Module III: Compensation Management

Factors affecting compensation; Wage policy & Wage boards; Job evaluation & work
measurement; Grade Fixation & ranking; relating wages with price index: Perquisites; Incentive
plans; Bonus & profit sharing.

Factors affecting compensation

1. Years of experience and education level

It probably goes without saying, but the more experience and education candidates have, the
higher their expected compensation. So, if you’re hoping to attract job seekers with master’s
degrees or more than five years of experience, you need to be ready and willing to compensate
accordingly.

2. Industry
Workers with similar or even the same job title can expect vastly different wages depending on
their industry. There are many reasons for this discrepancy – in some cases, their job function
may be critical to a particular sector, or it may simply be a matter of one industry being
considerably more significant than the others.

3. Location
Cost of living, a significant factor to consider when determining compensation, is mainly
dependent on location and, more specifically, the cost of housing. This is partially why salaries in
large urban areas are generally higher than salaries for similar positions in more rural locations.
However, with the surge in remote work, many employers have shifted to role-based
compensation rather than location-based.
4. In-demand skill sets
When determining compensation, essential skills may be an even more reliable metric to
compare against than job title. After all, different companies may have very different definitions
of the same job title. On top of that, many skill sets can apply to various roles – all of which are
effectively competing for the same talent. That’s why employers need to consider the value of
critical skills when determining compensation.

5. Supply and demand

It’s crucial to be aware of the availability of relevant talent in the geographic region where you’re
recruiting. If you’re recruiting in an area where the demand for specific skill sets and experience
outweighs the supply, you should expect to pay more to attract talent.

The compensation awarded to the employee depends on the volume of effort exerted, the nature
of the job, and his skill. Besides, there are several other internal and external factors affecting the
compensation.
I. External Determinants of Compensation:

1. Labour Market Conditions:

Undoubtedly, the forces of demand and supply of human resources play a role in compensation
decisions. Employees with rare skill sets and expertise gained through experience command
higher wages and salaries than those with ordinary skills available in the job market. But the
higher supply of human resources for specific jobs may not lead to a reduction of wages beyond
a floor level due to the Government’s prescription of minimum wage levels and employee
unions’ bargaining strength.
Similarly, this factor alone does not result in lower pay if the vast majority of available resources
are unemployable due to poor skill and inferior talent. Thus, it is clear that the law of demand
and supply applies to the labor market only to a limited extent.

2. Economic Conditions:

Organizations with state-of-the-art technology, excellent productivity records, higher operational

efficiency, a pool of skilled human resources, etc., can be better paymasters. Thus, compensation
is the consequence of the level of competitiveness .prevailing in a given industry.
3. Prevailing Wage Level:

Most organizations fix their pay in keeping with the level for similar jobs in the industry. They
frequently conduct wage surveys and seek to keep their wage level for different jobs. If a
particular firm keeps its pay level higher than those of others in the industry, its employee cost
becomes heavier, which may escalate the end cost of the products. This will affect the
competitiveness of the firm. On the other hand, if a firm keeps its pay level lower than the
prevailing rates, it may not recruit skilled and competent human resources.

4. Government Control:

Government through various legislative enactments such as Minimum Wages Act, 1948,
Payment of Wage Act, 1936, Equal Remuneration Act, 1976, Payment of Bonus Act, 1965,
dealing with Provident Funds, Gratuity, Companies Act, etc., have a bearing on compensation
decisions. Therefore, firms have to decide on salaries and wages in the light of the relevant Acts.

5. Cost of Living:

Increasing the cost of living raises the price of goods and services. It varies from area to area
within a country and from country to country. The changes in compensation are based on the
consumer price index, which measures the average change in the price of necessities like food,
clothing, fuel, medical service, etc., over time—allowances like Dearness Allowance. City
compensatory allowances are paid to meet the increasing cost of living and parity among
employees posted in different geographies.

