lOMoAR cPSD| 25755870

OMoARcPSD| 25755870

UNIT I
INTRODUCTION
SYLLABUS:
Compensation - Definition - objectives- principles of compensation formulation-
Compensation Design and strategy- theories of wage determination- Wage Structure
-types of wages- wage boards- wage policy. Compensation decisions- compensation
benchmarking- compensation trends and reward system in India.
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COMPENSATION:
 Compensation is the result or reward that the employee receives in return for
their work.
 It encourages employees and improve organizational effectiveness.
According to Edwin.B. Flippo - “The function compensation is defining
as adequate and equitable remuneration of personnel for their contributions to the
organizational objectives.”
OBJECTIVES OF COMPENSATION:

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1. To Attract Top Talent

One of the primary goals of compensation should be to recruit qualified talent. When
you have a competitive compensation plan in place, you‟ll be better able to attract
top industry talent.
2. To Retain & Reward Personnel
Don‟t lose your top talent to your competitors because employees believe that the
grass will be greener elsewhere. Find out market values for your employees and pay
accordingly. You can also set up pay-for-performance models to drive performance
by encouraging associates to reach new goals and push farther.
3. To Boost Motivation
When structured effectively, your compensation plan can drive motivation across
your teams. Employees who know that they‟re being fairly compensated for their
work feel appreciated and are therefore more likely to stay engaged, committed, and
productive. A well-developed compensation plan can also increase job satisfaction
in general.
4. Increase Worker's Efficiency:
One of the most important reasons for compensation is to increase the efficiency of
the employees. It plays vital role in the motivation of the employees
5. Maintain Income-Expenditure Ratio:
If there is a proper compensation plan, then the employees will get the number of
wages they deserve. They will neither be under-paid nor over-paid. In that case,
employees will not switch the job and organization will remain in a healthy financial
condition.
6. Avoid Conflicts:
If the compensation system is well planned, the workers will be satisfied and the
workers' union will have nothing to be unhappy and this will create harmony and
peace in the organization.

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TYPES OF COMPENSATION:

There are two main types of compensation:

1. Direct compensation (financial)
2. Indirect compensation (financial & non-financial)
Everyone involved in creating an employee compensation plan and pay structure
must first understand the different types of compensation. This is because it is the
organization‟s responsibility to explain the compensation plan to all candidates and
employees. It is especially important during the hiring process, and performance and
salary reviews. With so many different options available within the main two types
of compensation, employees can easily become confused.
1) Direct compensation
Direct compensation is a financial (or monetary) form of compensation. Here are the
four main types of direct compensation:
 Hourly
Hourly wages are often provided to unskilled, semi-skilled, temporary, part-time, or
contract workers in exchange for their time and labor.
Jobs where some employees receive hourly wage include the retail, hospitality, and
construction industries.

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Employees who receive hourly wages are usually able to earn overtime pay. This
pay consists of any additional hours worked outside of their set contract.
When setting your employees‟ wages, you need to be compliant with the local
minimum wage legislation.
 Salary
Annual salaries are typically provided to most full-time employees or skilled
employees and those who fill management positions. A salary often indicates that
the organization has invested in this employee for the long-term future.
Examples of employees who receive a salary include teachers, accountants, doctors,
and retail and hospitality managers.
Both hourly wages and salary make up an employee‟s base pay or base salary.
 Commission
Commission is a common form of compensation provided to employees in sales
roles. It will usually be based on a predetermined quota or target. The higher the
quota reached, the higher the commission will be.
Commission rates are often based on various specified factors, including revenue
and profit margins.
Some employees will work on commission only or obtain a salary with commission.
 Bonuses
Companies often offer bonuses to employees based on year-end business results or
the individual meeting their set goals. Sometimes, the decision is at the manager‟s
discretion.
Bonuses can be paid annually, quarterly, or even after the completion of each project.
Both commission and bonuses fall under incentive pay, along with piece rate, profit
sharing, stock options, and shift differentials.
However, bonuses can also be paid without an employee meeting a particular target.
For example, if the business has had a great year and decides to reward everybody.
In this case, the bonus would be classified as variable pay.
Tips are also a common form of compensation in people-based industries,
particularly hospitality.

