The compensation philosophy is the foundation for all compensation

decisions an organization makes. Developing a compensation philosophy,

however, is not always an easy task. There are a number of questions that an
organization’s leaders must explore in order to ensure that the compensation
philosophy helps the organization to achieve its goals.

What is a compensation philosophy and why is it so important?

A compensation philosophy, in short, is the formal statement or commitment an

organization creates in regards to the compensation of their employees. The
transparency of this commitment benefits both the employee and the
organization when it comes to pay strategy and salary negotiations.
Compensation philosophies usually are developed with teamwork between
human resources and executives. The key factors to be considered when
creating a compensation philosophy can include the:

 Organization’s financial position,

 Size of the organization,
 Type of industry,
 Organization’s objectives,
 Salary comparisons with the competition, and
 Level of talent currently in place and needed for success.

The main goal of a compensation philosophy is simple: attract, retain, &

motivate employees. In order to do this, the compensation decision making
team should mix Base Pay (salaries based on survey insight), Incentive Pay
(cash or non-cash awards), and Benefits (non-financial awards) in accordance
with the organization’s resources. For example, private sector organizations
would want to develop a pay philosophy that includes competitive pay, whereas
an organization in the public and non-profit sectors may want to develop a pay
philosophy that is more rounded to also include a heavier emphasis on work/life
benefits. Developing a philosophy can be a challenge, as many organizations
have varied circumstances. The organization’s unique circumstances can make
creating a competitive compensation philosophy difficult, no matter the level. A
careful balance of resources must be considered.

What are the components of a compensation system?

Compensation will be perceived by employees as fair if based on systematic

components. Various compensation systems have developed to determine the
value of positions. These systems utilize many similar components including job
descriptions, salary ranges/structures, and written procedures.

The components of a compensation system include

  Job Descriptions A critical component
selection systems, job descriptions define
requirements, functions, duties, location,
other aspects of jobs. Descriptions may be
or for entire job families.
of both compensation and
in writing the responsibilities,
environment, conditions, and
developed for jobs individually

 Job Analysis The process of analyzing jobs from which job descriptions
are developed. Job analysis techniques include the use of interviews,
questionnaires, and observation.

 Job Evaluation A system for comparing jobs for the purpose of

determining appropriate compensation levels for individual jobs or job
elements. There are four main techniques: Ranking, Classification, Factor
Comparison, and Point Method.

 Pay Structures Useful for standardizing compensation practices. Most

pay structures include several grades with each grade containing a
minimum salary/wage and either step increments or grade range. Step
increments are common with union positions where the pay for each job is
pre-determined through collective bargaining.

 Salary Surveys Collections of salary and market data. May include

average salaries, inflation indicators, cost of living indicators, salary
budget averages. Companies may purchase results of surveys conducted
by survey vendors or may conduct their own salary surveys. When
purchasing the results of salary surveys conducted by other vendors, note
that surveys may be conducted within a specific industry or across
industries as well as within one geographical region or across different
geographical regions. Know which industry or geographic location the
salary results pertain to before comparing the results to your company.

Compensation Management Theories

There are three main theories that are used by human resource professionals
when developing compensation management plans:

1. Behavior Reinforcement Theory

2. Equity Theory
3. Agency Theory

1] reinforcement theory is similar to that of operant conditioning. If a person

is rewarded for a particular behavior, he or she is more likely to perform those
actions again. You can probably think about a time when you did something that
made your parents or teacher happy, and you were rewarded in some way. The
positive reaction motivated you to do the same actions again because you would
anticipate getting the same or a similar reward.
2] Equity theory suggests that employees' actions will be changed based on
their perception of how they are paid in comparison to their coworkers. For
example, if you and Billy work the same number of hours and have the same
type of job and a similar level of work experience, you would expect to be paid
fairly and about the same salary. However, if you discovered that Billy was paid
more than you are, then your productivity will probably decrease so that you are
only working up to the level that is fair based on your new perception of your
compensation.

2] Agency theory attempts to use pay in order to get the different interests of
people involved with the company to become one in the same. There are many
categories of people within a company and each has their own set of priorities:

 Employees wish to have a safe workplace, to be paid fairly based on

their level of effort, and maybe even share in company profits if the
company is successful. After all, the company could not make profits
without employees.
 Management seeks to increase the productivity of employees and to be
paid fairly based on their level of expertise within the organization.
 Stockholders want the company to maximize profits by reducing costs
(including labor expenses) while increasing the value and reputation of
the company.

