Compensation Planning

• Definition: Compensation is what employees receive in

exchange for their contribution to the organization. It is
comprehensive term which includes pay,incentives and benefits
offered by the employer
•Objectives
– Internal Equity: It ensures that more difficult jobs are paid
more
– External Equity: It ensures that jobs are fairly compensated
to similar jobs in the labor market
– Individual Equity: It ensures equal pay for equal work i.e.
each individual’s pay is fair in comparison to others doing
same/similar jobs
 BASIC WAGES
• Basic wage is based on recommendations by Fair
Wage Committee(1948)and 15th Indian Labor
Conference(1957), awards by wage tribunals, wage
boards, pay commission and job evaluations.Criteria
be considered for basic wage:
– Skill needs of the job
– Experience needed
– Difficulty of work;mental as well as physical
– Training needed
– Responsibilities involved
– Hazardous nature of the job
Remunerations,if paid,not amounting to wages under any
of the Acts:
1. Bonus or other payments under a profit-sharing scheme
which do not form a part of contract of employment.
2. Value of any house accommodation, supply of light,
water, medical attendance, traveling allowances, or
payment in lieu thereof or any other concession.
3. Any sum paid to defray special expenses entailed by the
nature of the employment of a workman.
4. Any contribution to pension, provident fund, or a
scheme of social security and social insurance benefits.
5. Any other amenity or service excluded from the
computation of wages by general or special order of an
appropriate govt. authority.
 Objectives of Compensation Planning

1. Attract Talent
2. Retain Talent
3. Ensure Equity
4. New and desired behavior
5. Control costs
6. Comply with legal rules
7. Ease of operations
 WAGE BOARD

 Wage board: Important institutions set up by

government of India for fixation and revision of wages.
Each board consists of one neutral Chairman,two
independent members and two or three representatives
of workers and management each.Considers following
• Job evaluation, wages rates for similar jobs in
comparable industry, Employee’s productivity, firm’s
ability to pay, various wage legislations, Government
objectives, Place if industry, need for incentives
 Wage board fix revise various components of wages
like basic pay,DA,Incentive earnings, overtime HRA
 Equity & Pay Rates
1. Find the worth of each job through job
evaluation.
2. Conduct a salary survey to find what other
employers are paying for comparable jobs.
3. Group similar jobs into pay grades.
4. Price each pay grade by using wage curves.
5. Fine tune pay rates.
 Formal & Informal Surveys

 The published survey sources in India include:

• Reports published by the Ministry of Labour.
• Pay commission reports.
• Reports of Wage Boards appointed by Govt.
• Reports of employees and employers’ organization.

• Trade journals of specific industry groups etc.

 SURVEYS METHODS

• Key job matching

• Key class matching

• Occupational method

• Job evaluation method

• Broad classification method

 Dearness Allowance

• Definition It is allowance paid to employees to enable

them to face the increasing dearness of essential
commodities.It serves as a cushion, sort of insurance
against increase in price levels of commodities.DA is
linked to:
• All India Consumer Price Index(AICPI): The labor
bureau,Shimla,Computes AICPI(Base1960=100
points) from time to time
• Time Factor: In this case DA is linked to rise in All
India Consumer Price Index in a related period ,instead
of linking it to fortnightly or monthly fluctuations
 PAY COMMISSIONS

