EAEARNING OBJECTIVES this chapter, you should be able to: pose The impact of employees a understare on industrial relations. wy between wages and. salaries, + Dain get insight into the objectives of os tion. sree factors affecting employee j the economic and behavioural tapes of employee compensation. « (edosand the correlation between employee's jecetion of equity and compensation. «toon he stages involved in the process of com- jpmstion planning and also the problem an orga- fesian comes across in compensation planning, « Disingush between money wages and real vwaps and also understand the concept of sinmam wages, living wages and fair wages. “Unkerand the varius theories of wage + tao te wage problem in India. Undertand the various methods of wage . Ben tet advantages and disadvantages. fonne itcally the ice rate system oF bare by resut method of wage payment «gues method of wage based on results eo y bonus (premium) individual incentive plan or fay es lans—and make a comparative * eg iti Plans under each category 28 tho eaenanases of incentive wage plans 28 plan, Mials Of a successful incentive the 8 pan Biles of incentive system of statstnd the 1 Réihe pene SONCEDL of wage differentials Non te acting wage variations. seeming play an important role "0 ages management’ strategy with ‘Ompensatcee® icentives and supplementary cee eaten Soraeton IS a syst a tematic and orderly pro- a ng the worth of a job in relation Employee Compensation Wages, Incentives and Supplementary Compensation i! INTRODUCTION Employees compensation issues are one of the major causes of industrial disputes, thus disturbing industrial relations. Hence, issues related to employee compensation are highly significant not only to the employees and the employer but also to the community as a whole. It is important to the employees because monetary compensation that they get as a reward for their contribution in the process of production is the only means of economic survival besides determining their social status. It is important significant for the employer also as employee compensation usually constitutes the greatest single component of cost of production. It is equally important to the community because the price of products, standard of living of the people, and industrial peace etc., are also affected by it. However, determining rates of monetary compensation is @ highly complex and difficult task because there is no exact, definite and accurate yardstick to determine the correct rate of wages. There is no doubt that the devices like job evaluation, etc. have played an important role to overcome this problem to some extent, yet there still remains much to be done in this direction. Mt DEFINITION ies and Tmployee compensation includes wages/salaries ai pee ‘allowances and benefits. =| is 2 hensive term which Employee compensation is 2 comPly includes wages/salaries and all other allowances and benefits. Basically, there is no difference in wages and salaries. Wages are the remuneration paid for the labour of tive workforce. In tilled, semi-skilled and unskilled ope™ jc hich type of labour, the element ‘of corporal labour is much whore in comparison to mental ‘efforts and capabilities. On 307ON 308 Industral Relations and Labour Legislation “@ Distinguish between waged oonies Q Examine critically the ‘objectives of employee Base compensation Base compensation or base Pay or base wage is the basic cash “compensation ~ that an employee receives for the work performed by him. It tends to reflect the value of the work and ignores differences in indi- vidual contributions, ——___ ——_ compensation Variable compensation ties Pay to productivity or prof- ‘ability, usually as one-time lumpsum pi the other hand, salary is the remuneration of those employees why mental labour to the employer such as jobber, Supervisor, levels of executives, ete. Generally, salaries are paid on monty tase wages may be paid on daily basis or hourly basis, also, A . i opinion, Wages are payments to hourly rated production worker Wome paid to those who generally have no guarantee of continuous -,¥ throughout the week, month or year. Salaries, on the other hast Pid to clerical, supervisory and managerial employees made on max ya For our purpose, however, this distinction is meaningless because Tough, the same problems are involved in the administration of both wage ant Policies. However, the process of compensation is a complex network sub-processes directed towards remunerating people for the services aden] and motivating them to attain a desired level of Performance, Among the intermediate components of this process are wage and salary paymens awarding of other cost items such as allowan ces, leave