As you can see, the priorities of each group can be in direct conflict. The agency
theory of compensation management can make it a priority to maximize
productivity, performance, and the reputation of the company so that
employees, management, and stockholders all ultimately have the same goals.

Challenges of Compensation Management

Compensation management is more than providing a paycheck and cost of living

increases. In many organizations, employee performance relative to
organizational goals serves as the basis for compensation. Whether brought on
by economic difficulties, changes in technology or other business factors,
compensation remains a human resources challenge.

1) Forms of Pay
Employee pay begins with a cash base and bonus pay, but may also
contain non-cash forms of compensation. The valuation of non-cash
compensation is often most difficult for employees to appreciate, but it
offers the most opportunity for creativity on the part of the organization.

2) Pay Philosophy
 “All organizations pay according to some underlying philosophy about jobs
and the people who do them”, says KP Kanchana, a professor at CFAI
National College in Bhopal, India. Compensation programs must consider
and value the work of those who provide internal support to the
organization as well as those who directly impact financial results. An
organization’s compensation strategy will dictate the rate and timing of
pay increases, which jobs are eligible for bonuses, and the level of
competitiveness with similar organizations.

3) Employee Incentive
Pay-for-performance has become increasingly popular. Companies use
compensation to reward and boost the morale of high-performing
employees, but also to motivate underachievers.

4) Presentation of Compensation
How a manager speaks regarding pay can inadvertently create ill will
when the intention was to deliver good news. It is important to use
specifics when speaking with employees rather than categorize any pay
increase as “good”, “significant” or some other qualifier. Employee
perceptions of compensation are based on individual values, needs and
expectations.

5) Pay Competitiveness
Businesses wishing to compete for the best of the available talent pool
must offer a competitive compensation program compared to other
companies within their industry and at large.

6) Automation and Outsourcing

Automating compensation, including outsourcing some compensation
functions, enables businesses to standardize its system throughout the
organization, eliminate paperwork and help departments to communicate
more effectively. It minimizes payroll errors and makes it easier to
compensate performance based on quantifiable measures. Organizations
may also use technology to benchmark jobs and survey employees.

7) Generational Differences
People are living longer, and thus, working longer. In a look at physician
compensation, Max Reibolt of The Coker Group noted a difference in work
ethic and expected compensation that fell along generational lines. Older
workers were more likely to work longer hours in exchange for their pay
while younger workers expected high levels of pay even when their
productivity was aided by technology.
 8) Multinational Operations
Multinational corporations must balance the needs and expectations of
employees from various countries. Compensation must balance conformity
with local laws and customs against global corporate policies.

9) Controlling Labor Costs

Labor costs often constitute the largest line in a corporation’s budget. In a
tight economy, companies are faced with a flat, if not shrinking, pool of
funds. The cost of labor is broader than the amount paid to employees,
taking into account recruitment, training, turnover, infrastructure and
overhead, and the impact of these things on productivity.

Factors affecting Employee Compensation

The Compensation is the monetary and non-monetary rewards given to the

employees in return for their work done for the organization. Basically, the
compensation is in the form of salaries and wages. There are several internal
and external factors affecting employee compensation, which are discussed in
detail below.

Factors Affecting Employee Compensation

Internal factors: The internal factors exist within the organization and
influences the pay structure of the company. These are as follows:

1. Ability to Pay: The prosperous or big companies can pay higher compensation
as compared to the competing firms whereas the smaller companies can afford
 to maintain their pay scale up to the level of competing firm or sometimes even
below the industry standards.
2. Business Strategy: The organization’s strategy also influences the employee
compensation. In case the company wants the skilled workers, so as to outshine
the competitor, will offer more pay as compared to the others.Whereas, if the
company wants to go smooth and is managing with the available workers, will
give relatively less pay or equivalent to what others are paying.
3. Job Evaluation and Performance Appraisal: The job evaluation helps to have
a satisfactory differential pays for the different jobs.The performance Appraisal
helps an employee to earn extra on the basis of his performance.
4. Employee: The employee or a worker himself influences the compensation in
one of the following ways.
Performance: The better performance fetches more pay to the employee, and
thus with the increased compensation, they get motivated and perform their job
more efficiently.
Experience: As the employee devote his years in the organization, expects to get
an increased pay for his experience.
Potential: The potential is worthless if it gets unnoticed. Therefore, companies do
pay extra to the employees having better potential as compared to others.