6. Union’s Influence:

The collective bargaining strength of the trade unions also influences the wage levels. Trade
unions enjoy an upper hand in specific industries like banking, insurance, transport, and other
public utilities. Therefore, wage structure in such sectors and such Union-active regions, salary,
and wages need to be fixed and revised in consultation with the unions to ensure smooth
industrial relations.

7. Globalization:

It has ushered in an era of higher compensation levels in many sectors of the economy. The entry
of multinational and big corporations has triggered a massive change in the compensation
structure of companies across industries. There is a salary boom in sectors like information
technology, hospitality, biotechnology, electronics, financial services, etc.

8. Cross Sector Mobility:

Contemporary companies find it difficult to benchmark the salaries of their staff with others in
the industry, thanks to the mobility of talent across the sectors. For example, hospitality sector
employees are hired by airlines, BPOs, healthcare companies, and telecom companies.

II. Internal Determinants of Compensation:

1. Compensation Policy of the Organization:

A firm’s policy regarding pay, i.e., attitude to be an industry leader in pay or desire to pay the
market rate, determines its pay structure. The former can attract better talent and achieve lower
costs per unit of labor than the ones that pay competitive pay.

2. Employer’s Affordability:

Those organizations which earn high profits and have a larger market share, large business
conglomerates, and multinational companies can afford to pay higher pay than others. Besides, a
company’s ability to pay higher pay is impaired by sector-specific economic recession and acute
competition.

3. Worth of a Job:
Organizations base their pay level on the worth of a job. The wages and salaries tend to be higher
for jobs involving brain power, responsibility-laden jobs, creativity-oriented jobs, and technical
jobs.

4. Employee’s Worth:

In some organizations, time rates are granted to all employees, irrespective of performance. In
such cases, employees are rewarded for their physical presence on the job rather than for their
performance. However, many private sector organizations follow a performance-linked pay
system. They conduct performance appraisal more often than not, which provides input for
determining pay levels. It distinguishes the high-performer from the low-performer and the
non-performer.

5. Ability to Pay:
The level of compensation being paid to the em­ployees depends to a large extent on the paying
ability of the organization. If the organization is prominent and prosperous, its employees expect
a better salary and better perks and facilities from the management.

Wage Policy

The term “Wage Policy” refers to the legislation or government action undertaken to regulate the
level or structure of wages or achieve specific objectives of social and economic policy. The
social and economic aspects of wage policy are typically interrelated measures inspired by
special considerations; inevitably, economic effects and actions designed to achieve specific
financial results have social implications. Principles that act as guidelines to determine a wage
structure are called wage policies.

1. Minimum Wages:
It may be defined as a wage that is just sufficient for the worker to keep his body and soul
together. The Fair Wages Committee considered that “a minimum wage must provide not merely
for the bare subsistence of life but the preservation of efficiency of the worker. For this purpose,
the minimum wage must also provide education, medical requirements, and amenities”.
The objectives of a minimum wage are as follows:
1. To prevent workers from sweating in organized or unorganized industries.
2. To prevent workers' exploitation and enable them to obtain wages according to their
productive capacity.
3. To maintain industrial peace.

2. Fair Wages
The encyclopedia of Social Science describes a fair wage as “one equal to that received by
workers performing work of equal skill. Difficulty or unpleasantness”.
According to Pigou, there are two degrees of fairness in deciding fair wages. In a narrow sense.
Trade and in the neighborhood for similar work. In a broader sense, a wage is fair if it is equal to
the prevailing rate for similar work throughout the country and in the generality of trades.
3. Living Wages:
The living wage is a step higher than the fair wage. It may be defined as the wage that would
enable the worker to provide a measure of comfort for himself and his family, in addition to the
essentials of life. The concept of a living wage was first defined by Justice Higgins of the
Australian Commonwealth Court of Conciliation in 1907. He explained the living wage as “one
appropriate for the normal needs of the average employee regarded as a human being living in a
civilized community. He further pointed out that a living wage should be sufficient not merely to
provide bare necessities of life but also a condition of frugal comfort estimated by current human
standards.”
The committee on Fair Wages laid down that 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 a measure of frugal comfort. The items included in the frugal comfort are the provision of
education to the children. Protection against ill- health, requirements of essential social needs,
and a measure of insurance against the more critical misfortunes like old age.
Thus, from the above discussion, it is clear that a living wage is a wage –
(1) which should provide absolute essential needs like food, clothing, and shelter,
(2) which should be sufficient for the worker and his family to live in frugal comfort;
(3) which should provide insurance against future risks, and
(4) which should be according to the unique skill of the worker.