facilities, howng, travel, leave travel concession, and also the provision of essential nonces rewards such as recognition, privileges and symbols of status, Wl OBJECTIVES [The main objectives of employee compensation include attracting and retaining competent employees and keeping them motivated besides. maintaining g00d industrial relations. J Employee compensation can be used for the following three basic purposes: 1. To attract and retain qualified personnel in the organisation (in ort {0 achieve this objective, the organisation has to establish ag Compensation properly and provide supplementary compensat as 2. To motivate these personnel to higher level of performance achieved by making provision for wage and other incentives) 3. To maintain good industrial relations, ‘Thus, employee compensation basically involves the stady of the following UP 1. Base com it 2. Variable wa and Pensation for the job; 5 oF incentive compensation for separate people 3 . all or 18° Supplementary compensation paid by the organisation 0 Broup of employees,Employee Compensation: Wages, pacToRS AFFECTING EMPLOYEE COMPENSATION 4 nent factors which influence employee compensation in industrial prominen can be listed as follows: There are a number of factors affecting employee compensation like wage policy of the company, its capacity to pay, Govern iment wage policy, productivity, status of unions, etc, 1. Wage policy of the company: The wage policies of different are not alike. Whereas marginal units pay the minimum (usually, tte minimum wage rates fixed under the law) to its workers, the well-off sais believe in paying well above ongoing rates in the labour market so as tpatract and retain the best of the labour force and thus taking advantage of the economy of higher wages. Thus, the wage policy of the organisation afieas the rates of employee compensation. However, a sound wage policy should adopt a job evaluation programme so that four differentials in wages, twsed on differences in job contents, etc., could be established. 2 Sapply and demand: Since wage is a price for the services of human beings, it is affected by the market conditions of supply of and demand for lubour. If the demand for a particular labour skill goes up, wages are also lily to go up and vice versa. Similarly, if the supply of a particular labour Skill goes down, wages will go up and vice versa. Thus, the forces of demand for and supply of labour affect employee compensation to a great extent. 4 Labour unions: Labour unions affect wages by controlling the supply of labour through strikes, closed shops, controlling entry into apprentice- Programmes, regulating or restricting substitution of capital for labour “eh technology, and such other steps. The more effective are the labour “nlons in restricting the supply of labour, the higher will be the wages. ‘ nap Oductivity: Productivity is measured in terms of output per man- Increase in labour productivity may result in increase in employee mPesation. However, there are many drawbacks in its use. For example, Wis difficult to measure productivity accurately, specially of a 6) Proll factor of production; ©N ‘uctivity is worked out on long-term average; and , ‘ ‘Ot all industries Participate equally in productivity gains. Meeting n° PAY! Ability to pay is one of the most important factors "a. During NOY€ Compensation. It plays a more important role in the long- ages 1g cf te time of economic prosperity, most organisations pay high More, Ag an? OM profitable operations because they have the ability to pay Sainst this, during the period of economic depression or when the Incentives and Supplementary Compensation 309 ne Q Discuss in detail the fac- tors that affect employees’ Ameen ae —_— In closed shops, employ- ment is conditional on union membership. output to input.320 reid ans nb ~~ Lege ‘ sustaining losses consistently, wages are cut ath aaainal firms and industries pay relatively towne ot Pay Ma ore ts poor ability to pay: te ml 6. Prevailing market rate: Going wage rates oF comparable tn «so affect employee compensation. Every organisation endeavours % Tampweperstes to the wage rates being paid by the industry, community, or thea" Going wage rates ae tM nications. If an organisation does not pay going wage rats, he Sorat Siar ype difficult to attract and retain the employees. k of work/jobs. 7. Cost of living: The existing cost of living also affects wag considerably. This criterion calls for pay adjustments based on inceaers decreases in an acceptable cost of living index. Some Organisation tay provisions for automatic adjustment of deamess allowance withthe cot living index. The moment the cost of living index crosses certain nuaky of points, a fixed percentage or a fixed pre-determined amount is adel p the deamess allowance. 