Lesson: 25 (Components of Compensation)

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

Compensation an overview

External Environment Internal Environment

Financial Non-financial

Direct Indirect The Env.

Compensation

The Job

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 over reward (I)

Moderate over reward (2)

Equity

Moderate over reward

Equity Moderate under reward

Rel

ativ

e Pa

y

Equity Moderate under reward

Gross under 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:- (((fff iii llleee::: /// /// ///CCC::: ///DDDooocccuuummmeeennntttsss%%%222000aaannnddd%%%222000SSSeeettt ttt iiinnngggsss///sssaaammmsss111222222///LLLooocccaaalll%%%222000SSSeeettt ttt iiinnngggsss///TTTeeemmmpppooorrraaarrryyy%%%222000IIInnnttteeerrrnnneeettt%%%222000FFFiii llleeesss///CCCooonnnttteeennnttt ... IIIEEE555///CCCPPPEEEFFFGGGHHHIIIJJJ///222555666,,,111,,,CCChhhaaapppttteeerrr 111222::: CCCooommmpppeeennnsssaaattt iiiooonnn SSSyyysssttteeemmmsss))) (Compensation Systems—Power Point slides)((CCoommppeennssaattiioonn SSyysstteemmss——PPoowweerr PPooiinntt sslliiddeess)) SSSuuummmmmmaaarrryyy::: BBBeeecccaaauuussseee ooofff ttthhheee iiimmmpppooorrrtttaaannnccceee ttthhhaaattt ttthhheee cccooommmpppeeennnsssaaattt iiiooonnn hhhooollldddsss fffooorrr ttthhheeeiiirrr lll iiifffeee ssstttyyyllleee aaannnddd ssseeelllfff---eeesssttteeeeeemmm,,, iiinnndddiiivvviiiddduuuaaalllsss aaarrreee vvveeerrryyy cccooonnnccceeerrrnnneeeddd ttthhhaaattt ttthhheeeyyy bbbeee pppaaaiiiddd aaa fffaaaiiirrr aaannnddd cccooommmpppeeettt iii ttt iiivvveee wwwaaagggeee... OOOrrrgggaaannniiisssaaattt iiiooonnnsss aaarrreee cccooonnnccceeerrrnnneeeddd wwwiiittthhh pppaaayyy nnnooottt ooonnnlllyyy bbbeeecccaaauuussseee ooofff iii tttsss iiimmmpppooorrrtttaaannnccceee aaasss aaa cccooosssttt ooofff dddoooiiinnnggg bbbuuusssiiinnneeessssss,,, bbbuuuttt aaalllsssooo bbbeeecccaaauuussseee ooofff iii ttt mmmoootttiiivvvaaattteeesss iiimmmpppooorrrtttaaannnttt dddeeeccciiisssiiiooonnnsss ooofff eeemmmpppllloooyyyeeeeeesss aaabbbooouuuttt tttaaakkkiiinnnggg aaa jjjooobbb,,, llleeeaaavvviiinnnggg aaa jjjooobbb,,, aaannnddd pppeeerrrfffooorrrmmmaaannnccceee ooonnn ttthhheee jjjooobbb...