1. Wage and Salary Administration

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COMPENSATION MANAGEMENT

The term Compensation Administration or Wage and Salary Administration denotes

the process of managing a companys compensation programme. The goals of

compensation administration are to design a cost effective pay structure that will attract,

motivate and retain the competent employees.

Concept of Compensation

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

Generally, employees offer their services for three types of rewards. Pay refers to the base wages

and salaries employees normally receive. Compensation forms such as bonuses, commissions

and profit sharing plans are incentives designed to encourage employees to produce results

beyond normal expectation. Benefits such as insurance, medical, recreational, retirement, etc.,

represent a more indirect type of compensation. So, the term compensation is a comprehensive

one including pay, incentives, and benefits offered by employers for hiring the services ofemployees.

Nature of Compensation

Compensation offered by an organisation can come both directly through base pay and variable

pay and indirectly through benefits.

i. Base pay: It is the basic compensation an employee gets, usually as a wage or salary.ii. Variable pay: It is the compensation that is linked directly to performance

accomplishments (bonuses, incentives, stock options)

iii. Benefits: These are indirect rewards given to an employee or group of employees as apart of organisational membership (health insurance, vacation pay, retirement pension

etc.)

Objectives of Compensation Planning

a. Attract talent:Compensation needs to be high enough to attract talented people.b.Retain talent: If compensation levels fall below the expectations of employees or are notcompetitive, employees may quit in frustration.

c. Ensure equity: Pay should equal the worth of a job. Similar jobs should get similar pay.Likewise, more qualified people should get better wages.d. New and desired behaviour: Pay should reward loyalty, commitment, experience, riskstaking, initiative and other desired behaviours. Where the company fails to reward such

behaviours, employees may go in search of greener pastures outside.


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e. Control costs: The cost of hiring people should not be too high. Effective compensationmanagement ensures that workers are neither overpaid nor underpaid.

f. Comply with legal rules: Compensation programmes must invariably satisfy governmentalrules regarding minimum wages, bonus, allowances, benefits, etc.

g. Ease of operation:The compensation management system should be easy to understand andoperate. Then only will it promote understanding regarding pay- related matters between

employees, unions and managers.

Factors Determining Pay Rates

i. Job needs:Jobs vary greatly in their difficulty, complexity and challenge. Some needhigh levels of skills and knowledge while others can be handled by almost anyone.

Simple, routine tasks that can be done by many people with minimal skills receive

relatively low pay. On the other hand, complex, challenging tasks that can be done by

few people with high skill levels generally receive high pay.

ii. Ability to pay: Projects determine the paying capacity of a firm. High profit levelsenable companies to pay higher wages. This partly explains why computer software

industry pays better salaries than commodity based industries (steel, cement,

aluminium, etc.). Likewise, multinational companies also pay relatively high salaries

due to their earning power.

iii. Cost of living: Inflation reduces the purchasing power of employees. To overcomethis, unions and workers prefer to link wages to the cost of living index. When the

index rises due to rising prices, wages follow suit.

iv.

Prevailing wage rates:Prevailing wage rates in competing firms within an industryare taken into account while fixing wages. A company that does not pay comparable

wages may find it difficult to attract and retain talent.

v. Unions: Highly unionised sectors generally have higher wages because wellorganised unions can exert presence on management and obtain all sorts of benefits

and concessions to workers.

vi. Productivity: this is the current trend in most of the industries when workers wagesare linked to their productivity levels.

vii. State Regulation: Government regulates the laws in respect of minimum wages,bonus, dearness allowances etc.

viii. Demand and Supply of Labour: The demand for and the supply of certain skillsdetermine prevailing wage rates.


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Components of Pay Structure in India

Wages

In India, different Acts include different items under wages, though all the Acts include basic

wage and dearness allowance under the term wages. Under the Workmens Compensation Act,1923, wages for leave period, holiday pay, overtime pay, bonus, attendance bonus, and good

conduct bonus form part of wages.

Under The Payment of Wages Act, 1936, Section 2 (vi), any award of settlement and

production bonus, if paid, constitutes wages.

