Amity Business School

COMPENSATION
STRUCTURE-
INDIAN PRACTICES
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Learning Objectives:

• Salary Progression

•Methods of Payment

•Limitations of the Job Related Compensation

•Competency based Compensations

•Performance linked Compensations-

Performance Appraisal
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SALARY STRUCTURE
GRADED SALARY STRUCTURES
FEATURES OF PROPERLY DESIGNED SALARY
STRUCTURE:

• All jobs are allocated into a salary grade within

the structure.

• Each salary grade should consist of a salary range

or grade.

• General increases in the cost of living is taken

care by proportionate increases in the minimum
and maximum salary levels.
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• Salary grade should be wide enough to provide

room to recognize people graded at same level
can perform differently.
• Differential should be maintained between the
mid points of each salary grade
• Mid point of each grade is the target salary for the
grade.
• There can be overlap between the salary grades.
• Jobs allocated in one salary grade should be of
same level.
• Progression within a grade depends on
performance
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NUMBER OF SALARY GRADES DEPENDS ON

• The number of distinct jobs in hierarchy

• The width of each salary grade

• The extent of the overlap, if any between the

grades

• The salary level appropriate for the most senior

and the most junior jobs.
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MAKE-UP OF A SALARY GRADE

• The learning zone

• The qualified zone

• The premium zone

 DESIGNING THE SALARY
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STRUCTURE

STEP I: Establish the market rate surveys &

studies of existing structure

STEP II: Draw up salary grade structure

between the upper and lower limits

STEP III: Conduct a job evaluation exercise

STEP IV: Obtain market rate data

STEP V: Slot the jobs

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PAY STRUCTURE IN PRACTICE

JOBS CLASSIFIED INTO DIFFERENT GROUPS

• Managerial and professional: Top,middle and

junior

• Technical/supervisory

• Administrative and clerical (staff)

• Manual (workers): highly skilled, skilled, semi

skilled and unskilled
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Components of compensation

• BASIC WAGE:
• Fixed as price for labour/services rendered.
• Differentials are based on criteria which the Fair
Wages Committee suggests.
• Following are the criteria:
1. Degree of skill
2. Strain of work
3. Experience involved
4. Training required
5. Responsibilities undertaken
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6. Mental and physical requirements

7. Disagreeableness of the task
8. Hazard attendant on the work
9. Fatigue involved

THE BASES OF WAGE DIFFERENTIALS ARE GIVEN

BELOW:
• Interpersonal differentials
• Inter-occupational differentials
• Inter-area differentials
• Inter-firm differentials
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DEARNESS ALLOWANCE
• Refers to allowance paid to employees in order to
enable them to face the increasing dearness of
essential commodities

• In other countries referred as a practice of

inflation adjusted earnings or COLA

• Even in India, section 3 of The Minimum Wages

Act refers to it as Cost of Living Allowance
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Determination of D.A.

Based on 3 parameters:

1. The index factor: (AICPI)

2. The time factor : to offset the temporary

fluctuations in the index

3. The points factor

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Different patterns of calculating DA

• The Central DA
• The Industrial DA
• DA Systems in banks and LIC
• Double linkage:
100% for the 1st slab of basic pay
Add.50% for the next Rs.100.25% more for every slab
of the next Rs.100 or part thereof
A person with basic pay of Rs 400 will get Rs 800 as DA
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ALLOWANCES
• Car
• Cash
• City compensatory
• Traveling
• Transport
• Conveyance
• Education
• ESIS
• Heat
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• Hill
• Leave travel
• Lunch
• Medical
• Night duty-2nd shift and 3rd shift
• Overtime
• Servant
• Special
• Telephone
• Uniform
 OVERTIME PAYMENT
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The need for overtime arises due to-

• Inappropriate allocation of manpower

• Improper scheduling

• Absenteeism

• Breakdown of machinery

• Meet urgent delivery dates

• Sudden upswings in production schedules

• To give management a degree of flexibility in matching

labor capacity to production demands.
 ANNUAL BONUS Amity Business School

• Under payment of bonus act-1965

• Statutory obligation on the employer to pay bonus to

employees at minimum rate of 8.33% of the salary earned.

• Maximum limit-20%

• Payment of bonus to employees earning upto Rs 3500 pm

• For salary more than 3500,computed at Rs 2500 pm.

