Human Resource Management (Module-4) Pages: 26

Talent management
Talent management is the attraction, selection, and retention of employees, which
involves a combination of HR processes across the employee life cycle. It encompasses
workforce planning, employee engagement, learning and development, performance
management, recruiting, onboarding, succession and retention.

Talent management is one of the most current topics in HR. How can we give
candidates the best experience? How can we attract and retain the best people?
What do we need to do to win the war on talent?

Talent management is the full scope of HR processes to attract, develop, motivate and
retain high-performing employees.

Talent management helps employees feel engaged, skilled, and motivated, allowing
them to work in the direction of the company's business goals, which in turn, increases
client satisfaction and business performance.

This definition has three components:

1. The full scope of HR processes: Talent management is about a set of HR

processes that integrate with each other. This means that talent management
activities are larger than the sum of the individual parts. This also means that a talent
management strategy is required to capitalize on its full potential. More about this
later.

2. Attract, develop, motivate and retain: This is not a comprehensive list. Talent
management touches on all key HR areas, from hiring to employee onboarding and
from performance management to retention.

3. High-performing employees: The purpose of talent management is to increase

performance. It aims to motivate, engage, and retain employees to make them
perform better. This is why the importance of talent management is so signigicant.
When it’s done right, companies can build a sustainable competitive advantage and
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 outperform their competition through an integrated system of talent management
practices that are hard to copy and/or imitate.

In other words, talent management is a process aimed at driving performance through

integrated people management practices. As such, it’s one of the key functions of
Human Resources.

Talent management strategy

As we’ve mentioned already, when done right, the whole will be greater than the sum of
the parts. To achieve this, a talent management strategy is key.

In order to define your talent management objectives and create a strategy, you need to
answer the following five questions:

1. What are the aspirations of the organization and what are the goals that enable
us to measure progress?
When we talk about specific and measurable goals, we mean talent management
metrics. These metrics enable us to keep track of what we’re doing and how well
we’re doing it. Unwanted turnover is a good example of this. If we can’t retain our star
employees, we will most likely not achieve our aspiration.

2. What do we want to focus on?

There are multiple areas in talent management that you can focus on. You can
become a desirable employer. Being a top employer or being nominated as a Great
place to Work requires substantial investment. This can be effective especially when
you want to attract people from all kinds of backgrounds. However, if you have a very
specific employee profile, for example, engineers, your time is better spent on
developing a comprehensive tech sourcing strategy.

The HR talent management model is very helpful in this case as it enables you to
map the specific activities that you want to focus on. This will also help in the next
step. Below you’ll find a list of talent management practices that you can improve.

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3. How will we beat the competition?
Unfortunately, you’re not the only one who’s looking for top talent. Your competition
is as well. How can you outperform your competitors and become a more attractive
employer? This can be achieved through better employer branding, better retention,
better selection, et cetera.

4. What capabilities do we need to build or continue to win?

Talent management requires specific skills that are not always common within HR.
Think about marketing to become a more attractive employer, and hiring a dedicated
talent manager. Another example is HR data analytics expertise to make sure you
get the most out of your existing population. Depending on your focus points, you
need to develop different capabilities.

5. How do we track progress and improve?

The final step is about tracking progress and ensuring the further improvement
of talent management processes. A good way to do this is by using a talent
management dashboard. Such a dashboard can provide an overview of the Key
Performance Indicators and can display changes over time.

Which talent management practices should you focus on?

So, I hear you ask, how does this work in practice? What are the common talent
management best practices to apply? Here’s a brief overview.

1. Employer branding: Having a strong brand attracts even the best candidates.

2. Employer reputation: Reputation is related to employee branding. However,

reputation is more affected by external media the company has less control over. An
example of reputation gone wrong is the banking sector in recent years, especially
after the 2008 financial crisis.

3. Candidate experience: The experience of the candidate influences the employer

brand.

4. Selection: Spotting and selecting the best is a critical part of talent management.

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5. Referrals: Talent knows talent. Referral programs are effective as they help to pick
up candidates that onboard quicker and perform better. We listed 7 employee referral
programs examples you can take a look at to get inspired.

6. Onboarding: Getting people up to speed as quickly as possible helps to make them

more productive and increases employee retention.

7. Inboarding: Yes, you read it right. When people are promoted internally, they also
need support to achieve maximum productivity. This is called inboarding.

