MEANING
“Compensation includes direct cash payments and indirect payments in form of employee’s
benefits and incentives to motivate employees to strive for higher levels of productivity”.
Compensation is defined as the consolidated amount, allowances received and various other
kinds of benefits and services which are offered by the organisation to their employees. In
other words, compensation refers to all forms of financial returns, services and benefits
received by the employees from their organisation as a part of their employment relationship.
TYPES OF COMPENSATION
Direct financial compensation is most widely known and recognized form of compensation.
Most sought after by workers, direct compensation is the money which is paid directly to
employees in exchange for their labor. This includes everything from hourly wages, to set
salaries, bonuses, tips and commissions.
Indirect financial compensation includes all monies paid out to an employee that are not
included in direct compensation. This form of compensation is often understood as the
portion of an employee’s contract that covers items such as temporary leaves of absence,
benefits and retirement plans.
Compensation Management – 8 Main Objectives
1.To attract competent and qualified persons towards organization by offering fair wage and
incentive.
2. To retain present employees by paying competitive remuneration.
3. To establish fair and equitable remuneration so as to avoid pay disparities.
4. To improve production, productivity and profitability of the organization.
5. To minimise un-necessary expenditure and to control cost through a device of internal
check and establishment of standard.
6. To improve and maintain good human relation between employer and employee through a
process of payment of bonus, profit sharing and other fringes benefits.
7. To enhance the name and fame of the company through a proper system of wage payment.
8. To ensure prompt and regular payment of wage and salary to all the employees.
Compensation Management – Compensation
Consists of 4 Main Components
Job Descriptions The job description is the written responsibilities, functions, duties,
requirements, conditions, environment, location and other facets of jobs.
Job Analysis The process of analysing the job is job analysis and job descriptions are also
developed from it. Job analysis techniques include the use of interviews, questionnaires, and
observation.
Job Evaluation It is a process of comparing jobs for the determining adequate compensation
for individual jobs or job elements.
Pay Structures The pay structure includes the several grades and each grade containing a
minimum salary, increments and grade range.
Salary Surveys It is a collection of survey of salary and market data and also includes
inflation indicators, average salaries, cost of living indicators, salary budget averages.
Companies may purchase results of surveys conducted by survey vendors or may conduct
their own salary surveys.
Policies and Regulations Compensation is supposed to be as fair if it is contained the system
of components to develop and maintain internal and external equity in organization.
In India compensation or pay structure generally consists of the following components:
1. Wage or Salary
2. Dearness and other allowances
3. Incentives
4. Fringe benefits and perquisites.
1. Wage or Salary:
Wage:
The term wage refers to the remuneration paid to the workers appointed on hourly, daily or
weekly basis in return for the service rendered.
It varies according to physical and mental requirement of the job. Wage may be minimum
wage, fair wage and living wage.
i. Minimum Wage:
It is that wage which is sufficient to meet the basic need of a worker and his family. This
minimum wage has to be paid to the worker irrespective of the capacity of the industry to
pay. The Committee on fair wage has defined minimum wage as – “the wage must provide
not only for the bare sustenance of life, but for the preservation of the efficiency of the
workers. For this purpose, minimum wage must provide some measures of education,
medical requirements and amenities”.
ii. Fair Wage:
According to committee on fair wage “fair wage is the wage which is above the minimum
wage but, below the living wage”. It is fixed between the minimum wage and capacity to pay
by the industry. The lower limit of the fair wage is the minimum wage; the upper limit is set
by the capacity of the industry to pay.
Fair wage depends on several factors like:
(a) The productivity of labour
(b) The prevailing rates of wage in the same or neighbouring localities.
(c) The level of national income and its distribution.
(d) The place of industry in the economy of the country.
Thus, fair wage is determined on the basis of capacity of the industry to pay and region in
which industry is located.
iii. Living Wage:
It is the wage that provides some of the comforts of life. It provides certain amenities
considered necessary for the well-being of the worker. According to Fair Wage Committee
“the living wage should enable the male earner to provide for himself and his family not
merely the bare essentials of food, clothing and shelter but also a measure of frugal (using
only as much money or food as is necessary) comfort including education for children,
protection against ill health, requirements of essential social needs and measure of insurance
against the more important mis-fortunes including old age”.
Salary:
The term salary refers to remuneration paid to the employees appointed on monthly or annual
basis in return for the service rendered. Thus it refers to monthly rate of pay irrespective of
number of hours put in by employees.
Take Home Salary:
It is the net amount of salary received by an employee after making all the deductions
towards the payment of income tax, LIC premium and contribution to P.F. etc.
2. Dearness Allowance (DA):
Under section 3 of the Minimum Wages Act, DA is described as cost of living allowance. It
is given to protect the real wages of workers during inflation. In India it has become integral
part of the wage system.
Along with DA other allowances like City Compensatory Allowance (CCA), House Rent
Allowance (HRA), Medical Allowance (MA), Education Allowance (EA), Conveyance
Allowance etc., also form the part of compensation package.
However, inclusion of all these allowances in the compensation depends on nature and type
of job, contents of job, place of job, terms and condition of appointment, capacity of
employer etc.
3. Incentives:
Incentive is a reward paid in addition to wages whether monetary or not that motivates or
compensates an employee for performance above the standard. Payment of incentive depends
on productivity, sales and Profit of the organization.
4. Fringe Benefits and Perquisites:
Fringe Benefits:
It is a general term used to describe any of a variety of non-wage or supplemental benefits
that employees receive in addition to their regular wages. These include such employee
benefits as provident fund, gratuity, medical care, hospitalization, accident relief, paid
holidays, health and group insurance, pension etc.
Perquisites (Perks):
Perquisites also called perks are the special benefits made available only to the top executives
of an organisation. These may include company car, furnished house, stock option scheme,
club membership, paid holidays etc.
