program
Corporate Business Rewards Annual
Design and
Mission Strategy Strategy Maintenance
Administration

Rewards Strategy and Program must carefully

balance the needs of all stakeholders
Prof. Tapash Dey,-Panel Faculty-TISS-SVE
Elements of Total Rewards Strategy

The basic elements of a Rewards Strategy

Pay Philosophy: Overarching principles & prominence
Pay Approach: Defining the anchors and their role
Pay Positioning: External competitiveness
Pay Parity: Internal equity vs. External competitiveness
Pay Delivery: Communication & Delivery
Pay Mix: Fixed versus Variable
Market : Comparison

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

 Pay Approach

3P Compensation Management:
Pay for Position, Person and
Performance

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Paying for Position ƒ
Develop an equitable grading
structure ƒ
Create a reference salary structure
Leverage compensation costs with market survey
ƒ
information
Pay for Person -Determine competency
requirements and employee capabilities Pay
individuals based on their competency match
with the position Identify and pay market
premium for competencies
Paying for Performance -Design annual bonus
and incentives plans that motivate staff
Shift from merit salary increases to variable pay
Create long-term reward plans - stock options,
deferred compensation and phantom (stock
option)supply in the market Prof. Tapash Dey,-Panel Faculty-TISS-SVE
Reward Components and their Purpose

Component Purpose
Attract and retain
Fixed Pay Reward for minimum level of expected performance and
promotion opportunities
Primarily aimed at employee health and welfare to
provide employees security
Benefits and Perquisites Ensure tax-effective pay delivery
Focus behavior on short-term results
Reward for achievement of short-terms objectives
Short-Term Incentives on operation and key integration performance
measures
Encourage accountability for results
Reward long-term company performance
Align employees for shareholders by sharing wealth
Long-Term Incentives creation over a multi-year period
Provide retention through unvested awards

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Short-Term Incentives
What is it?
“Variable compensation tied to individual/group/corporate
performance, earned over a period of 12 months or less”

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Long-Term Incentives
What are long-term incentives?
“Variable compensation earned over a period of more than 12
months”
Specifically: “Compensation accruing primarily from Stock-
related employee ownership programs”
Typical Examples : Stock Options , Restricted Stocks , Phantom
Stocks , Deferred Cash Plans

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Module 3- Salary Structure Development

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Module 3
Salary Structure Development
■ Why we need a salary structure
■ Familiarizing ourselves with salary structure elements
■ Transitioning Employees and Cost Implications

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

 Why we need a Salary Structure
❑ To communicate how much the organization is willing to pay each and every job
❑ To reflect compensation philosophy, market competitiveness, and internal equity
❑ To set the same standard guideline of pay within the organization
❑ To provide the general relationship among levels of pay
❑ To provide a framework for sound pay management (pay increases/ pay
movement)
❑ To manage cost of resources
❑ The need to pay employees in a manner that is perceived to be internally fair AND
perceived to be externally competitive
❑ A process to assign employees into logical categories for other total rewards
elements such as incentive targets, equity eligibility, office assignments and
relocation benefits.

Prof. Tapash Dey,-Panel Faculty-TISS-SVE

Designing A Base Pay Structure

15
 JOB EVALUATION
❑ Intrinsic value of the job
❑ Relative Job Size
❑ Relative importance
❑ Relative difficulty

JE is process which involves of exercise judgment in identifying and

assessing difference and value in between jobs
Thereby identifying the relative worth of jobs thru hierarchical ranking
of jobs. to value the work inside the organization so that pay is
awarded fairly

It is not directly concerned with regard to the job holder position , pay
or performance ,but
Only relative size of jobs in relation to other jobs

Evaluation will always be judgmental

BUT if there is discipline within a systematic framework which
facilitates fairness, consistency and transparency by treating all jobs
on the common yardstick or same criterion
Later, it changed to 3 universal factors. It starts from the premise
that all jobs exist to serve a purpose that is to create value in the
organization.
Hence, jobs are evaluated by analyzing what is the value that is
created (accountability), how it is created (problem solving) and
what the job requirements are that the job holder has to meet in
order to deliver the value (know-how)
 What is Job Evaluation?
Job Evaluation is an analytical as well as judgmental processes used to
determine the relative worth of jobs within an organization.
JE is not an exact science
Job Evaluation enables
– Allocation of jobs to grades or bands
– Determination of levels for pay and benefits
– Internal equity of rewards
– Understanding of skills and experience required by different jobs
– Career development and succession planning exercise
1. What is a Salary Structure?

