What is Compensation Management ?

◦ Earlier, compensation management was limited up to designing, maintaining and sustaining a pay
structure, but in present era the term compensation management is composed of a number of activities
pertaining to job evaluation, market rate analysis, job analysis, pay structure design and maintenance,
etc. In a nutshell compensation management refers to the efforts of the organisation, to maintain a
competitive compensation structure, keeping in mind the conditions of local labour market, with respect
to present and future financial resources of an organisation.
Concept of Compensation
Compensation refers to the extrinsic rewards that employees receive in exchange for their work. It is
composed of the base wage or salary and incentives or bonus and any benefits.
According to Tapomoy Deb :
"Compensation management is a system compensating individuals for the work they perform in such a way
that the organisation is able to attract, retain, and motivate them to perform well keeping in view
organisational and market factors".
From the above definition it can be concluded that the organization mainly consist of two types of
compensation scheme:
1. Direct compensation
2. Indirect Compensation
What is Direct-Indirect Compensation?
1. Direct Compensation: There are direct financial payments in the form of the wages, salaries,
incentives, commission and bonuses. Money is included under the direct compensation popularly known as
wages/gross pay.

2. Indirect Compensation: Benefits come under indirect compensation. It may consist of insurance (life
and death insurance), the employer’s contribution to retirement, pay for illness and vacation, and
employer’s required payments for employment welfare as a social security.
1. Direct Compensation:
◦ There are direct financial payments in the form of the wages, salaries, incentives, commission and bonuses. Money is included
under the direct compensation popularly known as wages/gross pay.
◦ Hourly: Hourly wages are often provided to unskilled, semi-skilled, temporary, part-time, or contract workers in exchange for
their time and labor. Jobs where some employees receive hourly wage include the retail, hospitality, and construction industries.
Employees who receive hourly wages are usually able to earn overtime pay. This pay consists of any additional hours worked
outside of their set contract.
◦ Salary: Annual salaries are typically provided to most full-time employees or skilled employees and those who fill management
positions. A salary often indicates that the organization has invested in this employee for the long-term future.
◦ Commission: Commission is a common form of compensation provided to employees in sales roles. It will usually be based on
a predetermined quota or target. The higher the quota reached, the higher the commission will be. Commission rates are often
based on various specified factors, including revenue and profit margins. Some employees will work on commission only or
obtain a salary with commission.
◦ Bonuses: Companies often offer bonuses to employees based on year-end business results or the individual meeting their set
goals. Sometimes, the decision is at the manager’s discretion. Bonuses can be paid annually, quarterly, or even after the
completion of each project. Both commission and bonuses fall under incentive pay, along with piece rate, profit sharing, stock
options, and shift differentials.
2. Indirect Compensation:
◦ Benefits come under indirect compensation. It may consist of insurance (life and death insurance), the
employer’s contribution to retirement, pay for illness and vacation, and employer’s required payments
for employment welfare as a social security.
◦ 1. Stock options This form of compensation entitles employees to purchase a set number of shares at a
fixed price after a certain period. This is different from an equity package because the employee will not
have any ownership in the company. Many stock options require employees to work between three to
five years before they can access this compensation.
◦ 2. Benefits: Typical employee benefits usually include health insurance, life insurance, retirement plans,
disability insurance, legal insurance, and pet insurance.
Compensation is a tool used by management for a
variety of purposes
Compensation may be adjusted according the business needs, goals, and available resources.
◦ Compensation may be used to
◦ Recruit and retain qualified employees.
◦ Increase or maintain morale/satisfaction.
◦ Reward and encourage peak performance.
◦ Achieve internal and external equity.
◦ Reduce turnover and encourage company loyalty.
◦ Modify (through negotiations) practices of unions.
Objectives of Compensation
◦ Total compensation is important because of the several purposes it can serve including.
◦ To attract potential job applicants: In relation with the organizational recruitment and selection efforts
the compensation program can help assure that pay is sufficient to attract the right people at right time
for the right jobs.
◦ To retain good employee: internally equitable and externally competitive compensation scheme help to
retain the employee.
◦ To motivate employee: it acts as a tool of motivation to increase the productivity or potential of the
employees.
◦ To administer pay within legal requirements: there are many organizations to monitor the
compensation payment according to the law so to avoid the violation of the law the compensation should
be provided to the employees.
Objectives of Compensation
◦ To facilitate organizational strategic objectives: the organizational may want to create a very
rewarding and supportive climate. And to attract the potential candidate for the job the proper
compensation scheme could be the effective tool to attain the strategic objectives like rapid growth,
survival and innovation.
◦ To Optimize Cost : Compensation management should establish a suitable relationship between
performance and compensation because it is not necessary that, if employees are given high wages they
will perform better without any valid linkage.
Nature of Compensation Management