Basic WageThe basic wage in India corresponds with what has been recommended by the Fair Wages

Committee (1948) and the 15th Indian Labour Conference (1957). The various awards by wage

tribunals, wage boards, pay commission reports and job evaluations also serve as guidingprinciples in determining basic wage. While deciding the basic wage, the following criteria

may be considered: (i) Skill needs of the job; (ii) Experience needed; (iii) Difficulty of work:

mental as well as physical; (iv) Training needed; (v) Responsibilities involved; (vi) Hazardous

nature of job.

Dearness AllowanceIt is the allowance paid to employees in order to enable them to face the increasing dearness of

essential commodities. It serves as a cushion, a sort of insurance against increase in price levels

of commodities. Instead of increasing wages every time there is a rise in price levels, DA is paidto neutralise the effects of inflation.

Other AllowancesDifferent allowances given by the employers in India are city compensatory allowance, credit

card, car, club membership, leave travel, driver, education, family, lunch, medical, paternity,

overtime, night shifts, servant, transport, telephone, uniform allowance etc.

Job Evaluation

Job evaluation is a systematic way of determining the value/worth of a job in relation to other

jobs in an organisation. It tries to make a systematic comparison between jobs to assess their

relative worth for the purpose of establishing a rational pay structure.


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Features of Job Evaluation

i. It tries to assess jobs, not people.ii. The standards of job evaluation are relative, not absolute.

iii. The basic information on which job evaluations are made is obtained from job analysis.iv. Job evaluations are carried out by groups, not by individuals.v. Some degree of subjectivity is always present in job evaluation.

vi. Job evaluation does not fix pay scales, but merely provides a basis for evaluating arational wage structure.

Process of Job Evaluation

The process of job evaluation involves the following steps:

i. Gaining acceptance: Before undertaking job evaluation, top management mustexplain the aims and uses of the programme to the employees and unions. To

elaborate the programme further, oral presentations could be made. Letters, booklets

could be used to classify all relevant aspects of the job evaluation programme.

ii. Creating job evaluation committee:It is not possible for a single person to evaluateall the key jobs in an organisation. Usually a job evaluation committee consisting of

experienced employees, union representatives and HR experts is created to set the

ball rolling.

iii. Finding the jobs to be evaluated:Every job need not be evaluated. This may be tootaxing and costly. Certain key jobs in each department may be identified. While

picking up the jobs, care must be taken to ensure that they represent the type of work

performed in that department.iv. Analysing and preparing job description: This requires the preparation of a job

description and also an analysis of job needs for successful performance .

v. Selecting the method of evaluation: The most important method of evaluating thejobs must be identified now, keeping the job factors as well as organisational

demands in mind.

Benefits:

The pay offs from job evaluation may be stated thus:

i. It tries to link pay with the requirements of the job.

ii. It offers a systematic procedure for determining the relative worth of jobs. Jobs are ranked

on the basis of rational criteria such as skill, education, experience, responsibilities, hazards, etc.,

and are priced accordingly.


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iii. An equitable wage structure is a natural outcome of job evaluation. An unbiased job

evaluation tends to eliminate salary inequities by placing jobs having similar requirements in the

same salary range.

iv. Employees as well as unions participate as members of job evaluation committee while

determining rate grades for different jobs. This helps in solving wage related grievances quickly.

v. Job evaluation, when conducted properly and with care, helps in the evaluation of new jobs.

vi. It points out possibilities of more appropriate use of the plants labour force by indicating

jobs that need more or less skilled workers than those who are manning these jobs currently.

Wage policy in India

Wage policy is an important issue and recognizing its importance the constitution of India

guaranteed equal pay for equal work for both men and women (Article 39) and reiterated that

state must endeavour to secure for all workers a living wage and condition of work whichensures a decent standard of life (Article 43). After Independence the Government realized that

the wages of workers cant be left to the fluctuations (demand and supply of labour) in labour

market. It has decided to fix statutory minimum wages.

Minimum wage: Minimum wages is that wage which must invariably be paid whetherthe company, big or small, makes profit or not. It is that bare minimum that a worker can

expect to get for services rendered by him.

