INTRODUCTION

TO
COMPENSATION
MANAGEMENT

Topics covered after the learning:

1.Concept of Compensation
2. Component of compensation
3. Objective of compensation
4. Supplementary compensation
5. Factors influencing compensation
6.Concept of Reward and Reward
System,
7.Economic Theory of Wages.

CONCEPT OF
COMPENSATION

Compensation is what employees

receive in exchange for their contribution
to the organization
An employees standard of living, status
in the society, Motivation, Loyalty and
Productivity
depend
upon
the
compensation he/she receives
For
the
employer
to
employee
remuneration is significant because of
its contribution to cost of production

NATURE OF
COMPENSATION
Compensation can be offered by an
organization both directly( Base Pay &
Variable Pay) and Indirectly (Benefits)
1. Base Pay -Basic compensation an
employee gets usually as a wage or
salary
2. Variable Pay -Compensation linked
directly to the performance
3. Benefits- Indirect rewards given as a
part of organizational membership (
health
insurance,
vacation
pay,
retirement pension etc.)

Compensation components :
diagrammatic representation

Cont
Compensation can be offered by an
organization both directly(Basic wage i.e.
Base Pay & Variable Pay) and Indirectly
(Benefits)
1. Base Pay -Basic compensation an
employee gets usually as a wage or salary
2. Variable
Pay -Compensation linked
directly to the performance
3. Benefits- Indirect rewards given as a part
of organizational membership ( health
insurance, vacation pay, retirement
pension etc.)

Supplementary compensation
Supplementary compensation involves
fringe Benefits offered through several
employee services and benefits such as
housing, subsidized food, medical aid,
crche etc.
Basic purpose:
to attract and maintain efficient human
resource with the organization
To motivate the human resource.

Types of supplementary
compensation
Payment for time not worked : paid rest
period, paid lunch period, vacation,
holidays ,sick leave, personnel leave,
voting leave etc.
2. Hazard protection: protection against the
hazards of illness, injury,
debt,unemployment,permanent disability,
old age and death
3. Employee services: housing, food,
medical, recreation, low cost loan etc.
4. Legal payment
1.

Cont..
Perquisites or perks includes several new
benefits such as club membership,
company apartment, car, corporate aircraft,
home security, company credit card,
entertainment etc.
Differences between Base Compensation &
Supplementary compensation
1. Base compensation denotes payments to
worker in the form of wages and salaries
while supplementary compensation denotes
fringe benefits to worker over and above
their regular pay.

Cont..
2. wages and salary are paid in cash
while fringe benefits are offered in the
form of employees services and
benefits such as housing, medical aid,
canteen, crche etc..
3. Base compensation are given to
employee for their services whereas
the latter is given to increase the
efficacy of employees and to retain
them in long run.

Cont

4. Wage and salary are determined on

the basis of job evaluation whereas
the latter is determined on the
organization philosophy of
management, capacity to spend on
employee benefits etc.

NON MONETARY
Enhance dignity & satisfaction from work
performed.
Promote social relationship with coworkers.
Allocate sufficient resources to perform
work assignments
o Offer supportive leadership & management.
Enhance physiological health, intellectual
growth.

SOME OBJECTIVES of
compensation..
1.Internal Equity- Ensures that more difficult jobs are paid more.
2.External Parity- Aims to compensate fairly in comparison to
similar jobs in labor market.
3.Individual Equity - Equal Pay for equal work.
Other objectives in addition.
To attract talent
To retain talent
Ensure equity
To motivate new & desired behavior
Control cost
Comply with legal rules
Ease of operation

IMPORTANCE of Compensation
system

Job description
Job analysis
Job evaluation
Pay structure
Salary surveys

FACTORS INFLUENCING EMPLOYEE

COMPENSATION
i.
ii.
iii.

iv.
v.
vi.

vii.
viii.