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INCENTIVE SYSTEMS

Financial incentives Non financial

• Attractive wages incentives
• DA • Designation
• Travelling allowance • Nature of job
• Housing allowance • Working conditions
• Gratuity • Status
• Pension • Privileges
• PF contribution • Job security
• Opportunity for
advancement
• Participation in
decision making
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FRINGE BENEFITS
• Additional to regular wages paid to the workers

• The purpose of the benefits is to increase the

economic security of the employees

• Examples-
• private medical insurance paid for by the
employer
• Cheap or free loans
• Vacations
• Pension
• Other economic benefits
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• Incremental increase in salary

• The salary range are divided into zones

• Employees rewarded for experience and

performance

• Twelve months’ service is required since

appointment or the last salary progression was
granted.
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INCREMENTAL SYSTEM
Incremental system can be based on:-

• Service in the organisation

• Previous record of performance
• Flexible system: complete discretion of management
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Objective of salary progression

• To develop Career planning

• To reward merit performer

• To reward the people who have served the

organisation for a long term
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METHODS OF PAYMENT
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METHODS OF PAYMENT

TIME RATE SYSTEM PIECE RATE SYSTEM

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I. TIME RATE SYSTEM:

• Oldest and simplest method of wage payment
used extensively in the industrial as well as
government departments
• Wages paid as per the time spent by the workers
in the factory
• Production given by them not taken into
consideration
• The employer buys the hours of the workers and
pays them accordingly.
• Also called as day wage system
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CATEGORIES OF TIME RATE SYSTEM

TIME RATE

Ordinary Level High Wage Graduated

Level Time Rates
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a. Ordinary Level:
It is calculated on time (daily, monthly, weekly etc.) The
formula for calculation of salary is
Rate per hour X Hours worked = Earnings (RPH X HW=E).

b. High Wage Level :

It is calculated on hourly basis put over time is not paid. The
formula for calculation of salary is
RPH X HW = E

c. Graduate System:
Payment : the basis is linked with dearness cost of living.
The index of cost of living is varying and that is considered
for calculating the remuneration.
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ADVANTAGES OF TIME RATE SYSTEM:

1. Easy and Simple

2. Guarantee of Minimum Wage
3. Maintains Quality of production
4. Support from Trade Unions
5. Avoids quarrel among workers
6. Convenient in modern factory system
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DISADVANTAGES OF TIME RATE SYSTEM:

1. Not Scientific
2. Absence of positive encouragement
3. No distinction between workers
4. No initiative to workers
5. Labour cost may increase
6. Strict supervision
7. No effect on productivity/ efficiency
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II. PIECE- RATE SYSTEM

• Also treated as an incentive wage system as it
encourages workers to produce more and also
to earn more.
• Wages are paid as per the output or
production given by the worker and not as per
the time spent by the worker in the factory
• Payment is by results in terms of output
given.
• Wage rate is fixed per piece of work or for
certain quantity of production.
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CATEGORIES OF PIECE RATE SYSTEM

PIECE RATE

Piece & Time Differential

Straight Piece Rate
Combination

Taylor System Merrick System Gantt

Task
System
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a. Straight Piece Rate:

Payment : Flat rate is applicable per unit, which is predetermined.
The time spent is not considered.
Formula: PPR X O = Earnings.

b. Piece Rate and Time Rate Combinations:

Payment: It is a dual rate system, designed to perfect inefficient
workers. The worker is ensured to get the minimum payment. If
the payment is calculated on the basis of piece rate guarantees
and number of pieces fall below the minimum wages guaranteed,
he is paid by time Rate.

c. Differential Piece rate:

Payment: In favour of piece rate system, minimum wages were
assured. However, under this system, instead of combining time-
rate and piece-rate, there are dual rates for different efficiency
level. The purpose behind keeping high piece rate for higher
efficiency is as the level of production increases, the cost per unit
falls.
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ADVANTAGES OF PIECE RATE SYSTEM

1. Linking of wages with production

2. Distinction is made between efficient and
inefficient workers
3. Encourages workers to take initiative in the work
4. Fair to employers and employees
5. Incentive System
6. Limited supervision adequate
7. Freedom of work to workers
8. Brings cordial relations
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DISADVANTAGES OF PIECE RATE SYSTEM

1. No guarantee of minimum wage payment

2. Workers suffer even when they are not at
fault
3. Complicated System
4. Disturbs unity of workers
5. Not fair to trainees
6. Quality of production is adversely affected
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TIME RATE V/s PIECE RATE SYSTEMS
S.No BASIS TIME RATE PIECE RATE
1. Meaning Wages are paid as Wages are paid as per the
per the time spent by output or production given by
workers. workers.
2. Old/new Oldest and simplest Modern and incentive system
system method of wage of wage system.
payment.
3. Guarantee Gives guarantee of Fails to give guarantee of
of wages certain minimum minimum wage payment to
wage payment to every worker.
every worker.
4. Support Employees and trade Employers and efficient
unions support time workers prefer piece rate
rate system. system
5. Understan Easy to understand Complicated system as
ding of and simple to various recorded and
system administer. registers are required to be
maintained
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S.No BASIS TIME RATE PIECE RATE

6. Distinction Distinction is not made Distinction is made between
between between efficient and efficient and inefficient workers.
workers inefficient workers as Efficient worker is paid more
all are paid at one and while an inefficient worker is
same rate. paid less.
7. Effect on Encourages workers to Encourages workers to take
production follow go-slow policy more interest in the work and
and naturally naturally production increases.
production suffers.
8. Quality of Quality, workmanship Quality, workmanship of
production of production are not production may suffer. Increase
affected, raw in spoiled work and wastage of
materials, machinery raw materials.
are utilized properly.
The spoiled work is
also negligible
9. Supervision Strict supervision is Strict supervision is not
necessary as workers necessary as workers are paid
are paid as per the in proportion to the production
period spent. given
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COMPETENCY BASED
COMPENSATION
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•What do we mean by Competencies?

