INDIRA GANDHI KRISHI VISHWAVIDYALAY, RAIPUR

ASSIGNMENT ON

Compensation management and salary administration

SESSION 2021-22

COURSE TITLE: - HUMAN RESOURCE MANAGEMENT

COURSE CODE: - ABM 514

CREDIT HOUR: - 2(1+1)

YREAR/SEM: - MBA (ABM) 1ST YEAR 2ST SEM

SUBMITTED TO: SUBMITTED BY:

Dr. Ajay kumar gauraha K Naga Madhu Kiran

(Department Of ABRM) ROLL NO 20210328

COMPENSATION MANAGEMENT

Compensation management, also known as wage and salary administration, remuneration

management, or reward management, is concerned with designing and implementing a total
compensation package.

COMPENSATION:

Compensation is the human resource management function that deals with all rewards
individuals receive in exchange for performing an organizational task.

The consideration for which labour is exchanged is called compensation.

It is a particular kind of price, that is, the price of labour. Like any other price, remuneration
is set at the point where the demand curve for labour crosses the supply curve of labour.

“Compensation is what employees receive in exchange for their contribution to the

organization.” – Keith Davis.

Cascio has defined compensation as follows;

“Compensation includes direct cash payments, indirect payments in the form of employee
benefits, and incentives to motivate employees to strive for higher levels of productivity.”

“Wage and salary administration (Compensation Management) refers to establishing and

implementing sound policies and practices of employee compensation. It includes such areas
as job valuation, surveys of wages and salaries, analysis of relevant organizational problems,
development, and maintenance of wage structure, establishing rules for administering wages,
wage payments, incentives, profit sharing, wage changes and adjustments, supplementary
payments, control of compensation costs and other related items.”

Different Types of Compensation:

There are different types of compensation. Schuler identified three major types of
compensation, which are mentioned below;

➢ Non-monetary Compensation.
➢ Direct Compensation.
➢ Indirect Compensation.

Non-monetary Compensation
The non-monetary compensation includes any benefit that an employee receives from an
employer or a job that does not involve tangible value. Examples are career development and
advancement opportunities, opportunities for recognition, and work environment and
conditions.

Direct Compensation

Direct compensation comprises the salary that is paid to the employees along with the other
health benefits. Money is included under direct compensation. An employee’s base wage can
be an annual salary or hourly wage and any performance-based pay that an employee
receives.

Direct compensation consists of pay received in wages, salaries, bonuses, and commissions
provided at regular and consistent intervals.

These include the basic salary, house rent allowances, medical benefits, city allowances,
conveyance, provident funds, etc. It also includes bonuses, payments for holidays, etc.

Indirect Compensation

Indirect compensation can be thought of as the non-monetary benefits an employee gets from
the organization.

It includes everything from legally required public protection programs such as Social
Security to health insurance, retirement programs, paid leave, childcare, or moving expenses.

While benefits come under indirect compensation and may consist of life, accident, health
insurance, the employer’s contribution to retirement, pay for a vacation, and employers’
required payment for employee welfare as social security.

Rewards and recognitions, promotions, responsibility, etc., are factors that induce confidence
in the employees and motivate them to perform better. It also instils the faith in them that
their good work is being recognized, and they can boost their career opportunities if they
continue to work harder.

Objectives of Compensation Management:

The basic objective of compensation management can be briefly termed as meeting the needs
of both employees and the organization.
Employers want to pay as little as possible to keep their costs low. Employees want to get as
high as possible.

Objectives of compensation management are;

➢ Acquire qualified personnel.

➢ Retain current employees.
➢ Ensure equity.
➢ Reward desired behaviour.
➢ Control costs.
➢ Comply with legal regulations.
➢ Facilitate understanding.
➢ Further administrative efficiency.
➢ Motivating Personnel.
➢ Consistency in Compensation.
➢ To be adequate.

Acquire qualified personnel:

Compensation needs to be high enough to attract applicants. Pay levels must respond to the
supply and demand of workers in the labour market since employees compare for workers.

Premium wages are sometimes needed to attract applicants working for others.

Retain current employees

Employees may quit when compensation levels are not competitive, resulting in higher
turnover. Employees serve organizations in exchange for a reward. If pay levels are not
competitive, some employees quit the firm. To retain these employees, pay levels must be
competitive with that of other employers.

Ensure equity

To retain and motivate employees, employee compensation must be fair. Fairness requires
wage and salary administration to be directed to achieving equity. Compensation
management strives for internal and external equity.

Internal equity requires that pay be related to the relative worth of a job so that similar jobs
get similar pay.
External equity means paying workers what other firms in the labour market pay comparable
workers.

Reward desired behaviour

Pay should reinforce desired behaviours and act as an incentive for those behaviours to occur
in the future. Effective compensation plans reward performance, loyalty, experience,
responsibility, and other behaviours.

Good performance, experience, loyalty, new responsibilities, and other behaviours can be
rewarded through an effective compensation plan.

Control costs

A rational compensation system helps the organization obtain and retain workers’ reasonable
costs. Without effective compensation management, workers could be overpaid or underpaid.

Comply with legal regulations

A sound wage and salary system consider the legal challenges imposed by the government
and ensures employers comply.

Facilitate understanding

The compensation management system should be easily understood by human resource

specialists, operating managers, and employees.

Further administrative efficiency

Wage and salary programs should be managed efficiently, making optimal use of the HRIS,
although this objective should be a secondary consideration with other objectives.

Motivating Personnel

Compensation management aims at motivating personnel for higher productivity. Monetary

compensation has its own limitations in motivating people for superior performance. Besides
money, people also want praise, promotion, recognition, acceptance, status, etc., for
motivation.

