HRM-UNIT 4- COMPENSATION

Compensation management is a critical facet of human resource management that encompasses the
systematic structuring and administration of the rewards provided to employees in return for their work
contributions. The practice of compensation management holds paramount importance in enhancing
organizational efficiency and fostering a positive work environment. In this article, we will discuss the
meaning of compensation management, its objective, importance and type of compensation.

Human resources plays an important role in an organisation. Their efforts are needed to be rewarded.
Compensation is the motivating force that is the consideration paid by the employer in return for the
efforts made by the employees. This not only includes monetary rewards and non-monetary aspects
too.

Compensation management is the systematic and strategic design and implementation of a total
compensation package. This package includes monetary remuneration as well as non-monetary benefits
with the primary objective of providing equitable value to employees for their work performance. It
encompasses the careful alignment of compensation strategies with organizational goals, ensuring that
employees are adequately rewarded, motivated, and retained.

Objectives of Compensation

The objectives of compensation management can be summarized as follows:

Recruitment and Retention: Attracting and retaining qualified employees who contribute to the
organization’s success.

Morale Enhancement: Boosting employee morale to foster a positive work culture and enhance job
satisfaction.

Determining Basic Wage and Salary: Establishing fair and competitive wage and salary structures based
on job roles and market standards.

Rewarding Job Performance: Recognizing and incentivizing high-performing employees to motivate

continued excellence.

Importance of Compensation Management

Compensation management is integral to human resource management and plays a pivotal role in
motivating employees and improving organizational effectiveness. Its significance lies in its effectiveness
in:

Attracting and Retaining Talent: Offering competitive compensation packages to attract top talent and
keep them engaged within the organization.

Motivating Talent for Better Performance: Linking compensation to performance to encourage

employees to consistently achieve their best.

Cost Effectiveness: Ensuring that compensation practices align with the organization’s financial capacity
while providing value to employees.
Key factors affecting compensation management

 Productivity of workers– Productivity-based compensation helps derive the best results. The
higher the productivity of employees, the more should be the compensation.

 Ability to pay– If your company has high profitability, you can pay better compensation
and retain your employees and vice versa.

 Government Policies– Government also has certain policies to protect employee interests. The
employer has to pay the employees as per governmental regulations and provide benefits such
as PF, medical insurance, gratuity, and pension.

 Labour Unions– They also play an essential role in ensuring employees get a fair wage.
They fight with the employers for the employee’s rights and wage revision.

 Cost of Living– Cost of living also influences compensation to a large extent. An employee based
in a city with a high cost of living needs a higher salary and vice versa.

 Demand and Supply of Labour– It is one of the most important factors that affect the
compensation of employees. If the demand is more than the supply, the compensation will be
higher.

 Industry Standards– No employee would like to join a company whose compensation is below
the industry standards. Therefore you need to analyse the standard market rates of different
roles and pay your employees accordingly.

Compensation may be defined as money received in the performance of work, plus the many kinds of
benefits and services that organizations provide to their employees. ‘Money’ is included under direct
compensation (popularly known as wages, i.e., gross pay); while benefits come under indirect
compensation, and may consist of accident and health insurance, the employer’s contribution to
retirement, pay for vacation or illness, and employer’s required payments for employee welfare as social
security. A ‘wage’ (or pay) is the remuneration paid, for the service of labour in production, periodically
to an employee/worker. “Wages” usually refer to the hourly rate or daily rate paid to such groups as
production and maintenance employees (“blue-collar workers”).

Indian Labour Organisation (ILO) defined the term wage as “the remuneration paid by the employer for
the service of hourly, daily, weekly and fortnightly employees”.

‘Salary’ normally refers to the weekly or monthly rates paid to clerical, administrative and professional
employees (“white-collar workers”).Earnings are the total amount of remuneration received by an
employee during a given period. This includes salary, dearness allowance, house rent allowance, city
compensation allowance, other allowance, overtime payments, etc.