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Another umbrella of direct compensation is deferred pay which includes savings

plans and annuity.
Merit pay is often given to an employee who meets their targets or performs well in
their role.
2) Indirect compensation
Indirect compensation is still a financial form of compensation since it has a
financial value. However, employees do not directly receive it in cash form. That‟s
why certain types of indirect compensation are viewed as monetary, while others are
deemed non-monetary. This often varies between organizations.
Indirect compensation is often known as employee benefits or perks of the job.
PRINCIPLES OF COMPENSATION:

 Ability to pay
Organization should their employees as pay per their financial capacity and
capability. If an organization pays more than its ability, then the organization may
get bankrupt.
On the other hand, if the organization pays much below its ability to pay, then such
organizations are unlikely to attract / retain competent employees, which will
ultimately adversely affect the effectiveness organization.

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 Internal and external equity

Organization must compensate their employees according to their qualification,
experience, skills, knowledge, responsibilities job and performance. This is called
internal equity.
Organization must compensate their employees according to their qualification,
experience, skills, knowledge, responsibilities job and performance. This is called
internal equity.
Organizations must pay their employees a compensation which is at least
comparable to their competitors or industry standards. This is called external equity.
 Performance orientation
Compensation should be in commensuration with individual and organizational
performance. Performance linkage is essential for creating a performance driven
work culture.
 Non-discriminatory
Organizations must pay their employees without any discrimination on the ground
of race, religion, gender, nationality and ethnicity.
 Legal Compliance
Organizations must pay as per the relevant laws of the land. For example, in India,
the Minimum Wages Act, 1948.
 Simplicity and Flexibility
Compensation system should be simple to design, understand and administer.
Compensation plans and policies must be flexible to adapt with ease to the changing
profile of the workforce.
 Foster employee development
Compensation should be such so as to motivate employees to acquire, sharpen and
develop their skills and competencies in conjunction with changing technology,
innovations and organizational requirements.

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COMPENSATION STRATEGY:
Compensation Strategy outlines organization approach toward pay and benefit of the
employees.
Components of Compensation Strategy:

 Leading
A leading compensation strategy aggressively sets salary rates above the market. By
paying employees more than the market rate, it‟s easier to attract qualified talent and
retain your best employees. You also set yourself apart from other organizations and
promote the perception that your company is the employer of choice.
In order to go with a leading compensation strategy, you have to have the financial
health to pay employees higher salaries.
 Lagging
A lagging compensation strategy is when you set salary rates below the market rate.
There are several reasons to pay employees below the established market rate.
Smaller organizations don‟t have the financial resources to devote to salaries. Others
have non-monetary characteristics to recruit talent, like nonprofits and charitable
organizations.
Opting for a lagging strategy can help lower costs and you can use the money saved
to offer benefits and incentives. Paying salaries below the market rate will make it

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difficult to attract good employees and well-trained employees may leave for higher
paying competitors.
 Meeting the Market
Meeting the market is a compensation strategy where you pay employees the market
rate. In this strategy, employees are paid fairly and expected to perform well.
As the most common compensation strategy, meeting the market ensures that your
pay and costs match the competition. In strong financial environments, you can share
bonuses and short-term incentives with employees. Though employees are paid well,
this strategy may make it hard to keep your best employees as they are recruited by
companies offering more money.
FACTORS DETERMINING COMPENSATION:

1. Years of experience and education level

It probably goes without saying, but the more experience and education a candidate
has, the higher their expected compensation. So, if you‟re hoping to attract job
seekers with master‟s degrees or more than 5 years‟ experience, you need be ready
and willing to compensate accordingly.