Consistency in Compensation
Compensation management tries to achieve consistency-both internal and external in
compensating employees. Internal consistency involves a payment based on the criticality of
jobs and employees’ performance on jobs.

Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation is

attached to higher performers in the same job.

To be adequate

Compensation must be sufficient so that the needs of the employee are fulfilled substantially.

Challenges or Problems of Compensation Management

Even the most rational methods of determining pay must be tempered by good judgment
when challenges arise. The implications of these demands may cause analysts to make further
adjustments to compensation.

➢ Strategic Objectives.
➢ Prevailing Wage Rates.
➢ Union Power.
➢ Government Constraints.
➢ Comparable Worth and Equal Pay.
➢ Compensation Strategies and Adjustments.
➢ International Compensation Challenges.
➢ Productivity and costs.

1. Strategic Objectives

Compensation management is not limited to internal and external equity. It also can be used
to further an employer’s strategy. Employee compensation might have been initially anchored
by the relative worth of jobs and the prevailing wage rates in the local market.

2. Prevailing Wage Rates

Market forces may cause some jobs to be paid more than their relative worth. Demographic
shifts and relative supply and demand relationships affect compensation.

3. Union Power

When unions represent a portion of the workforce, they may obtain wage rates that are out of
proportion to the relative worth of the jobs.
Unions may also limit management’s flexibility in administering merit increases since unions
often argue for raises based on seniority and are applied across the board equally.

4. Government Constraints

The government sets minimum wage, overtime pay, equal pay, child labour, and record-
keeping requirements. The minimum-wage and overtime provisions require employers to pay
at least a minimum hourly rate regardless of the job’s worth.

5. Comparable Worth and Equal Pay

Beyond “equal pay for equal work” is the idea of “comparable pay for comparable work”
called comparable worth. It requires employers to pay equal wages for jobs of comparable
values.

Comparable worth is used to eliminate the historical gap between the incomes of men and
women.

6. Compensation Strategies and Adjustments

Most organizations have compensation strategies and policies that cause wages and salaries
to be adjusted.

A common strategy is to give non-union workers the same raises given to unionized
employees; this is often done to prevent further unionization.

7. International Compensation Challenges

The globalization of business affects compensation management. Compensation analysts

must focus not only on equity but on competitiveness too. The growing globalization of
business also means a greater movement of employees among countries.

8. Productivity and costs

Regardless of the company or social policies, employers must make a profit to survive.
Without profits, they cannot attract enough investors to remain competitive.

Therefore, a company cannot pay its workers more than the workers give back to the firm
through their productivity. The company needs some creative techniques for compensation.

WAGE FIXATION:
In order to attract and retain workers in the organisation, wage/salary rates are fixed as per
the prevailing rate in the region. This is also called the ‘going wage rate’ which is the most
widely used criterion of wage/salary fixation. The prevailing wage rate is, thus, fixed based
on inter-firm wage comparisons.

METHODS OF WAGE FIXATION:

• Legislation
• Wage Boards
• Pay Commission
• Job Evaluation
• Collective Bargaining
• Arbitration and Adjudication

LEGISLATION:
• Payment of wages act, 1936
• Minimum wages act, 1948
• Equal remuneration act, 1976
WAGE BOARD
The wage board is tripartite in nature and is a voluntary negotiation body set up by discussion
between the employers and the employees to regulate the wages.
It consists of an equal number of representatives from the employers and employees with an
independent chairperson.
Pay commission:
Pay commission are salary fixing machinery of the central government for the employees of
the public sectors and government employees.
The commission has a team of economist, secretary\chairman of commerce and industries
and representatives from relevant ministries under the chairmanship of a retired judge.
• First pay commission in 1946
• Second pay commission in 1957
• Third pay commission in 1970
• Fourth pay commission in 1983
• Fifth pay commission in 1994
• Sixth pay commission in 2006
Job evaluation:
Job evaluation is the process of systematically determining a relative internal value of a job in
an organization. In all cases the idea is to evaluate the job, not the person doing it.
Job evaluation is the process of determining the worth of one job in relation to that of the
other jobs in a company so that a fair equitable wage and salary system can be established.
Collective Arbitration:
It is bi-party in nature, where representatives from the employers and the employee\unions
from a board to discuss wage related issues and agreement is signed on the concluding
remarks or agreement.
Voluntary Arbitration:
If the parties to the dispute, voluntarily agree to submit the dispute to an impartial authority,
whose decision they are ready to accept then it is known as voluntary arbitration. The
voluntary submission of dispute to the arbitrator is the distinguishing features of this method
of settlement of conflict.
Adjudication:
This instrument is used for settlement of any wage related disputes through courts and
tribunals. Supreme court has also upon such disputes.
Fringe benefits:
• Fringe benefits are rewards given to employees as an extra to their wage or salary.
• These can be an extra that is awarded with the job on a permanent or sometimes a
reward for a particular achievement.
• Fringe benefits are benefits that are in kind: not money.
Types of fringe benefits:
Need and importance of fringe benefits:
• To retain the employees
• Employee demands
• To motivate performance
• As a social security
• Trade union demand
• Hazards of industrial life
• Skill shortage
Fringe benefits in India:
• Payments for time not worked
• Statutory fringe benefits
• Voluntary benefits
• Payments for health and security benefits
• Other expenditure
Incentive payment:
A monetary gift provided to an employee based on performance, which is thought of as one
way to entire the employee to continue delivering positive results. Incentive pay may come in
the form of a bonus, profit-sharing, or commission.
Bonus:
Bonus pay is compensation that is over and above the amount of pay specified as a base
salary or hourly rate of pay.
Profit sharing:
• company stock or bonuses used to reward employee’s hard work and encourage
greater productivity.
• An employee’s share may be based on seniority, productivity, evaluations, or other
criteria.