COMPENSATION MANAGEMENT

Module Number: 01

Module Name: Introduction to Compensation

Management
 Syllabus

• Module: 1:
Introduction to Compensation Management - [7 Sessions] [Blooms ‘level selected: Knowledge Level - 1]

• Compensation, types of compensation, conceptual framework of compensation management, Theories of wages –

criteria of wage fixation – Institutional and cultural factors on compensation practices – National differences in
compensation – Compensation system design issues: Compensations Philosophies, compensation approaches.

HUMAN RESOURCE MANAGEMENT

OBJECTIVES

After completing this module, the students should be able to :

• The course is designed to enhance the skill development and employability skills through experiential
learning, participative learning and technology enabled learning.

HUMAN RESOURCE MANAGEMENT

OUTCOMES

At the end of this module, the students are expected to:

• The course is designed to enhance the skill development and employability skills through experiential
learning, participative learning and technology enabled learning

HUMAN RESOURCE MANAGEMENT

Table of Contents
1.1Introduction to Compensation Management:
• Meaning of Compensation

• Types of compensation,

• Conceptual framework of compensation management,

• Theories of wages

• criteria of wage fixation

• Institutional and cultural factors on compensation practices

• National differences in compensation

• Compensation system design issues: Compensations Philosophies,

compensation approaches.

HUMAN RESOURCE MANAGEMENT

Table of Contents
• Self Evaluation Questions
• Exercise/Activity
• Summary
• Text Book & Reference Books
• Research Article Links
• Video Links
• Digital Article Links
• Case Study Links
• Podcast Links

HUMAN RESOURCE MANAGEMENT

 Concept of Compensation Management

• Compensation is the human resource management function that deals

with every reward individuals receive for performing an organizational
task. The consideration for which labor is exchanged is called
compensation.
 Compensation
• Payment is seen as a measure of justice.
• Stockholders are interested in how employees are paid.
• Pay is a statement of an employee’s worth by an employer.
• Pay is a perception of worth by an employee.
Nature & Importance
The basic nature of wage and salary administration is to establish and maintain
an equitable wage and salary structure.

Steven Kerr says, “People do what they do to satisfy some need. Before they do
anything, they look for a reward or pay-off.”
 Purpose of Compensation

Contribution based Ensure Equity

Remuneration

Attract talent Effective Administratively

Compensation Efficient Legal
Institutionalized Compliance
Processes

Motivate & Reward Valued

Retain Staff Behavior
Objectives
1. Employees are paid according to requirements of their jobs
2. Favoritism is minimized
3. Job sequences, lines of promotion are established
4. Employees morale and motivation are increased - wage
programme can be explained & based on facts
5. Employers can control the labour costs
6. Dealing with trade unions is easier
7. Attracts qualified employees
 Total
Total Compensation
Compensation

Direct
Direct Indirect
Indirect

Wages Time
TimeNot
NotWorked
Worked
Wages//Salaries
Salaries ••Vacations
Vacations
••Breaks
Breaks
••Holidays
Commissions Holidays
Commissions
Insurance
InsurancePlans
Plans
••Medical
Bonuses
Bonuses Medical
••Dental
Dental
••Life
Life
Gainsharing
Gainsharing Security
SecurityPlans
Plans
•
•Pensions
Pensions

Employee
EmployeeServices
Services
••Educational
Educationalassistance
assistance
••Recreational programs
Recreational programs
 The Mechanism of Wage and Salary Administration

Salary is structured, fixed, adjusted on the basis of several systems

1. Wage Theories

i. The Just Wage Theory- Medieval period – worker should be paid on the level of maintaining
himself and his family

ii. Subsistence Theory – According to Ricardo, “ the labourers are paid to enable them to subsist
and perpetuate the race without increase or diminution”

iii. Standard of Living Theory – Karl Marx pointed out that, “Wage of labour is determined by a
traditional standard of living, which in turn is determined by the mode of production of the
country concerned.”
The Mechanism of Wage and Salary
Administration
iv. The Wage Fund Theory : According to J.S.Mill,
Wage = Amount of fund allocated for wage payment
Number of workers
v. Residual Claimant Theory : According to Walker,
The amount of wages = Production value – (Rent + Profits + interest)
vi. Marginal Productivity Theory : According to J.B.Clark, the wages are determined on the basis of
marginal contributions of the worker to the production
vii. The Bargaining Theory of wages : The wages and other terms of employment are determined on
the basis of the relative bargaining strength of the two parties, (Employer and Employees)
viii. Contribution of behavioural scientists to the wage theories – based on size, nature, prestige of
organisation, strength of union, social norms, traditions, customs, job authority, responsibility &
status, job satisfaction, morale, employee behaviour and level of performance
 The Mechanism of Wage and Salary
Administration
2. Job Evaluation- It is the process of determining the relative worth of jobs, ranking and grading
them by comparing the duties, responsibilities, requirements like skill, knowledge of a job with
other jobs, with a view to fixing compensation payable to concerned job holder.