Salary Structure is the series of pay ranges which determine a

minimum and a maximum of pay rate of each grade.
Jobs grouped in the same grade should have the same earning
opportunity.
Currency
170,000 Maximum

150,000

130,000
Midpoint
110,000

90,000

70,000
Minimum
50,000

30,000

Grade
10,000
1 2 3 4 5 6 7 8
Determine Pay Policy Line – Lead ,meet , Lag

❑ Research thru salary surveys to learn what other companies are paying
for similar positions, qualification , experience , competence , of similar
revenue, industry, size,

❑ Build your salary structure around this “market” rate. Where internal
structure is corrected with the external market pay rates
❑ Market rate should be what an experienced, solid performing employee is
paid
❑ Entry-level employees may be paid 75-80% of the market rate
(depending on a variety of factors) and highly-experienced employees
would max out around 120-125% of the market rate

❑ Everyone else should spread out across that range based on experience,
knowledge, performance etc and what they’d been earning in previous
positions and what they negotiated coming into the organization
2. What is Pay Policy Line?

Pay Policy Line is the “target pay positioning” that the organization
determines based on comparisons with the market. It should reflect
the stated compensation competitive stand of the organization.
360,000

320,000 Market Data at Different Percentiles P90th

280,000 P80th
Monthly Base Salary (Currency)

240,000
P60th
P50th
200,000

160,000

120,000

80,000

40,000

-
1 2 3 4 5 6 7 8 9 10 11
Level
 Designing A Base Pay Structure
❑ Establisha pay policy line. Whether or not the pay structure
should lead or lag or meet the market
❑ Establish overall pay range
❑ Establish number of grades
❑ Determine Range spread
❑ Design pay grades using pay grade minimum and maximum
❑ Determine overlap between pay grades.
❑ Determine if the organization needs more than one pay
structure and why.
❑ Create pay grade chart.
22
PURPOSE OF GRADE STRUCTURE

❑ Attract , Retain and Engage

❑ Job Grades and Bands are not simply designed out

of nothing. Whatever you will design will mean cost
for the company.
❑ Hence, you need to understand the four basic
compensation principles of:
❑ internal equity,
❑ external competitiveness,
❑ affordability, and
❑ sustainability
Pay grades

❑Pay grades are groups of jobs (often sorted by

business function) that have the same or similar
internal value as defined by your job evaluation
process.
❑For example, customer support specialists and
customer support technicians may belong in the same
grade if they demand the same skills and education
and have the same level of responsibility.
❑In this case, the salaries of every customer support
role in the same grade would fall between the same
minimum, midpoint and maximum range.
 Grade
Grade M1: - 20000 and above
CEO, GM – Finance, GM – Service, GM – Sales, GM - Human Resource
Grade M2: - 8000 to 18000
Show-room Manager, Admin Manager, Finance Manager, Account Manager,
HR Manager, Works Manager, Sales Manager, Customer Care Manager
Grade M3: - 6000 to 10000
Showroom incharge, Finance Incharge, Account Incharge, Billing Incharge,
Maintenance Incharge, House-Keeping Incharge, HR Incharge, RTO Incharge,
Work-shop Incharge, Delivery Incharge,
Grade M4: - 3000 to 6000
Sales Advisor, Service Advisor, Computer Operator, CCE, Receptionist, TME,
Finance Coordinator, Cashier, Petty Cashier, Account Assistant, RTO
Executive, Selection, Test Ride Marshall, Exchange Marshall, DSS Marshall,
Floor Supervisor, Back office staff.
Grade M5: -
Expert Mechanic, Mechanic, Technician,
Grade M6: -
Peon, House Keeping, Washing boy
Salary Bands

❑ Candidate offers are easier to create and more

consistent.
❑ When appropriate, Salary Bands prepare you to
communicate pay ranges with candidates.

❑ Salary Bands help you translate hiring and

employee raise plans into budgets.

❑ Salary structure on knowledge, problem solving

skills, and accountability
Salary Bands

❑ Salary Bands (or Pay Ranges) are how you define the target pay for
employees within Job Grades.

❑ For each Level of your Job grade , a company should decide the low-end
and high-end of the pay that Level will command. Salary Bands help when
making offers, retaining employees, and planning for future growth.
❑ To make up some Salary Bands for the Technical Job Grades as per excp in
previous slide

❑ T1: 60k-72k
❑ T2: 68k-87k
❑ T3: 85k-107k
❑ T4: 98k-122k
❑ T5: 115k-138k
❑ T6: 130k-155k
 3. What is a Pay Range?