1) Integral Part of HRM : Compensation management is essential for entire human resource of the
organisation. Thus, it has become an integral part of human resource management as it plays a significant
role in proper functioning of HRM.
2) Challenging Function : Compensation management has a great impact on the objectives established by
the organisation. Therefore, it is considered to be one of the most challenging functions of human resource
management.
3) Dynamic Discipline : Compensation management is known as dynamic discipline because it is not only
affected by individual factors but business and environmental factors also influence it to a large extent.
4) Wide Application : Compensation management is not only related to paying the employees but also
focuses on motivating them. It also supervises the functions of recruitment, budgeting, monetary
forecasting, improving human relationships
Nature of Compensation Management
5) Strategic Tool :Compensation management serves as a strategic tool, which increases the competitive
level of organisation and prepares it for the stiff competitions taking place in today's global industries.
Factor Influencing Compensation management

A. External Factors: Followings are external factors which influence compensation:

i. Labor Market: Demand and supply of labor influences the fixation of wage and salary. A lower wage
fixed when the labor demands were less than the labor supply. A higher wage will have to be paid
when the labor demand more than labor supply
ii. Cost of Living: When the cost of living is rise and it required to be remunerated by payment of
dearness allowance, basic pay to continue uninterrupted.
iii. Union Influences on Compensation Decisions Unions and labor relations laws also influence
compensation design. The various labor legislations and court decisions were legitimized the labor
movement.
iv. Labor Laws We have a various labor laws at the central and as well as at the state levels. These
legislations are for protection of employees interests.
Factor Influencing Compensation management

B. Internal Factors: Following are the internal factors which influence compensation:
i. Business Strategy: The overall strategy of a company which pursue the determination of employees
compensation. The strategy is to sustain and protect current profit because of the declining fortunes of
the company the compensation level were needs to be average or even below average.
ii. Performance Appraisal: The Performance appraisal helps to reward, compensation hike for the
employees who show better performance
iii. The Employee Several employee-related factors interact to determine his or her remuneration. These
include performance, seniority, experience.
Wage and Salary Administration.
◦ Wage and salary administration is a collection of practices and procedures used for planning and
distributing company-wide compensation programs for employees. These practices include employees at
all levels and are usually handled by the accounting department of a company.
◦ OR
◦ Wage and salary administration is defined as the process by which wage and salary levels and structures
are determined in organisational settings.
◦ Wages are payments for labour services rendered frequency, expressed in hourly rates, while a salary is a
similar payment, expressed in weekly, monthly or annual rates.
◦ Salary’ normally refers to the weekly or monthly rates paid to clerical, administrative and professional
employees (“white-collar workers”).
Wage and Salary Administration
Wage and salary administration is defined as the process by which wage and salary levels and structures
are determined in organisational settings.
In simple words wages means reward for the labourer for his services rendered to the industry. These can
be paid on per unit, per hour, daily, fortnightly, weekly, or monthly basis. Labourers render services of both
types i.e. mental and physical.
OR
Wages constitute the major factor in the economic and social life of any community in an economic sense;
wages represent payment of compensation in return for work done.
In a psychological sense, wages satisfy need directly and indirectly in response to changing employee
aspiration.
Wage and Salary Administration –Importance

