Compensation Management: Meaning,

Concept, Objectives, Components, Forms,

and Functions

Unit-4
What is Compensation Management ?

• It is essentially the application of a systematic and scientific

approach for compensating the employees for their work in a
fair, equitable and logical manner.

• Compensation Management is concerned with the

compensation to employees for their work and contribution for
attaining organisational goals.
Compensation Management – Concept
• An organisation’s goals or objectives can be achieved when its
employees put in their best efforts in the right direction. Hence,
they should be nurtured properly and paid well for their work,
performance, services, etc. Besides wages or salaries,
organisations provide different kinds of incentives, benefits and
services to their employees.
• Money paid to employees for their work in the form of gross pay
is included under direct compensation;
• while benefits come under indirect compensation and they may
consist of life, accident and health insurance, the contribution of
an organisation to retirement i.e. retirement benefits, expenses
incurred for employee welfare as social security etc.
• Compensation is defined as the consolidated amount,
allowances received and various other kinds of benefits and
services which are offered by the organisation to their
employees.
• In other words, compensation refers to all forms of financial
returns, services and benefits received by the employees from
their organisation as a part of their employment relationship.
Types of Compensation

1. Direct Compensation- Such compensation may be received in the form

of cash i.e. wages/salaries, bonus, overtime payments, incentives (i.e. gross
payment). 

2. Indirect Compensation-While benefits that come under indirect

compensation may consist of life, accidents and health insurance, pay for
vacation or illness, retirement benefits and so on.
Objectives of Compensation Management
A well-developed remuneration system should aim at achieving the following
objectives:

1. To attract competent and qualified persons towards organization.

2. To retain present employees by paying competitive remuneration.

3. To establish fair and equitable remuneration so as to avoid pay disparities.

4. To improve production, productivity and profitability of the organization.

5. To minimise un-necessary expenditure and to control cost through a device of internal check
and establishment of standard.

6. To improve and maintain good human relation between employer and employee through a
process of payment of bonus, profit sharing and other fringes benefits.

7. To enhance the name and fame of the company through a proper system of wage payment.
Compensation Consists of 4 Main Components

1. Wage or Salary
2. Dearness and other allowances
3. Incentives
4. Fringe benefits and perquisites.
1. Wage or Salary:
Wage:
The term wage refers to the remuneration paid to the workers appointed on hourly, daily or
weekly basis in return for the service rendered.
It varies according to physical and mental requirement of the job. Wage may be minimum wage,
fair wage and living wage.
i. Minimum Wage:
It is that wage which is sufficient to meet the basic need of a worker and his family. This
minimum wage has to be paid to the worker irrespective of the capacity of the industry to pay.
The Committee on fair wage has defined minimum wage as – “the wage must provide not only for
the bare sustenance of life, but for the preservation of the efficiency of the workers. For this
purpose, minimum wage must provide some measures of education, medical requirements and
amenities”.
ii. Fair Wage:
According to committee on fair wage “fair wage is the wage which is above the minimum
wage but, below the living wage”.
It is fixed between the minimum wage and capacity to pay by the industry. The lower limit of the
fair wage is the minimum wage; the upper limit is set by the capacity of the industry to pay.
iii. Living Wage:
• It is the wage that provides some of the comforts of life.
• It provides certain amenities considered necessary for the well-being of the
worker.
• According to Fair Wage Committee “the living wage should enable the
male earner to provide for himself and his family not merely the bare
essentials of food, clothing and shelter but also a measure of frugal (using
only as much money or food as is necessary) comfort including education
for children, protection against ill health, requirements of essential social
needs and measure of insurance against the more important mis-fortunes
including old age”.
Salary:

• The term salary refers to remuneration paid to the employees

appointed on monthly or annual basis in return for the service
rendered. Thus it refers to monthly rate of pay irrespective of
number of hours put in by employees.
• Take Home Salary:
• It is the net amount of salary received by an employee after
making all the deductions towards the payment of income tax,
LIC premium and contribution to P.F. etc.
2. Dearness Allowance (DA):

• Under section 3 of the Minimum Wages Act, DA is described as cost of living

allowance. It is given to protect the real wages of workers during
inflation. In India it has become integral part of the wage system.

• 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.
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.
Any Question??