How does the organization decide how much an employee should be

paid?
Maximum A Pay Range can be divided into three equal
parts:
Upper
Range The upper third - reserved for a more
senior or experienced employee whose
Pay Midpoint performance is consistently above the norm
Middle
Range Range or exceed expectations.

Lower The middle third - defines the acceptable

Range range of pay for a fully qualified employee
whose performance meets expectations.
Minimum
The lower third - reserved for new hire or
developing employee.
 4. What is a Range Spread?
Range Spread is the distance between minimum and maximum expressed
by %

% Range Spread = (Maximum – Minimum )

Minimum

Narrower Range Spread - used for lower grade jobs which individuals will
progress rapidly through a development
Wider Range Spread - used when combining jobs with widely varying market
values into a single grade and pay range (e.g. broadband).
Wider Range Spread
Narrow Range Spread
Maximum

Midpoint
(Target
Positioning)

Minimum
A second method is to calculate the range spread above and below the midpoints. The formula for the range spread above
the midpoint is maximum pay minus midpoint pay divided by midpoint pay. The formula for the range spread below the
midpoint is minimum pay minus midpoint pay divided by the midpoint pay.
 •RANGE SPREAD

•Executives, vice-president and managerial staff: 50% and

above
•Professional and supervisory staff:40% to 50%
•Clerical, technical and administrative staff: 30% to 40%
•Services, production, maintenance staff: 20% to 30%
5. What is Midpoint Progression?

Midpoint Progression represents pay differences in moving through a salary

structure.
Midpoint Progression Rate (MPR) is the percentage change in midpoint value
from one adjacent pay grade to the next.

% Midpoint Progression = (Midpoint Grade 2 – Midpoint

Grade 1) Midpoint Grade 1

Pay Grade 2
Employee Groups Common MPR Differences (%)
Pay Grade 1
Low Average High
Maximum
Unskilled to clerical staff 3–5 8 – 12 15 – 20
Midpoint
Progression Officer to Middle 5 – 10 12 – 20 20 – 30
Midpoint management
Senior Management 10 – 15 20 – 30 35 – 50

Minimum
7. What is Comparative Ratio?
Comparative Ratio (Compa Ratio) is the relationship between the actual pay
and the midpoint of pay range. This ratio helps highlighting the number of
actual pay outside the “reasonable range”

Compa Ratio = Actual Employee’s Pay

Midpoint of Pay Range

Example: Given…Actual pay at 22,000 and Midpoint of pay range at

20,000
Compa Ratio = 22,000 / 20,000
= 1.1
b) Types of Executive Compensation--Executive compensation often has
five basic elements: (1) Base Salary, (2) Short-Term Incentives or Bonuses,
(3) Long-Term Incentives and Capital Appreciation Plans, (4) Executive
Benefits, and (5) Perquisites.
The way an executive compensation package is designed is partially
dependent on the ever-changing tax rules.
Base Salary: Salary is obviously important. It is a factor in determining
standard of living. Salary also provides the basis for other forms of
compensation.
Short-Term Incentives or bonuses: Payment of bonuses reflects a
managerial belief in their incentive value. Today, virtually all top executives
receive bonuses that are tied to base salary.
Long-Term Incentives and Capital Appreciation: The stock option is a
long-term incentive designed to integrate further the interests of management
with those of the organization. The typical stock option plan gives the
manager the option to buy a specified amount of stock in the future at or
below the current
market price.
employee compensation" means the total cost incurred by the company towards
employee compensation including
basic salary, dearness allowance, other allowances, bonus and commissions
including the value of all perquisites provided, but does not include:

(a) the fair value of the option granted under an Employee Stock Option Scheme;
and
(b) the discount at which shares are issued under an Employee Stock Purchase
Scheme.
(c) “employee stock option” means the option given to the whole-time Directors,
Officers or employees of a company which gives such Directors, Officers or
employees, the benefit or right to purchase or subscribe at a future date, the
securities offered by the company at a predetermined price
❑ Company makes huge profits but Employers get only salary
❑ But not part of growth
❑ Employee becomes disillusioned and leave
❑ Most important for employers how to do we attract
,motivate, retain talent and make them continue giving
profitable contribution
❑ What is Infosys without employees –infosys not only
buildings and computers – its people
❑ its all about people skills and technology
❑ Salary may not be the only factor that retain employees
❑ For key - high performer and high potential people give also salaries and
shares in the companies
❑ Shares are given as and hence prospective candidate joins
❑ Say you Jan 2018 company says you be I the company for 2 years that is
on 2020 1st January we will grant you options
❑ Grant option means on that day the company will give you a letter
❑ Letter says congrats you have done a good job – you qualify for 500O
shares of company - if you continue to work for another 3 years the
Employee will able to purchase 5000 shares @Rs10 per share – may
become that day the market value of the shares may be 100 rs
❑ Today this 5000 shares are not active when it was granted
❑ This 3 year period is called vesting period
❑ The price can be either 10 Rs per share on 1/1/ 2023 you will have to pay
❑ OR whatever the mkt price 20% or 50% u will pay
That 10 Rs per share the employee has to pay on
1/1/2023 is called exercise price
On 1/1/2023 when after 3 years the vesting period
is over and that paper gets live then it is called the
option got vested
In that paper it may have been agreed upon that
paper which got live may be valid for another 2 ,3 6
or 12 months which is called exercise period
After that 1 year or the time period the option will
die down
Vesting period
❑ in which you keep issuing the stock to employees as they continue to work 2 to
5 yrs whatever is the time period
❑ During the vesting period if they work for 2 yrs then this much they will get if
they work for 5 yrs then this much much they will get
❑ VESTING SCHEDULE
❑ What is the frequency stocks are accrued by the employees
❑ For example if the vesting period is of 4 yrs then every quarter the employee
spends there they are eligible to get the stocks or it can be a monthly schedule
or annual, half yearly depends on the company
❑ So if annual then if employee quits before one year – he looses all the stock given
last one year
❑ If its quarterly then immediate last quarter the employee gets to which he has
served
exercise period
It is the time period
Generally when we give ESOPS we do not give equity stocks to the employee we
given them only options
OPTION means it then becomes a discretion of the employee to exercise the option
so they have to come and say that I want equity again these options then u covert
those OPTIONS into equity
There is a time period associated based on the company need that within that time
period the employee should come and that I want to exercise the OPTIONS and there
is process associated with that exercise they should pay that price so that u convert
those options into actual equity
Cliff is part of vesting Period if refers to the first allotment
Most of the companies takes one year as cliff so until you do not complete 1st year
of year of service then you are not eligible to convert into stocks then after one
year you have to follow the vesting schedule
Grant letter is the letter which u give to each employees specifying various terms
of the grant for exp how much options u r giving how much price u r giving for
the option to the employee
what would be vesting schedule and vesting exercise period

Once u give the grant letter u give some time period to employee to think
and accept it that I accept this grant then the employee becomes eligible for
esop after accepting the grant
❑ Sweat equity and ESOP confusion
❑ Sweat given against sweat that is related to consultants and senior level guys who
part of being a share holder or they are senior level guys
❑ ESOP was for employees working full time it generally does not include
consultants n contractors
❑ But it entirely depends on company discretion and if required can give to
Consultants and contractor for which there are differenet formalities which needs
to be followed
ESOP policy
❑ Which gives the entire operation how you have structured it and contains details
of the total grant size .
❑ Total ESOP pool size ,
❑ how will people encash it
❑ what would happen if there is a death ,retirement or resignation
❑ what are the exit clauses
❑ when they can sell it
❑ how much options to equity that can be converted
ADVANTAGES
Company do not have to pay too much cash to pay out
Same time reward employees with substantial gains as the company
makes progresses and growth and share increases it valuation the
employee makes much more money than they get out of their salary
ESOP good tool but requires lot of planning and analysis
Collective bargaining is a process of negotiation between employers and
a group of employees aimed at agreements to regulate working salaries,
working conditions, benefits, and other aspects of workers' compensation
and rights for workers. The interests of the employees are commonly
presented by representatives of a trade union to which the employees
belong. The collective agreements reached by these negotiations usually
set out wage scales, working hours, training, health and
safety, overtime, grievance mechanisms, and rights to participate in
workplace or company affairs
The union may negotiate with a single employer (who is typically
representing a company's shareholders) or may negotiate with a group of
businesses, depending on the country, to reach an industry-wide
agreement.
A collective agreement functions as a labour contract between an employer
and one or more unions.
Collective bargaining consists of the process of negotiation between
representatives of a union and employers (generally represented by
management, in respect of the terms and conditions of employment of
employees, such as wages, hours of work, working conditions, grievance
procedures, and about the rights and responsibilities of trade unions
1. Job Context:
❑ Working Conditions

