COMPENSATION MANAGEMENT-

Compensation management, also known as wage and salary

administration, remuneration management, or reward management, is
concerned with designing and implementing a total compensation
package.

Compensation is the human resource management function that deals

with every reward individuals receive in exchange for performing an
organizational task.

The consideration for which labor is exchanged is called compensation.

Compensation is what employees receive in exchange for their work. It

is a particular kind of price, that is, the price of labor. Like any other
price, remuneration is set at the point where the demand curve for
labor crosses the supply curve of labor.

What is Compensation and Compensation

Management?
Compensation is referred to as money and other benefits received by
an employee for providing services to his employer.

Compensation refers to all forms of financial returns: tangible services

and benefits employees receive as part of an employment relationship,
which may be associated with employee’s service to the employer like
provident fund, gratuity, insurance scheme, and any other payment
which the employee receives or benefits he enjoys instead of such
payment.

According to Dale Yoder, “Compensation is paying people for work.”

Compensation can be in the form of cash or kind. Compensation may
be defined as money received in the performance of works, plus the
many kinds of benefits and services that organizations provide their
employees.

Different Types of Compensation

There are different types of compensation. Schuler identified three

major types of compensation, which are mentioned below;

 Non-monetary Compensation.
 Direct Compensation.
 Indirect Compensation.

Non-monetary Compensation

The non-monetary compensation includes any benefit that an

employee receives from an employer or a job that does not involve
tangible value. Examples are career development and advancement
opportunities, opportunities for recognition, and work environment
and conditions.

Direct Compensation

Direct compensation comprises the salary that is paid to the employees

along with the other health benefits.

Money is included under direct compensation. An employee’s base

wage can be an annual salary or hourly wage and any performance-
based pay that an employee receives.

Direct compensation consists of pay received in wages, salaries,

bonuses, and commissions provided at regular and consistent intervals.
These include the basic salary, house rent allowances, medical benefits,
city allowances, conveyance, provident funds, etc. It also includes
bonuses, payments for holidays, etc.

Indirect Compensation

Indirect compensation can be thought of as the nonmonetary benefits

an employee gets from the organization.

It includes everything from legally required public protection programs

such as Social Security to health insurance, retirement programs, paid
leave, childcare, or moving expenses.

While benefits come under indirect compensation and may consist of

life, accident, health insurance, the employer’s contribution to
retirement, pay for a vacation, and employers’ required payment for
employee welfare as social security.

Rewards and recognitions, promotions, responsibility, etc., are factors

that induce confidence in the employees and motivate them to perform
better. It also instills the faith in them that their good work is being
recognized, and they can boost their career opportunities if they
continue to work harder.

Objectives of Compensation Management

The basic objective of compensation management can be briefly
termed as meeting the needs of both employees and the organization.

Employers want to pay as little as possible to keep their costs low.

Employees want to get as high as possible.

Objectives of compensation management are;

 1. Acquire qualified personnel

Compensation needs to be high enough to attract applicants. Pay levels

must respond to the supply and demand of workers in the labor market
since employees compare for workers.

Premium wages are sometimes needed to attract applicants working

for others.

2. Retain current employees

Employees may quit when compensation levels are not competitive,

resulting in higher turnover.

Employees serve organizations in exchange for a reward. If pay levels

are not competitive, some employees quit the firm. To retain these
employees, pay levels must be competitive with that of other
employers.

3. Ensure equity

To retain and motivate employees, employee compensation must be

fair. Fairness requires wage and salary administration to be directed to
achieving equity. Compensation management strives for internal and
external equity.

Internal equity requires that pay be related to the relative worth of a

job so that similar jobs get similar pay.

External equity means paying workers what other firms in the labor
market pay comparable workers.

4. Reward desired behavior

Pay should reinforce desired behaviors and act as an incentive for those
behaviors to occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility, and other behaviors.

Good performance, experience, loyalty, new responsibilities, and other

behaviors can be rewarded through an effective compensation plan.

5. Control costs

A rational compensation system helps the organization obtain and

retain workers’ reasonable costs. Without effective compensation
management, workers could be overpaid or underpaid.

6. Comply with legal regulations

A sound wage and salary system considers the legal challenges imposed
by the government and ensures employers comply.

7. Facilitate understanding

The compensation management system should be easily understood by

human resource specialists, operating managers, and employees.