Fair wage: It is that wage which is above the minimum wage but below the living wage.According to the committee on Fair Wage, 1948, fair wage should be determined taking

the following factors in account: The productivity of labour Prevailing rates of wages Level of national income The employers capacity to pay

Living Wage: living wage is highest among three. It must provide Basic amenities of life Efficiency of worker Medical, education and retirement benefits etc.

Institution involved in Fixation of Wages

1) Employer2) Collective Bargaining: Its a procedure through which employee problems relating to

various issues including wages are settled through the process of joint consultation, in an

atmosphere of give and take, trust and mutual confidence.


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3) Legislation Minimum Wages Act, 1948: The act prescribes minimum rates of wages for certain

unorganized sectors covered under the act. The acts provides for setting up a tripartite

body consisting of employees, unions and the government, to advise and assist in fixing

and revising the minimum wage rates.

The payment of Wages Act, 1936: The main objective of the act is to provide forregular payment of wages without any unauthorized deductions to persons who are

employes in any industrial establishment or factory or railway whose payment is less than

Rs 1600. The acts provides for following permissible deductions to be made from

employees salary; fines, deduction from absence, deduction for loss of goods, house

given by employer, advances given to the worker etc.

Adjudication of Wage Disputes: If issues related to wages are not settled throughcollective bargaining, they may be settled through voluntary arbitration or adjudication.

4) Wage Boards: This is one of the important institution set up by the Government of Indiafor fixation and revision of wages. Separate wage boards are set up for separate

industries. Wage boards are not governed by any legislations but are appointed by the

central government on an ad hoc basis.

Each wage board is consist of one neutral chairman, two independent members and two

or three independent members of workers and management each.

The Wage Board fix and revise various components of wages like basic pay, dearness

allowance, incentive earnings, overtime pay, house rent allowance and all other

allowances.

5) Pay Commissions: Wages and allowances of Central and State level employees aredetermined through the pay commissions appointed by the appropriate government. So

far the Central Government has appointed six pay commissions.

Wage Differentials

It means different wages for the employees doing different jobs. It performs important economic

functions like labour productivity, attracting the people to different jobs. Attracting efficient

workers, maximization of employee commitment, development of skills, knowledge, utilizationof human resources, maximization of productivity cab be fulfilled through wage differentials.

Wage differential plays a pivotal role in a planned economy in the regulation of wages and

development of national wage policy by allocating the skilled human force on priority basis.

Development of new skills, knowledge etc are essential part of human resource development.

Shortage of technical and skilled personnel is not only a problem for industries but also creates

bottleneck in attainment of planned goals. Thus wage differentials, to certain extent are desirable


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from the viewpoint of national interest. As such they probably become an essential part of

national wage policy. Complete uniform wage policy is impracticable and undesirable.

Reasons for Wage Differentials

i. Interpersonal Differentials: differentials in gender, age, skill, knowledge and experience.ii. Inter- occupational Differentials: varying requirements of skill, knowledge, demand

supply situation

iii. Inter-area Differentials: cost of living, ability of employer to pay, demand and supplysituation, extent of unionization

iv. Inter-firm Differentials: ability of employer to pay, employees bargaining power, degreeof unionization, skill needs etc.

Are Wage Differentials Justified?

Wage differentials on the basis of occupations, units and areas (when real wages are taken into

account) can be justified on the basis of equal pay for equal work among workers. They can also

be justified in view of varying conditions of demand and supply and varied job requirements like

skill, knowledge, aptitude and ability. But the object of Government is to minimize income

inequalities and inequalities in the distribution of wealth. Thus, wage differentials are not

desirable in a socialistic pattern of society. However, formulating uniform wage policy ignoring

differences in individual skills, knowledge, etc. are constrained by limitations in a units ability

to pay varying living costs in different regions, varying demand and supply conditions,

differences in occupations etc. rendering uniformity impracticable.

Interpersonal, inter-unit, inter-occupational wage differentials are more predominant in

unorganized sector of Indian Economy. But even in organized sectors and public sector units,

wage differentials are quite common. Wage differentials on the basis of gender are however

common in unorganized sector of the economy. However it is felt that further steps should be

taken in order to minimize wage differentials

Documents

1. Wage and Salary Administration