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2. Industry
Workers with similar, or even the same job title can expect vastly different wages
depending on what industry they‟re in. There are many reasons for this discrepancy
– in some cases their job function may be critical to a particular industry, or it may
simply be a matter of one industry being considerably larger than the others.
3. Location
Cost of living, a major factor to consider when determining compensation, is largely
dependent on location and, more specifically, the cost of housing. This is at least
partially why salaries in large urban areas are generally higher than salaries for
similar positions in more rural locations. However, with the surge in remote work,
many employers have shifted to role-based compensation, rather than location-
based. Do some research to see what the trend is in your field.
4. In-demand skill sets
When it comes to determining compensation, key skills may be an even more
reliable metric to compare against than job title. After all, different companies may
have very different definitions of the same job title. On top of that, many skill sets
can apply to a wide variety of roles – all of which are effectively competing for the
same talent. That‟s why it‟s important for employers to consider the value of key
skills when determining compensation.
5. Supply and demand
It‟s crucial to be aware of the availability of relevant talent in the geographic region
where you‟re recruiting. If you‟re recruiting in an area where the demand for a
certain skill sets and experience outweighs the supply, you should expect to pay
more in order to attract talent.
COMPENSATION DECISION:
According to Timothy (2009) – “Compensation decision making is a complicated
process that includes making decisions on both fixed and variable pay/benefit
offered to individual employees”.
COMPENSATION BENCHMARKING
Salary benchmarking, also known as compensation benchmarking, is the process of
matching internal job descriptions with those of competitors in order to identify the
market rate for each position.

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Types of Compensation Benchmarking:

Importance of benchmarking:
 To analyses the current market trends.
 An idea whether their internal pay structure is competitive compared to local
external market.
Advantages of benchmarking:
 Avoid losing the top talent.
 Remain competitive with the best remuneration pack.
 Attract the best talent.
 Plan & budget.
WAGES:
 A sum of money paid under contract by an employer to a worker for services
rendered.

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According to ILO (International Labor Organization) – “Wages refer to that

payment which is made by the employers to the laborer for his services hired on the
conditions of payment per hour, per day, per week or per fortnight”.
WAGE STRUCTURE:
Wage structure is the hierarchy within a company that sets the amount each level of
employment is paid and what benefits each level is due.
Components of Wage Structure:
1. Basic wage
2. Bonus
3. Dearness allowance
4. Overtime allowance
5. Fringe benefits.

1) Basic wage

 A wage or salary based on the cost of living and used as a standard for
calculating rates of pay.
 Basic salary is the primary payment given to an employee by their employer
against his/her performance.

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 It is the amount apart from surplus or additional factors, such as bonuses,

benefits or compensation from an employer's end
 Annual basic salary = monthly basic salary X 12 months
 The basic pay is usually 40% of gross income or 50% of an individual‟s CTC.
Factors Affecting Basic Salary
The basic salary in India can depend on several factors. Some of them are as follows.
 HR Policies- The policies set by HR impacts the basic salary. Depending on
this factor, a proficient individual can receive higher compensation than
colleagues at the same level.
 Company Policy- Most companies set a salary bracket and inform individuals
during the hiring process. This salary is based on factors such as demand and
supply, company turnover, product, etc. For instance, the basic salary offered
by an IT firm will be different from a small content writing firm.
 Designation- An employee‟s designation significantly influences the basic
pay. An individual with experience and qualifications is obligated to receive
a better pay scale than the other employees.
 Location or Country- The social and economic factors may also contribute
to the different salary brackets. For instance, the basic salary in India will be
way different from the one in Europe.
 Industry or Sector- A base salary of an individual working in the media
sector will differ from one in a software company.
2) Bonus
 A bonus is a financial compensation that is above and beyond the normal
payment expectations of its recipient.
 Bonuses may be awarded by a company as an incentive or to reward good
performance.
 Typical incentive bonuses a company can give employees include signing,
referral, and retention bonuses.
 Companies have various ways they can award employee bonuses, including
cash, stock, and stock options.
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Types of Bonuses:

 Annual bonus
An annual bonus is usually dependent on the company's overall performance and
can also be thought of as profit sharing. So, depending on how successful the
organization or a specific department was that year and how crucial an employee
was to that accomplishment, an employee may receive a modest or huge bonus.
Companies wait until the end of the year to pay bonuses because it requires
employees to stay on the job longer, so very few people leave their positions before
receiving their annual bonus. On the other side, it's linked to company objectives, so
they want to make sure they're driving performance for the entire year, not just a
portion of it.
 Bonuses for great performance
Performance bonuses are broader incentives that motivate the employees throughout
the year and are usually tied to specific performance measures. Bonuses are
frequently determined based on how far a department, an individual, or a team
exceeds particular targets or goals.
Performance can be evaluated annually, quarterly, or monthly though incentives are
typically given at the end of the calendar or fiscal year.

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 Bonuses for shareholders

Companies may offer bonuses to their shareholders as a means to boost their return
on investment. The most frequent types of shareholder bonuses are bonus shares and
dividends.
 Spot bonus
A spot bonus is given to employees who go above and beyond the time and effort
required to complete a task that was not part of their job description. Suppose an
employee, for example, contributed unexpectedly to the firm's success or assisted
with a specific project by working beyond hours. In that case, the firm can use its
discretion to pay some additional compensation.
 Signing bonus
A signing bonus is a one-time payment offered to workers when they accept a new
position or encourage candidates to take the job. Companies may offer it if an
employee is leaving a better position or if the person is moving to a new place for
work and the employer wants to cover part of the expenditures (this might also be in
the form of a relocation bonus).
 Bonus for retention
The purpose of a retention bonus is to keep valuable employees. It's usually paid out
following a merger, acquisition, or large-scale reorganization to persuade staff to
stay on for a longer length of time if they have a better offer elsewhere or are
considering leaving.
 Bonus for referrals
A referral incentive is offered to current workers to motivate them to refer
exceptional candidates for open positions at the organization. It's usually not given
until the candidate has been hired and has been with the company for a few months.
Calculation for Bonus Payable
If the gross earning of your employees is below Rs. 21,000 employers are liable to
pay bonus. Calculation of bonus will be as follows:

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 If Salary is equal to or less than Rs. 7000/- then the bonus is calculated on the
actual amount by using the formula: Bonus = Salary x 8.33/100
 If Salary is more than Rs. 7,000/- then the bonus is calculated on Rs. 7,000/-
by using the formula: Bonus = 7,000 x 8.33/100
Note: Salary means Basic Salary + Dearness Allowance
3) Dearness Allowance
 An amount of money that is added to a person's basic pay or pension because
of rising prices and other costs
 The rate of DA admissible to above categories of employees of Central
Government and Central Autonomous Bodies shall be enhanced from the
existing 164% to 189% of the Basic Pay with effect from 01.07. 2021

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Calculation of Dearness Allowance

After the Second World War, the DA component was introduced by the government.
After 2006, the formula for calculating dearness allowance has changed and
currently, DA is calculated as follows:
 For Central Government employees: Dearness Allowance % = ((Average
of AICPI (Base Year 2001=100) for the past 12 months -115.76)/115.76) *100
 For Central public sector employees: Dearness Allowance % = ((Average
of AICPI (Base Year 2001=100) for the past 3 months -126.33)/126.33)
*100Where, AICPI stands for All-India Consumer Price Index. From the year
1996, DA has been included to compensate for price rise or inflation in a
particular financial year and hence it is revised twice every year, once in
January and then in July.
Types of Dearness Allowance
The Two separate categories to calculate Dearness Allowance are Industrial and
Variable Dearness Allowance.
 Industrial Dearness Allowance: Industrial dearness allowance or IDA is the
allowance applicable to employees of public sector enterprises. Recently, the
government of India has increased IDA by 5% for this sector. This decision is
set to benefit all board-level executives, officers, and employees of central
PSUs.IDA for government sector enterprises is revised quarterly based on the
movement of the Consumer Price Index (CPI) to compensate for the rising
inflation in the country.
 Variable Dearness Allowance: VAD or Variable dearness allowance is the
allowance that comes as a result of revision every six months for central
government employees. The changed new figure that is received as a result of
taking into consideration the increase or decrease in the Consumer Price
Index, CPI, is termed as Variable dearness allowance. Based on this figure,
the DA of employees is revised and rolled out. Three components make up
VAD. First is the consumer price index, second, the base index, and third is
the variable DA amount fixed by the government of India. The third
component remains fixed until the government revises the minimum wages.
Same way, the base index also remains fixed for a particular period. Only the
CPI or Consumer Price Index changes every month and affects the overall
value of the variable dearness allowance.
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4) Overtime allowance
 Overtime allowance is an allowance paid to employees for actual time worked
in excess of the hours of employment prescribed by any law or rule.
 In most cases, overtime pay rate is 1.5 times the employee's regular rate of
pay, which is commonly referred to as “time and a half”.
 Overtime pay is the amount of overtime paid to each employee in a pay period.
Overtime pay is calculated: Hourly pay rate x 1.5 x overtime hours worked.
5) Fringe benefits