8. Further administrative efficiency

Wage and salary programs should be managed efficiently, making

optimal use of the HRIS, although this objective should be a secondary
consideration with other objectives.

9. Motivating Personnel

Compensation management aims at motivating personnel for higher

productivity.
Monetary compensation has its own limitations in motivating people
for superior performance. Besides money, people also want praise,
promotion, recognition, acceptance, status, etc., for motivation.

10. Consistency in Compensation

Compensation management tries to achieve consistency-both internal

and external in compensating employees. Internal consistency involves
a payment based on the criticality of jobs and employees’ performance
on jobs.

Thus, higher compensation is attached to higher-level jobs. Similarly,

higher compensation is attached to higher performers in the same job.

11. To be adequate

Compensation must be sufficient so that the needs of the employee are

fulfilled substantially.

REMUNERATION
Remuneration is concerned with needs, motivation and rewards.
Managers, therefore, analyse and interpret the needs of their
employees so that reward can be individually designed to satisfy these
needs. It is very difficult for human resource management to fix wages
and wage differentials, salaries acceptable to employees and their
leaders.

Wage or salary is very important from employees point of view because

it contributes a major share of their income. Pay is a powerful
motivational factor. It provides recognition, a sense of accomplishment,
social status.
Remuneration – Definitions

Remuneration may be defined as money received in the performance

of work, plus many kinds of benefits and services that organisations
provide their employees. Money is a direct compensation, known as
wages, gross pay. Benefits are indirect compensation, it includes, life
insurance, accident insurance, health insurance, employees
contribution to retirement benefits such as gratuity, pension, pay for
vacation, pay for illness/ sickness, simply it includes payment for
welfare and social security.

Remuneration – Components:
Monappa (1998) identifies five wage components – basic wage,
dearness allowance, overtime, bonus, and fringe benefits. Bonus and
fringe benefits are considered separate dimensions of the
compensation system.

1. Basic Wage:

It is a stable wage paid over a period of time – monthly, weekly or daily.

It can also be considered as the normal rate for a specified level of
output. Thus, for a particular job involving its varied requirements such
as skills and training, it commands a price to get it done.

It does not fluctuate; rather, it progresses evenly over time in case of a

running grade and remains stationary, otherwise. There are a number
of considerations in the fixation of the basic wage embracing the
statutory minimum wage, the awards of industrial tribunals, directives
of the pay commission at the national and state levels and collective
bargaining.

2. Dearness Allowance (DA):

The system of DA payment was used for the first time after World War I
to enable the workers to meet the steep rise in prices of essential
commodities such as foodstuffs. Although called by various names, the
special allowance thus paid aimed at neutralising the high cost of living
and protect the real wages of the wage earners. In other words, the
major purpose of DA payment was to provide relief to the workers
confronted with inflationary conditions by attempting to offset the cost
of living with additional allowance.

Along with DA other allowances like City Compensatory Allowance

(CCA), House Rent Allowance (HRA), Medical Allowance (MA),
Education Allowance (EA), Conveyance Allowance etc., also form the
part of compensation package.

However, inclusion of all these allowances in the compensation

depends on nature and type of job, contents of job, place of job, terms
and condition of appointment, capacity of employer etc.

3. Overtime:

The overtime meets the exigencies of increased work load. Frequently,

on working days, overtime rin many work situations in India, it is used
to accomplish vested interest to increase earnings. Indeed, the normal
work is not done by workers unless their supervisors sanction the
overtime.
Usually, it is done by them only on an overtime basis. Keeping in view
this malpractice, many organisations have restricted overtime to the
bare minimum and that too when sanctioned by the higher
management. It was probably this misuse of the overtime which
propelled the Fourth Pay Commission to recommend that it should be
withdrawn from non-industrial employees. Accordingly, overtime
cannot be considered the regular and guaranteed component of the
wages.

3. Incentives:

Incentive is a reward paid in addition to wages whether monetary or

not that motivates or compensates an employee for performance
above the standard. Payment of incentive depends on productivity,
sales and Profit of the organization.

4. Fringe Benefits and Perquisites:

Fringe Benefits:

It is a general term used to describe any of a variety of non-wage or

supplemental benefits that employees receive in addition to their
regular wages. These include such employee benefits as provident
fund, gratuity, medical care, hospitalization, accident relief, paid
holidays, health and group insurance, pension etc.

Perquisites (Perks):

Perquisites also called perks are the special benefits made available
only to the top executives of an organisation. These may include
company car, furnished house, stock option scheme, club membership,
paid holidays etc.  