8. Engagement: Engaged employees are motivated, perform well, and are more likely
to stay.

9. Retention: Retention strategies help to keep the best people on board. An example
is succession planning.

10. Succession planning: You want to be able to fill crucial top positions whenever they
become vacant. Having a talent pipeline that ensures succession planning is a key
element in this.

11. Learning and development: This is not only a common talent management
practice, it’s also a Human Resource best practice. Educating employees helps
increase performance and retention. After all, once you’ve recruited the best people,
you want to make sure they remain the frontrunners in the field, right?

12. Performance management: An essential part of managing talent is tracking and

improving their performance.

13. HR analytics: As we’ve said before, by leveraging data you can ensure that you’re
hitting the right KPIs that have an impact on business outcomes.

Of course, this is not a comprehensive list. There are many more activities that help to
build and maintain an effective workforce

The importance of talent management and why

companies should invest in it

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Talent management is not just a simple human resource key term one will come
across. It is also committed to hire, manage, develop, and retain the most talented and
excellent employees in the industry. In fact, talent management plays an important role
in the business strategy since it manages one of the important assets of the company—
its people.

That is why companies should make the effort to effectively manage the employees to
help them develop their skills and capabilities in order to retain them. Here are some
reasons why companies should invest in talent management.

Attract top talent Having a strategic talent management gives organizations the
opportunity to attract the most talented and skilled employees available. It creates an
employer brand that could attract potential talents, and in turn, contributes to the
improvement of the organizations’ business performance and results.

Employee motivation. Having a strategic talent management helps organizations keep

their employees motivated which creates more reasons for them to stay in the company
and do their tasks. In fact, 91 percent of employees shared that they wanted more than
just money to feel engaged and motivated, as revealed by Chandler and Macleod’s
survey.

Continuous coverage of critical roles. Talent management equips companies with

the tasks that require critical skills to plan and address the important and highly
specialized roles in the workforce to its employees. This means that the company will
have a continuous flow of employees to fill critical roles to help companies run their
operations smoothly and avoid extra workload for others, which could lead to
exhaustion.

Increase employee performance. The use of talent management will make it easier
for the companies to identify which employees will be best suited for the job that can
lead to less performance management issues and grievances. It will also guarantee that
the top talent within the company stays longer.

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Engaged employees Talent management allows companies to make systematic and
consistent decisions about the development of staff, which guarantees the employees’
skills and development. Furthermore, employees will feel more engaged when there is a
fair procedure for the development, which helps in increasing the retention rates that
helps companies in meeting their operational requirements.

Retain top talent. Well-structured on-boarding practices create higher levels of

retention which saves the company on its recruitment and performance management
cost in the long run.

Improve business performance. Talent management helps employees feel engaged,

skilled, and motivated, allowing them to work in the direction of the company’s business
goals, which in turn, increases client satisfaction and business performance.

Higher client satisfaction. A systematic approach to talent management means that

there is an organizational integration and a consistent approach to management. When
systems are more integrated, client satisfaction rates are usually higher, since they are
dealing with fewer people and their needs are met more rapidly.

Significance of Talent Management

The basic purpose of talent management is to recruit, develop, and retain best talent in
the organization. The HR Department always endeavors to ensure that employees with
the right skills and qualities stay with the organization for a long time.

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The most important functions of Talent Management are as follows −

 Establishing a high-performance workforce.

 Attracting individuals with high potential and retaining them through proper
training and refreshment.

 Increasing the productivity of the organization.

 Proper time management, as untrained and unskilled workforce lead to wastage

of time and commitment of errors, which is not cost-effective.

 Retain talented and high-performing employees.

 Ensuring growth and innovation in the organization.

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  Developing skills and competencies in employees.

A requisite pool of qualified and talented employees can simplify the process of
achieving the organizational goal and help focus on issues that really matters in the
interest of the organization. Therefore, the overall purpose of talent management is to
maintain a skilled and efficient workforce for the organization.

In modern-day organizations, the importance of talent management is second to none.

Unless an organization has the required talented workforce, it cannot succeed in
attaining its goal even if it possesses other factors such as natural resources,
infrastructure, and technology. In fact, it is people who take an organization to its next
levels of success.

Talent Management Life Cycle

Talent Management Life Cycle is a continuous process that deals with human capital
in a comprehensive, holistic way ensuring that both employee and employer gain the
maximum benefit from their mutual association.

Step By Step Talent Management Process.

