Compensation & Rewards

Definition
• Compensation (also known as Total Rewards) can be
defined as all of the rewards earned by employees in
return for their labour.
• Compensation refers to all forms of financial returns
and tangible services and benefits employees receive
as part of an employment relationship.
• Employee compensation is the total amount an
employee can expect to receive when working for an
organization.
Direct financial compensation consists of pay received in the
form of wages, salaries, bonuses and commissions provided at
regular and consistent intervals.
Indirect financial compensation including all financial rewards
that are not included in direct compensation and can be
understood to form part of the social contract between the
employer and employee such as benefits, leaves, retirement
plans, education, and employee services.
Non financial compensation refers to topics such as career
development and advancement opportunities, opportunities
for recognition
 Compensation Management
• Compensation management is the act of distributing
some type of monetary value to an employee for
their work by means of the company's policy or
procedures. (paying an employee based upon the
decided pay and benefit package for the position).
• The goal is to compensate employees to retain them
and reduce turnover rates.
• Some different types of compensation include salary,
overtime pay, commission, bonuses, and benefits
packages that might include health and dental
insurance, vacation time, and retirement savings.
Objectives in compensation management
Compensation components
 Anatomy of Pay Structure
• Basic pay
• Dearness allowance
• Overtime payment
• Annual bonus
• General allowance
• Fringe benefits
• Incentive payments
 Basic Pay
• Basic salary is a fixed amount paid to employees by
their employer in return for the work performed.
• The floor of the basic pay is the ‘minimum wage’. It
corresponds with what has been recommended by
the Fair wage committee (1948) and the 15th
Indian Labor Conference (1957).
• The various awards by wage tribunals, wage
boards, pay commission reports and job
evaluations also serves as guiding principles for
determining it.
 Basic Pay
• The following criteria may be considered while deciding basic
pay:
i. Skill of the job
ii. Experience needed
iii. Difficulty of work – mental or physical
iv. Hazardous nature of the job
• Basic salary is used to calculate other constituents of the salary.
• It is always taxable and should therefore not be more than 40%
of the cost to company.
• But it should not be kept too low since it will then result in
reduction in other constituents of the salary.
 Dearness Allowance
• DA is cost of living adjustment allowance.
• It can be understood as a component of salary which is
some fixed percentage of the basic salary, aimed at
hedging the impact of inflation.
• In India, at present there are several systems of paying
DA:
1. Flat rate- a fixed rate is paid to all category of
employees irrespective of their salary scale.
2. Linkage with CPI numbers published periodically by
the government.
 Dearness Allowance
• It indicates the changes in the prices of the fixed
basket of goods and services customarily bought by
index shows the rise or fall in the cost of living due to
a rise or fall in the cost of living due to rise or fall in
consumer prices.
3. The third method of paying DA is on graduated scale
according to slabs.
• In this method, workers are divided into groups
according to slabs of salary scale to whom fixed
amounts of DA paid on a graduated scale.
 Overtime Payment
• Overtime payment was initiated to restrict working hours of
the employees; the employers are using OT to supplement
production and employees to supplement their earnings.
• The payment of OT allowance to factory and workshop
employees is guaranteed by law. Employees covered by
Factories Act or Minimum Wages act are entitled to OT
allowance at twice the normal.
• Major drawback- The motivation to collect a heavier pay leads
to the degenerating phenomenon wherein a tendency
grows on the part of many employees to force conditions for
overtime work.
 Annual Bonus
• Bonus is regarded as an incentive for regular attendance;
as an encouragement for good work or payment for some
special or additional service by workers; as an ex-gratia
payment dependent entirely upon the good-will of the
employers which cannot be claimed as of right; as a share
in the profits which workers may claim as a legal right and
also as deferred wage.
• It has assumed a statutory status with the enactment of
payment of bonus act in 1965.
• Bonus can be profit based, productivity based, or
customary bonus.
 General Allowance
• The employers pay various sorts of advances as custom or as
a part of settlement.
• It includes the following:
1. Tiffin allowance- free tiffin facility as a custom or to
economize on time and ensure efficiency.
2. Clothing and Uniform allowance- to workmen who need to
wear uniforms during working hours (like watchmen) or
working in extreme conditions.
3. Compensatory allowance- paid as compensation for some
additional work or duties of the workmen, like work
performed on weekly off or holidays.
 General Allowance
4. Acting allowance- for working at a higher post or carrying
additional work for an employee who has proceeded on
leave.
5. Special allowance- a compensation to worker for
accepting some additional risk or responsibility like
performing a job of his supervisor.
6. Vacation allowance/ LTA or LTC-  paid time off/ claims for
vacation.
7. House Rent Allowance- given to meet house
renting expenses. The biggest advantage of HRA is the tax
deductions allowed under section 10 of IT Act.
 Fringe Benefits
• These are supplementary benefits and
services, in addition to wages (wherein the
payment is not directly associated with effort
from workers).
• Examples include: retirement program,
unemployment compensation, social
insurance, vacations, holidays, sick leave, shift
allowance, meal allowance, petrol allowance,
etc.
 Incentive Payments
• Incentive payments- inducement offered to
employees to put forth their best in order to
maximize their production results.
Determinants of compensation
Organization As A Determinant Of
Direct Financial Compensation
• It is based on
- Compensation policies
- Organizational level
- Ability to pay
 Compensation policies

• Pay leaders- pay higher wages & salaries

• Pay based on market rate- pay what most
employers pay for same job
• Pay followers- pay below market rate because
poor financial condition or believe do not
require highly capable employees
 Organizational level

• Upper management often makes decisions to

ensure consistency
• Having problems when pressure to retain top
performers may override desire to maintain
consistency in pay structure
 Ability to pay

• Organization’s assessment of ability to pay is

important factor in determining pay levels.
Labor Market As Determinant Of
Direct Financial Compensation
 Employee will be pay based on labor market
conditions:
Demand- Supply conditions-
Compensation surveys- what are other firms paying?,
geographic area of survey
Cost of living- when prices rise over a period of time
Labor Unions- mandatory collective bargaining
management & unions as wages, hours & other terms
and conditions of employment, cost of living (COLA)
allowance has been disappearing
Labor Market As Determinant Of
Direct Financial Compensation
The economy- cost of living often rises as
economy expands.
Compensation legislation- states in wages
council Act 1947, government has generally
resisted any suggestions for a minimum wage
applicable throughout industry and region.
• Job itself continues to be factor.
• Organizations pay for value they attach to
certain duties, responsibilities, and other job
related factors as working conditions.
• E.g, professional positions different level of
salary
 Employee as determinant of
direct Financial Compensation

• Employees may demands for their salaries

based on:
• Performance
• Competencies
• Skills
• Experiences
• Seniority