❑ Risks involved

❑ Hazards

❑ Physical and mental demands

❑ Judgment

2. Job Requirements:
❑ Knowledge or basic information required to perform a job successfully
❑ Specific skills such as communication skills, IT skills, operational skills
❑ Personal ability including aptitude, reasoning, abilities, handling sudden
and unexpected situations, problem-solving ability, mathematical abilities
etc’ Educational Qualifications including degree, diploma, certification or
license
❑ Personal Characteristics such as ability to adapt to different environment,
endurance, willingness, work ethic, eagerness to learn and understand
things, behaviour towards colleagues, subordinates and seniors, sense
of belongingness to the organization, etc
51
 What Aspects of a Job Are Analyzed?
•Duties and Tasks
❑ performance of specific tasks and duties.
❑ frequency, duration, effort, skill, complexity, equipment, standards, etc

•Environment
❑ physical requirements to be able to perform a job.
❑ Unpleasant conditions such as offensive odors and temperature extremes.
❑ Risks to the incumbent such as noxious fumes, radioactive substances,
hostile and aggressive people, and dangerous explosives.

Tools and Equipment

❑ Specific equipment and tools.
❑ Equipment may include protective clothing

•Relationships
❑ Supervision given and received.
❑ Relationships with internal or external people.

•Requirements 52
Job Analysis is a process to identify and determine in detail the
particular job duties and requirements and the relative
importance of these duties for a given job
53
In simple terms, job analysis may be understood as a process of collecting
information about a job. The process of job analysis results in two sets of data:
i) Job description and
i) Job specification.

Specifically, job analysis involves the following steps:

❑ Collecting and recording job information

❑ Checking the job information for accuracy.
❑ Writing job description based on the information
❑ Using the information to determine the skills, abilities and knowledge that are
required on the job.
❑ Updating the information from time to time.
 Purpose of Job Analysis
Training Needs
To identify or develop:
❑ training content
❑ Evaluation of effectiveness of training
❑ methods of training (i.e., small group, computer-based, video, classroom...)
❑ Compensation
skill levels
❑ compensable job factors
❑ work environment (e.g., hazards; attention; physical effort)
❑ responsibilities (e.g., fiscal; supervisory)
❑ required level of education (indirectly related to salary level)
❑ Selection Procedures
job duties that should be included in advertisements of vacant positions;
❑ help determine what salary should be offered to a candidate;
❑ minimum requirements (education and/or experience) for screening applicants;
❑ interview questions;
❑ selection tests/instruments (e.g., written tests; oral tests; job simulations);
❑ applicant appraisal/evaluation forms;
❑ orientation materials for applicants/new hires
Performance Review
performance standards
❑ evaluation criteria 55
❑ goals , duties and /KRAs
 JOB DESCRIPTION
1) The job description should indicate the scope and nature of the work
including all-important relationships.
2) The job description should be clear regarding the work of the position, duties
etc.
1) More specific words should be selected to show:-

a) The kind of work

a) The degree of complexity

a) The degree of skill required

a) The extent to which problems are standardized

a) The extent of worker’s responsibility for each phase of the work

1. Physical specifications: - Physical specifications include the physical qualifications
or physical capacities that vary from job to job.
1. Include physical features like height, weight, chest, vision, hearing, ability to lift
weight, ability to carry weight, health, age, capacity to use or operate machines,
tools, equipment etc.
2. Mental specifications: - Mental specifications include ability to perform,
arithmetical calculations, to interpret data, to read electrical circuits, ability to
plan, reading abilities, scientific abilities, judgment, ability to concentrate, ability
to handle variable factors, general intelligence, memory etc.
3. Emotional and social specifications: - Emotional and social specifications are more
important for the post of managers, supervisors, Etc. These include emotional
stability, flexibility, social adaptability in human relationships, personal appearance
including dress, posture etc.
4. Behavioral Specifications: - Behavioral specifications play an important role in
selecting the candidates for higher-level jobs in the organizational hierarchy.. These
specifications include judgments, research, creativity, teaching ability, maturity
trial of conciliation, self-reliance, dominance etc.
Employee Specification: -
Job specifications information must be converted into employee specification
information in order to know what kind of person is needed to fill a job. Employee
specification is a like a brand name which spells that the candidate with a particular
employee specification generally possess the qualities specified under job
specification.
Employee specification is useful to find out the suitability of particular class of
candidates to a particular job. Thus, employee specification is useful to find out
prospective employees (target group) whereas job specification is useful to select the
right candidate for a job
COMPENSATION MANAGEMENT
WAGE CONCEPTS & THEORIES
The National Income (measured as Net National Income
at market prices) and Per Capita National Income
(measured as Per Capita Net National Income at market
prices)

Average per-person income is for a city, region or country

in a specified year, and is used as a means of evaluating
the living conditions and quality of life in different areas in
a specified year.