External Factors: The factors that exist out of the organization but do affect
the employee compensation in one or the other way. These factors are as
follows:

1. Labor Market: The demand for and supply of labor also influences the
employee compensation. The low wage is given, in case, the demand is less than
the supply of labor. On the other hand, high pay is fixed, in case, the demand is
more than the supply of labor.
2. Going Rate: The compensation is decided on the basis of the rate that is
prevailing in the industry, i.e. the amount the other firms are paying for the
same kind of work.
3. Productivity: The compensation increases with the increase in the production.
Thus, to earn more, the workers need to work on their efficiencies, that can be
improved by way of factors which are beyond their control.The introduction of
new technology, new methods, better management techniques are some of the
factors that may result in the better employee performance, thereby resulting in
the enhanced productivity.
4. Cost of Living: The cost of living index also influences the employee
compensation, in a way, that with the increase or fall in the general price level
and the consumer price index, the wage or salary is to be varied accordingly.
5. Labor Unions: The powerful labor unions influence the compensation plan of
the company. The labor unions are generally formed in the case, where the
demand is more, and the labor supply is less or are involved in the dangerous
work and, therefore, demands more money for endangering their lives.The non-
unionized companies or factories enjoy more freedom with respect to the
fixation of the compensation plan.
6. Labor laws: There are several laws passed by the Government to safeguard the
workers from the exploitation of employers.The payment of wages Act 1936,
The Minimum wages act 1948, The payment of Bonus Act 1965, Equal
Remuneration Act 1976, Payment of Gratuity Act 1972 are some of the acts
passed in the welfare of the labor, and all the employers must abide by these.
Thus, there are several internal and external factors that decide the amount of
compensation to be given to the workers for the amount of work done by them.

Pay policies- Wage Policy in India

It is the right of every man to be paid duly for his work irrespective of his
religion, caste, and creed. However it has been observed that in certain what
places the workers have been denied of the rights to proper pay by their
employers. Because of this certain laws have been drafted for safeguarding the
rights of these workers to fair wages.

Firstly we must know what the term wage refers to. Any sort of remuneration
given for a particular work can be categorized as:

Wage – this is the form of remuneration usually administered on a daily basis to

the labourers. This term is usually common in used for Blue Collar type of jobs.

Salary – the remuneration that is usually given on the completion of a specified

term usually monthly is called salary.

Most countries have a be determined wage policy according to which the wages
of the workers are given. Wages are of three types that have been determined
by the Legislature.

Minimum wages – this refers to the minimum amount of P that the water
needs for sustaining a normal life which includes basic amenities and
requirements for him as well as his family.

Fair wages – fair wages refer to the amount that prevails within the particular
section of workers in different industries.

Living wages – living wages are higher than fair wages and it provides for basic
subsistence as well as certain extra comforts that may include education,
insurance, medical aids, etc.

The specified amount for each of these wages are usually determined on the
basis of various factors which includes the employers capacity to pay as well as
the economic conditions of the workers as well as the prevailing purchasing
power parity.

Wage policy

Wage policy refers to the guidelines that have been laid down by the
government in order to safeguard the rights of the workers and ensure proper
payment by their employees.
The wage policy also serves as a skill for the determination of the the wage
policy also serves as a skill for the determination of the wages to be given for a
particular work.

Concept of Wage payment method

Before we discuss the methods of wage payment, let us first know what wages
means. In the widest sense, wages means any economic compensation paid to
the employer under some contract to his woks for the services rendered by
them.

Based on the needs of the workers, capacity of the employer to pay and the
general economic conditions prevailing in a country, the committee on Fair
Wages (1948) and the 15th session of the Indian Labour Conference (1957)
propounded certain wage concepts such as minimum wage, fair wage, living
wage and need based minimum wage. While the first three types (concepts) of
wages were defined by the Committee on Fair Wages, the last one was defined
by the 15th session of the Indian Labour Conference.

1. Minimum Wage:
A minimum wage is a compensation to be paid by an employer to his workers
irrespective of his ability to pay. The Committee on Fair Wage’ has defined
minimum wage as “the wage must provide not only for the bare sustenance of
life, but for the preservation of the efficiency of the workers. For this purpose,
minimum wage must provide some measures of education, medical
requirements and amenities”.

2. Living Wage:
A living wage is one which should enable the earner to provide for himself and
his family not only the bare essentials of food, clothing and shelter but a
measure of frugal comfort including education for his children, protection against
ill-health, requirement of essential social’ needs and a measure of insurance
against the more important misfortunes, including old-age. Thus, a living wage
represents a standard of living. A living wage is fixed considering the general
economic conditions of the country.