1. Identify Organization Goals And Understand The Requirement

What are your organizations high level priorities or goals? List down the goals and
upcoming changes you need to initiate in the organization.

Develop the job descriptions and specifications for the role you want to acquire the
talent for. Since it the first step towards the process, it plays a crucial role in the success
of the whole process.

2. Sourcing and Attracting The Talent

First thing one must understand in talent acquisition is why would somebody with high-
level skills come to work for you? Employment branding is the concept that comes into
play at this moment. Best thing to do for employment branding is to be honest.

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Searching for the people according to the requirement is the main activity in this step.
Look out for the platforms like Linkedin where you can search highly talented people.

Despite the explosion of social networking sites like Linkedin and twitter, there are still
lot of different ways people find new positions. Significant amount of them comes from
internal candidates and through referrals.

3. Recruiting And Selecting The Talent.

This is the stage where you actually conduct interview tests and recruit the top talent.
Conduct relevant interview tests to identify the best person and scoop them in.

4. Employee Retention

Now that you have recruited the best employees, you need to make strategies to retain
those employees. how do you retain them?

Almost 51% of the employers have problem with employee retention. High salary hikes
and incentives are not the only things you should do to retain your employees. You
have to create opportunities for growth and give them the room for creativity. You can
implement these 5 employee retention strategies to retain your best employees.

5. Promotion

Promote the people gradually to the new role. Nobody wants to work at the same
designation for a long period of time. This way you are helping your employees grow in
their professional career.

6. Performance Appraisal

Measuring the performance of an employee is imperative to identify his or her true

potential. You can check whether the person can be loaded with extra responsibilities or
not.

7. Succession Planning

Succession planning is different from replacement planning. It is a conscious decision

by an organization to nurture and develop the continuous development of employees. I

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 have written earlier about the importance of succession planning process in an
organization. It is all about who will replace whom in the near future.

Talent Management Initiative

The managers and the higher authorities need to take the initiative to pave the
way for the personal development and long-term association with the
organisation. Some of the ways in which a manager can motivate and retain
employees are as follows:

 Recognition: Recognising employees’ contribution and their work on individual

grounds, boost up self-confidence in them.

 Remuneration and Reward: Increasing pay and remuneration of the employees as a

reward for their better performance.

 Providing Opportunities: Giving the charge of challenging projects to the employees

along with the authority and responsibility of the same, makes them more confident.

 Role Design: The role of employees in the organisation must be designed to keep them
occupied and committed, it must be flexible enough to inculcate and adapt to the
employee’s talent and knowledge.

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 Job Rotation: Employees lack enthusiasm if they perform the same kind of work daily.
Thus, job rotation or temporary shifting of employees from one job to another within the
organisation is essential to keep them engaged and motivated.

 Training and Development: On the job training, e-learning programmes, work-related

tutorials, educational courses, internship, etc. are essential to enhance the
competencies, skills and knowledge of the employees.

 Succession Planning: Internal promotions helps identify and develop an individual who
can be the successor to senior positions in the organisation.

 Flexibility: Providing a flexible work environment to the employees makes them more
adaptable to the organisation and brings out their creativity.

 Relationship Management: Maintaining a positive workplace where employees are

free to express their ideas, take part in the decision-making process, encourage
employees to achieve goals and are rewarded for better performance leads to
employee retention.

 Self-motivation: Nothing can be effective if the employee is not self-determined and

motivated to work.

Benefits of Talent Management

Benefits of talent management for the organization

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 Strategic talent management results in the accomplishment of organisational
vision.
 Filtration of talented employees and retaining of the finest ones is possible.
 Talent management strengthens the organisational structure by building
strong human capital.
 It helps the organisation to succeed over its competitors and establish a
strong presence in the market.
 It builds up a good reputation of the company among the job seekers.
 It leads to improved participative decision making by the management.
 It directs continuous improvement in organisational performance making it
more efficient and effective.
Benefits of talent management for employees

 Talent management initiates a positive environment in the organisation where

employees experience job satisfaction.
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 Employees get a chance of learning and improving themselves which
motivates them to perform better.

 The training and development programmes help the employees to learn

something new, enhancing their personal skills and knowledge.

 The organisation focuses on an individual’s growth and betterment hence

employees develop a feeling of being cared for and belongingness for the
organisation.

 The employees remain associated with the organisation for a long-term

period.

 Recognition and rewards lift up the employee’s confidence level.

 The rigorous learning, adds on to the experience of the employees.

