Compensation Management

(Wage and Salary Administration)

Submitted to- Submitted by-

JRF Suman Kurdia Simar Madhok (29)
Subhreet kaur(30)
According to S.P.Robbins “ the term compensation
management or wage and salary administration denotes
the process of managing a company's compensation
programme.The goals of compensation administration are
to design a cost effective pay structure that will attract
,motivate and retain competent employees.”

It includes –
1. Establishment and implementation of sound
compensation policies.
2. Job evaluation and survey of wage and salaries.
3. Development and maintenance of wage structure.
4. Establishing rules for administrating wages.
5. Wage changes and adjustments.
6. Control of compensation costs.
Objectives of wage and salary administration
1. To establish a fair and equitable compensation
offering similar pay for similar work.
2. To attract competent and qualified personnel.
3. To retain the present employees by keeping wage
levels in tune with competitive units.
4. To keep labour and administrative costs in line with
the ability of the organization to pay.
5. To improve motivation and morale of employees.
6. To project a good image of the company.
7. To improve the union management relations.
8. To minimize the chances of favoritism while assigning
the wage rates.
 Principles of wage and salary administration

•Wage policy should be developed in the interest of all

the parties.
•Wage and salary plans should be flexible or
responsive to changes in external and internal
conditions of the organization.
•Wage and salary plans should be consistent with the
overall organizational plans .
•Wage and salary plans should be in conformity with
the social and economic objectives of the country.
•Wage and salary plans should simplify the
administrative process.
•Workers should be associated in the formulation of
the policy.
 Continued…

•The level of wages and salaries should be in line with

that prevailing in the labour market.
•Prompt and correct payments to the employees should
be ensured.
•Wage and salary programme should be reviewed and
revised periodically in confirmity with changing needs.
•There should be an adequate database and a proper
organisational set up should be developed for the
compensation determination and administration.
•The workers should receive a guaranteed minimum
wage to protect them against conditions beyond their
control.
 Factors
influencing
wage and salary
administration

External Internal
factors factors
 Demand
and supply

Cost of
economy
living

Trade
unions' External Technological
bargaining factors development
power

Government Prevailing
legislation rates
Psychological
and social
factors
 Ability to pay

Job Internal Managerial

requirements factors strategy

The
employee
 Wage and salary administration process

Group similar
Conduct the
Job analysis jobs into
salary survey
similar grades

Wage
administration Fine tune Price each
payments grade
rules
 1. Job analysis
A job analysis describes the duties, responsibilities, working
conditions and interrelationships between the job as it is and
the other jobs with which it is associated. Job descriptions are
crucial in designing pay systems, for they help to identify
important job characteristics. They also help determine,
define and weigh compensate factors (factors for which an
organization is willing to pay-skill, experience, effort and
working environment). After determining the job
specifications, the actual process of grading, rating or
evaluating the job occurs. A job is rated in order to determine
its value in relation to all the other jobs in the organization
which are subject to evaluation. The next step is that of
providing the job with a price. This involves converting the
relative job values into specific monetary values or translating
the job classes into rate ranges.
2. Conduct the Salary Survey:
Virtually every employer, therefore, conduct at least an
informal survey. Employers use salary surveys in three
ways (i) Survey data are used to price bench mark jobs
that anchor the employer’s pay scale and around which the
other jobs are slotted, based on their relative worth to the
firm (ii) Some Jobs (generally 20% or more) of an
employer’s position are usually priced directly in the
market place (rather than relative to the firm’s benchmark
jobs), based on a formal or informal survey of what
competitive firms are paying for comparable jobs (iii)
Surveys also collect data on benefits like insurance, sick
leave and vacations to provide a basis for decisions
regarding employee benefits.
Salary surveys can be formal or informal.
3. Group Similar Jobs into Pay Grades:

After the results of job analysis and salary surveys

have been received, the committee can turn to the task
of assigning pay rates to each job, but it will usually
want to first group jobs into pay grades. A pay grade is
comprised of jobs of approximately equal difficulty or
importance as determined by job evaluation. Pay
grading is essential for pay purposes because instead of
having to deal with hundreds of pay rates, the
committee might only have to focus on say 8 or 12.
4. Price Each Pay Grade:

The next step is to assign pay rates to pay grades. Assigning pay
rates to each pay grade is usually accomplished with a wage
curve. The wage curve depicts graphically the pay rates
currently being paid for jobs in each pay grade, relative to the
points or rankings assigned to each job or grade by the job
evaluation. The steps involved in pricing jobs with a wage
curve are:
1. Find the average pay for each pay grade, since each of the pay
grades consists of several jobs.
2. Plot the pay rates for each pay grade. Then fit a line, called a
wage line through the points just plotted. This can be done
either free hand or by using a statistical method.
3. Price the jobs. Wages along the wage line are the target wages
or salary rates for the jobs in each pay grade.
5. Fine-Tune Pay Rates :

Fine tuning involves correcting out of line rates and developing

rate ranges.
Developing Rate Ranges : Most employers do not pay just one
rate for all jobs in a particular pay grade. Instead, they develop
rate ranges for each grade so that there might be different levels
and corresponding pay rates within each pay grade. The rate range
is usually built around the wage line or curve. One alternative is to
arbitrarily decide on a maximum and minimum rate for each
grade.
Correcting out of Line Rates : The average current pay for a job
may be too high or too low, relative to other jobs in the firm. If a
rate falls well below the line, a pay rise for that job may be
required. If the rate falls well above the wage line, pay cuts or a
pay freeze may be required.
6. Wage Administration Rules :

The development of rules of wage administration has to be done

in the next step. It is considered advisable in the interests of the
concern and the employees that the information about average
salaries and ranges in the salaries of group should be made
known to the employees concerned; for secrecy in this matter
may create dissatisfaction and it may also vitiate the potential
motivating effects of disclosure. Finally, the employee is
appraised and the wage fixed for the grade he is found fit.
 Methods of wage
payment system

Combination
Time rate Piece rate of time and
system system piece rate
system
Method 1. Time Rate System:

Time rate system is the simplest and oldest method of

wage payment. According to this system, the workers
are paid in accordance with the time spent on the job.
The time may be on hourly, daily, weekly, fortnightly
or monthly basis. The work or production done by an
employee is not taken into consideration.
For example,
If the worker is paid at the rate of Rs.20 per hour and he
spends 50 hours during a week, the weekly payment is:
Weekly wages = (Number of hours worked during the
week) x (Rate per hours) = 50 x 20 = Rs.1000 per
week.
Advantages:

a. This method of wage payment is very simple. The

workers will not find any difficulty in calculating the
wages.
b. This method is acceptable to trade unions because it does
not distinguish between workers on the basis of their
performance.
c. The quality of goods will be better as workers are assured
of wages on time basis.
d. This system is good for the beginners because they may
not be able to reach a particular level of production in the
beginning.
e. There will be less wastage, as workers will not be in a
hurry to push through production.
Disadvantages:

a. This method does not distinguish between efficient and

inefficient workers. The payment of wages is related to
time and not output. Thus, the method gives no incentive
for producing more.

b. There will be wastage of time, as the workers are not

following a target of production.

c. Because wages are not related to output, employees find it

difficult in determining labour cost per unit.

d. Work needs supervision. Thus, cost of supervision increases.

Method 2. Piece Rate System

Piece rate system is a system in which wages are paid in

accordance with the number of units of work produced.
This is independent of time spent on the job. A fixed
rate of wage is paid for each piece of unit produced.

For example,
If a worker produces 100 pieces per day and he is paid at
the rate of Rs.1.2 per piece, the daily wage is 100 x 1.2 =
Rs.120.
Advantages:

a. This system is simple in working and the workers

can easily calculate their wages.
b. This system helps in distinguishing efficient and
inefficient workers.
c. Strict supervision is not required in this system.
d. This system is fair to employee and employer
both.
e. There will be no dispute for wages, as workers will
be rewarded satisfactory for their work.
Disadvantages:

a. Thissystem does not guarantee a fixed minimum wage to a

worker.
b. The quality of goods will be poor as workers try to speed up
their work in order to produce more.
c. There will be increase in wastage of materials.
d. Workers intentionally ignore safety rules, inviting
accidents.
e. Workers neglect their health in order to put their maximum
efforts.
f. The wages of beginners will be less, as their output cannot
be equal to the experienced workers.
Method 3.
Combination of Time and Piece Rate System(Balance
Method)

In this system, both time and product are taken into

consideration. The minimum weekly wages are fixed for every
worker, which are to be paid irrespective of his output during
the week, provided he has worked for full working hours
required in a week. The wages for the period of his absence are
deducted from the total amount of his wages.
 Example of balance method

week Piece Time credit debit balance

wages wages
first (150*4)= 500 100 _ 100
600
second (100*4)= 500 _ 100 nil
400
third (125*4)= 500 _ _ nil
500
Advantages:
a. This system provides incentives to workers to
produce more,
b. It is simple in its working and the workers can easily
calculate their wages.

