COMPENSATION

One of the more difficult and more important functions of human resources
manufactures is that of determining the rates of monetary compensation. It is not only
complex but also significant both to the organization and employees

The compensation system has great influence on the employee attitude and
behaviour alternatively the effectiveness of the organisation and its units. Compensation
may directly influence key outcomes like job- satisfaction, attraction, retention,
performance skill- acquisition, cooperation and flexibility.

Compensation is usually composed of the basic wage or salary, allowances,

incentives or bonuses and benefits the fact that how employees are paid, has important
consequences for individual group and organizational performance.
As the name suggests, compensation means what an employee receives from the
employers in return to what he has given to the cause of employer be it in terms of
physical labour or advisory or managerial role. Organisation raises employees, taken work
from them in order to achieve its objectives and pays back to them in terms of salary or
wages, benefits, incentives and better living conditions.
According to Hegewische, “The pay package in one of the most obvious and visible
expressions of the employment relationship, it is the main issue in the exchange between
employer and employees expressing the connections between the labour market, the
individuals work and the performance of the employing organisation itself.
The design and operation of payment system in many organisations have often
been institutionalized by custom and practice, tradition and collective-bargaining
mechanisms. Due to competition pressures organisations are continually looking to
increase the ‘added value’ of their employees by encouraging them to increase them to
increase their effort and performance beyond that which is at a minimally acceptable
standard or by reducing labour costs to a minimum.

INFLUENCES ON COMPENSATION
Following factor are considered responsible for the determination of compensation
in an organisation.
 Beliefs About the Worth of Jobs:
For example the influence of the size, responsibility, skill requirements and objective
 Individual Characteristics
For example age, experience, seniority, general qualifications special skills,
contribution, performance and potential.

 Labour Market:
i.e. Labour supply and demand either at national level or in response to the local labour
market companies will have to match or exceed the wages and salaries offered by their
labour market competitors in order to attract the staff they requires and prevent after
employees to moving out to other organisations

 Remuneration Policy and Strategy of Companies

 Strength of Bargaining Groups:

For example the strength the two different bargaining groups will be influenced by
collective bargaining arrangements, legal requirements and restrictions on either party, as
well as economic factors such as unemployment levels and job security.
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 The Cost of Living:
This is also an important determinant in influencing the compensation composition of an
organisation – It has to often the employees keeping in mind the price index of essential
commodities.

 Government Intervention
Government may intervene in the employment relationship in terms of attempting to
influence wage inflation through initiatives introduced in the public sector and by
encouraging certain types of compensation such as profit sharing or share option
schemes.

Organizations can use general methods to formulate a competitive pay rate. For example,
the use of periodic job market surveys, an exchange of information between organisations,
recruiting in same labour markets.

Thus we can say that education, experience, performance and other individual
difference and also product market and labour market play decisive role in determination
of compensation programme.

An organisation will find it self at a competitive disadvantage in the producer

market if its labour costs exceed those of its competitor. Because such costs will be
reflected to some extent in higher prices for its products.

Similarly a pay level that is too low relative to the competitors then this could lead
to difficulties in attracting and retaining sufficient number of quality employees. In on to
avoid such a situation, many companies emphasis that their total compensation is equal
to or better than other companies in the market.
EXAMPLE
Defence organisations of the country such as Army, Navy, IAF have comprehensive
and excellent compensation system. Though they are non-profit organisations concerned
with the security of the nation, they have left no stone unturned to keep the morale of its
employees to highest levels. Though governmental organisations, they have borrowed
many aspects from the private sector firms in terms of employee development and
training, motivation and morale of the employees and compensation related decision
making.

Recently, provisions envisaged in the pay commission are implemented and due to
this employee at different levels are benefited .But before deciding on the structure and
composition of the compensation various surveys are carried out at the unit levels.
Compensations survey in a process of collecting datas and facts about compensation
policies, practices and programmes.

Of course it is the finance ministry, which is concerned with the determination of

compensation programme, but survey about the compensation data that are already
available is also taken into consideration. There are three basic methods of conducting
compensation survey personal interview, mail questionnaire and observation. These
compensation surveys serve as valuable tools for the compensation at the top level to
acquire useful and necessary information concerning pay structure of practices.

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 The defence organisation have a sound structure based on job evaluation progress
in order to establish fair differences in payments depending upon differences in job
contents.

If we study the principles of Compensation in defence organisations.

