Compensation                                                                                   

Employee compensation is a vital part of human resource management. Wages, salaries and other forms of employee compensation constitute a very large component of operating costs. "One of the biggest factors affecting industrial relations is the salary or wage the compensation an employee receives for a fair day's work." Majority of union management disputes relate to remuneration. No organisation can expect to attract and retain qualified and motivated employees unless it pays them fair compensation. Employee compensation, therefore, influences vitally the growth and profitability of the company. For employees, pay is more than a means of satisfying their physical needs. It provides them a sense of recognition and determines their social status. Remuneration is directly or indirectly one of the mainsprings of motivation in our society. Wages and salaries have significant influence on distribution of income, consumption, savings employment and prices. This is all the more significant in an under-developed country like India suffering from problems of concentration of income, inflation and unemployment. Thus, employee compensation is a very significant issue from the view-point of employers, employees and the nation as a whole.

Compensation Management

Administration of employee compensation is called compensation management or wage and salary administration. It involves formulation and implementation of policies and programmes relating to wages, salaries and other forms of employee compensation. It includes job evaluation, wage/salary survey, development and maintenance of wage structure rules for administration of wages, profit sharing and other incentives and control of payroll costs. The basic purpose of wage and salary administration is to establish and maintain an equitable wage and salary structure and an equitable labor cost structure.

Compensation management is a complex, non-transactional process which includes decisions regarding benefits and variable pay.

An employee's total compensation consists of four components. The relative proportion of each component in the total compensation varies from firm to firm.

The first and generally the largest component is base compensation which means the fixed pay an employee receives on a regular basis, either in the form of a salary or as wage. The second component is allowances such as house rent allowance (HRA), dearness allowance (DA) and city compensatory allowance (CCA). The third component is incentive pay designed to reward employees for good performance, e.g., performance-linked bonus, share in profit, etc. The fourth component consists of benefits or indirect compensation or perquisites such as company accommodation, company car, paid holiday, club membership, stock options, and so on.

Compensation constitutes the single most important cost in most organisations. Therefore, the effectiveness with which compensation is designed and managed can provide a competitive edge. Compensation is equally important for the employee as it determines his or her standard of living and status in society. In other words, compensation affects a person economically, socially and psychologically.

Objectives of Wage and Salary Administration

A sound wage and salary administration seeks to achieve the following objectives:

• To Establish a Fair and Equitable Remuneration. There should be internal and external equity in remuneration paid to employees. Internal equity means similar pay for similar work. In other words, wage differentials between jobs should be in proportion of differences in the worth of jobs. External equity implies pay for a job should be equal to pay for a similar job in other organisations. Payments based on jobs requirements, employee performance and industry levels minimize favoritism and inequities in pay.

• To Attract Competent Personnel. A sound wage and salary administration helps to attract qualified and hard-working people by ensuring an adequate payment for all jobs.

• To Retain the Present Employees. By paying competitive levels, the company can retain its personnel. It can minimize the incidence of quitting and increase employee loyalty.

• To Improve Productivity. Sound wage and salary administration helps to improve the motivation and morale of employees which in turn lead to higher productivity.

• To Control Costs. Through sound wage and salary administration labor and administrative costs can be kept in line with the ability of the company to pay. It facilitates administration and control of pay roll. The company can systematically plan (payroll budgeting) and control labor costs.

• To Establish Job Sequences and Lines of Promotion wherever Applicable.

• To Improve Union Management Relations. Wages and salaries based on systematic analysis of jobs and prevailing pay levels are more acceptable to trade unions. Therefore, sound wage and salary administration simplifies collective bargaining and negotiations over pay. It reduces grievances arising out of wage inequities.

• To Improve Public Image of the Company. Wage and salary programme also seeks to project the image of a progressive employer and to comply with legal requirements relating to wages and salaries.