 Fringe benefits are the additional benefits offered to an employee, above the
stated salary for the performance of a specific service.
 Some fringe benefits such as social security and health insurance are required
by law, while others are voluntarily provided by the employer.
Types of Benefits
Fringe benefits can be categorized into two categories. Some benefits are required
by law and others are provided at the employer‟s discretion.
1. Fringe benefits required by law
The mandatory fringe benefits are intended to provide employees with medical care,
mitigate them from economic hardships in the event they lose employment, and
provide them with retirement income to sustain them during retirement. The
following are some of the mandatory fringe benefits that employers are required to
provide:
 Health insurance
This fringe benefit is contained in the Patient Protection and Affordable Care Act. It
requires businesses that employ more than 50 people to provide healthcare plans,
and employees are required to have health insurance coverage. The health care plans
cover visits to primary care physicians, specialist doctors, and emergency care.
 Unemployment insurance
The Federal Unemployment Tax Act (FUTA) requires employers to pay a federal
and state unemployment tax to the Department of Labor, which provides wages,
training, and career guidance to employees who become unemployed due to no fault

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of their own. Such benefits are meant to provide brief monetary assistance to
unemployed citizens who meet the requirements of the act.
 Medical leave
Businesses that employ over 50 employees are required by law to provide family
and medical leave to an employee who has worked for over one year in the company.
The medical leave is unpaid, protected, and can last up to 12 weeks.
 Worker’s compensation
The worker‟s compensation benefit is administered by the Department of Labor to
federal workers who are injured at their workstation or acquire an occupational
disease. Employees are provided with medical treatment, wage replacement benefits,
rehabilitation, and other benefits. The compensation requirements vary by state, and
injured employees should contact their state worker‟s compensation board.
2. Fringe benefits not required by law
The following benefits are provided at the employer‟s discretion. On the side of the
employer, most of these benefits are taxable, but with certain exceptions. Examples
of these fringe benefits include:
 Stock options
 Disability insurance
 Paid holidays
 Education reduction
 Retirement planning services
 Life insurance
 Paid time off
 Commuter benefits
 Achievement awards
 Fitness training
 Employee discounts
 Meal plans
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TYPES OF WAGES:

 Regular wages
An employee‟s regular wages are fixed amounts they earn each pay period. You can
pay an employee salary vs. hourly wages.
1. Salary wages
If an employee earns a salary, they receive a fixed, regular payment per year. To
determine an employee‟s wages per period, divide their annual salary by the number
of pay periods in your chosen pay frequency. For example, if you pay an employee
biweekly, divide their annual salary by 26.
2. Hourly wages
If you pay employee hourly wages, you must multiply their hourly rate by the
number of hours they work per pay period. An employee paid hourly might work
varying hours, therefore changing their paycheck each period.