3. Fair Wage:
Fair wage, according to the committee on Fair Wage, is the wage which is above
the minimum wage but below the living wage. The lower limit of the fair wage is
obviously the minimum wage; the upper limit is set by the capacity of the
industry to pay. The concept of fair wage is essentially linked with the capacity
of the industry to pay.
Unit 2

As we said, many firms simply price their jobs based on what other employers
are paying—they just use a market-based approach. However, most employers
also base their pay plans on job evaluation methods like those just described.

These evaluations assign values (such as point values) to each job. This helps to
produce a pay plan in which each job’s pay is internally equitable, based, as it is,
on the job’s value to the employer (as measured, for instance, by how many
points it warrants).

However, even with the job evaluation approach, managers must adjust pay
rates to fit the market. After all, you want employees’ pay to be equitable
internally—relative to what their colleagues in the firm are earning—but also
competitive externally—relative to what other employers are paying. In a
market-competitive pay plan a job’s compensation reflects the job’s value in the
company, as well as what other employers are paying for similar jobs in the
marketplace.

Because the point method (or “point-factor method”) is so popular, we’ll use it
as the centerpiece of our step-by-step example for creating a market-
competitive pay plan.

The 16 steps in creating a market-competitive pay plan begin with choosing

benchmark jobs.

1. Choose Benchmark Jobs

2. Select Compensable Factors

3. Assign Weights to Compensable Factors

4. Convert Percentages to Points for Each Factor

5. Define Each Factor’s Degrees

6. Determine for Each Factor Its Factor Degrees’ Points

7. Review Job Descriptions and Job Specifications

8. Evaluate the Jobs

9. Draw the Current (Internal) Wage Curve

10. Conduct a Market Analysis: Salary Surveys

11. Draw the Market (External) Wage Curve

12. Compare and Adjust Current and Market Wage Rates for Jobs

13. Develop Pay Grades

14. Establish Rate Ranges

15. Address Remaining Jobs

16. Correct Out-of-Line Rates

Wage Differential

A wage differential refers to the difference in wages between people with similar
skills within differing localities or industries. It can also refer to the difference in
wages between employees who have dissimilar skills within the same industry. It
is generally referenced when discussing the given risk of a certain job. For
example, if a certain line of work requires someone to work around hazardous
chemicals, then that job may be due a higher wage when compared to other
jobs in that industry that do not necessitate coming into contact with dangerous
chemicals. There are also geographical wage differentials where people with the
same job may be paid different amounts based on where exactly they live and
the attractiveness of the area.

Components of pay structures in india

Basic Pay

The concept of basic Pay is contained in the report of the Fair Wages Committee.
According to this Committee, the floor of the basic pay is the “minimum wage”
which provides “not merely for the bare sustenance of life but for the
preservation of the efficiency of the workers by providing some measure of
education, medical requirements and amenities.” The basic Pay has been the
most stable and fixed as compared to dearness allowance and annual bonus
which usually change with movements in the cost of living indices and the
performance of the industry.

Dearness Allowance

Dearness allowance is a cost of living adjustment allowance paid to the

government employees and pensioners. It is one of the components of salary,
and is counted as a fixed percentage of the person's basic salary. It is adjusted
according to the inflationary trends to lessen the impact of inflation on
government employees.
House Rent Allowance (HRA)

House rent allowance (HRA) is paid by an employer to the employee to meet

expenditure actually incurred on payment of rent in respect of residential
accommodation occupied by the employee.

Leave Travel Allowance (LTA) –

is one of the important components of the salary structure that helps in saving
income tax. ... LTA is added to the salary structureby the employer based on
various factors such as title, position, pay scale, etc.

unit 3

Gainsharing is a system of management used by a business to increase

profitability by motivating employees to improve their performance through
involvement and participation. As their performance improves,
employees share financially in the gain(improvement).

In a profit-sharing program, employees receive bonuses tied directly to the

company's overall profitability. The more money the company makes, the bigger
the bonuses.

What is ESOP?
ESOP is a system under which the employees of a company are generally given the
right to acquire the shares of the company for which they are working. In some of
the cases, the foreign holding/subsidiary company also grants such options to the
employees of the Indian subsidiary/ holding company. Under such a scheme, the
employees are granted some rights, called as stock options, to get the shares of the
company for free or at a concessional rate, at a predetermined price or the price to
be determined on the prefixed method, as compared to the potential market rate.

Employee Benefits in India

• Flexible benefits plans are gaining popularity in India as the typical employee
demographic evolves.

• Leased company cars are popular, with tax incentives available.

• Training and education have become a key benefit provided by Indian employers.
• End-of-service perks are generous, including provident funds, gratuity,and
superannuation/pension plans.

• Health insurance is often extended to a worker’s spouse and children, as well as to

dependent adults.

SURAJ NIKAM HR3