1. Attract and Retain the Employees: If an organization possesses good wage and salary structure, it will
attract and retain suitable, qualified, and experienced personnel.
2. Builds High Morale: The wage rates established for various categories of jobs should be internally
consistent; it will motivate the employees of the organization. It will build the high morale of employees
and act as an incentive to greater employee productivity and efficiency.
3. Satisfied Employees: A good wage and salary structure will keep the employees satisfied. There will be
lesser labor turnover, industrial disputes and employee grievances and exigencies.
4. Harmonious Industrial Relations: A good wage and salary structure will serve as a sound basis for
collective bargaining and enable the maintenance of satisfactory union-management and employee-
management relations.
5. Image of Progressive Employer: A good and definite wage and salary structure would enable the
company to project in the public.
Wage and Salary Administration –
Nature
◦ The basic purpose of wage and salary administration is to establish and maintain an equitable wage and
salary structure.
◦ The wage and salary administration is concerned with the financial aspects of needs, motivation and
rewards
◦ Employees should be paid according to the requirements of their jobs i.e. highly skilled jobs are paid
more compensation than low skilled jobs
◦ To minimise the chances of favouritism.
Objective of Wage & Salary Administration
◦ The main objective of wage and salary administration is to establish and maintain an equitable wage and
salary system. This is so because only a properly developed compensation system enables an employer to
attract, obtain, retain and motivate people of required calibre and qualification in his/her organisation.
◦ Organizational Objectives:
◦ 1. Enable an organisation to have the quantity and quality of staff it requires.
◦ 2. Retain the employees in the organisation.
◦ 3. Motivate employees for good performance for further improvement in performance.
◦ 4. Maintain equity and fairness in compensation for similar jobs.
◦ 5. Achieve flexibility in the system to accommodate organisational changes as and when these take place.
◦ 6. Make the system cost-effective.
Objective of Wage & Salary Administration
2. Individual Objectives:
1. Ensures a fair compensation.
2. Provides compensation according to employee’s worth.
3. Avoids the chances of favouritism from creeping in when wage rates are assigned.
4. Enhances employee morale and motivation.
Wage and Salary Administration –
Characteristics
◦ The wages are determined on the basis of time-rate system or piece-rate system.
◦ Wages change with the change in the time spent by the labourer.
◦ Wages may be paid weekly, fortnightly, hourly, or on monthly basis.
◦ Wage is the reward paid to the workers for the services rendered by them
◦ Wages can be paid in cash or in kind.
◦ All kinds of allowances are included in wages.
Role of various parties – Employees, Employers, Unions
& Government and Legislations in Compensation
management
◦ The role of various parties, including employees, employers, unions, and government legislations, in
compensation management is crucial for maintaining a fair and effective system. Each party plays
distinct roles in shaping, implementing, and overseeing compensation practices within an organization.
Here's a breakdown of the roles of
◦ employees,
◦ employers,
◦ unions,
◦ government, and
◦ legislations in compensation management
Employees:
◦ Negotiation and Advocacy: Employees often negotiate their compensation packages during hiring or
performance review processes. They may advocate for fair wages, bonuses, benefits, and other forms of
compensation.
◦ Performance Contribution: Employees contribute to their compensation through their performance,
skills, and dedication to their roles. High-performing employees may expect to be rewarded with
competitive compensation
◦ Compensation Feedback: They provide feedback to employers and HR departments regarding the
effectiveness and competitiveness of compensation packages
Employers:
◦ Designing Compensation Packages: Employers are responsible for designing comprehensive
compensation packages that attract and retain talent. This includes salary structures, bonuses, benefits,
and other perks
◦ Performance Evaluation: Employers assess employee performance and link compensation to individual
and organizational achievements. Performance reviews often influence salary increments and bonuses
◦ Market Competitiveness: Employers benchmark their compensation practices against industry
standards to ensure they remain competitive in attracting top talent
Unions:
◦ Collective Bargaining: Labor unions play a crucial role in negotiating collective bargaining agreements
on behalf of employees. This involves discussions on wages, benefits, and other compensation-related
matters
◦ Advocacy for Fair Compensation: Unions advocate for fair compensation practices, working
conditions, and benefits for their members. They may engage in negotiations or take collective action to
address compensation issues
Government:
◦ Minimum Wage Laws: Governments establish minimum wage laws to ensure that employees receive a
baseline level of compensation. Employers must adhere to these regulations
◦ Labor Standards: Governments set labor standards that may include regulations on working hours,
overtime pay, and other compensation-related aspects to protect employee rights
◦ Tax Regulations: Tax laws impact compensation, influencing the tax treatment of various components
such as salaries, bonuses, and benefits
Legislation:
◦ Equal Pay Acts: Legislation may mandate equal pay for equal work, aiming to eliminate gender-based
pay disparities
◦ Labor Laws: Employment and labor laws regulate various aspects of compensation, including overtime
pay, benefits, and workplace condition
◦ Social Security and Retirement Laws: Legislation may dictate employer contributions to social
security and retirement funds, impacting overall compensation
Wage Boards in Compensation
Management
◦ Wage Boards are specialized bodies formed by governments to determine and recommend wage
structures and benefits for workers in specific industries. These boards bring together representatives
from labor unions, employers, and the government to collectively address wage-related issues and
establish fair compensation standards.
◦ Wage Boards play a crucial role in bridging wage disparities and fostering a sense of economic justice
among workers.
The main objectives of wage boards
are;
◦ To work out wage structure based on the principles of fair wages as formulated by the Committee on Fair
Wages.
◦ To work out a system of payment by results.
◦ To evolve a wage structure based on the requirements of social justice.
◦ To evolve a wage structure based on the need for adjusting wage differentials in a manner to provide
incentives to workers for advancing their skill.
Role of Wage Boards
◦ Addressing Wage Disparities
◦ Wage Boards actively work to reduce wage disparities across different job roles within an industry,
ensuring that workers receive equitable compensation for their contributions.
◦ Enhancing Job Satisfaction
◦ By recommending fair wages, Wage Boards contribute to improved job satisfaction and motivation
among workers, leading to increased productivity and a better work environment.
◦ Promoting Social Equity
◦ Wage Boards play a role in promoting social equity by ensuring that workers are not exploited and
receive compensation that aligns with their efforts
Role of Wage Boards
◦ Sustainable Growth
◦ Wage Boards contribute to the long-term growth of industries by establishing wage structures that attract
skilled workers and enhance overall productivity.
◦ Improved Industrial Relations
◦ Fair wage recommendations foster positive relationships between employers and workers, reducing the
likelihood of labor disputes.
The wage boards functions in three
steps:
1. Data Collection and Analysis: The first step is to gather relevant data on
various factors affecting wages, such as cost of living, industry standards, labor
productivity, and economic conditions. This data is then analyzed to determine
appropriate wage levels.
2. Consultation and Negotiation: Once the data is analyzed, the wage board
engages in consultations with stakeholders, including employers, employees,
labor unions, and government representatives. Negotiations take place to discuss
proposed wage adjustments and reach consensus on appropriate compensation
levels
The wage boards functions in three
steps:
◦ Recommendation and Implementation: Based on the data analysis and
negotiations, the wage board formulates recommendations for wage
adjustments or revisions. These recommendations are often presented to
relevant authorities or government bodies for approval. Once approved, the
recommended wage adjustments are implemented by employers in accordance
with the established guidelines
What is Pay Commission?
◦ The Pay Commission is a body set up by the Central Government that reviews and
recommends changes to the salary structure of employees.
◦ The composition of the Pay Commission comes under the Department of Expenditure
(Ministry of Finance)
◦ The Pay Commission is an essential institutional mechanism that plays a pivotal role in
determining the salaries, allowances, and benefits of millions of central government
employees, the commission periodically evaluates the prevailing economic conditions and
recommends appropriate revisions in pay scales to ensure fair remuneration for the public
sector workforce.
What is Pay Commission?
◦ Pay commissions are usually constituted every 10 years and the first pay commission was
set up in 1946. Since Independence, a total of seven pay commissions have been formed.
◦ The latest pay commission was set up in 2014 and its recommendations came into effect
in 2016. Currently, central government employees and pensioners get salaries based on
the recommendations of the 7th pay commission.