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 Supplemental wages
Supplemental wages are typically additional, non-regular wages you pay employees.
There are a number of supplemental wages you can use to compensate employees.
Some supplemental wages are mandatory while others are optional.
1. Overtime wages
If you have nonexempt employees, you must follow overtime laws. Under the Fair
Labor Standards Act (FLSA), you are required to pay overtime wages to nonexempt
employees who work more than 40 hours in one workweek.
Overtime pay is time and a half, or 1.5 times, the employee‟s regular wages. Provide
overtime pay for each hour an employee works over 40 during the workweek.
2. Retroactive pay
Retroactive pay is compensation that you owe an employee from a previous pay
period.
You may need to compensate employees with retro pay for a number of reasons,
including miscalculating the employee‟s regular wages, failing to pay overtime,
forgetting to account for a raise, or neglecting a shift differential.
Paying retro wages is mandatory because the employee is entitled to the
compensation you neglected to pay.
3. Commissions
Commission pay is money an employee earns when they make a sale or accomplish
another goal. You might give commissions as a percentage of a sale or a fixed
amount depending on the sales volume.
For some jobs, commissions are common. You might pay commissions to
employees who work in sales positions, such as a car salesman.
You might provide an employee with both regular and commission wages. That way,
the employee is guaranteed to earn a set amount per pay period, regardless of if they
don‟t earn commissions.
Or, you can forego regular wages and pay employees solely with commissions. Keep
in mind that you must pay the employee at least the minimum wage.

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4. Bonus pay
You can choose to pay employees bonus wages, which is money an employee earns
in addition to their regular wages. You might give an employee bonus pay as a
reward or gift.
Unless an employee‟s employment agreement explicitly promises them bonuses,
you can give bonus pay at your discretion. For example, you may give an employee
a holiday bonus.
5. Severance pay
If you must terminate an employee, you may consider offering severance pay.
Employees earn severance pay after leaving a business in lieu of their regular wages.
You can decide how much severance pay to offer a terminated employee. Generally,
an employee earns severance for a period that is proportional to how long they
worked for the business.
You might be required to provide an employee severance pay depending on state
laws and whether you include severance in the employee‟s contract.
6. Accrued time off pay
Accrued time off pay, or PTO accrual, is when an employee has earned paid time
off from work but has not used it.
Some businesses pay out the employee‟s accrued time off as taxable wages when
the year ends or the employee leaves rather than rolling over or removing the accrued
time.
7. Tip wages
Your employees might be eligible for earning tips, depending on your business. Tips
are supplemental wages an employee earns from customers in addition to regular
wages you pay them.
Employees must report tip earnings to you if they earn more than $20 per month in
tips.

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THEORIES OF WAGE DETERMINATION:

1. Wages Fund Theory:

This theory was developed by Adam Smith (1723-1790). His theory was based on
the basic assumption that workers are paid wages out of a pre-determined fund of
wealth. This fund, he called, wages fund created as a result of savings. According to
Adam Smith, the demand for labour and rate of wages depends on the size of the
wages fund. Accordingly, if the wages fund is large, wages would be high and vice
versa.
2. Subsistence Theory:
This theory was propounded by David Recardo (1772-1823). According to this
theory, “The laborers are paid to enable them to subsist and perpetuate the race
without increase or diminution”. This payment is also called as „subsistence wages.
The basic assumption of this theory is that if workers are paid wages more than

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subsistence level, workers‟ number will increase and, as a result wages will come
down to the subsistence level.
On the contrary, if workers are paid less than subsistence wages, the number of
workers will decrease as a result of starvation death; malnutrition, disease etc. and
many would not marry. Then, wage rates would again go up to subsistence level.
Since wage rate tends to be at, subsistence level at all cases, that is why this theory
is also known as „Iron Law of Wages‟. The subsistence wages refer to minimum
wages.
3. The Surplus Value Theory of Wages:
This theory was developed by Karl Marx (1849-1883). This theory is based on the
basic assumption that like other article, labour is also an article which could be
purchased on payment of its price i e wages. This payment, according to Karl Marx,
is at subsistence level which is less than in proportion to time labour takes to produce
items. The surplus, according to him, goes to the owner. Karl Marx is well known
for his advocation in the favor of labour.
4. Residual Claimant Theory:
This theory owes its development to Francis A. Walker (1840-1897). According to
Walker, there are four factors of production or business activity, viz., land, labour,
capital, and entrepreneurship. He views that once all other three factors are rewarded
what remains left is paid as wages to workers. Thus, according to this theory, worker
is the residual claimant.
5. Marginal Productivity Theory:
This theory was propounded by Phillips Henry Wick-steed (England) and John Bates
Clark of U.S.A. According to this theory, wages is determined based on the
production contributed by the last worker, i.e., marginal worker. His/her production
is called „marginal production‟.
6. The Bargaining Theory of Wages:
John Davidson was the propounded of this theory. According to this theory, the
fixation of wages depends on the bargaining power of workers/trade unions and of
employers. If workers are stronger in bargaining process, then wages tend to be high.
In case, employer plays a stronger role, then wages tend to be low.