Remuneration – 2 Major Factors: Internal and

External Factors
Employee remuneration and its structure are influenced by a variety of
factors—some are related to and exist within the organization (called
internal factors) and others exist outside the organization (called
external factors).

Factor # 1. Internal:
Among the internal factors which have an impact on employee
remuneration are the company’s business strategy, worth of a job,
employee’s relative worth, and the employer’s ability to pay. Collective
bargaining and the productivity levels are also internal to the
organization.

(i) Company’s Business Strategy:

For a business which is pursuing an aggressive strategy to achieve rapid

growth, its remuneration levels will be higher than what the com-
petitors pay. A business pursuing a defensive strategy, because of
declining fortunes of the company, will keep its remuneration levels at
average or below average levels than the prevailing market rates.

(ii) Job’s Worth:

Organizations decide the worth of a job in two ways – formally, through

a system of job evaluation, or informally, through the opinion of people
familiar with the job. Job evaluation helps in establishing rational and
satisfactory wage differentials among jobs.

However, when the worth of a job is decided informally, pay rates may
be influenced heavily by the labour market conditions or, in case of
unionized organizations, by collective bargaining. Informally deter-
mined remuneration rates are generally higher.

(iii) Employee’s Relative Worth:

An employee’s worth is determined by the efficiency with which he/

she performs his/her job, his/her loyalty towards the organization, and
his/her seniority in the organization. Of these, performance is highly
valued in organizations. Superior performance always commands a
higher pay.

For determining performance-based remuneration, organizations use

an objective performance appraisal system that differentiates between
those employees who deserve a higher pay and those who do not.
Managements prefer performance and loyalty to effect pay increases
while unions view seniority as the most objective criterion for pay
increases.

(iv) Employer’s Ability to Pay:

Remuneration payable to workers also depends upon the paying ability

of the employer, which is a function of the financial condition and
profitability of the firm. Financially well-off and profitable organizations
are always in a better position to pay higher pay.

Factor # 2. External:
The major external factors that influence employee remuneration
include labour market conditions, prevailing area wage rates, cost of
living, collective bargaining capacity, and government laws and
regulations.

(i) Labour Market Conditions:

Labour market reflects the forces of supply and demand of workers

within an area. These forces help to decide the pay rates required to
recruit and retain competent employees. In general, higher wage rates
will have to be paid when the demand exceeds supply, and if labour is
available in sufficient supply, wage rates tend to be low.

(ii) Prevailing Area Wage Rates:

A formal wage structure should provide rates that are in line with those
being paid by other employers for comparable jobs within an area. This
serves the important function of providing external equity between
one’s own organization and other organizations competing for labour in
the surrounding labour market.

(iii) Cost of Living:

Since wages and salaries represent the only means of livelihood to the
employees, it is obvious that they should be sufficiently high to meet
the cost of living and should be kept in tune with the increasing cost of
living. Progressive employers are always guided by this consideration in
determining wage levels.

It is a common experience in industrial organizations that if employers

do not show enough awareness and sensitivity towards the trends in
cost of living, labour unions will bring this to the notice of the
employers and force them for a wage raise.

(iv) Collective Bargaining Capacity:

Employee remuneration is also determined, to a considerable extent,

by the relative bargaining power of the employer and the labour
unions. A strong labour union is generally able to force the employer to
pay higher wage rates. The agreements negotiated by unions generally
establish pay-rate patterns within the labour market. As a result, wages
are generally higher in areas where organized labour is strong.

(v) Government Laws and Regulation:

There are numerous labour laws, at the Central and State levels, that
affect employee remuneration. Some of the Central laws are the
Payment of Wages Act, 1936; the Minimum Wages Act, 1948; the
Payment of Bonus Act, 1936; the Minimum Wages Act, 1948; the
Payment of Bonus Act, 1965; and Equal Remuneration Act, 1976. In
addition to labour laws, there are Wage Boards, Tribunals, and Fair
Wages Committees which regulate wages payable to workers.

The basic aim of all the legal enactments and regulatory agencies is to
protect the workers from the exploitation of powerful employers and
also to ensure payment of fair wages that would provide a decent
standard of living to them. For regulating remuneration to managerial
personnel, provisions of the Companies Act, 1956, are applied.

Wage Board and Tribunal Awards also play a significant role in

influencing the compensation to be paid.