We find the following
 There is a definite plan to ensure that difference in pay job are based on variations in job
requirements, such as skill, effort, responsibility and working conditions.
 The plan is carefully distinguished between job and employees.
 There is equal pay for equal work.
 It is ensured that wages are sufficient for the worker and his family to have reasonable
standard of living.
 Prompt and correct payment of the dues of the employees is ensured. Arrears are paid in
time in order to prevent accumulation.
 Wage committee is set up for revision of wages at periodical intervals.

Pay structure of the employees of the defence organisations include various aspects i.e.
Pay in band, Grade pay. Good conduct Badge Pay, Dearness Allowances (DA).
Transportation Allowance, House Rent Allowances, Technical Allowances (as applicable).
Apart from this there is provision of Family Planning allowances, Leave Travel Allowances,
Flying pay in respect to Air Force.

There is provision for provident fund deduction which is very useful for the future
security of the worker and his family.

Above discussion suggests that the compensation system in defence system is

comprehensive. There are number of allowances and schemes for future security. There is
no doubt that the Indian Soldiers are well paid and can rank themselves with best forces in
the world. Morale of the forces is high. Motivation level is excellent. Sound compensation
policies have rendered the defense forces an enviable position. Security forces of the USA,
UK, France, Singapore, and South Africa feel proud to have exercise with the defence
forces of India. There have been joint exercises carried out on the Indian as well as foreign
soils. Western countries have recognized the might of the defense organization of India.

WAGES

The basic purpose of wage and salary administration is to establish and maintain an
equitable wage and salary structure. Its secondary objective is the establishments and
maintenance of an equitable labour – Cost structure. i.e. an optimum balancing of
conflicting personal interests so that the satisfaction of the employers and employees is
maximized and conflicts are minimized. The wage and salary administration in concerned
with the financial aspects of needs, motivation and rewards

Wages are among the major factors in the economic and social life of any
community. International Labor organization (ILO) has adopted various conventions and
recommendations laying down the principles and methods of wage payment and fixation.
The legal frame work on wages in our country includes the following:

The payment of wages Act 1936,

The minimum wages Act, 1948.
The payment of Bonus Act 1965,
The Equal Remuneration Act, 1976
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DEFINITION
The “Wage” is the remuneration paid, for the service or labour in production
periodically to an employee / worker. “Wages” usually refer to the hourly rates aid to such
groups and production and maintenance employees. These are called “blue – collar
workers” On the other hand “Salary” normally refer to the weekly or monthly rates paid
to clerical administration and professional employees. These are called “White – collared
jobs”

According to the payment wages Act 1936: “Wages” means all remuneration whether by
way of salary allowances or otherwise, expressed in terms of money or capable of being so
expressed which, if the terms of employment express or employed are fulfilled, would be
payable to a person employed in respect of his employment or of work done in such
employment.
According to the payment of wages, 1936, wages include:-
i) Any remuneration payable under any award or settlement between the parties or
order of a court
ii) Any remuneration to which the person employed is entitled in respect of overtime
work or holidays or any leave period.
iii) Any sum which by reason of the termination of employment of the person employed
is capable under any law, contract or instrument which provides for the payment of
such sum, whether with or without deduction but does not provide for the time with
in which the payment is to be made
iv) Any sum to which the person employed is entitled under any scheme framed under
any law for the time being in force.

However if does not include

i) any bonus, which does not form part of the remuneration payable under the terms
of employment or which is nor payable under any reward or settlement between the
parties or order of a court.
ii) The value of any house, accommodation or of the supply of light, water, medical
attendance or other amenity or of any service excluded from the computation of
wages by a general or special order of the state government.
iii) Any contribution paid by the employer to any pension or provident fund and the
interest which may have accrued there on.
iv) Any traveling concession.
v) Any sum paid to the employed person to defray special expenses entailed on him
by the nature of his employment or
vi) Any gratuity paid on the termination of employment.

Definition of wages under the minimum wages Act – 1948

“Wages” means all remuneration capable of being expressed in terms of money,
which would, if the terms of contract of employment , express or implied, were fulfilled, be
payable to a person employed in respect of his employment or of work done in such
employment and includes house Rent Allowances.

According to this act the term wages exclude:

i) The value of any house, accommodation supply of light, water, medial attendance
ii) Any contribution paid by the employer to any pension fund or PF or under any
scheme of social insurance.