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7. Behavioral Theories of Wages:

Based on research studies and action programmes conducted, some behavioral
scientists have also developed theories of wages. Their theories are based on
elements like employee‟s acceptance to a wage level, the prevalent internal wage
structure, employee‟s consideration on money or‟ wages and salaries as motivators.
WAGE POLICY:
The term “Wage Policy” refers to legislation of government action undertaken to
regulate the level or structure of wages or both for the purpose of achieving specific
objectives of social and economic policy.
Major factors that may affect the wage policy:
 Internal equity
 External equity
 Productivity
 Cost of living
 Motivation level of workers
 Pay vis-a-vis performance
 National wage policy
 Statutory obligations
 Labour market conditions
 Present rate of attrition of employees.
Factors Influencing Sound Wage Policy:
 Demand and Supply:
If the supply of labour is abundant, workers will be ready to work for lower wages.
But if the supply of labour is scarce, workers will demand higher wages.
 Prevailing Wage Rates:
Wages paid by one firm generally depend upon the wages paid by other competing
firms or by other firms in the same locality or by the industry as a whole for the same
type of work.

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 Ability to Pay:
The wage level of the organization largely depends upon the ability of the firm to
pay to its workers. The ability to pay, in its turn, depends upon the amount of profits
earned by the organization. Therefore, wages will be generally raised as the firm‟s
net profitability increases.
If the firm‟s earnings increase beyond reasonable level of return on the capital
employed, workers claim that they are entitled to participate in the surplus profit.
However, it becomes necessary first to determine precisely the fair amount of profit.
 Productivity:
It is argued that wages should be commensurate with the productivity of the workers.
Therefore, the higher the productivity, the higher will be the wage level to be paid
to the workers.
 Cost of Living:
Wages should depend upon the cost of living. Changes in cost of living therefore
lead to changes in the wage-rates. It is therefore desirable to increase wage-levels
whenever the cost-of-living rises. What is important is not the money wage but the
real wage which actually satisfies the needs of the workers. Hence money wages
should be adjusted to maintain the real wages intact.
 State Regulation:
Since workers‟ bargaining power is weak, the State steps in to protect their interest
by regulating their wage-rates. The State, by enacting necessary legislation,
guarantees minimum or fair wages to workers so as to enable them to lead a decent
standard of living.
 Job Requirements:
Jobs differ in their responsibility and authority. Generally, jobs requiring higher
authority and responsibility are paid higher wages. Similarly, jobs which require
highly skilled workers are also highly paid. Again, jobs which are very risky and
dangerous (e.g., pilots) are also highly paid.