Disadvantages:
a. It needs check on quality.
b. It needs careful piece rate fixing.
c. The entire benefit of extra payment goes to worker.
According to national commission
on labour :
‘wage incentives are extra financial
motivation . They are designed to stimulate
human effort by rewarding the person over
and above the time related remuneration
for improvements in the present or
targeted results.’
Minimum wages are guaranteed
May contain monetary and non-monetary benefits
Properly communicated

BENEFITS
Encourages employees
Opportunities to hard working employees
Discipline , less supervision
Better employer employee relationship
Cooperation and teamwork
Morale increases
LIMITATIONS
Deterioration of workers health due to no
ceiling on incentives
Quality sacrificed
Stiff resistance from workers while
revising rates
Disregard safety regulations to produce
more
Additional cost and time of clerical staff.
a) Halsey plan: under Halsey plan minimum wages
are guaranteed to every worker. A standard time is fixed
for the workers. If the workers finish the work before
standard time they are given bonus. But no penalty if
they fails to do that.

Total wages (W) =T*R+ 50% of (S-T)*R

Standard time(S) =15 hours
Time taken (T) = 10 hours
Rate of wages(R) =rs 10 per hour
Bonus (P) = wages of 50% of time saved
Than wages= 10*10+50 %*( 15-10)*10 = rs
125
Advantages:
a. It is simple.
b. Each worker is guaranteed a minimum wage.
c. This is beneficial to efficient worker.
d. Causes no harm to new worker, trainee, or slow worker.
e. Management shares benefits of over-achievement by
workers.
Disadvantages:
a. Workers get only a percentage of return on their over-
achievement.
b. The quality of production may suffer as workers may do
work in hurry,
c. There may be difficulties in setting standard time for
different jobs.
b) Rowan plan: it is the modification of the Halsey plan it also
guarantees the minimum wages and does not penalize the slow
workers. Standard time is fixed and the bonus is paid on the
basis of time saved
 Total wages (W) =T*R+[T*R* Time saved/ Standard time]
 Standard time(S) =15 hours
 Time taken (T) = 10 hours
 Rate of wages(R) =rs 10 per hour
 Bonus (P) = Time saved/ Standard time
 Than wages= 10*10+[10*10* 5/15] = rs 133.33
Advantages:
a. This system checks over-speeding and overstrain by
worker.
b. Each worker is guaranteed a minimum wage.
c. Efficiency is rewarded.
Disadvantages:
a. The workers find it difficult to understand.
b. Discourages workers to over-achieve.
c. Workers may not like sharing of profit for over-
achievement.
 c) Emerson plan: In this plan, a minimum wage is
guaranteed to every worker on time basis and incentive is
given on the basis of efficiency. Efficiency is determined
by the ratio of time taken to standard time. Payment of
bonus/incentive is related to efficiency of the workers.
Incentive will be given to those workers who attains
more than 2/3rd i.e. 66.67% of efficiency. No incentive
will be given at 66.67% efficiency. At 100% efficiency
incentive is 20% of the hourly rate. For efficiency
exceeding 100%, 1% incentive/bonus is paid for every
1% increase in efficiency.
For example, if standard time for a job is 6 hours and hourly
rate is Rs.3. If a worker completes a job in 6 hours, the
efficiency of worker is 100%. His wages will be 6 x 3 +
bonus @20% i.e. Rs.18 + 20% of 18 = Rs.21.6

Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
Disadvantages:
i. Incentive after attaining standard is very low.
d) Bedeaux plan: under this minute is the time unit described as
the standard minute. The standard time for each job is fixed after
undertaking time and motion study expressed in terms of B. the
standard time for a job is the number of B’s allowed to complete
it. Generally the bonus paid to the worker is 75% of the wages
for time saved. The rest 25% goes to the foreman.
 W=TR+75% (S-T)R
 where, w= Total wages
 S=Standard time
 T=Time taken to complete the job
 R=Rate;
 For example, if standard time for a job is 6 hours i.e 360 B’s and
wage rate is Rs.3 per hour. If a worker completes his job in 5 hours
i.e 300 B’s, he saves 60B’s.
 His total wages will be:
 W=5×3+75 %(6-5)x3
 =15+75%of 3=Rs.17.25
Advantages:
a. Minimum wages are guaranteed.
b. Management also shares some percentage of
bonus.
Disadvantages:
a. Incentive after attaining standard is very low.
b. Workers do not like their bonus to be shared by
management.
i) The production based individual
incentive plans are:
Under the production based incentive plan
a standard output is fixed and the workers
are paid on the basis of the production.
They are given incentive if they produced
more number of units than the standard
fixed. it includes the
a) Taylor’s differential piece rate system: in this
plan, Taylor did not give minimum guarantee to each
worker. As per his statement it is possible to calculate
standard workload for every worker on the basis of
time and motion studies. He gave two piece rates for
the workers. The lower rate for average and less
efficient workers who produce less than the standard
production and the higher piece rate for the above
average or efficient workers. So the efficient workers
are paid more than the inefficient workers.
 For example, if standard production in 8
hours is fixed at 10 units. The lower piece
rate is Rs.3 and higher piece rate is Rs.3.5. If
a worker produces 9 units, his wages = 9 x 3
= Rs.27. In case a worker produces 10 units,
his wages = 10 x 3.5 = Rs.35.
 Thus in this method inefficient workers are
penalized. Workers are treated like machines
and there is no guarantee of minimum wages
in this method.
Advantages:
a. Provides incentives to efficient worker.
b. Inefficient worker is penalized.
c. This system is simple and easy to implement.
Disadvantages:
a. Minimum wage is not assured,
b. There are chances that quality of work may suffer,
c. This system is not liked by below average workers, as
they do not get any incentive.
b) Merrick’s multiple piece rate plan: under this plan
there are three grade piece rate rather than two given by
Taylor.
•Workers who produce Less than 83% are paid basic piece rate
•Workers who produce between 83%- 100% are paid 110% of
basic piece rate
•Workers who produce more than 100% paid 120% of basic
Thus this system is improvement over the Taylor’s plan. But
this system also does not give guarantee minimum wages to
the workers. All the workers producing between 1 to 82% of
standard output are considered same and paid at the same
piece rate.
Advantages:
a. Efficient workers are rewarded handsomely.
b. Minimum wages are guaranteed.
Disadvantages:
a. There is wide gap in slabs of differential wage rate.
b. Over emphasis on high production rate.
 c) Gantt’s bonus plan:
This plan is based on careful study of a job. The main
feature of this plan is that it combines time rate,
piece rate and bonus. A standard time is fixed for
doing a particular job. Worker’s actual performance
is compared with the standard time and his
efficiency is determined.
. Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
c. Efficient workers can earn more money.
Disadvantage:
a. Emphasis on over speed or high production rate.
•If a worker does not complete the job within
standard time i.e. he takes more time than the
standard time (efficiency below 100%), he will
not receive any bonus but he is given wages for the
time taken by him.
•If a worker completes the job within standard
time (100% efficiency), he is given wages for the
standard time and bonus of 20% of wages earned.
•If the worker completes the job in less than the
standard time (i.e. efficiency more than 100%),
wages are paid according to piece rate
 Group incentive plan: under this method group bonus is
given instead of individual bonus. The bonus is distributed
among all the employees of the organization on the
different basis which are as follows:
1. Scanlon’s Plan:
A Scanlon plan is a type of gain sharing plan that pays a bonus
to employees when they improve their performance or
productivity by a certain amount as measured against a
previously established standard. A typical Scanlon plan
includes an employee suggestion program, a committee
system, and a formula-based bonus system. A Scanlon plan
focuses attention on the variables over which the organization
and its employees have some control.
2. Priestman’s Plan:
In this plan workers are not considered individually but
collectively. This system considers the productivity of all
workers as a whole. Bonus is paid in proportion in excess of
standard output per week. If in a year, the output increases
either above the standard output or the output of the
previous year, the wages are increased in the same ratio.
For example, if in 2009 the output per worker per unit
time is 10 units and in year 2010 the output per worker per
unit time comes out to be 12 units, the wages in 2010 will be
20% more than in 2009. The drawback of this system is that
individual efficiency is not considered.
3. Profit sharing method: under this method increased profit
is shared among the workers and management as agreed between
both the parties.
https://managementation.com/types-of-incentive-plans/
https://www.slideshare.net/kishivaprasad/incentives-plans-49996239
http://www.businessmanagementideas.com/wage/wage-incentive-plan/types-of-
incentive-plans-wages-human-resource-management/12075