job need: job is always rated on the basis

of their difficulty, challenge and complexity
Ability to pay
Cost of living
Prevailing wage rate
Unions
Productivity
State Regulation
Demand and supply of labor

Dimensions
Pay for Work & Performance
Pay for Time not Work
Disability Income Continuation
Deferred Income
Health, Accident & Liability Protection
Income Equivalent Payments Perks

COMPENSATION PLAN

Develop a program outline

Designate an individual to oversee
Develop a compensation philosophy
Conduct a job analysis of all positions
Evaluate jobs
Determine grades
Establish grade pricing and salary range
Determine an appropriate salary structure
Develop a salary administration policy
Obtain top executives' approval of the basic salary
program
Communicate the final program to employees and
managers
Monitor the program

CONCEPT
OF
REWARD

Reward.

Reward is a composite of all

organizational
mechanism
and
strategies used to finally acknowledge
employees behavior and performance.

OBJECTIVE OF REWARD
To motivate employees to perform
effectively
To motivate employees to join the
organization
To motivate employees to continue to
work
Enhance Loyalty
Satisfaction

Cont
Financial Rewards
+
Non Financial Rewards
=
Total Reward

FINANCIAL REWARDS
A number of monetary benefits offered
to employees to obtain short term and
long term commitment.
Types of financial rewards given are;
base pay, variable pay, share
ownership, bonus, etc.

NON FINANCIAL REWARDS

Non-financial rewards cater mainly to
fulfill the psychological needs of the
employees.
Types of non financial rewards given
to
employees
are;
recognition,
opportunities to develop skills, quality
of work life, etc.

REWARD SYSTEM

WHY REWARD SYSTEMS?

Attracting, retaining & motivating
employees
To get desired behavior
To achieve stretched standards
To cater to individual needs

REWARD MECHANISMS
Praise/recognition from supervisors
Challenging work assignments
Promotions and lateral moves
Paid leave to employees

Designing Reward System

Whom to Reward?
Individual Employees
Teams
Organization

Designing Reward System

What to Reward?

Performance
Organizational Level
Unit / Departmental Level
Speed and Efficiency
Loyalty
Innovation
Upholding Values

Cont..

Technical Solution
Learning
Good Behavior
Teaching
Publications
Event Management
Social Concern ( CSR)

Characteristics of rewards
Rewards must
characteristics

Value
Relevant
Purpose
Behavioral effect
Recognition

have

the

following

Concept of Total Reward

System
Total Reward Strategies should include

Direct Financial
Indirect Financial
Identification
Work Content
Career Opportunities

Wage Determination Theories

Acc. To Prof. J. Dunlop the history of
wage theory may be divided in to 3
periods :
1. Up to 1870 , Which was dominated
by WAGE FUND THEORY
2. 1870-1914 : THEORY OF
MARGINAL PRODUCTIVITY
3. 1914- till date : Process of Collective
bargaining & Keynesian Equity & the
General Wage Level & Employment.

Subsistence Theory by David

Ricardo(1772-1823)
Also called as Iron Law of Wages
Assumptions
1.

Law of diminishing returns apply to the industry.

Consider a factory that employs laborers to
produce its product. If all other factors of
production remain constant, at some point each
additional laborer will provide less output than the
previous laborer. At this point, each additional
employee provides less and less return. If new
employees are constantly added, the plant will
eventually become so crowded that additional
workers actually decrease the efficiency of the
other workers, decreasing the production of the
factory.

Cont..
1.

2.

3.

Population increases or decreases

on the basis of subsistence wages
paid to the workers.
Labor demand constant
No wage differentials.

Cont..
This theory states that The laborers
are paid to enable them to subsist &
perpetuate the race without increase
or diminution. According to this
theory , if the wages fall below the
subsistence level, the number of
workers would decrease as many of
them would die out of hunger
,disease or malnutrition. This would
make the wage rate go up as labour
will become scare.

