Chapter-1

❖ What is compensation?
Compensation means remuneration awarded to an employee by an employer in exchange for the
contribution of employee in the organization.
According to Dale Yoder: “Compensation is paying people for work.”
Compensation is a package that include Compensation includes payments like bonuses, profit sharing,
overtime pay, recognition rewards and sales commission, etc.
❖ What is Compensation Management?
Compensation management means the specialist HR discipline of planning and administering everything
of financial value that an employer gives an employee in exchange for their work. It includes their salary
but also benefits, bonuses and rewards.
❖ Types of compensation.
Broadly compensation are 2 types. These are Direct Compensation and Indirect Compensation.

Direct
Compensation
Compensation Financial
Indirect
Compenstion
Non Financial

1) Direct Compensation: Direct compensation is the monetary payment given directly to the employees for
time worked or achievements, This includes Basic Salary, Wages, Rental Allowance, Medical Allowance,
House Rent Allowance, Special Allowance, Leave Travel Allowance, Bonus etc.
2) Indirect Compensation: Indirect compensation is a type of payment to an employee that doesn't involve
directly paying a wage or salary. This includes both financial and non financial benefits that are paid
indirectly to the employees.
•Insurance •Recognition of merit
•Pension •Praise
•Paid Time Off Non-Financial
Financial Benefit •Self-esteem
Benefit •Pay for holiday •Growth Prospects
•Pay for vacation •Working Condition
•Child Care •Career Development

❖ Objectives of Compensation
1. Internal & External Equity
2. Attract Quality Candidates
3. Retain Employees
4. Cost Control
5. Comply with Legal Rules
6. Ease to Understand and Operate
Source Link: https://www.geektonight.com/compensation-
in-hrm/
 ❖ Pre-requisite for effective compensation
1. Adequate: The compensation system must meet minimum governmental determined level.
2. Equitable:
3. Balanced: Pay, benefits, and other rewards must be provided as a reasonable compensation package.
4. Secure: The compensation package must cover employee security needs.
5. Cost effective: Cost behind compensation system should neither be excessive nor be inadequate.
6. Incentive providing: Incentive excess than base pay generates motivation among the employees.
7. Acceptable to all employees: All employees are aware about pay system. So the it should be reasonable

❖ Challenge/Problems of Compensation Management

1. Strategic Objectives
2. Prevailing wages rate
3. Union Power
4. Govt. Constraint
5. Corporate work and equal pay
6. Compensation strategy
7. International Compensation Challenge
8. Productivity vs cost

❖ How is compensation determined?

1. Required experience and education level of position:
2. Job titles and responsibilities:
3. Industry average pay of similar wages:
4. Job location and cost of living.
5. Availability of qualified candidates
6. Company size and reputation:

❖ What is wages?
According to Cambridge Dictionary, “Wages means a particular amount of money that is paid, usually every
week or everyday, to an employee, especially one who does work that needs physical skills or strength,
rather than a job needing a college education”
Normally wages are paid according to contract and that can be on hourly, daily, or piecework basis.
❖ Different types of wages
Here are examples of different types of wages are noted below
1. Salary Wages: Salaries refer to set amounts of money that employers pay their employees monthly or
annually according to employment contracts. Examples of jobs that usually offer salaries include: IT
specialist, HR generalist, Marketing manager, Accountant, Business development coordinator, Physician
2. Hourly wage: are a type of wage where employers pay employees by the hour. This is a common type of
wage for part-time employment and sometimes full-time employment.
3. Commissions: is a type of wage typically offered by employers to the sales professionals to earn a portion
of money from each sale they make.
4. Fair wage: It considers factors like cost of living in a particular area and typical wages for a job position.
Fair wages usually act as a midway point for minimum wage and living wage.
5. Overtime wages: Employees receive overtime wages for any work they complete that exceeds 48 hours
per week. Overtime pays are typically one and half percent of actual payment in BD.
6. Severance pay: For example, an employee who worked for a company for three years would likely get
three weeks of severance pay to help their transition.
7. Prevailing wage: Prevailing wage is a type of wage employers typically used in government contracting
between government agencies and outside businesses. For ex. Civil engineer, Urban planner, Mechanic,
get this.
8. Living wage: Living wage refers to the least amount of money an employer can offer to an employee.
Waiter, Receptionist, get this.
9. Minimum wage: Minimum wage refers to a set hourly rate decided upon by the U.S. Department of
Labor. This figure varies depending on the state an individual works in. Here are some examples of jobs
that offer minimum wage:
10. Bonuses Pay: refer to cash compensation an employer provides to an employee for producing good
work.