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 Trade Unions:
Workers who are well organized into trade unions are able to get higher wage-rates
whereas those who have not formed such unions are not able to get higher wage-
rates.
Limitations of wage policy:
The limitations of wage policy are as under:
1. Enforcement – Enforcement in unorganized sector.
2. Rise in Prices – Prices rising is almost beyond government‟s regulatory
capabilities.
3. Wages versus Productivity – Wages lag far behind from the labour productivity.
4. Imbalanced Labour – Lesser number of workers in organized sector takes away
bulk of wages than unorganized.
5. Less Skilled Labour – Ever increasing addition to workforce yet death of skilled
labour.
6. Shifting of Methods – High wages may force employer to shift towards capital-
intensive methods.
7. Reduction in Capital – High wages brings a reduction in the capital for growth.
8. Increased Consumption – The nature of wage incomes is consumption-oriented
rather than savings-oriented so increased wages would mean increased consumption.
Therefore, economic growth may not be affected directly as it depends upon rate of
investment possible with the medium of savings.
WAGE BOARD
The wage board is, as a rule, tripartite body representing the interest of labor,
management and the public. Labor and management representatives are nominated
in equal numbers by the government, after consultation with and with the consent of
major central organizations
Objectives of wage boards
1. To work out wage structure based on the principles of fair wages as
formulated by the Committee on Fair Wages.
2. To work out a system of payment by results.
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3. To evolve a wage structure based on the requirements of social justice.

4. To evolve a wage structure based on the need for adjusting wage
differentialsin a manner to provide incentives to workers for advancing
their skill.
Functions of Wage Board:
 Recommending the minimum wage
 Differential cost of living compensation.
 Regional wage differentials
 Gratuity
 Hours of work
 Categorizing workers for wage fixation.
 Workout wage structure based on principles of fair wages.
 Workout the principles of bonus.
EMPLOYEE COMPENSATION TRENDS IN INDIA TODAY
• Substantial differentials in gross compensation of the managerial level to the
next lower level are practiced.
• Differentials in gross compensation and sometimes compensation structure
are being practiced between the project and support functions.
• Personalized salaries out of a basket of options for individuals at senior levels.
• Significant increase in basic salary and hence in deferred benefits.
• Restriction of non-tax perks in the form of reimbursement under various
heads to only certain top levels of management.
• Higher annual increments, the average increments varying from 50 to 100%
for different levels of management.
• Shift in incentives to group / team incentives rather than individual based.
Different kinds of incentive like Performance Incentive, Commission,
Performance Payment, and Performance Bonus etc. are not always individual
specific. They are usually team or level based. Individual based cash incentives
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are on the downslide except at very senior levels.

• Soft furnishing allowance is being provided towards purchase of curtains,

carpets, cutlery and crockery etc., and this is usually paid as an annual, non-
taxable allowance.
• Conveyance is an area, which provides a lot of scope for variations.Practices
with regard to provision of car, driver and reimbursement of expenses on car,
parking, cleaning, petrol, and maintenance are covered under this category.
• Companies encourages the employees to buy cars through hire purchase
schemes and the installments are paid by the company. This also helps combat
the problem of accumulation of used cars by the company cars with the high
employee turnover.
• Two and Four wheeler loans are common practice. Interest rates may vary
from 0% to 5% with the repayment period varying from 3 to 5 years.
• Medical benefits are liberally available with tie-ups with insurance companies
and hospitals in many cases.
• Some companies assist employees in their higher education by sponsoring
evening classes or providing sabbatical leave at company cost.
• Reimbursement of books, periodicals, newspapers, journals etc against a pre-
determined limit is common. Membership subscription to professional bodies is
also reimbursed.
• Club membership in form of reimbursement of one-time joining fee for one
club plus the monthly/ annual subscription to one more clubs is an attractive
perk for senior management.Companies also go for bulk corporate club
memberships.
• Soft loans for purchase of furniture, appliances and computers are also
extended.
• Housing loans or interest subsidy is also provided
• Reimbursement for travel for a holiday including accommodation in
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guesthouses, transit flats etc is practiced. In most cases, this is used as a

discretionary reward for exemplary performance rather than as a perk.
• Pre-employment benefits for attracting good people include the company
picking up of all relocation expenses for the family, transport of personal goods,
assistance in locating housing, schooling etc.
• Some trendy components like long-term paternity or maternity leave, part and
flexi-time employment options are also available.
• The trend has shifted to make components direct and taxable. There is a
distinct shift towards schemes for asset creation.
• The senior executives share introduction of profit sharing schemes whereby
when the company earns profits beyond a certain fixed level, the profit accrued,
the average norm being 20 to 25% of the excess profit.
• Stock options are also a rage in the mark