Lesson: 25 (Components of Compensation)

The following diagram gives an overview of the components of compensation:

Compensation an overview

External Environment
Internal Environment

Compensation

Financial Non-financial

Direct Indirect The Job The Env.

Direct- Wages, Salaries, Commissions, Bonuses

Indirect- Insurance plans, Social Assistance, Educational Assistance, Paid

Absences

The Job- Interesting Duties, Challenge, Responsibility, opportunity for

recognition, feeling of advancement, achievement opportunity

The Environment- Sound policies, Competent supervision, Congenial

coworkers, Appropriate status symbol, Comfortable working conditions, flexi-
time, Job sharing, Cafeteria compensation

Examples / Situations on different types of Compensation:

1. Nirmal and his wife are full of excitement and anticipation as they leave
their home for a shopping trip. Nirmal recently found a job after
several months of unemployment and the paycheck he received today
will enable them to make a down payment on a much-needed
refrigerator.

2. Sonia’s anxiety over schedule minor surgery was somewhat relieved.

Her supervisor has assured her that 80% of her medical and
hospitalization costs will be covered by her firm’s health insurance
plan.

3. Anup Singh, Executive Director of local YMCA, returns home dead

fixed from job each evening no earlier than 6 O’clock. His salary is
small compared to the salaries of many other local managers who
have similar responsibilities. Yet, Anup is on exceptionally happy
person who believes that his work with youth, civic leaders, & other
members of the community is extremely important & worthwhile.

4. A large manufacturing firm has employed John for eight years.

Although his pay is not what he would like to be, his job in the accounts
payable department enables him to have contact with some of his best
friends. He likes his supervisor & considers that overall working
environment to be great. John would not trade jobs with anyone he
knows.

Wage Policy

Now friends we will discuss about wages and it’s types:

Wage policy deals with remuneration of work rendered by employees in any

organization. Wages are that compensation given to employees done for work in
return. Wages are given to the worker (blue color) who are the shop floor employees
and salaries are given to executive cadre (white color) according to Public Policy, a
good wage policy should look into the following:

1. An equitable distribution of return between capital & labour.

2. To establish justified wage differentials
3. Equal pay for equal work
4. To base wages on need basis

WAGES

Minimum Wages
These are the wages that ensure more than just adequate sustenance, these ensure
certain medical & other essential requirements of individuals catered to ensure:-

1. 3 extra compensation unit to a family of a simple earning member.

2. 2700 calorie of food intake per member per day.

3. 18 yards of cloth per member and for an unit of four members i.e. 18 x 4 = 72
yards cloth per annum.

4. To ensure land, shelter equivalent of what is provided by industrial housing

scheme.

5. Amenities catered to by wages 20% of minimum wage.

LIVING WAGES

Ensure more than adequate sustenance to the extent that certain greater needs like
social needs, sanitations, health aspects, and protections from misfortunes.

FAIR WAGES

These are fixed on the basis of: -

1. Productivity of Labour
2. Prevailing level of wages
3. Industry Policy to wages & income distribution in the country.
4. Contribution of industry to the economy

The upper limit is fixed on the basis of the above factors and ensures minimum
wages.

COMPENSATION & EQUITY

Compensation affects the behaviour of people. Employing organization desires two

things: -

1. Attract & keep personnel in the organization.

2. Motivate them to higher level of compensation.
Equity is concerned with felt justice according to natural law or right when an
employee receives compensation from the employer, perceptions of equity are
affected by two factors: -

1. The ratio of compensation to one’s inputs of effort, education, training, endurance

of adverse working condition.

2. The compensation of their ratio with the perceived ratios of significant, other
people with whom direct contact is made.

Equity only exists when a person perceives that the ratio of outcomes to inputs is in
equilibrium with respect of self and in relation to others.

Equity & Trust

Gross Moderate Equity

over over
reward reward (2)
(I)
Modera Equity Moderate
te over under
Relative Pay

reward reward
Equity Moderate Gross
under under
reward reward
Low (L) Med (M) High (H)
Relative - Contribution

RECARDO’S SUBSISTENCE THEORY OF WAGES

This stated that wages should be fixed at subsistence level if the wages were higher
than the subsistence level; there would be an increase in supply of labour and
consequent decrease in level of wages to a subsistence level. If wages were below
subsistence level then labour employed i.e. demand for labour would increase and rise
to subsistence level. According to this theory the wage should be the subsistence
wage.

ADAM SMITH’S WAGE FUND THEORY

 According to Adam Smith there is a corpus of funds from which wages are paid out
and to increase wages efforts must be made to increase this corpus through greater
productivity.

KARL MARKS THEORY

Karl Marks propounded that labour would never be adequately compensated as the
profits of capitalists could only be considered if labour was under paid.

Wage and salary:

Wages represent hourly rates of pay, and salary refers to the monthly rate of pay,
irrespective of the number of hours put in by an employee. Wages and salaries are subject
to annual increments. They differ from employee to employee, and depend upon the
nature of job, seniority, and merit.

Incentives:

Also called ‘payments by results’, incentives are paid in addition to wages and salaries.
Incentives depend upon productivity, sales, profit, or cost reduction efforts.

There are: (I) Individual incentive schemes, and

(ii) Group incentive programs.

Individual incentives are applicable to specific employee performance. Where a given

task demands group effort for completion, incentives are paid to the group as a whole.
The amount is later divided among group members on an equitable basis.

Fringe Benefits:

These include such employee benefits as provident fund, gratuity, medical care,
hospitalization, accident relief, health and group insurance, canteen, uniform, recreation
and the like.

Perquisites:

These are allowed to executives and include company car, club membership, paid
holidays, furnished house, stock opinion schemes and the like. Perquisites are offered to
retain competent executives.
Non-monetary benefits:

These include challenging job responsibilities, recognition of merit, growth prospects,

competent supervision, comfortable working conditions, job sharing, and flextime.

Rewards:

People join organizations expecting rewards. Firms distribute money and other benefits in
exchange for the employee’s availability, competencies and behaviours.

Compensation is the most essential component of the individual’s job in an organization

that guides both the individual and the organization to perform their best. The below
power point slide highlights the importance of compensation:

Compensation—PP Slide

You can refer to the following link for the below inserted power point slide. For referring
to the link please refer to the below mentioned address:-

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Compensation SSystems—Power
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