It can be calculated for a country by dividing the

country's national income by its population.
➢ Minimum wage rates in India are fixed under the Minimum Wages Act,
1948.
➢ Since labour is a concurrent subject under the Indian Constitution,
minimum wage rates are determined both by the Central Government and
the state Governments.
➢ Minimum wage rates in India are declared at the national, state, sectoral
and skill/occupational levels.
➢ Minimum wage rates may be established for any region, occupation and
sector.
➢ Also, minimum wage is established for trainees, youth and piece-rate
workers.
➢ Minimum wage is determined by considering the cost of living.
➢ Minimum rate of wages may consist of a basic rate of wages and a cost of
living allowance; and
❑ While fixing or revising minimum rates of wages, different minimum rates
of wages may be fixed for different scheduled employments; different
classes of work in the same scheduled employment; adults, adolescents,
children and apprentices; and different localities.
❑ The minimum wage rates may be fixed by hour, day, month or any such
other larger wage period as may be prescribed.
➢ Minimum wage is announced for 45 scheduled employments in the
Central Sphere while the State level minimum wage is determined by
every state keeping in view the sectors more dominant in the State.
➢ Minimum wage is revised while considering the following five
elements:
❑ three consumption units per earner;
❑ minimum food requirement of 2700 calories per average adult;
❑ cloth requirement of 72 yards per annum per family;

➢ The Minimum Wages Act provides for two methods of fixation/revision

of minimum wages. Under the Committee Method, committees and
sub-committees are set up by the Government to hold inquiries and
make recommendations with regard to fixation and revision of
minimum wages.
➢ Under the Notification method, government proposals are published in
the Official Gazette for information of the persons likely to be affected
and specify a date (not less than two months from the date of the
notification) on which the proposals will be taken into consideration.
What is the cost of living index?
The cost-of-living index, or general index, shows the difference in living costs between
cities. The cost of living in the base city is always expressed as 100. The cost of living
in the destination is then indexed against this number.
So to take a simple example, if London is the base (100) and New York is the
destination, and the New York index is 120, then New York is 20% more expensive
than London. Similarly, if London is the base and Budapest is the destination, and the
Budapest index is 80, than the cost of living in Budapest is 80% of London's.
A Cost Of Living Index (COLI) is a price index that measures the relative cost of living over time. It
is an index that measures differences in the price of goods and services.

A COLI measures changes over time in the amount that consumers need to spend to reach a
certain level or standard of living. COLI is typically a number, where the Base Index is 100.

A Consumer Price Index (CPI) on the other hand is a measure of the average change over time in
the prices paid by consumers. CPI is typically a percentage change compared to the previous
period. An increase in CPI is called inflation, while a decrease is called deflation. Both the COLI and
the CPI use a market basket of consumer goods and services.

A COLI is also used to measure the price of the same quantities and types of goods and services in
different geographic locations. The COLI used in this way shows the difference in living costs
between different locations.
➢ Wages have been classified into three categories:
(1) Living wages (2) Minimum wages (3) Fair wages

➢ Living Wages-Living wages has been defined differently by different people

in different countries. "Living wage is a wage sufficient to ensure the
workman food, shelter, clothing, frugal comfort, provision for evil days etc.

➢ 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."
➢ 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.
➢.
➢ .
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.

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
➢ 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. 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. Fair wage depends on the present economic
position as well as on its future prospects. Fair wages depends upon the
following factors :
(1) Minimum Wages
➢ (2) Capacity of the industry to pay
(3) Prevailing rates of wages in the same or similar occupations in the same
localities
(4) Productivity of labour
➢ (5) Level of national income and its distribution.
(6) The place of the industry in the economy of the country
Indirect Cost of Fringe Benefits
These benefits can include insurance, a company car, employee discount,
etc. While there are some exceptions, fringe benefits are usually a direct
cost to the business in terms of accounting as long as they are allocable
to direct labor on a consistent basis.