Wage and salary administration is defined as the process by which wage and salary levels and structures
are determined in organisational settings. Wages are payments for labour services rendered frequency,
expressed in hourly rates, while a salary is a similar payment, expressed in weekly, monthly or annual
rates.
Thus the term ‘wage’ frequently connote payments in terms of the number of hours worked and may
fluctuate depending upon hours actually worked. The determination of wage rates, administration of
wage policies and satisfying the employees as regards to wages and rates of wages is an important
aspect of wage administration.As a matter of fact wage and salary administration is one of the major
responsibilities of modern manpower management.

Nature:

1. The basic purpose of wage and salary administration is to establish and maintain an equitable
wage and salary structure.

2. It is concerned with the establishment and maintenance of equitable labour cost structure i.e.
an optimal balancing of conflicting personnel interest so that the satisfaction of the employees
and employers is maximised and conflicts are minimised.

3. The wage and salary administration is concerned with the financial aspects of needs, motivation
and rewards.

4. Employees should be paid according to the requirements of their jobs i.e. highly skilled jobs are
paid more compensation than low skilled jobs.

5. To minimise the chances of favouritism.

6. To establish the job sequences and lines of production wherever they are applicable.

7. To increase the employees’ morale and motivation because a wage programme can be
explained and is based upon facts.

Characteristics:

1. Payment of wages is in accordance with the terms of contract between the employer and the
worker.

2. The wages are determined on the basis of time-rate system or piece-rate system.

3. Wages change with the change in the time spent by the labourer.

4. Wages create utility.

5. Wages may be paid weekly, fortnightly, hourly, or on monthly basis.

6. Wage is the reward paid to the workers for the services rendered by them.

7. Wages can be paid in cash or in kind.

8. All kinds of allowances are included in wages.

Incentive in simple terms is something that encourages a person or organization to do or achieve

something. It is something that incites or has a tendency to incite a determination. This is usually given
in cash or in kind.

Participative Management
Participative Management refers to as an open form of management where employees are actively
involved in organization’s decision making process. Participative Management can also be termed as
‘Industrial Democracy’, ‘Co-determination’, ‘Employee Involvement’ as well as ‘Participative Decision
Making’. Toyota is the best example. The company has been following suggestion schemes and
employee involvement procedures for over a decade now. The management receives almost 2,000,000
suggestions and ideas every year and around 95 percent of these are implemented by the company.
Who is not aware of Toyota’s success rate? Around five thousand improvements per year have made
Toyota one of the fastest growing organizations globally. The need is to develop and implement a
comprehensive company policy and everything works well.

British Airways is another great example of participatory management. During economic downsizing,
employees’ suggestions helped them cut annual cost of their operations by 4.5 million pounds.

Employee welfare

Employee welfare means “the efforts to make life worth living for workmen.” According to Todd
“employee welfare means anything done for the comfort and improvement, intellectual or social, of the
employees over and above the wages paid which is not a necessity of the industry.”

Employee welfare is a comprehensive term including various services, facilities and amenities provided
to employees for their betterment. It generally includes those items of welfare that is provided by
statutory provisions or required by the customs of the industry or the expectations of employees from
the contract of service from the employers.

employee welfare agencies

5.1. Central government

The central government has made elaborate provisions for the health, safety and welfare under
Factories Act 1948, and Mines Act 1952. These acts provide for canteens, crèches, rest rooms, shelters
etc.

5.2. State government

Government in different states and Union Territories provide welfare facilities to workers. State
government prescribes rules for the welfare of the workers and ensures compliance with the provisions
under various labor laws.

5.3. Employers

Employers in India in general looked upon welfare work as fruitless and barren though some of them
indeed had done pioneering work.

5.4. Trade unions

In India, trade unions have done little for the welfare of workers. But few sound and strong unions have
been the pioneering in this respect. E.g. The Ahmedabad textiles labor association and the Mazdoor
Sabha, Kanpur.
5.5. Other agencies

Some philanthropic, charitable social service organizations like: – Seva Sadan society, Y.M.C.A. etc. are
contributing towards employee welfare.