Cont..
However, if the workers are paid more
than the subsistence wages, they
would marry and procreate and this
would increase their number and bring
down their rate of wages.
The Theory has been criticized on the
basis of unrealistic assumption.

Wage Fund Theory by Adam

Smith(1723-1790)
It assumes that there is a predetermined fund
of wealth which lays surplus with wealthy
persons as a result of savings & wages
are paid out of it.
MAGNITUDE of Wage fund determines:1. Demand of Labor
2. Wages paid to the labor, higher the fund
higher would be the demand for labor &
wages paid to the labor & vice versa.

Cont..

1.
2.

Wages depends on Demand &

Supply of Labor.
Wage fund is fixed
So to increase the wages 2 things
can be doneLarge size of wage fund
Reduction in labor

Cont..
Criticism
It is not clear from where wage fund
will come.
No emphasis on efficiency &
productivity
Unrealistic assumption.

Surplus Value Theory by Karl

Marx(1818-1883)
Acc to this theory Workers was an
article of commerce which could be
purchased on the payment of
subsistence price.
The price of any product is determined
by the labor time needed for
producing it.
The workers were not paid acc to their
contribution.

Cont..
CRITICISM
Labor is treated as commodity
Price can not be determined by labor
time
No emphasis on productivity

MARGINAL PRODUCTIVITY THEORY by P H

Wicksteed (England) & J B Clark(USA)

It assumes that wages depend upon

the demand for & supply of Labor.
Wages are based on entrepreneur s
estimate of the value that will be
produced by the last or marginal
worker
wages are paid on the base of
economic worth

MARGINAL PRODUCTIVITY THEORY by P H

Wicksteed (England) & J B Clark(USA)

Homogeneous factor of production

Full employment of resources
Perfect competition
Perfect mobility of factor of production
Law of diminishing returns
Perfect knowledge

MARGINAL PRODUCTIVITY THEORY by P H

Wicksteed (England) & J B Clark(USA)

CRITICISM
No importance to supply of labor
In practice employer gives lower
wages than marginal productivity of
laborer
Unrealistic assumptions

Residual Clainmant Theory by Francis A Walker(18401897)

4 factor of production-land ,labor, capital &

entrepreneurship.

Wages = value of production (rent+

interest+ profit)
Criticism

Demand & supply factor ignored

Based on wrong notion of residual

claimant

Productivity & efficiency ignored.

Investment Theory by H M Gitelman

Acc to this theory workers are paid in terms
of their investment in education, experience
& training.
Worker must be having attributes.
Higher attributes higher payments.

Bargaining Theory of Wages by John

Davidson
Acc. To this theory Wages are
determined by relative bargaining
power of workers or trade unions and
of the employers.
Applicable in organized sector.
If union is strong workers will be paid
more. & vice versa.

The Contingency Theory

No single best way to evolve the
payment system
Acc to Lupin & Bowey essentially, a
contingency approach is that in some
industry & in some envt conditions one
managerial practice will contribute to
some desired objectives while the
same will not happen in other industry.

Demand & Supply Theory

Alfred Marshall, the chief exponent to this theory, explained the

complexity of the economic world tried to provide a less rigid &
deterministic theory. According to him, the determination of wages
is affected by the whole set of actors which govern demand for &
supply of labour. The demand price of labour, however, determined
by the marginal productivity of the individual worker

The term supply & labor can be expressed in a number of senses.

First, it refers to the number of workers seeking employment; these
are the workers who have no alternative livelihood & join the labor
market seeking employment for wages. Secondly, supply & labor
may refer to the number of hours each worker is available for work.
The supply of labour in this sense increases with any increase in the
number of working hours.

Agency theory

This theory focuses on the divergent

interest i.e. goal of the organization,
stake holder and the way employee
remunerations can be used to align
these interest and goals. Employer
and employee are the two
stakeholders of a business unit, the
former assuming the role of principle
and the latter the role of agent. The
remuneration is paid to the employee
in the agency cost.

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