◦ It is not mandatory for the government to accept the recommendations of the pay
commission. The government may choose to accept or reject the recommendations
Why is Pay Commission Required?
◦ Salary Revisions: The Pay Commission periodically assesses the existing pay
scales, allowances, and other benefits for government employees. It considers
various factors like inflation, economic conditions, the cost of living, and
prevailing market rates while recommending revision.
◦ Social Equality: The Pay Commission also addresses the issue of pay parity
and social justice. By ensuring that government employees receive fair and
competitive wages, it helps reduce income disparities between different
sections of society.
◦ Reviewing Allowances and Perks: Apart from basic pay, the Pay Commission
also reviews and recommends changes to various allowances and perks
provided to government employees, such as housing allowances, medical
benefits, and travel allowances
Why is Pay Commission Required?
3. Addressing Evolving Needs: As economic conditions evolve over time, the role of Pay
Commissions becomes crucial in ensuring that government employees receive competitive and
fair compensation packages.
Understanding the Process
1. Data Collection and Analysis: Pay Commissions gather extensive data on various economic indicators,
inflation rates, living costs, and market trends. This data forms the basis for their recommendations.
2. Consultations and Deliberations: The commission engages in consultations with employee unions,
government representatives, and other stakeholders to understand the diverse perspectives and concerns
related to compensation
3. Formulating Recommendations: Based on the collected data and inputs, the Pay Commission
formulates recommendations for revising pay structures, allowances, and other benefits. These
recommendations aim to strike a balance between employee expectations and fiscal sustainability
4. Implementation and Impact: Once the government approves the recommendations, the revised pay
structure is implemented. This has a direct impact on the financial well-being of government employees,
influencing their standard of living and job satisfaction