Wage Boards
The Government sets up wage boards, but in the selection of members of wages boards, the
government cannot appoint members arbitrarily. Members of wage boards can be established
only with the consent of employers and employees. The representatives of employers on the
wage boards are the nominees of employers’ organizations, and the workers’ representatives are
the nominees of the industry-concerned national center of trade unions. As a rule, wage boards
are tripartite, representing the interests of labor, Management, and the Public.
The main objectives of wage boards are;
1. To work out wage structure based on the principles of fair wages formulated by the
Committee on Fair Wages.
2. To work out a system of payment by results.
3. To evolve a wage structure based on the requirements of social justice.
4. To evolve a wage structure based on the need for adjusting wage differentials to
incentivize workers to advance their skills.

Job evaluation

is the systematic process of determining the relative value of different organizational jobs. The
goal of job evaluation is to compare jobs with each other to create a pay structure that is fair,
equitable, and consistent for everyone. This ensures that everyone is paid their worth and that
different jobs have different entry and performance requirements.
Job evaluations are developed by HR, often together with workers' unions and other social
partners. The advantage of job evaluation is that it does not consider the job holder's qualities.
According to a report on this topic by the European Commission, the relative worth of a job is
assessed irrespective of the qualities of the specific job holder.
 Evaluation Description
method

Ranking Jobs are paired, and the most impactful job is chosen for each pair. This
method/ Paired results in a forced ranking of different jobs based on their seniority. This
comparison approach is only recommended for smaller organizations with fewer than 100
jobs.

Job Jobs are ranked based on a pre-determined grade comparison. An example

classification classification is a CEO, vice president, director, manager, and operator. This
is a pre-determined ranking that many US-based organizations use. Grades
are created among job families (e.g., marketing, HR, sales). For more
information, see our full article on job classification.

Factor-comparis Jobs are ranked on a series of factors: knowledge & skills, communication &
on method contacts, decision making, impact, people management, freedom to act,
working environment and responsibility for financial resources. Each factor is
assigned points, and the total number of points indicates the job’s ranking

Point-factor Jobs are assessed on required know-how, problem-solving abilities, and

method accountability. Each factor is assigned points, and the total number indicates
the job’s ranking.

Market pricing Assessing rates of pay by reference to market rates for comparable jobs
leads to pricing the job based on what it is worth. It does not consider internal
equity nor the fact that the internal value of a job may differ from its market
value. Market pricing can perpetuate marketplace inequalities, defeating the
purpose of job evaluation.

Work Measurement
Work measurement is concerned with determining the time required to perform a unit of work.
Work measurement is essential for promoting the productivity of an organization. It enables
management to compare alternate methods and also to do initial staffing. Work measurement
provides the basis for proper planning.

Since it is concerned with measuring time, it is also called ‘Time Study. A detailed examination
of time is essential for correct pricing. To find the correct manufacturing time for a product. To
give competitive quotations, estimation of accurate labor cost is very essential. It becomes a
basis for wage and salary administration and devising incentive schemes.

British Standard Institution has defined work measurement as “The application of techniques
designed to establish the time for a qualified worker to carry out a specified job at a defined level
of performance.” This time is called standard or allowed time. Time study may also be defined as
“the art of observing and recording the time required to do each detailed element of an industrial
operation.”