In today’s global scenario, the human resource has been a very effective tool
for the company’s growth and success. Thus to make the best possible
utilisation of the employee’s talent and skills, talent management is essential

Compensation Management
Compensation Management refers to the establishment and implementation of
sound policies, programmes and practices of employee compensation. It is
essentially the application of a systematic and scientific approach for compensating the
employees for their work in a fair, equitable and logical manner.

Compensation Management – Concept

An organisation’s goals or objectives can be achieved when its employees
put in their best efforts in the right direction. Hence, they should be
nurtured properly and paid well for their work, performance, services, etc.
Besides wages or salaries, organisations provide different kinds of
incentives, benefits and services to their employees.

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Money paid to employees for their work in the form of gross pay is included
under direct compensation; while benefits come under indirect
compensation and they may consist of life, accident and health insurance,
the contribution of an organisation to retirement i.e. retirement benefits,
expenses incurred for employee welfare as social security etc.
All these things are nothing but the compensation the employees receive in
return for their contribution to their organisation. From the viewpoint of an
organisation, compensation management is a major function. Compensation
Management is one of the most important topics in HRM. This is one area
which needs all the attention as it can have a direct impact on all others.
Compensation Management is concerned with the compensation to
employees for their work and contribution for attaining organisational
goals. Obviously, it is concerned with designing and implementing total
compensation package. It is also known as wage and salary administration
or remuneration management.
Every organisation requires suitable human resources to achieve its
objectives. To get the effective results, the employees must be paid and
compensated properly even though this is not the only motivator for the
employees to work. Any unjustifiable inequality or an unacceptably low level
of reward definitely causes great dissatisfaction among employees.
Hence, sound wage and salary policies and programmes are very essential
to attract, induct, retain and develop the employees working in the
organisation in order to get the best results from them. Wage and salary
administration or compensation management is considered as one of the
vital areas of “Human Resource Management”.
Compensation Management refers to the establishment and implementation
of sound policies, programmes and practices of employee compensation. It
is essentially the application of a systematic and scientific approach for
compensating the employees for their work in a fair, equitable and logical
manner. The factors affecting the determination of fair and equitable
compensation are many and are very complex.

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Compensation Management includes various areas such as job evaluation,
surveys of wages and salary analysis of relevant organisational problem,
development of suitable wage structure, framing of rules for administering
wages and salaries, wage payment, incentive, control of compensation cost
etc. Hence, in the era of globalisation, privatisation, liberalisation,
compensation management has become very complex and depending upon
the size of the organisation, it may be helpful to induct a specialist to handle
this specific portfolio under HRM.
Wages and salaries mean different things to different people and
organisations. From the view point of employees, white collar or blue collar,
a salary or a wage is an income and a return they get for offering their
services to their organisation. From the view point of an organisation or
management, wages and salaries constitute a cost of production. A wage or
salary is a price paid to an employee for hiring his services.
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.
Such compensation may be received in the form of cash i.e. wages/salaries,
bonus, overtime payments, incentives (i.e. gross payment). This is called as
‘direct compensation’. While benefits that come under indirect
compensation may consist of life, accidents and health insurance, pay for
vacation or illness, retirement benefits and so on.
Thus, in short, compensation is direct and indirect monetary benefits and
rewards received by employees on the basis of the value of the jobs, their
personal contributions and overall performance. Such rewards are given to
employees by their organisation according to the ability of the organisation
to pay and the legal provisions.

Objectives of Compensation Management

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 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;

1. Acquire qualified personnel.

2. Retain current employees.
3. Ensure equity.
4. Reward desired behavior.
5. Control costs.
6. Comply with legal regulations.
7. Facilitate understanding.
8. Further administrative efficiency.
9. Motivating Personnel.
10. Consistency in Compensation.
11. To be adequate.

Compensation management tries to strike a balance between these

two with specific objectives;

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
labor 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

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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 labor
market pay comparable workers.

Reward desired behavior

Pay should reinforce desired behaviors and act as an incentive for

those behaviors to occur in the future. Effective compensation plans
reward performance, loyalty, experience, responsibility, and other
behaviors.

Good performance, experience, loyalty, new responsibilities, and

other behaviors 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 considers the legal challenges

imposed by the government and ensures employers comply.

Facilitate understanding

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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.