Competencies in brief are those behaviors that

excellent performers exhibit more consistently

and more excellently than average performers

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•How to establish a Competency Model?

Can be designed for an organization overall or

for a particular segment- a role, function or a

job within the organization. Which type of model

an organization employs depends upon its

needs and objectives.

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FOUR PRIMARY MODELS

Core Functional Role Job

Competency Competency Competency Competency
Model Model Model Model
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1. Core Competency Model

• Aligned with Organization’s vision, mission &
values
•Applies to all levels of organization as well as job
functions
•Useful for identifying and making explicit those
behaviors associated with organization’s core values
•Can be used to introduce broad cultural changes in
the organization
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2. Functional Competency Model

•Built around key business functions like IT,

Marketing etc.
•Necessary when the behaviors required to
be successful vary across the organization
•More focused and enables the organization
to be specific about the behaviors expected
and paves way for rapid behavioral change
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3. Role Competency Model

Applies to a specific role that an individual
plays in an organization like technician,
manager etc.

A representative model encompasses
managers from various functions and
disciplines

Useful in a team-based organization
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4. Job Competency Model

• Useful for a specific job held by large

no. of employees

•Application is limited
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LINKING COMPTENCIES TO PAY

• Should be implemented only as a part of
broader competency based – human resource
program
• Must follow successful implementation
competency based performance management at
a point where new competencies have been fully
understood and embraced
• Should be considered only when changed
intended from adoption of overall competency
based system needs additional emphasis that
comes from linking it to pay
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IMPLEMENTING COMPETENCY BASED PAY

1. Make sure all employees have acquired an in-depth
understanding of competencies required for their jobs
2. Teach employees how to do competency planning and provide
them training and other opportunities to develop their
competencies
3. Establish an accurate competency baseline. To measure it,
both organization and its employees should have an
understanding of its strengths and weaknesses
4. Identify the value of competencies and define pay
mechanisms for delivery
5. Establish a system for competency assessment- preferably
multi-source
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PERFORMANCE
LINKED
COMPENSATION-
PERFORMANCE
APPRAISAL
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MEANING OF PERFORMANCE BASED PAY

•Links the compensation of the employees to their
performance and their contribution to the
organizational goals
•Commissions, incentives and bonuses, piece rate
pay help the employer to pay the employee
according to their productivity and hard work
• May either be open ended (does not have a
fixed ceiling) or close ended (has an upper ceiling
which is normally stipulated in the employment
contract)
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PROCESS OF PERFORMANCE BASED PAY

•Deciding and clearly defining the performance

goals and the performance measures
•Setting the target bonus for different levels of
performances
•Measuring the performance of the employee
•Giving rewards and bonus according to
performance
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TYPES OF PERFORMANCE BASED

PAY

MERIT PAY PROFIT INCENTIVE & GAIN

SHARING PERFORMANCE SHARING
BONUS
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1.MERIT PAY:
• setting some basic salary according to the
position and the rank of the employee and the
variable part of the salary is based on the
periodic performance reviews.

2. PROFIT SHARING:
• Sharing the profits of the enterprise with the
employees as bonus
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3. INCENTIVE & PERFORMANCE BONUS:

•Rewards for special accomplishments or
fulfillment of the targets set such as sales
commission.

4. GAIN SHARING:
•Sharing of gains as a result of the increased
performance of the employees with them.
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METHOD OF CALCULATING
PERFORMANCE BASED COMPENSATION

•Management by objectives is the generally

used to define the output which determines
the payment of Performance Based Pay
• Only the performance and not the
potential of the employee should be
considered. Potential of the employee is
normally subjective and can be contested.
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PERFORMANCE BASED COMPENSATION

vs. APPRAISAL

•Appraisals, normally conducted half-yearly

or annually used to decide on the salary
increments and promotions of the employee.
• Being permanent increase, takes
both performance and potential of the
employee.
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BENEFITS OF PERFORMANCE BASED
COMPENSATION

1. Rewards high level performers

2. Provides greater incentive

3. Provides opportunities to encourage higher

performance

4. Increases employee motivation

5. Contributes to employee retention

6. Deals more effectively with marginal performers