8. Job requirements: Jobs are graded according to the relative ski, responsibility, job conditions, hazards involved, and efforts required accomplish them. The higher the degree of requirement of the aforsil —— i factors, the higher are the wages. Moe ea ei ete 9. Government: The Government also affects employee compensa Ployees to neutralise the through its policy regarding wages, wage differentials, deamness allowan, impact of increase in cost of living due to rise in minimum wage legislation, wage determination machinery, labour policy, prices (usually measured through price index, Ml ECONOMIC ASPECT OF EMPLOYEE COMPENSATION @ Examine the i Tepioaapedtictinnts Economic a 1d curve, supe ployee comp pects like demand curve, suppl Cf, a [on of wages, profit, physiological needs &- J employee compensation. Economic aspect or economic principles too affect employee cone A brief review of such aspects is as under: pos 7 Mawes 8a price: Wages are a particular kind of price of !PO™ ios case of price determination of other commodities, the me ‘ wakes) is also determined by the forces of demand for ' Provided other things remain the same. (ie, wa Demand curve 2, Demand curv, ¢. the wat fe: Each organisati mand curve, 1 OF yap Serr tors Of labourers tha the ene eaisation hs & de ce a Organisation would employ at varyil8 crease inthe rate of wages, Pe ee increases if the wage rate goes ona and vice ¥ ——E ml “a dfFIGURE 8.1 Role of demand and supply curves in the Supply curve setermination of Rate of wages Number of workers foes affecting demand curve: Demand for labour (ie, its demand curve) is affected by a number of factors, ius pointed out the following factors in this regard: (a) Short-run changes in (@) Company production schedules; Gi) Competitors’ production schedules; (iii) Seasonal production; and (iv) Consumer demands. (b) Long-run changes in () Fundamental processes of production; (i) Demands of competitors for labour; (ii) Fundamental productivity of labour; (iv) Growth or decline of industry; and, (¥) Profitability of the industry. \ Supply curve: une an upward by an organisation . Michael J. Jucius! In the ordinary course of life if the wage rates are Sener trend, the supply curve will also follow suit. It means SUPP, cure goes a uily, it takes increasing quantities of rupees to attract larger number the rate of wages are into employment market (see supply curve in Figure 8.1), On he ——————== lv tha genet COMPanies have a certain number of personnel who are so rk do not bother for wage rates. mt off Moving cting supply curve: Michael J. Jucius? has pointed out the &) gy » in outline, which affect supply curve: jy aun changes in / 4 Mobility of labour in or out of the community;3112 Industrial Relations and Labour Legislation beings like hunger, thirst, shelter, clothing, etc. run changes in a oan Cyclical depressions or Periods of Gi) Influx of new industries or depart (iii) Family size and other population (iv) Costs and standard of living: and (v) Trends in union strength and eovernmental Tegul Prosperity, ure of old; characteristics ations, 4. Effect of wages on profit etc.: Wage Tates affect cost of profit, standard of living of community, employment, Savings, Hay output, exports, imports, etc. tu 5. Physiological needs: The economic compulsion js based on Physiological needs of man. If a man is hard, unemployed and sutferig Pad hunger, he will be ready to work even at lower Tates of wages or less On the other hand, if he has to satisfy his Physiological needs conf, he will bargain for better compensation. ‘Thus, it can be said that the level of wages are affect factors and also affect the cor ted by economic nomic life of the country. i BEHAVIOURAL ASPECT OF EMPLOYEE COMPENSATION [Behavioural factors also affect ‘employees’ conper Behavioural (psychological) factors determine, to a great extent, how hal 1 ined Work for the wages received, or what prescures& persin ee ‘0 increase his wages, From behavioural Point of view also, the problem Wage determination is based on need. ow! People perceive the level of Wages as a measure of themselves. This result into the following: L Inferiority complex; : Indulging in self-pity; ‘celing insecure; Sceming inadequate; - Feeling just the reverse of all the above; 83 tay . may Not feel pride in the amount of pay oy al more; Pt © know that his counterpart is. geting NAAAYWN 7 = y ing it ve é ed like to get a wage rise of & 5000 per year sor ove ¥ taxes. 