A direct cost is broadly defined as any cost that can be assigned to a

specific item in an accurate way, such as wages, materials, supplies,
consulting services and fringe benefits

Indirect costs are simply considered any costs that are not direct.
Common fringe benefits include group-term life insurance coverage and
educational assistance
That which cannot be directly associated with any project or process or
manufacturing and therefore cannot be charged as a direct expense.
Indirect costs include, but are not limited to, physical overhead, space
occupancy, utilities, information technology ,leaves etc
incentive compensation plays an important role in driving the performance of
organizations
It has been seen that most incentive plans, do exactly the opposite of what their
designers intend. They act as powerful brakes on performance, causing
managers to be much more conservative . While not simple, it is possible to
structure truly effective incentive systems that solidly align the financial interests
of managers with those of shareholders, that improve motivation and morale,
and that create an atmosphere in which managers constantly strive.
There has been a lot of talk with respect to executives having a very short-term
focus since executive compensation package is tied to short-term gains.
Focus is more on the longer term is to have short-term bonuses or salaries paid
in stock and require executives to hold the stock for two, three, four or five years
before they can sell it and have these sort of longer-term performance
objectives

❑ What is ‘fair pay’ for the executive?

❑ Are they already overpaid for what they do?
❑ Do managers respond differently to different compensation plans?
❑ What elements of compensation lead to superior corporate performance?
❑ How should CEO pay be correlated with performance?
❑ How sensitive is pay for performance
Most executive pay packets contain four components –
❑ a base salary,
❑ an annual bonus,
❑ stock options and
❑ long – term incentive plans.

The base salary is determined based on the

❑ company’s size,
❑ profitability,
❑ the executive’s experience,
❑ education and
❑ past performance.
❑ compensation practices in comparable companies both within the industry group and
outside.

The annual bonus depends on actual performance on one or more measures like
❑ return on investment,
❑ net income,
❑ cash flow, and
❑ sales,
The executive does not get the bonus unless he meets a threshold. Further, the
executive cannot earn unlimited amounts in bonus. That is, the bonus is capped.
INCENTIVE
➢ The term incentive means an inducement which rouses or stimulates one to
action in a desired direction.
➢ An incentive has a motivational power;
➢ a large number of incentives the modern organisations use to motivate their
employees may be broadly grouped into
➢ (i) financial incentives, and (ii) non-financial incentives.

➢ 1. Financial Incentives:
➢ wages and salaries, bonus, retirement benefits, medical reimbursement,
etc.
➢ Management needs to increase these financial incentives making wages
and salaries competitive between various organisations so as to attract and
hold force.
➢ physiological and security/social needs
➢ money is recognized as a basis of status, respect and power, it also helps
satisfy the social needs of the people.
➢ It is important to mention that once the physiological and security needs are
satisfied, money ceases to be motivator.
➢ Money then becomes, what Herzberg termed, hygiene and maintenance
factor.
➢ The presence of hygiene factor, of course, prevents job dissatisfaction but do not
provide ‘on the job satisfaction’ to the employees in the organisation.

➢ In such case, money cannot be considered as motivator.

➢ Then, in order to motivate employees, according to Herzberg, it is necessary to

provide other incentives for the satisfaction of ego, status, and self-actualization
needs.
➢ People in higher positions getting higher monetary rewards are not
motivated by increased monetary rewards. Yes, they may be motivated by
money only when increase is large enough to raise their standard of living
and status in the society to which they belong to.
 Non-Financial Incentive:-
(2)(a)

➢Appreciation of Work Done

➢Competition
➢Group Incentives
➢Knowledge of the Results
➢Worker’s Participation in
Management
➢Opportunity for Growth
➢Suggestion System
 Job Redesign ( Non financial incentives-2(b))

➢ Same job day in and day out, it can become mundane or

boring.
➢ It may seem like you show up to work, go through the
motions and come back the next day to do it all over again.
➢ Sometimes it's not the type of work that needs a makeover
but the tasks, responsibilities and roles that do.
➢ Job redesign looks specifically at ways to expand an
employee's job by redesigning certain aspects relating to
the scope and depth of what it is that an employee does
and is responsible for at the organization.
➢ In doing so, the manager essentially prevents an employee
from losing motivation and interest in their work.
➢ There are three ways a manager can redesign an employee's
job: job enrichment, job enlargement and job rotation
Job Enrichment
➢ more tasks to do as a part of their job, as well as the
responsibility and authority needed to complete those
additional tasks.
➢ What works particularly well to increase motivation is when job
enrichment includes additional tasks that match the skills,
knowledge and abilities the employee already has.
Job Enlargement
job redesign strategy that increases only the tasks of a particular
job. While job enlargement is limited in that it does not provide
the additional responsibilities or authority or challenge that job
enrichment does
Job Rotation
Assigns to some other job on a temporary basis
Boredom
New perspective
Some ting new to learn beyond the regular job
Types Of Incentive Plans
Systems of Wage Payment and Incentive
➢A good incentive plan should encourage the workers to work hard and
produce more than the standard production set for them
➢The standard output is determined on the basis of time and motion studies by
the specialists and
➢the rates of wages are fixed for different jobs on the basis of job evaluation
➢Individual incentives may be based on time or output.
➢In time based plans, a standard time is determined and incentive
is paid
➢In output based plans, a standard of output is determined and
an employee producing more than standard output is given
incentive.
➢Output based plan
(i) earnings varying in proportion to output; or;
(ii) earnings varying less proportionately to output; or;
(iii) earnings varying more proportionately to output; or;
(iv) earnings varying in different proportions at different levels of
output.
standard time (S) = 10
hrs
Rate (R) = Rs. 4 per
hour
Time (T) = 6
hours
Rate of Bonus (P) = 50%of time
saved
Total Wages = T X R + (S-T) X P X R
= 6 X 4 + (10-6) X ½ X 4
= Rs. 32.00