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iii) Any traveling Allowances or value of any travelling concession.
iv) Any sum paid to the person employed to defray special expenses entailed on him by
the nature of his employment, or
v) Any gratuity payable on discharge.

According to the Payment of Bonus Act, 1965:

The term “Salary or wages” includes
i) Basic pay and dearness allowance (DA) but not any other allowance
ii) According the Act of 1965, wages excludes the value of any house accommodation
or of supply of light, water medical attendance or amenity or any service or any
service or any occasional supply of food grains or other articles, any travelling
concession, any contribution paid or payable by the employer to any pension fund
or provident fund, retrenchment compensation, and gratuity.

According to the Equal Remuneration Act, 1976:

The term remuneration includes basic wage or salary and any additional
employments payable, either in cash or kind, to a person employed in on employment, or
work done in such employment, if the terms of the contract of employment, express or
implied are fulfilled.

It is the duty of the employer to pay equal remuneration of men or women work for
the same work or work of similar or a similar nature
NORMS FOR FIXATION OF WAGES
The generally accepted norm or principles governing the fixation of wages and
salary are:
1. There should be a definite plan to ensure that differences in pay for job are based upon
variations in job requirements such as skill, effort, responsibility and working
conditions.
2. The general level of wages and salaries should be reasonably in line with that
prevailing in the labour market.
3. The plan should carefully distinguish between jobs and employees.
4. There should be equal pay for equal work.
5. An equitable practice should be for the recognition of individual differences in ability
and contribution
6. There should be a clearly established procedure for hearing and adjusting wage
complaints.
7. The employees and the trade unions if there in one, should be informed about the
procedure used to establish wage rates
8. The wage should be sufficient to ensure for the worker and his family reasonable
standard of living
9. The wage and salary structure should be flexible so that changing conditions can be
easily wet.
10.Prompt and correct payments of the dues of the employees must be ensured and
arrears of payment should not accumulate.
11.Wage committees should be set up for revision of wages at periodical intervals.
12. the wage and salary payments must fulfill a wide variety of human needs, including the
need for self-actualization

FACTORS INFLUENCNG WAGES AND SALARY ADMINISTRATION

1. Organisation’s ability to pay good sales leads to higher profits and subsequently higher
wages. Employees tend to pay no less than their competitors to attract and retain
talent.

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2. Supply of and Demand for Labour-
If the demand is greater than supply, wages will rise and vice versa.
3. Prevailing Market Rate - this is also known as “Comparable wages” or going wage rate”
4. The cost of living - When the cost of living increases, workers and trade unions demand
adjusted wages to off set the erosion of real wages
5. The living wage - this means that wages paid should be adequate to enable an
employee maintain himself and his family as a reasonable level of existence.
6. Productivity - This is output per hour.
7. Trade Unions Bargaining Power – Greater the
Strength of trade unions, the higher the wages.Strike is most powerful weapon of
unions.
8. Job Requirement - Generally, more difficult and complex a job higher the wages
complexity of job is measured on the basis of skill effort responsibility and working
conditions required.
9. Managerial Attitudes – top managements desire to maintain or enhance the company‘s
prestige has been a major factor in the wage policy of a number of firms. Desire to
improve or maintain morale, to attract high – caliber employees, to reduce turnover
and to provide a high living standard for employees also appear to the factors in
managements wage policy decisions.
10.Psychological and sociological Factors
To satisfy the conditions of equity, fairness and justice, the management should take
these factors into considerations. Psychological persons perceive the level of success in
life.

Example:

Employees of the INFOSYS are best paid in the industry. Passout youngsters of the
institutions aspire to be part of the INFOSYS. The Company has taken into consideration
many factors in deciding upon the wage and salary structure. The top management of the
company taken adequate steps to improve the morale and motivation level of employees.
For this they are paid handsomely.This helps in turn to attract talented’ high caliber and
competent employees and to retain the best ones in the firm. With this the firm has been
able to provide a high living standard for employees. It is made sure that equal jobs carry
equal wages. Wages are commensurate with the efforts of the employees. There is no
distinction on the basis of caste, colour, sex or religion. Company has greater ability pay
and the standard of living is very high. Wages Company is not only leading one in India but
it has great image worldwide. Recently British Prime Minister Spent much time with
INFOSYS mentor NarayaMurthy than the time spent with political bosses in Delhi.