Objectives of Work Measurement:

1. To compare the performance times by alternative methods.

2. To enable a realistic schedule of work to be prepared.

3. To arrive at a realistic and fair incentive scheme.

4. To analyze the activities for doing a job to reduce or eliminate unnecessary jobs.

5. To minimize human effort.

6. To assist the labor organization by comparing the actual time daily with the target time.

Uses of Work Measurement:

1. Wok measurement is used to plan work and draw out schedules.

2. Wok measurement is used to determine standard costs.

3. Wok measurement is used as an aid in preparing budgets.

4. It is used in balancing production lines for new products.

5. Wok measurement is used in determining machine effectiveness.

6. To determine time standards to be used as a basis for labor cost control.

7. To establish supervisory objectives and to provide a basis for measuring supervisory

efficiency.

8. To determine time standards to provide a basis for wage incentive plans.

Ranking Method:
The ranking method is the simplest form of job evaluation. In this method, each job is compared
with others, and this comparison continues until all the jobs have been evaluated and ranked. All
jobs are ranked in the order of their importance from the simplest to the hardest or from the
highest to the lowest.

The importance of the order of the job is judged in terms of duties, responsibilities, and demands
on the job holder. The jobs are ranked according to “the whole job” rather than several
compensable factors.
The application of the Ranking Method involves the following procedure
1. Analyze and describe jobs, bringing out those aspects to be used for job comparison.
2. Identify bench-mark jobs (10 to 20 jobs, which include all central departments and functions).
The jobs may be the most and least meaningful jobs, a job midway between the two extremes,
and others at the higher or lower intermediate points.
3. Rank all jobs in the organization around the benchmark jobs until all jobs are placed in their
rank order of importance.
4. Finally, divide all the ranked jobs into appropriate groups or classifications by considering the
standard features of jobs, such as similar duties, skills, or training requirements. All the jobs
within a particular group or classification receive the same wage or range of rates.

The ranking method is appropriate for small-size organizations where jobs are simple and few. It
is also suitable for evaluating managerial jobs wherein job contents cannot be measured in
quantitative terms. A simple ranking method can be used in the initial stages of job evaluation.

Merits

1. It is the simplest method.

2. It is pretty economical to put it into effect.
3. It is less time-consuming and involves little paperwork.

Demerits
1. The main demerit of the ranking method is that there are no definite standards of judgment and
no way of measuring the differences between jobs.
2. It suffers from its sheer unmanageability when there are many jobs.
Grading Method:
The grading method is also known as the ‘classification method.’ This job evaluation method
was made famous by the U.S. Civil Service Commission. Under this method, job grades or
classes are established by an authorized body or committee appointed for this purpose. A job
grade is defined as a group of different jobs of similar difficulty or requiring similar skills to
perform them. Job grades are determined based on information derived from job analysis.
The grades or classes are created by identifying some common denominator, such as skills,
knowledge, and responsibilities. The example of job grades may include, depending on the type
of jobs the organization offers, skilled, unskilled, account clerk, clerk-cum-typist, steno typist,
office superintendent, laboratory assistant, and so on.
Once the grades are established, each job is placed into its appropriate grade or class, depending
on how well its characteristics fit in a grade. In this way, a series of job grades are created. Then,
a different wage/salary rate is fixed for each grade.

Merits:
1. This method is easy to understand and operate.
2. It is economical and, therefore, suitable for small organizations.
3. Classifying jobs into classifications makes pay determination problems easy to administer.
4. This method is helpful for Government jobs.

Demerits:
1. The method suffers from the personal bias of the committee members.
2. It cannot deal with complex jobs which will not fit neatly into one grade.
3. This method is rarely used in industry.

Wage Price Indexes

The WPI is a critical economic indicator used by various organizations and individuals in
industrial relations forums, developing wages policy and financial analysis. WPI is the primary
measure of inflationary pressure on wages and salaries and is one of the preferred information
sources when assessing monetary policy.
Perquisites (Perks)

Perquisites are a benefit that the employees are entitled to because of the job or position they
hold in the company. They can be in cash or kind—for instance, a car given by the company’s
side, rent-free accommodation, etc. An employee can also exchange wages for some other
benefit. It is known as ‘salary exchange’ and ‘salary packaging.’ Perquisites do not include the
reimbursement of expenses incurred for office work.