• Wages and allowances of Central and state

governments employees are determined through
pay commissions appointed by appropriate
governments.So for Central government has
appointed five such commissions. The disputes
arising out of pay commissions awards and their
implementation are decided by Commissions of
inquiry, adjudication machinery and joint
consultative machinery
Objectives of Wage and Salary Administration
1. To establish a fair and equitable remuneration offering similar
pay for similar work.
2. To attract qualified and competent personnel.
3. To retain the present employees by keeping wage levels in tune
with competing units.
4. To control labour and administrative costs in line with the
ability of the organisation to pay.
5. To improve motivation and morale of employees and to
improve union-management relations.
6. To project good image of company & to comply with legal
needs relating to wages & salaries.
Some common allowances in the organised
Section in India are:
• Attendance • Books • Car
• Credit Card • Education • Medical
• City Compensatory • ESIS • Night Shift
• Club Membership • Family • Overtime
• Computer • Insurance • Paternity
• Deputation • Lease Travel • Pension
• Driver • Lunch • PF
• Relocation • Servant • Tiffin
• Transport • Telephone • Uniform
The elements of Wage and Salary Administration
1.Identifying the available salary opportunities, their
costs, estimating the worth of its members, of their
salary opportunities and communicating them to
employees.
2.Relating salary to needs and goals.
3.Developing quality, quantity and time standards
related to work and goals.
4.Determining the effort necessary to achieve
standards.
5.Measuring the actual performance.
Elements of Wage and Salary Administration contd.
6.Comparing the performance with the salary
received.
7.Measuring the job satisfaction of the employees.
8.Evaluating the unsatisfied wants and unrealised
goals of the employees.
9.Finding out the dissatisfaction arising from
unfulfilled needs and unattained goals.
10.Adjusting the salary levels accordingly with a
view to enabling the employees to reach unreached
goals and fulfill the unfulfilled needs.
Wage Policy in India
• Minimum Wage
• Fair Wage
• Living Wage
Minimum Wage
The 15th Indian Labour Conference (1957) formally
quantified the term ‘minimum wage’ thus:
• In calculating the minimum wage, the standard
working class family should be taken to comprise
three consumption units for one earner, the earnings of
women, children and adolescents being disregarded;
Minimum Wage (contd.)
• Minimum food requirements be calculated on basis of set
intake of calories as recommended by Dr Aykroyd for an
average Indian adult of moderate activity;
• Clothing requirements be estimated on the basis of per
capita consumption of 18 yards per annum which would give for
the average worker’s family of four a total of 72 yards;
• In respect of housing, the rent corresponding to the minimum
area provided for under Govt. Industrial Housing Scheme
should be taken into consideration in fixing the minimum wage;
• Fuel,lighting and other miscellaneous items of
expenditure should constitute 20% of the total minimum wage.
 Fair Wage
Fair Wage should be determined taking the following
factors into account:
• The productivity of labour;
• The prevailing rates of wages in same or similar
occupations in same region or neighboring regions;
• The level of national income and its distributions;
• The place of industry in the economy of the country;
• The employer’s capacity to pay.
 Living Wage

According to the Committee on Fair Wages, the living

wage is the highest among the three. It must provide (i)
basic amnesties of life, (ii) efficiency of worker and (iii)
satisfy social needs of workers such as medical,
education, retirement, etc. ‘Living Wage’ is a dynamic
concept, which grows in line with the growth of the
national economy.
 STATE REGULATION OF WAGES ACTS

• Minimum Wages Act, 1948

• The Payment of Wages Act, 1936

• Adjudication of Wage Disputes

• Wage Boards

• Pay Commissions

• The Payment of Bonus Act, 1965

 Bonus Calculation in India
1. Bonus is calculated on salary of Rs 2,500 /month.
2. Bonus is to be paid at a minimum of 8.33% of the
salary of an employee.
3. Bonus be paid within 8 months from the close of
accounting year.
4. Available surplus exceeds the amount of minimum
bonus payable to an employee, employer pays a higher
bonus subject to a minimum of 20% of salary or wage.
5. Bonus is paid out of available surplus of an
accounting year after deducting the sums referred to in
Sec.6. If there is no surplus, even then bonus has to be paid
treating it as ‘deferred wage’.
6. To claim bonus, the employee must have worked for 30
days in that year.
Some common allowances in the organised
Section in India are:
• Attendance • Books • Car
• Credit Card • Education • Medical
• City Compensatory • ESIS • Night Shift
• Club Membership • Family • Overtime
• Computer • Insurance • Paternity
• Deputation • Lease Travel • Pension
• Driver • Lunch • PF
• • Servant • Tiffin
Transport • Telephone • Uniform
Objectives of Wage and Salary Administration
• To establish a fair and equitable remuneration
offering similar pay for similar work.
• To attract qualified and competent personnel.
• To retain the present employees by keeping wage
levels in tune with competing units.
• To control labour and administrative costs in line
with the ability of the organisation to pay.
• To improve motivation and morale of employees
and to improve union-management relations.
• To project a good image of the company and to
comply with legal needs relating to wages and
salaries.
Factors influencing compensation levels
• Job needs
• Ability to pay
• Cost of living
• Prevailing wage rates
• Unions
• Productivity
• State regulation
• Demand and supply of labour
REASONS FOR WAGE DIFFERENTIALS
The following are the reasons for Wage Differentials:
Wage Differentials Reasons
Interpersonal Differentials in sex, skills, age,
differentials knowledge, experience
Inter-occupational Varying requirements of skill,
differentials knowledge, demand-supply situation
Inter-area Cost of living, ability of employers’
differentials to pay, demand and supply situation,
extent of unionisation
Inter-firm Ability to employer to pay,
differentials employees’ bargaining power, degree
of unionisation, skill needs, etc.