Compensation Management – Need and

Significance
Compensation refers to the rewards, an employee gets after offering his/her
mental and physical efforts, wherein he/she compares his/her worth. Any
dissatisfaction may result into a conflict or a dispute. This dissatisfaction

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not only affects the performance of the employee but also imbalances the
equity between human capital investment and expected returns to the
organization.
As such it is a most sensitive issue in any organization or HRM as
employers, employees and the government have observed that 95% of the
industrial disputes in any organization in India are related to wage/salary or
method of payments.
Compensation decisions have become more complex in this competitive age
because of an unbalanced demand and supply ratio. The HRM of every
organization is required to make some systems to scrutinize the wage and
salary differentiations or disparities to ensure a motivated environment in
the organization.
The perceptions of employees and employers about compensation are
changing and the emphasis is being laid on how important is pay for the
employees and how it affects investment to hire competitive employees and
how it compares with three main factors, namely, job contents, work
environment, and pay attraction to retain an employee.
The expensive growth of some of the sectors like IT, Telecom, BPOs and
financial institutions has triggered off huge demand for talent at all levels.
The consultants and HR professionals are continuously surveying and
studying the paradigm shifts of concepts, perceptions and the need for
revising the compensation systems.
The paradigm shift from standard wage and salary to compensation or cost
to the company is clearly visible in today’s hiring practices.
The satisfaction or dissatisfaction is a gap between the expectations of an
employee and the feeling or the experience of worth. This feeling or
experience is an outcome of efforts offered to perform, comfort felt at work
place, cushion for inflation in compensation, and appreciation perceived by
the employee. HRM, therefore, needs to design policy and practices to
develop willingness to work and satisfaction toward worth.

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Secondly, the compensation policy and the structure must be made
attractive and adjustable so as to attract the talents, motivate the
employees to use their hidden potentials, emphasize the need of self-
improvement, and most importantly to retain the employees as they are the
valuable asset to the organization.

Compensation Management – Compensation Consists of 4

Main Components
Compensation is the reward or remuneration paid to the employees in
return for the service rendered. Such compensation package includes both
monetary and non-monetary components.

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:

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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 neighboring 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

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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.
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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.

Compensation Management – 11 Major Factors Influencing

Compensation
The amount of compensation received by an employee should take into
account several factors such as the amount of effort put in, competitive
rates prevailing in labour market, demand for and supply of labour, the
firm’s ability to pay, labour policy, etc.

Let’s look into these issues more closely:

1. The Organisation’s Ability to Pay:
Wage increases should be given by those organisations which can afford
them. Companies that have good sales and, therefore, high profits tend to
pay higher wages than those which running at a loss or earning low profits
because of the high cost of production or low sales. In the short run, the
economic influence on the ability to pay is practically nil. All employers,
irrespective of their profits or losses, must pay no less than their
competitors and need pay no more if they wish to attract and keep workers.
In the long run, the ability to pay is very important. During the time of
prosperity, employers pay high wages to carry on profitable operations and

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because of their increased ability to pay. But during a period of depression,
wages are cut because funds are not available. Marginal firms and non-
profit organisations (like hospitals and educational institutions) pay
relatively low wages because of low or no profits.
2. Supply of and Demand for Labour:
The labour market conditions or supply and demand forces operate at the
national, regional and local levels, and determine organisational wage
structure and level.
If the demand for certain skills is high and the supply is low, the result is a
rise in the price to be paid for these skills. When prolonged and acute, these
labour-market pressures probably force most organisations to “reclassify
hard-to-fill jobs at a higher level” than that suggested by the job evaluation.
The other alternative is to pay higher wages if the labour supply is scarce;
and lower wages when it is excessive.
Similarly, if there is great demand for labour expertise, wages rise; but if
the demand for manpower skill is minimal, the wages will be relatively low.
Mescon says- “The supply and demand compensation criterion is very
closely related to the prevailing pay, comparable wage and ongoing wage
concepts since, in essence, all of these remuneration standards are
determined by immediate market forces and factors.”
3. Prevailing Market Rate:
This is also known as the ‘comparable wage’ or ‘going wage rate’, and is the
most widely used criterion. An organisation’s compensation policies
generally tend to conform to the wage rates payable by the industry and the
community. This is done for several reasons. First, competition demands
that competitors adhere to the same relative wage level. Second, various
government laws and judicial decisions make the adoption of uniform wage
rates an attractive proposition.
Third, trade unions encourage this practice so that their members can have
equal pay, equal work and geographical differences may be eliminated.
Fourth, functionally related firms in the same industry require essentially

