Compensation management

MEANING
• Wage and salary administration refers to the establishment and implementation of
sound policies and practices of employee compensation. Thus, it is:-

• administration of employee compensation.

• systematic approach to provide monetary value to employees.
• establishment and maintenance of equitable as well as cost-effective wage structure.
 DEFINITIONS

“Wage and salary administration denotes the process of

managing a company’s compensation programme.”
- S.P. Robbins

“ Wage and salary administration is essentially the application of

a systematic approach to the problem of ensuring that
employees are paid in a logical and fair manner."
- Bewath & Reins
 Definitions
 COMPENSATION: Compensation may be defined by as money
received in performance of work plus many kinds of services and
benefits that organizations provide to their employees.
 Compensation may be classified into (a) Base or primary
compensation and (ii) Supplementary compensation. Primary
compensation refers to basic pay in the form of wages and salaries.
It is a fixed and non-incentive payment on the basis of time
expended on the job.
 Supplementary compensation consists of incentive and variable
payments, based on either individual output or output of the group
as a whole.
 WAGE: Wage is a general term referring to direct monetary
compensation. It is also used specifically to refer to payments to
service workers on the basis of hourly rated production.
Base compensation:

 It involves monetary benefit to the employees in the form of

wages and salaries. It is giving the remuneration to the
workers for doing the work. Wages are generally given to the
workers based on hourly, daily, weekly or monthly basis. But
salary is the compensation given to the office employees.

 Wages may be based on the number of units produced i.e.

piece wage system or the time wage system i.e. the time spent
on the job. But salary is always based on the time spent on the
job. When it is difficult to judge the production of the
company then the compensation is paid in form of salary.
Supplementary compensation:
 The organizations use supplementary
compensation over and above the base
compensation. It helps in satisfying the employees
as well as retaining them for long time. It can be
given in form of various services like housing,
medical, educational facility. Supplementary
compensation is also called fringe benefit as well
as hidden payroll. The basic purpose of fringe
benefit is to maintain efficient human resources in
the organization and to motivate the employees.
 Definitions (contd.)
 SALARY: Salary refers to weekly or monthly rates paid to
clerical, administrative and professional employees.

 WAGE LEVELS: The wage levels represent the money an

average worker makes in a geographical area or in his
organisation. It is only an average. Specific markets, firms and
individual wage rates can vary widely from the average.

 WAGE STRUCTURE: The term ‘wage structure’ is used to

describe wage relationships within a particular grouping. The
grouping can be according to occupation or organisation such
as wage structure of mechanics, carpenters etc.
 Supplementary compensation is again divided into
following types
 (i) Protection against hazards: supplementary
compensation helps in protecting against the
hazards of illness, injury, old age, death, permanent
disability.
 (ii) Employee services: some big organizations
provide housing, low-cost loan, food, medical, and
day care centre for children, educational facilities
to their employees for their services.
 (iii) Payment for time not worked: the employees
are also paid for the time they are not working like
wash up time, lunch period, vacations, holidays,
sick leave etc.
 (iv) Legal payments: payment under this category
involves unemployment; layoff compensation, old
age benefits etc.
 CONCEPTS OF WAGES
 Minimum Wage: wage which must be pays whether
the company earns profit or not.
 Fair Wage: Wage is the above the minimum wage
but below the living wage.
 Living Wage: The living wage is the highest among
the three. It must provide :
 Basic amenities of life
 Efficiency of worker

 Satisfy social needs of workers such as medical,

education retirement etc.

 Acquire competent personnel
 Retain present employees
 Provide fair and equitable compensation
 Ensure desired behaviour
 Keep labour costs in control
 Keep organization ability in mind
 Improve motivation and morale
 Project good image of the organization
 Impartial implementation
Factors influencing wagE
and salary administration
 ABILITY TO PAY
 High profits : high wage rate
 Low profits : low wage rate

 DEMAND AND SUPPLY

 Demand > Supply : high wage rate
 Supply > Demand : lower wage rate

 PREVAILING MARKET RATES

 High market rates : high wage rate to retain good workers and
vice – versa.

 COST OF LIVING
 High cost of living : higher wages
 Low cost of living : lower wages
 PRODUCTIVITY
 High productivity : higher wages
 Low productivity : lower wages

 GOVERNMENT REGULATIONS
 It may pass legislation for fixing minimum wages. For example : In India
Minimum Wages Act, 1948

 JOB REQUIREMENTS
 Difficult job : higher wages
 Easy job : lower wages

 LIVING WAGE
 Associated with the maintenance of adequate standard of living
 BARGAINING OF TRADE UNIONS
 Stronger trade unions : higher wages
 Weak trade unions : lower wages

 TECHNOLOGICAL DEVELOPMENT
 Workers having updated knowledge : higher wages and vice – versa

 MANAGEMENT STRATEGY
 Strategy is to expand and grow : higher wages
 Strategy is to maintain status quo : average wages

 PSYCHOLOGICAL AND SOCIAL FACTORS

 Fair wages : psychological and social satisfaction
PROCESS
1. Job Analysis
 Job description
 Job specification
 Grading and ranking the jobs
 Value of a job is determined
 At last, the job is given a price

2. Wage Surveys
 To determine actual amount to be paid
 Provides information about differences in wage levels
 surveys through telephone, questionnaire, personal interviews etc.

3. Assigning Pay Grades to Job

 Pay rates are assigned
 Similar jobs are grouped together
 Each group is assigned grade
4. Preparing Wage Structure
 Pay scales of industry
 Higher payments or single grade
 Number and width of pay grades
 Jobs to be placed in each pay grade
 Actual money value to be assigned to various pay grades
 Differentials in pay grades

5. Wage Administration Rules

 Determine the basis of advancement, frequency of pay increases, control
over wage costs, rules of promotion from one grade to another
METHODS OF WAGE PAYMENTS
 TIME WAGE SYSTEM: Earnings = T*R
T stands for time spent R rate of pay.
SUITABILITY:
 Productivity cannot be measured
 Quality is more important than quantity
 Individual employees don't have control over production.
MERITS
 Simplicity
 Security
 Less wastages
 Beneficial for beginners
DEMERITS
 Wastage of time
 No incentive for efficiency.
 Low production
 PIECE WAGE SYSTEM: Wages= Output*Piece rate
MERITS
 Wages linked to efforts
 Increase in production
 Better Utilization of equipment
 Distinction between efficient and inefficient
 Less supervision required
 Effective cost control
 Better Planning and controlling
DEMERITS
 No guarantee of minimum wages
 Poor quality of goods
 Not suitable for beginners
 Cause of dissatisfaction
 Opposition from unions
 Difficulty in fixing piece-rates
StraightPiece Rate
Increasing Piece Rate
Decreasing Piece Rate
EXAMPLE