❖ Criteria for Wage Fixation

1. The organizational ability to pay
2. Supply and demand of labor
3. The prevailing wage rates
4. The cost of living
5. Productivity
6. Trade union bargaining power
7. Job requirement
8. Level of skills available in the market.

❖ Salary Vs Wages
Basis Salary Wages
1. Meaning Salary refers to a fixed regular payment, Wages refers to money paid on
typically paid on a monthly basis an hourly, daily, or a weekly basis
2. Skills Skilled Personnel Semi-skilled or unskilled
3. Type of cost Fixed Variable
4. Rate of Payment Fixed rate Variable rate
5. Payment cycle Monthly Daily or weekly
6. Basis of payment Performance Basis Hourly Basis
7. Paid to whom Employees Labor
8. Nature of work Administrative-Office work Manufacturing-Process work

❖ Theory of wages
1. Wages Fund Theory: This theory was developed by Adam Smith (1723-1790). His theory was based on
the basic assumption that workers are paid wages out of a pre-determined fund of wealth. This fund, he
called, wages fund created as a result of savings. According to him, the demand for labor and rate of
wages depend on the size of the wages fund. Accordingly, if the wages fund is large, wages would be
high and vice versa.
2. Subsistence Theory: was propounded by David Recardo (1772-1823). Acc. to him “The laborers are paid
to enable them to subsist and perpetuate the race without increase or diminution”. This payment is also
called as ‘subsistence wages’. The basic assumption is that if workers are paid wages more than
 subsistence level, workers’ number will increase and, as a result wages will come down to the subsistence
level.
3. The Surplus Value Theory of Wages: was developed by Karl Marx (1849-1883). This theory is based on
the basic assumption that like other article, labour is also an article which could be purchased on
payment of its price i.e wages. This payment, according to Karl Marx, is at subsistence level which is less
than in proportion to time labour takes to produce items. The surplus, according to him, goes to the
owner. Karl Marx is well known for his advocation in the favour of labour.
4. Marginal Productivity Theory: was propounded by Phillips Henry Wick-steed (England) and John Bates
Clark of U.S.A. According to this theory, wages is determined based on the production contributed by
the last worker, i.e. marginal worker. His/her production is called ‘marginal production’.
5. The Bargaining Theory of Wages:John Davidson was the propounder of this theory. According to this
theory, the fixation of wages depends on the bargaining power of workers/trade unions and of
employers. If workers are stronger in bargaining process, then wages tends to be high. In case, employer
plays a stronger role, then wages tends to be low.
6. Behavioural Theories of Wages: Based on research studies and action programs conducted, some
behavioural scientists have also developed theories of wages. Their theories are based on elements like
employee’s acceptance to a wage level, the prevalent internal wage structure, employee’s consideration
on money or’ wages and salaries as motivators.

❖ What is compensation philosophy?

A compensation philosophy is simply a formal statement documenting the company's position about
employee compensation.
❖ Why does need your organization a compensation philosophy?
1. Attract talent
2. Retaining employees
3. Ensuring equal pay
4. A positive employees’ experience

❖ Different types of compensation philosophy.

Generally speaking, there are four basic compensation philosophies: market pay, equal pay, flexible pay or
tailored pay. Each approach has its pros and cons.
Market Pay: With a philosophy of market pay, compensation is determined by breaking down jobs into
various elements that are graded in terms of value. Compensation is generally based on the difficulty of the
job as well as the background and experience necessary to function in the position.
Equal Pay: Some family businesses believe in equal pay for all. All jobs held by family owners get the same
amount of pay, regardless of position or complexity (sometimes pay is adjusted for longevity).
Flexible Pay: This philosophy relates to compensation determined by a board or individual based on a variety
of factors. Many family business owners tend to favor this method because of the flexibility and authority it
offers the senior manager or board.
Tailored Pay: Some companies have combined various factors in determining compensation. To
accommodate the desire to support all family members of the coming generation, a base dividend or related
compensation is set at a level that enhances the standard of living and can be distributed consistently year
to year.