Perks are non-monetary benefits given to employees in addition to wages, salaries, and
health/retirement benefits. Unlike wages, salaries, and health/retirement benefits, it is often
considered to be nice extras. That said, it can reduce employee turnover and attract top talent to
your organization.

Perks Meaning
Perks are anything that the company offers employees apart from money or the salary they earn.
They can be taxable or non-taxable, depending on the perk type. For instance, Travelling abroad
at the company’s expense and even the little winter workplace perks like work from home, hot
beverages in the office, and free lunches that aren’t included in CTC. Perks help a company in
bettering its R&R strategies.

Perquisites types
As mentioned earlier, some perquisites are taxable, and some aren’t. So, perquisites can be
categorized basis of tax levied on them in the following types: Rent-free accommodation,
professional tax of employee, medical expense reimbursement, the salary of a servant at the
employee’s residence, gas, water, and electricity supply are examples of taxable perquisites.
Moreover, gifts above 5k, gym facilities, and more are taxable.
Exempted Perquisites Examples
Travel allowance, refreshments, assets provided by the company like a laptop, use of sports club,
Interest-free loan provided by the employer, contribution to PF, recreational activities, and more
are all a part of fringe benefits that come under exempted perquisites.
Perquisites taxable from employees
This prerequisite type covers companies cars the employee is using, the education funded by the
company for their children, etc.

Benefits of offering perks:

Offering perquisites to employees can be a great way to motivate them, which will help your
business stay productive.
Furthermore, it can attract top talent in the form of recruits.

Turnover reduction: If you have high turnover rates, reducing them will be beneficial. Offering
it such as professional development opportunities helps retain employees and make your
company more competitive. Without these, you may find that your employees are drawn to
companies that offer them.
Hire the best talents: It can be a significant factor in attracting new employees. If the salaries
and benefits are comparable across multiple companies in the industry, it is often the factor that
will make a prospective employee decide where to work. If your company offers more
perquisites that applicants want, then your company will be able to attract more of the top talent
available.
Increasing productivity: A company can increase productivity by offering the right perks. It
can positively affect employees’ health and reduce stress. Many perquisites are designed to
increase productivity. Morale improves, and the effect is even greater because employees feel
valued.

Incentive,
The primary purpose of incentives is to tie employees’ rewards closely to their achievements.
This tie is done by providing more compensation for better performance. The individual will
generally strive for additional tips by higher production, and their performance depends upon
increased efforts. Some people may prefer some extra time off rather than more money.
An incentive provides additional compensation for those employees who perform well. It
attempts to tie other compensation as directly as possible to employee productivity.
Further incentives are monetary benefits paid to workers for their outstanding performance. They
are defined as “variable rewards granted according to variations in the achievement of specific
results.”
The international labor office refers to incentives as payment by results. But it is appropriate to
call them Incentive systems of price’. ‘Emphasizing the motivation, i.e., the imparting incentives
to workers for higher production and productivity.
Importance
1. The primary advantage of incentive is the inducement and encouragement of workers for
higher efficiency and greater output,
2. Fixed remuneration removes the fear of insecurity in the minds of employ­ees (as an incentive
as a part of total remuneration)
3. The earnings of employees would be enhanced due to incentives.
4. Reduction in the total and unit cost of production through incentives (because of higher
productivity)
5. Production capacity is also likely to increase.
6. Incentive payments reduce supervision, better utilization of equipment, reduce scrap, reduce
loss time, and reduce absenteeism and turnover.