Factors Affecting Compensation

The main factors influencing wage or salary levels are as follows:

1. Demand for and Supply of Labor

Wage or salary is the price for the services rendered by a worker. Forces of demand and supply of labor determine the going wage-rate. When there is no dearth of labor (as in India) wages tend to be low. On the other hand, executive salaries have increased in India after liberalization, due to rise in demand for professionally trained managers.

2. Ability to Pay

An organization’s ability to pay its employees is an important determinant of wage level. Ability to pay depends upon the profit earning capacity of the enterprise. Multinational corporations pay relatively higher salaries due to their higher paying capacity.

3. Labor Unions

Well-organized trade unions exert pressure for higher wages and allowances. This pressure is exercised through collective bargaining, strikes and other methods. Salary levels in commercial banks are relatively high due to higher bargaining power of bank unions.

4. Cost of Living

Due to inflation, the real wages decline affecting the purchasing power of workers. Therefore, dearness allowance is given according to changes in consumer price index. Labor agreements generally have a clause providing for automatic increase in pay as cost of living rises.

5. Prevailing Wage Rates

While fixing wages, prevailing wages in the particular industry/region are taken into account. This is necessary to retain and attract qualified workers.

6. Job Requirements

Basic wages depend largely on the difficulty level and physical and mental effort required in a particular job. The relative worth of a job can be estimated through job evaluation.

7. Productivity

There is an increasing trend towards linking wage increases to gains in productivity or performance of workers. In some concerns annual increment in wages is based on merit. While in other companies pay increases every year without any relation to the performance of a worker.

8. State Regulation

Wage policy and laws of the Government exercise a significant influence on wage levels. Government has enacted laws to protect the interests of the working class. No organisation can violate laws relating to minimum wages, payment of bonus, dearness allowance and other allowances, equal pay for equal work, etc.

The factors given before exert a general influence on wage rates. In addition some factors influence the individual differences in wages rates. These specific factors are as follows:

• Worker's age and potential

• Work experience

• Educational qualifications

• Promotion possibilities

• Hazards involved in the job

• Stability of employment

• Demand for the product

• Industry's role in the economy

All the factors given above account for wage differentials between industries/ regions and occupations.

Minimum, Fair and Living Wage

1. Minimum Wage

Minimum wage is that wage which is sufficient to cover the bare physical needs of a worker and his family. The minimum wage should provide not merely for the base subsistence or sustenance of life but for the preservation of the health, efficiency and well-being of the worker by providing some measure of education, medical facilities and other amenities. Minimum wage has got to be paid to every worker irrespective of the capacity of the industry to pay. If an enterprise is unable to pay its workers at least a bare minimum, it has no right to exist.

2. Fair Wage

A fair wage is something more than the minimum wage providing the bare necessities of life. While the lower limit of the fair wage is set by the minimum wage, the upper limit should be the capacity of the industry to pay. Between these two limits, fair wage should depend on several factors like:

• The productivity of labor

• The prevailing rates of wages in the same or similar occupations in the same region or neighboring regions

• Level of national income and its distribution

• The place of the industry in the economy of the country, and

• The employer's capacity to pay.

Thus, the fair wage should be determined on industry-cum-region basis. Fair wage is a step toward the ideal of living wage. The objective should be not merely to determine wages which are fair in abstract but also to ensure that employment and efficiency of the industry is maintained and if possible increased.

3. Living Wage

It is the wage that provides, in addition to the necessities of life, certain amenities considered necessary for the well-being of the worker in a particular society. It should ensure a normal standard of life to the average employee regarded as human beings living in a civilized community. According to the Fair Wages 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 comfort including education for children, protection against ill-health, requirements of essential social needs and measure of insurance against the more important misfortunes including old age."

The concept of living wage is dynamic related with the level of economic development in a country. There should be progressive improvement in the wage with improvements in the economic life of the nation. In an underdeveloped country like India, living wage is the ideal or target that is to be achieved through higher productivity.