3. Wage/Salary Survey

4. Factors affecting Wage/Salary Levels

5. Wage Fixation Institutions in India

4. Factors affecting Wage/Salary Levels

Labor Market Compensation Strategy

Conditions of the Organization

Area Wage
Rates Worth of
the Job
Cost of WAGE
Living Fixation
Employee’
s
Relative
Collective Worth
Bargaining
Employer’s
Ability
Legal to Pay
Requirements
Wage Determination process

Job Wage
Analysis Legislation

Wage survey Wage

Job Job
Structure
Description Evaluation & analysis of
& relevant
Specification organizational Rules of
problems Administration

Performance Differential
Standards Employee
Appraisal

Wage Payments
Wage Fixation Institutions in
India
Wages are fixed by the following institutions in India. They
are:
1. Collective Bargaining & Adjudication
2. Wage Boards
3. Pay Commissions
 Pay Commissions

• First Pay Commission (1946) – minimum wage Rs.30

• Second Pay Commission (1957) – min. wage Rs.80 (basic + Rs.10 as DA)
• Third Pay Commission (1970-73) – min. remuneration of Rs.185/month.
• Fourth Pay (1983) – min. salary Rs.750
• Fifth Pay (1996) – min. salary Rs.2,000
• Sixth Pay (2008) - min. salary Rs.6,500
 Wage Fixation Institutions in India
2. Wage Boards

• One of the important set-up by the GOI for fixation and revision of wages.
• recommended by 2nd five year plan, reiterated by the 3rd five year plan
• Appointed on ad-hoc basis by GOI
• Tripartite body – labour, management and public.
• One neutral Chairman, two independent members & two or three
representatives of workers and management each
 Concept of Wage Differentials
• Wage differentials bear a direct relationship to the diversity in occupation and
industries that exist in the economic sphere of activity in a country. A certain job
requiring a certain skill is paid more or less than another job requiring a different skill
either in the same or some other industry. There are a variety of contributory
factors.
• There is a need to understand the reasons for these differences as in many cases
there is a constant adjustment taking place in order to maintain the existing
disparity, for instance, between the skilled and unskilled or semiskilled workers;
between the officers and the supervisory or clerical staff and so on.
 Wage Differentials

1. Occupational
2. Inter-firm
3. Inter-area or Regional
4. Inter-industry - skill sets
5. Personal Wage – age or sex – equal pay recommended by Industrial courts,
labour Tribunals, minimum wages committee and the fair wage committee
 Type 1. Occupational Differentials
Different occupations require
• different qualifications,
• different wages of skill
• different degrees of responsibility,
wages are usually fixed on the basis of the differences in occupations and various
degrees of skills.
The basic functions of such differentials are:
• (a) To induce workers to undertake “more demanding”, “more agreeable or
dangerous” jobs, or those involving “a great chance of unemployment, or wide
uncertainty of earnings.”
• (b) To provide an incentive to young person to incur the costs of training and
education and encourage workers to develop skills in anticipation of higher earnings
in future.
• (c) To perform a social function by way of determining the social status of workers.
 Type 2 Inter – Firm Differentials
It is the relative wage levels of workers in different plants in the same area and
occupation.
The main causes of inter-firm wage differentials are:
• Difference in the quality of labour employed by different firms;
• Imperfections in the labour market; and
• Differences in the efficiency of equipment, supervision and other non-labour
factors.
Differences in technological advance, managerial efficiency, financial capacity, age
and size of the firm, relative advantages and disadvantages of supply of raw materials,
power and availability of transport facilities — these also account for considerable
disparities in inter-firm wage rates. Lack of co-ordination among adjudication
authorities, too, is responsible for such anomalies.
 Type 3 Inter-Area or Regional Differentials:

• It is when workers in the same industry and the same occupational group, but
living in different geographical areas, are paid different wages.
• Regional wage differentials may be due to two senses. In the first sense, they are
merely a part of inter-industry differentials in a particular region. In the second
sense, they may represent real geographical differentials, resulting in the payment
of different rates for the same type of work.
• This is the result of living and working conditions, such as unsatisfactory or irksome
climate, isolation, substandard housing, disparities in the cost of living and the
availability of manpower. In some cases, regional differentials are also used to
encourage planned mobility of labour.
 Type 4 Inter-Industry Differentials:

• It arise when workers in the same occupation and the same area but in different
industries are paid different wages. Inter-industry differentials reflect skill
differentials.
• The industries paying higher wages have mostly been industries with a large
number of skilled workers, while those paying less have been industries with a
large proportion of unskilled and semi-skilled workers.
• Other factors influencing inter-industry differentials are the extent of unionization,
the structure of product markets, the ability to pay, labour-capital ratio, and the
stage of development of an industry.
 Type 5 Personal Wage Differentials:

• It arise because of differences in the personal characteristics (age or sex) of

workers who work in the same plant and the same occupation.
• But in practice this principle has not been fully implemented because in
occupations which involve strenuous muscular work, women workers, if employed,
are paid less than men workers.
• Lack of organization among women employees, less mobility among them, their
lower subsistence and their weak constitution are other reasons which bring them
lower wages than their male counterparts receive.
 Acts
• Payment of Wages Act, 1936
• Factories Act, 1948
• Industrial Disputes Act, 1947, amended 1982
• Provident Fund Act, 1952
• Payment of Bonus Act, 1965
• Contract Labour Act, 1970

In India, Industrial Truce Resolution (1947), the report of the National Commission on Labour
(1969), the report of the Steering Group on Income, Wages and Prices appointed by the RBI, the
report of the Committee on Wage Policy (1974), Equal Remuneratios Act, (1976), the
Bhoothanlingam Commission Report (1978) and the various reports of the wage boards and the
various pay commissions have played an important role in structuring the wage policy.
Challenges Faced by Compensation
Design
• Using compensation in lieu of sound management: this equates to trying to solve a problem by
throwing money at it. No amount of compensation makes up for poor management
• Confusing compensation and benefits with rewards and recognition: the fact is that employees
rarely leave organization for relatively small increases in pay. More often, they leave for intrinsic
reason such as feeling valued by an organization or seeing opportunity for growth. Compensation,
no mater how much, does not fill intrinsic need
• Utilizing compensation strategies that are not linked to achieving an organization’s goals and
objectives: the only reason to hire or retail an employee is because he/she directly or indirectly
adds value to the company. Therefore, how much an employee should be paid, depends solely on
how much value he/she adds in reaching the company’s goals and objective.
Compensation System Design Issues
Compensation must be viewed strategically as a lot of
organizational funds are spent on compensation related
activities. Organizations must make a number of
important decisions about the nature of a compensation
system. Especially the following things need to be
questioned.
• What philosophy and approach will be taken?
• How will the firm react to market pay levels?
• Will the job be paid or the person’s level of
competence?
• Will pay be individual or team based?
FACTORS INFLUENCING COMPENSATION
PHILOSOPHY
• Some of the factors that influence compensation philosophy include
present revenue of the company
• and expected profits in the future, market value of the jobs for which
the company is hiring, and degree
• of competitiveness in the types of jobs a company offers.
• The way an organization views its employees and its responsibility to
those employees’ factors into the
• development of a compensation philosophy too. Essentially, many
different elements may contribute to
• the way an employer determines rate of pay, raises and bonuse
 Compensation Philosophies
Strategic Business Industry & Labour
Employee Inputs &
Assessment

Market Practices &

Preferences & Operating Inputs
Trends

Compensation Philosophies and Objectives

Basic Pay Organisation Fringe Benefits Compensation
Performance or Administration
Variable Pay,
Delivery
Design

Nonmonetary &
Other Monetary
Rewards &
Recognition
 COMPENSATION APPROACHES
• Traditional Compensation Approach
For some organizations, a traditional compensation approach makes sense and offers
certain advantages in specific competitive situations. It may be more legally defensible,
less complex, and viewed as more “fair” by average and below average employees. It
reflects a logical, rational approach to compensating employees.
• Total Rewards Approach
It tries to place a value on individual rather than just the jobs. Widespread use of various
inventive plans, team bonuses, organizational gain sharing programmes, and other designs
serves to link growth in compensation to results.
• 3 P’s Approach to Compensation Management
There are 3P approach of developing a compensation policy centered on the
fundamentals of paying for Position, Person and Performance. The 3P approach to
compensation management supports a company’s strategy, mission and objectives. The 3P
system ensures that human resources management plays a central role in management
decision making and the achievement of business goals.
TEXT & REFERENCE BOOKS
• Text Book:

• T1: Bhattacharyya, Dipak Kumar (2014), Compensation Management, Oxford University Press, 12th
Edition, New Delhi.

• Reference Books:

• R1: Milkovich, George T., Newman, Jerry M & Ratnam, C S Venkata (2009). Compensation, Ninth
Edition, Tata Mc Graw Hill Publications.
• R2: Richard. I. Henderson (2008). Compensation Management in a Knowledge Based World. Prentice Hall
Publications.
 Research Article:

• Chen, C. and Hassan, A. (2022), "Management gender diversity, executives compensation and firm
performance", International Journal of Accounting & Information Management, Vol. 30 No. 1, pp. 115-142.
https://doi.org/10.1108/IJAIM-05-2021-0109
• Link:https://www-emerald-com-presiuniv.knimbus.com/insight/content/doi
/10.1108/IJAIM-05-2021-0109/full/html
HBS Case Study:

• Mulla, Zubin R., Patil, Sushil., Dubey, Mansi., Kaur, Jasleen (2017). Bharat
Petroleum: Long-Term Wage Settlement, W17585-PDF-ENG. Ivey Publishing.
Video:

• Compensation Management Lifecycle

• Link: https://www.youtube.com/watch?v=dYP17zVRyjQ