Compensation

Management
Dr. Himani Singh
Assistant Professor
GLA University, Mathura
• Meaning, Nature and Objectives of Compensation Management,
Components of Remuneration.
• 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
in lieu of such payment.
According to Dale Yoder, “Compensation is paying people
for work”.

“Compensation is what employees receive in exchange for

their contribution to the organization”. – Keith Davis
Compensation management is the practice of the
organization that involves giving monetary as well as non-
monetary rewards to the employees, in order to
compensate for the time they allocate to their job.
 Acquire qualified personnel

Retain current employees

Ensure equity

Reward desired behavior

Comply with legal regulations

Control costs

Motivating Personnel

To maintain consistency in Compensation

 Components of Compensation

Components of compensation means components of

remuneration to employees.

• Monetary benefits which can further classified into two

heads:
fixed pay or guaranteed pay i.e wages or salaries
variable pay i.e incentives, fringe benefits, perquisites etc.

• Non-Monetary benefits
 A. Monetary compensation

• Wages & Salary

• Incentives

• Fringe Benefits

• Perquisites
 Wages and Salary

Wages and salary are generally paid on monthly basis, though many times,
wages are paid on hourly or daily basis.

Wages and salary are subject to annual increments. They differ from job to
job, depending upon the nature of the job.
 Incentives

• Incentives which are also called ‘payments by results’ are paid to the
employees in addition to wages and salaries.
• Incentives depend upon productivity or efficiency of the workers, sales
effected, profit earned or cost reduction efforts.
• Incentives schemes may be classified as – (i) individual incentive schemes
and (ii) group incentive schemes. Individual incentive scheme is applicable
to specific individual employee’s performance but group incentive scheme is
applicable to a group of workers who are required to complete collectively
a given work in a given time. The incentive amount paid to the group is
divided among the group members on equitable basis.
 Incentives

Incentives schemes may be classified as –

(i) individual incentive schemes (ii) group incentive schemes.

Individual incentive scheme is applicable to specific individual employee’s

performance

Group incentive scheme is applicable to a group of workers who are required

to complete collectively a given work in a given time. The incentive amount
paid to the group is divided among the group members on equitable basis.
Fringe Benefits

• Fringe benefits which are given to employee include such benefits

as provident fund, gratuity, medical care, hospital allowance,
accident relief, health insurance, canteen benefits, recreation,
leave-travel allowance, etc.
Perquisites

Perquisites are the allowances given executives and other higher

level officers. They include such allowances as company car, club
membership, paid holidays, furnished residential bungalows, stock
option schemes, foreign travel benefits etc.
B. Non-Monetary Benefits:

• Non-monetary benefits include such benefits which are given in

kind and not in terms of money. They include such benefits as
recognition of merit, issue of merit certificates, job
responsibilities, growth prospects, competent supervision,
comfortable working conditions, job-sharing, flexi-time etc.
Functions of Compensation Management

The main functions of Compensation Management are:

• The Equity Function

• The Welfare Function

• The Motivation Function

• The Retention Function

• (1) The Equity Function – It is the first and foremost important
function of compensation which ensures that the employees are
fairly paid and that their worth is appropriately compared. This
function ensures that more difficult jobs are paid more and that
they are fairly compensated in comparison to similar jobs in the
market.

• (2) The Welfare Function – This function is to take care of their

psychological and social need satisfaction. The employees worry
about the family, and the liability should be reduced and their self-
esteem needs should be met to allow them to work without tension
or unwanted stresses.
(3) The Motivation Function – The motivational function is to encourage an
employee to take further challenges, perform better and develop oneself
for superior positions. This function, therefore, takes care of career plans
and training and development activities.

(4) The Retention Function – Today, human resources are being considered
as a valuable asset to the organization and because of retaining and
developing the knowledge bank, the retention of employees has become an
important function of compensation management.
Factors affecting Compensation management

1. The Organisation’s Ability to Pay:

Wage increases should be given by those organisations which can

afford them. Companies that have good sales and, therefore, high
profits tend to pay higher wages than those which running at a loss
or earning low profits because of the high cost of production or low
sales.
2. Supply of and Demand for Labour:

• The labour market conditions or supply and demand forces operate at

the national, regional and local levels, and determine organisational
wage structure and level.
• If the demand for certain skills is high and the supply is low, the result
is a rise in the price to be paid for these skills. When prolonged and
acute, these labour-market pressures probably force most
organisations to “reclassify hard-to-fill jobs at a higher level” than
that suggested by the job evaluation. The other alternative is to pay
higher wages if the labour supply is scarce; and lower wages when it is
excessive.
3. Prevailing Market Rate:
• This is also known as the ‘comparable wage’ or ‘going wage rate’, and is the
most widely used criterion. An organisation’s compensation policies generally
tend to conform to the wage rates payable by the industry and the
community.

4. The Cost of Living:

• The cost of living pay criterion is usually regarded as an automatic minimum
equity pay criterion. This criterion calls for pay adjustments based on
increases or decreases in an acceptable cost of living index. In recognition of
the influence of the cost of
living, “escalator clauses” are written into labour contracts.
5. The Living Wage:
• The living wage criterion means that wages paid should be
adequate to enable an employee to maintain himself and his
family at a reasonable level of existence. However, employers do
not generally favour using the concept of a living wage as a guide
to wage determination because they prefer to base the wages of
an employee on his contribution rather than on his need. Also,
they feel that the level of living prescribed in a worker’s budget is
open to argument since it is based on subjective opinion.
6. Productivity:
• Productivity is another criterion, and is measured in terms of output per man-hour.
It is not due to labour efforts alone. Technological improvements, better
organisation and management, the development of better methods of production
by labour and management, greater ingenuity and skill by labour are all responsible
for the increase in productivity.

7. Trade Union’s Bargaining Power:

• Trade unions do affect rate of wages. Generally, the stronger and more powerful
the trade union, the higher the wages. A trade union’s bargaining power is often
measured in terms of its membership, its financial strength and the nature of its
leadership. A strike or a threat of a strike is the most powerful weapon used by it.
8. Job Requirements:
• Generally, the more difficult a job, the higher are the wages. Measures of
job difficulty are frequently used when the relative value of one job to
another in an organisation is to be ascertained. Jobs are graded according
to the relative skill, effort, responsibility, and job conditions required.

9. Managerial Attitudes:
• These have a decisive influence on the wage structure and wage level
since judgement is exercised in many areas of wage and salary
administration — including whether the firm should pay below average, or
above average rates, what job factors should be used to reflect job worth,
the weight to be given for performance or length of service, and so forth,