Incentives for Employees:

The following are the different incentives for employees that the company can use:
a. Financial Incentives:
(i) Pay and allowances
(ii) Productivity linked wage incentive
(iii) Bonus
(iv) Co-partnership/stock option
(v) Retirement benefits
(vi) Perquisites
b. Non-Financial Incentives:
The various non-financial incentives are:
(i) Employee recognition programs,
(ii) Employee empowerment,
(iii) Job security,
(iv) Status,
(v) Employee participation,
(vi) Organisational climate

Incentives for Agents:

The following are the different incentives for agents which the company can use:
a. Financial Incentives:
The various financial incentives are:
(i) Commission
(ii) Profit sharing

b. Non-Financial Incentives:
The various non-financial incentives are:
(i) Recognition programs like certificates of merit etc.,
(ii) Organisational climate,
(iii) Job enrichment,
(iv) Career advancement opportunity

Incentives – Classification of Incentive Plans

Incentives can be short-term and long-term, which can be tied up with the performance of an
individual employee or a group/unit’s productivity. Performance through incentives may be
defined as cost saving, quantity produced, standards met or quality improved, revenue generated,
return on investment, or increased profit. This means that there are endless possibilities.
1. Long-Term Incentives:
Long-term incentives are focused on an employee’s efforts on multi-layered results, such as
innovations, strategic suggestions to increase the return on investments, and increasing the
market share or multi-layered contributions to developing the organization’s competitiveness.
These could be indirect financial support to tax payee employees, social security plans, pension
plans, stock ownership, etc.

2. Short-Term Incentives:
They are in addition to the basic pay provided within the current operating year, which could be
supplemented to pay cheques or a different amount on a monthly, half-yearly or yearly basis.
This added income relates to the employee’s achievement or exceptional performance to benefit
the organization, such as 100% attendance, overtime, reduction in cost, suggestion for
improvement, long-term association with the organization, etc.

Bonus

A bonus is a financial compensation that is above and beyond the regular payment expectations
of its recipient. Companies may award bonuses to both entry-level employees and senior-level
executives. While bonuses are traditionally given to exceptional workers, employers sometimes
dole out bonuses company-wide to stave off jealousy among staffers.

Bonuses may be dangled as incentives to prospective employees, and they can be given to
current employees to reward performance and increase employee retention. Companies can
distribute bonuses to their existing shareholders through a bonus issue, which offers free
additional shares of the company's stock.
● A bonus is a financial compensation that is above and beyond the regular payment
expectations of its recipient.
● A company may award bonuses as an incentive or to reward good performance.
● Typical incentive bonuses a company can give employees include signing, referral, and
retention bonuses.
 ● Companies have various ways they can award employee bonuses, including cash, stock,
and stock options.

Incentive Bonuses
Incentive bonuses include signing bonuses, referral bonuses, and retention bonuses. A signing
bonus is a monetary offer that companies extend to top-talent candidates to entice them to accept
a position—especially if they are being aggressively pursued by rival firms. In theory, paying an
initial bonus payment will result in greater company profits down the line. Signing bonuses are
routinely offered by professional sports teams attempting to lure top-tier athletes away from
competitive clubs.

Performance Bonuses
Performance bonuses reward employees for exceptional work. They are customarily offered after
the completion of projects or at the end of fiscal quarters or years. Performance bonuses may be
doled out to individuals, teams, departments, or the company-wide staff. A reward bonus may be
either a one-time offer or a periodic payment. While reward bonuses are usually given in cash,
they sometimes take the form of stock compensation, gift cards, time off, holiday turkeys, or
simple verbal expressions of appreciation.

Profit sharing

It is a system by which employees are paid a share of the net profits of the company that employs
them by a written formula defined in advance. Such payments, which may vary according to
salary or wage, are distinct from and additional to regular earnings.
What Is a Profit-Sharing Plan?
A profit-sharing plan is a retirement plan that gives employees a share in a company's profits.
Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an employee
receives a percentage of a company’s profits based on its quarterly or annual earnings. This is an
excellent way for a business to give its employees a sense of ownership in the company. Still,
there are typically restrictions on when and how a person can withdraw these funds without
penalties.
Profit sharing is various incentive plans introduced by businesses that provide direct or indirect
payments to employees that depend on the company's profitability in addition to employees'
regular salary and bonuses. In publicly traded companies, these plans typically amount to the
allocation of shares to employees.
Profit sharing is a pre-tax contribution plan for employees that gives workers a certain amount of
a company’s profits. The profit-sharing payments depend on the:

● Business’s profitability
● Employee’s regular wages and bonuses
● Amount set by the business