7riT8* Part of it will be taken away by the © ue social ARMY be due to feeling of sate/prestle ‘cial hierarchies, ete.;) Employee Compensation: Wages, incentives and Supplementary Com, 313 sax if the salary is fair and just in terms of May thi ey Tam on: kh @ tribution to the company; My eoviy and my responsibilities; My i's of education, experience and service: @ fe job compared to other jobs; (©) Miycelf and those of other races, creeds, colours and sexes; and ® Myself and other employees. while establishing its compensation plan, the management posite de cae of the aforesaid behavioural aspects in order to achieve jectives of employee compensation. pe deste ob 9. pturry AND EMPLOYEE COMPENSATION “Q Write an exhaustive The management should observe the principles of equity while determining the rates of employees’ compensation. mocing and keeping people in the organisation involves problems of ————————= tajoyee perceptions of equity. Equity is concerned with felt justice FN i, concemed with scoring to natural law or right. An individual's perception in regard to felt justice according to ‘gts is affected by two factors (i) the ratio of compensation to one’s inputs ee Lach ea right. Equity ‘{ciots, expertise, education, training, adverse working conditions, etc., and Smployee perceives. that (a) the comparison of this ratio with the perceived ratios of other significant the ratio of outcome to ple with whom direct contact is made. Equity usually exists when a person ee oy Seca Pexeives that the ratio of outcomes to inputs is in equilibrium, both internally ¢o self and in relation to nih respect to self and in relation to others.* Ca in order to achieve the desired objectives of employee compen- = aims the management should observe the principle of equity while ‘emiing the rates of employee compensation. Examine critically the ‘of employee planning. _compensation planning: _ e ‘ ’MPLOYEE COMPENSATION PLANNING i [Employee compensation planning is @ el ty process. yee . s i Compensation Planning involves the following steps: Fig eed t the mar : fatal nisation’s nagers begin with the orgal Bhidg Bers or executives begin wi : DLs on general policy on compensation. For instance, the 4 ag? Edwin, op My + op.cit., p, 297, Nee Ds Pe i f India, Peli greet Management and Industrial Relations, Prentice-Hall 0 18, 1976,314 industrial Relations and Labour Legislation Job pricing involves con- verting the relative job values into specific mon- etary values or translating the job into rate ranges, ie, attaching price tags to each job. — achie The area of co, Of wage theori introduction supplement recording and thei and the root cai general policy on compensation may aim at depending on output, contribution, or length of service, or Policy ma Sing Priorities among these and such other intentions or Policy Y eta differing intentions for various types or groups of Works Y Mlng general policy on compensation provides guideline re Th te in view while framing compensation plans, Te Key 2. The next step involves defining the limits and boundaries group of rewardees under consideration. For ce example ean te Programme for managers may be markedly different from tha salesmen or supervisors. of - The third step involves discovery and evaluation of the expect, tions and wish lists of the rewardees under Consideration so that the compensation programmes may be designed to maximise te behavioural influence of rewards to be Provided. Then, in the next step, the cost of various alte: as compared with the estimates of their effe considered. These costs then should also be cor if the work is got done elsewhere, 5. The fifth step involves comparison of cost-benefit relationships for financial and non-financial rewards. The next step involves recognising that a part of compensation cos may be regarded as investment in People because a part of these costs has developmental impact in as much as it Prepares recipients for future job responsibilities. 7. The final outcome of the above exercise is likely to suggest a pay Package, which may be a mix of financial and non-financial rewards » mative programmes tiveness. should be mpared with the cos Thus, properly chalked out employee compensation planning er ving the desired objectives. However, there are many constr employee compensation planning which are detailed in the ensuing Ps PROBLEMS IN COMPENSATION PLANNING df cause [Wages are the most crucial factor and 00 industrial relations. Hence, employee the om Planning needs careful handling 50 Ov iy. sation may have appropriate compe” fl es tio th mpensation planning is very wide. It incorporate ns Spi Job-evaluation, job pricing, individual pay Cian 4 of incentive plans, introduction and impr wages, lary compensation, evolution of sound system set crucial ey ir timely payment, etc. Wages are the Most “py d oul use of industrial disputes. Hence, they 5M