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the same quality of employees, with the same skills and experience. This
results in a considerable uniformity in wage and salary rates.
Finally, if the same or about the same general rates of wages are not paid to
the employees as are paid by the organisation’s competitors, it will not be
able to attract and maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe- “Some companies pay on the high side of the
market in order to obtain goodwill or to insure an adequate supply of
labour, while other organisations pay lower wages because economically
they have to, or because by lowering hiring requirements they can keep jobs
adequately manned.”
4. The Cost of Living:
The cost of living pay criterion is usually regarded as an automatic
minimum equity pay criterion. This criterion calls for pay adjustments based
on increases or decreases in an acceptable cost of living index. In
recognition of the influence of the cost of
living, “escalator clauses” are written into labour contracts.
When the cost of living increases, workers and trade unions demand
adjusted wages to offset the erosion of real wages. However, when living
costs are stable or decline, the management does not resort to this
argument as a reason for wage reductions.
5. The Living Wage:
The living wage criterion means that wages paid should be adequate to
enable an employee to maintain himself and his family at a reasonable level
of existence. However, employers do not generally favour using the concept
of a living wage as a guide to wage determination because they prefer to
base the wages of an employee on his contribution rather than on his need.
Also, they feel that the level of living prescribed in a worker’s budget is
open to argument since it is based on subjective opinion.
6. Productivity:
Productivity is another criterion, and is measured in terms of output per
man-hour. It is not due to labour efforts alone. Technological improvements,

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better organisation and management, the development of better methods of
production by labour and management, greater ingenuity and skill by labour
are all responsible for the increase in productivity. Actually, productivity
measures the contribution of all the resource factors — men, machines,
methods, materials and management.
No productivity index can be devised which will measure only the
productivity of a specific factor of production. Another problem is that
productivity can be measured at several levels — job, plant, industry or
national, economic level. Thus, although theoretically it is a sound
compensation criterion, operationally many problems and complications
arise because of definitional measurement and conceptual issues.
7. Trade Union’s Bargaining Power:
Trade unions do affect rate of wages. Generally, the stronger and more
powerful the trade union, the higher the wages. A trade union’s bargaining
power is often measured in terms of its membership, its financial strength
and the nature of its leadership. A strike or a threat of a strike is the most
powerful weapon used by it.
Sometimes trade unions force wages up faster than increases in
productivity would allow and become responsible for unemployment or
higher prices and inflation. However, for those remaining on the payroll, a
real gain is often achieved as a consequence of a trade union’s stronger
bargaining power.
8. Job Requirements:
Generally, the more difficult a job, the higher are the wages. Measures of
job difficulty are frequently used when the relative value of one job to
another in an organisation is to be ascertained. Jobs are graded according
to the relative skill, effort, responsibility, and job conditions required.
9. Managerial Attitudes:
These have a decisive influence on the wage structure and wage level since
judgement is exercised in many areas of wage and salary administration —
including whether the firm should pay below average, or above average

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rates, what job factors should be used to reflect job worth, the weight to be
given for performance or length of service, and so forth, both the structure
and level of wages are bound to be affected accordingly. These matters
require the approval of the top executives.
Lester observes “Top management’s desire to maintain or enhance the
company’s prestige has been a major factor in the wage policy of a number
of firms. Desires to improve or maintain morale, to attract high-caliber
employees, to reduce turnover, and to provide a high living standard for
employees as possible also appear to be factors in management’s wage
policy decisions.”
10. Psychological and Social Factors:
These determine in a significant measure how hard a person will work for
the compensation received or what pressures he will exert to get his
compensation increased. Psychologically, persons perceive the level of
wages as a measure of success in life; people may feel secure; have an
inferiority complex, seem inadequate or feel the reverse of all these. They
may not take pride in their work, or in the wages they get.
Therefore, these things should not be overlooked by the management in
establishing wage rates. Sociologically and ethically, people feel that “equal
work should carry equal wages,” that “wages should be commensurate with
their efforts,” that “they are not exploited, and that no distinction is made
on the basis of caste, colour, sex or religion.”
To satisfy the conditions of equity, fairness and justice, a management
should take these factors into consideration.
11. Skill Levels Available in the Market:
With the rapid growth of industries, business trade, there is shortage of
skilled resources. The technological development, automation has been
affecting the skill levels at faster rates. Thus, the wage levels of skilled
employees are constantly changing and an organisation has to keep its level
upto suit the market needs.

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