In the above illustration, the worker gets Rs. 8 extra than he would
have earned under the time wage system.
 HALSEY PLAN
➢ standard time for doing each job or operation is fixed and the worker is given
wages for the actual time he takes to complete the job at the agreed rate per
hour plus a bonus equal to (usually) one-half of the wages of the time saved.
➢ If there is no saving in the standard time allowance, the worker is paid only his day
rate.
➢ Thus, if S is standard time, T the time taken, R the labour rate per hour, and %
the percentage of the wages of time saved to be given as bonus, total earnings
of the worker will be:
Incentive plan was devised by P.A. Halsey
Halsey plan are as under:
1. Halsey premium plan is very simple to understand. The amount of wages
can be calculated very easily.
2. Both the workers and the employer get the benefit of time saved.
3. Halsey plan gives due importance to the efficient workers by paying them
bonus for the time saved by them in doing a particular job.
4. Minimum wage is assured to each worker. Every worker gets wages for the
time he has actually devoted at the fixed rate irrespective of his output.
plan suffers from the following limitations:
1. workers may not like the sharing of the benefit of their efficiency with the
employers. Under this plan, the worker get wages for 50% of the time saved
only.
2. There may be deterioration in the quality of work because the worker may
just rush through not caring for the quality of the product or the amount of
waste of raw materials.
3. The standard time may not have been properly fixed
Rowan Bonus Plan
Rowan Plan is a modification of Halsey Plan. It guarantees the minimum time
wages and does not penalize the slow worker. A standard time as fixed for the
completion of a job and the bonus is paid on the basis of time saved. Bonus is a
proportion of the wages earned by the worker for the time taken by him and the
proportion is the ratio of time saved to standard time. It implies that as the time saved
increases, time taken will be reduced and as such the bonus would increase at a
diminishing rate. This will check over speeding and overcome a major drawback of
Halsey Plan. The working of this plan is explained with the help of the following
illustration :

Standard time(S) = 10 hours

Time taken (T) = 6 hours
Rate ( R) = Rs. 4 per hour

Total wages = T X R X [ T X R X Time saved__ ]

Standard time
= 6 X 4 + ( 6 X 4 X 4/10)
= Rs. 33.60
Taylor’s Differential Piece Rate System (Formula and Calculation)!

➢ Differential Piece Rate System was introduced by Taylor, the father of scientific
management.
➢ The underlying principle of this system is to penalize a slow worker by paying him a
low piece rate for low production and
➢ to reward an efficient worker by giving him a higher piece rate for a higher
production.
➢ Taylor was of the view that an inefficient worker should have no place in the
organisation and he should leave the organisation by paying him a low piece rate
for low production.
➢ Time and motion study it is possible to fix a standard time for doing a
particular task. To encourage the workers to complete the work within the
standard time, Taylor advocated two piece rates, so that if a worker performs
the work within or less than the standard time, he is pad a higher piece rate,
and if he does not complete the work within the standard time, he is given a
lower piece rate.
Thus, if the standard production has been fixed at 8 units per day of 8 hours
(taking normal piece rate as Re 1), the higher piece rate for 8 units or beyond
may be Rs 1.20 per unit and the lower rate for an output of less than 8 units per
day, may be 80 P. per unit.
➢ The system is very harsh to the inefficient workers because they earn much less
wages on account of lower output and lower rate.

➢ Moreover, minimum wages are not guaranteed under this method. Another
drawback of the system is that if a worker just fails to complete the work within the
standard time earns much less wages than a worker who just completes the job
within the standard time.

➢ Therefore, the system is now almost out of use.