12.

1 INTRODUCTION gement
Employee compensation is avital part of human
Wages, salaries and other forms of humanr
employee esourcem
compensat
avery large component of operating costs. "One of ion manageme n t.
wage -the consfatctituotres
affecting industrial relations is the
the salary or the biggest
an emplovee receives for a fair day s Work.
Majority of .n
management disputes relate to remuneration. No
expect
expettoattract andretain qualified and;
No organisation can compensation
pays them fair compensation. Employeemotcompensation,
ivated employees unless it
influences vitally the growth and profitability of the
company.
emplovees, pay is more than a means of satistying their physical
therefore,
For
provides them a sense of recognition and determines needs k
their social status.
Remuneration directly or indirectly one of the mainsprings of
is
motivation in our society. Wages and salaries have significant
on distribution of income, influence
consumption, savings employment and prices.
This is allthe more significant in an under-developed country like India
suffering from problems of concentration of income,
inflation and
unemployment. Thus, employee compensation is avery significant issue
from the view-point of employers,
employees and the nation as awhole.
12.2 CONCEPT OF
EMPLOYEE COMPENSATION
Literally, the term compensation' means something that
offsets for something else. In this sense, makes up or
range of rewards that an employer pays compensation refers to awide
rendered by them. According to G.T. to employees for the services
"all forms of financial returns and Milkovich, compensation meas
as part of an tangible benefits employees recerve
employment
relationship."
Employee compensation may be classified into
(i) Base or direct three categorieS:
(ii)
Supplementarycompensation.
or indirect
(iii) Incentive compensation.
Base or primary
compensation, and
and salaries. It is
job.
compensation
fixed and paidrefers to
on the basic ofpayin the form of wages
Supplementary compensation basis time expended on the
1. IIPM: Op. cit., p. 222. consists fringe
of benefits such as
Compensation
12.3
bousing, medical and paid leave, retirement benefits, etc.
compensation refers to monetary compensation paid to Incentive motivate
employees. It is based on either individual performance or performance
of the group as a whole.
12.2.1 Base and Supplementary Compensation
Following are the components of compensation:
(1) Basic Pay: Theprimary part of pay package is basic pay. For
blue-collar workers basic wage may be based on work done (piece
wage system) but for white-collar employees, supervisory staff
and managers, basic salary is generally time bound: Basic pay is
generally determined through job evaluation which is the
process of systematicallyascertaining the relative worth of ajob.
Pay differentials between different jobs should be based
relative intrinsic worth of jobs. Demand for and supply of labour,
prevailing wage rates, statutory requirements, ability topay of
employer, etc. are also considered in deciding the basic pay.
(a) Wage: Wage is the price paid for the services of labour.
(b) Salary: It is the payment made by an employer to office
staff and executives.
Table 12.1shows the distinction between Wage and Salary.
Table 12.1: Distinction between Wage and Salary

Basis of Distinction Wage Salary

Salary is the remuneration
Wage is the remuneration paid
1. Payee or to whom paid for the services of
for the services of labour or office staff or white collar
paid blue collar workers
employees and managers
is usually paid on
2. Basis of payment Wage is usually paidon hourly Salary
monthly basis
basis
rate or daily rate

allowances are paid in addition to basic pay.

(2) Allowances:Several are given here:
Some of these allowances
allowance is given to protect real
Allowance: This dearness allowance
(a) Dearness inflation. Generally,
income against percentage ofbasic pay.
(DA)is paidas a
4

(b) House Rent

Allowance: Employers who dodo not
rent:
naprovide
nagement
living accommodation pay house
employees. This allowance
allowance (HRA) to
is calculated as a
of basic pay(30 per cent of basic pay in case of
employees).
percenta
governmentge
(c) City Compensatory Allowance: This allowance is paid
generally to employees in metros and other bjg cit:as
where cost of living is comparatively high. City
compensatory allowance (CCA) is generally afixed
amount per month.
(d) Transport Allowance/Conveyance Allowance: Some
employers pay transport allowance (TA) to their
employees. A fixed sum is paid every month to cover a
part of travelling charges.
In some cases, medical allowance, education allowance for
children, tiffin allowance, etc. are also paid.
K3) Fringe Benefits or Perquisites: Fringe benefits refer to
benefits
and facilities paid in addition to basic pay and
allowances.
Medical facilities, leave travel concession (LTC),
transport
allowance, free or subsidised meals, provident fund, pension,
8ratuity, group insurance, legal aid, children's education,
interest free loans, etc. are some examples of fringe benetits.
The purpose of fringe benefits is to provide a
measure of
comfort and welfare to emplovees. Some of these benefits are
Payable under government rules and regulations. Others are
paid voluntarily by employers. Senior
executives get several
Perquisites such as company house, chauffeur driven car,
corporate aircraft,company credit card, club membership, etc.
4.
Incentives: Incentive compensation is performance-linked
remuneration paid
hard and do better.with a view to inspire
employees to wo
Both individual incentives and ongroup
incentives are used. Bonus, profit--sharing, commission sales
are some examples of
incentive compensation.
Compensation
12.5
shows the comparison between Base
Table12.2:
Supplementary Compensation. Compensation and
Thble 12.2: Comparison between Base Compensation and
Compensation
Supplementary
Basis of Comparison Base CompensationSupplementary Compensation
LMeaning It means wages and salaries It means fringe benefits paid in
paid to employees addition to wages and salaries
2 Form Wages and salaries are paid Fringe benefits are paid in
in cash kind
3. Purpose Wages and salaries are paid Fringe benefits are paid to
to compensate employees retain employees and to
for their services increase their efficiency
4 Basis Wages and salaries are Fringe benefits depened
determined on the basis of mainly on the company's
job evaluation and other policies and needs
relevant factors

Flgure 12.1 shows the components of compensation.

COMPENSATION

Supplementary Incentive
Basic
Compensation Compensation
Compensation
Basic Pay
Individual Incentives
Fringe Benefits
Allowances
Group lncent1ves

Figure 12.1: Components of Compensation