Wage or Compensation Differentials

EQUITY IN COMPENSATION MANAGEMENT
Managing Equity literary means application of general

principles of justice to correct or supplement the law or
fairness.
Compensation Equity
Compensation equity may be defined as a practice
wherein employees (and organization) examine their
inputs and outputs and judge fairness of compensation
by comparing inputs and outputs of a referent other.
EQUITY IN COMPENSATION MANAGEMENT
Equity by nature, human beings compare themselves

with other. We live and work in a relative world.
Compensation is natural to be compared upon.
Equity equation: if A stands for self-compensation

and B stands for other’s compensation then three
scenarios emerges:-
A > B; employee will be satisfied.

A < B; employee will be dissatisfied.
A = B; neither satisfied nor dissatisfied.
EQUITY IN COMPENSATION MGMT…
Inputs includes:
Quality of job performance, length of service,

education , experience, amount of responsibility and
pressure, productivity on the job, and organizational
citizenship behavior.
Outputs includes:
Compensation and benefits, promotions and

status.
MODEL OF COMPENSATION EQUITY
External Compensation Internal

Equity Management Equity
Individual
Equity
TYPES OF EQUITY
 Internal equity
Employees compare their compensation with other employees
doing same work or similar nature of work in the same organization.
 External Equity
Employees compare their compensation with other employees
doing same work or similar nature of work in another organization.
 Individual Equity
Employee assesses his self-worth in terms of education, experience,
competence, performance and results and then compares these
with his compensation.
EQUITY IN COMPENSATION MANAGEMENT…
WAYS TO IMPROVE EQUITY IN COMPENSATION MANAGEMENT
Communicate
compensation
system
Link Categorize
compensation
with
employees
performance by job
Ways to
Manage improve Compare
internal Equity in with labor
equity Compensation market
Management
INTRODUCTION
 Itmeans difference in wages and salaries of the
employees.
 Itreflects the differences in physical and mental

abilities of workers, in productivity and
efficiency of management and in consumer
preference.
 Itact as an incentive to work hard, to develop

requisite skills and improve productivity
REASONS OF COMPENSATION DIFFERENTIALS:
 It is now well established in the literature that

similar workers earn very dissimilar wages when
working for different employers.
Reasons of Compensation Differentials:
1. Inter-industry Differentials
2. Intra- industry Differentials
INTER-INDUSTRY DIFFERENTIAL (WITHIN INDUSTRY)
 Nature of Industry
 Knowledge based work
 Technology employed
 Level of skills and competencies
 Sector- organized & unorganized
 Competitive strategy
INTRA-INDUSTRY DIFFERENTIAL
 Size of the organization
 Financial success
 Competitors
 Market position
 Automation
 Compensation philosophy and policies
 Organizational Culture
DIFFERENTIAL AT INDIVIDUAL LEVEL
 Occupation
 Skills and competencies
 Gender
 Labour market
 Experience
 Education
 Intellectual level
PRINCIPLES OR GUIDELINES OF WAGE DIFFERENTIALS
 Wages should proportionate with work.
 Equal wages should be paid for equal work.
 Differentials should be sufficient to attract workers to

jobs in industries.
 Differentials should be sufficient for acquiring skills and

improving productivity.
PRINCIPLES CONTINUED…….
 Fair Wage Committee recommended that wage

differential should be established on the basis of certain
consideration:-
 The degree of skills

 The strain of work
 The experience involved
 The training required
 Responsibility under-taken
 Mental & physical requirement
 The disagreeableness of the task
 Fatigue involved (exhaustion, tiredness)
REASONS/ CAUSES OF WAGE DIFFERENTIALS
 Degree of skills and training period needed
 Nature of work to be performed
 Mental and physical exertions
 Risk involved in the job.
 Differences in efficiency of labor
 Demand and supply of particular type of labor

TYPES OF WAGE DIFFERENTIALS
Skill
Occupational Differential
OCCUPATIONAL WAGE DIFFERENTIAL
 These are based on occupation or position the employees

hold in the organisation rather than on skills, hazard and
efficiency.
 It may be inter-occupational, inter-firm or inter-area.
 These are the differences in the pay for same kind of

input.
SKILLS WAGE DIFFERENTIAL
 Differentials in wages and salaries made on the basis of
skills acquired by the employees.
 Two types of workers:- skilled and unskilled workers
 Due to industrialization more labor has to be drawn

initially from non-industrial sector like agriculture.
 Skilled labour or workers are less in numbers so demand

high wages/salaries as compared to unskilled workers.
INTER-INDUSTRY WAGE DIFFERENTIAL
 Inter-industry wage differentials arise when
workers in the same occupation and in the same
area but in different industries are paid different
wages.
 It reflects skill differentials.
 Reason behind Inter-Industry Wage differential

is development and expansion of capital-
intensive industries rather than labour intensive
industries.
 Other factors:- extent of unionization, relative
bargaining power, ability to pay, labour –capital
ratio, stage of development of industry…. And
many more
REGIONAL WAGE DIFFERENTIAL (ON
AREA)
 It can be said as inter-area or geographical wage

differentials.
 These type of wage differentials arise when workers in
the same industry and in the same occupational group,
but living in different geographical areas are paid
different wages.
 Workers doing same job in units of an industry located in
different regions.
 Other factors: Capacity to pay, profitability & nature of
the product market
REGIONAL WAGE DIFFERENTIAL
 There are many other factors such as

 Relative abundance of natural resources.
 Difference in labour productivity.
 Difference in cost of living
 Rate of capital formation
 Extent of unionization
 Urban or rural character of the surrounding
 Quantity & Quality of labour supply
SEX WAGE DIFFERENTIAL
 Wage differential due to gap between male and female

earnings.
 Gap between the wages of female and male, even with
similar qualification, doing similar job etc..
 Equal remuneration for men and women workers for
equal value, without discrimination based on sex- ILO
SECTOR WAGE DIFFERENTIAL
 Wage differential between agricultural sector and

industrial sector.
 Mostly seen in under-developed or developing
economies like India.
 This type of wage differential is due the nature of the
workers’ group whether they are organised group or
unorganised group, and the level of economic
development of the sector.
 Agricultural labour belongs to unorganised sector and
Industrial labour belongs to organised sector of the
economy.
CONTINUED….
 Unlike industrial sector, no industry-cum-region

principle is followed while fixing wages in agricultural
sector.
 Due to the strength of the industrial unions only a higher
level of wages is provided to industrial labour as
compared with their counterparts in the agricultural
sector or agricultural labour.
CONCLUSION
 Wage differentials are necessary both in the interests of

efficiency and in the interests of justice. But wide
disparities in wage levels and exploitation of low-wage
earners belonging to a particular society are not justified
under any circumstances. Wage differentials exploit the
workers in one or the other way. Keeping this in view,
there is a general need to evolve a policy on wage
differentials in order to safeguard the interest of
employees/workers.

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EQUITY IN COMPENSATION MANAGEMENT

Managing Equity literary means application of general

Equity by nature, human beings compare themselves

Equity equation: if A stands for self-compensation

A > B; employee will be satisfied.

Quality of job performance, length of service,

Compensation and benefits, promotions and

External Compensation Internal

 Itreflects the differences in physical and mental

 Itact as an incentive to work hard, to develop

 It is now well established in the literature that

Reasons of Compensation Differentials:

 Knowledge based work

 Level of skills and competencies

 Sector- organized & unorganized

 Compensation philosophy and policies

 Skills and competencies

 Wages should proportionate with work.

 Equal wages should be paid for equal work.

 Differentials should be sufficient to attract workers to

 Differentials should be sufficient for acquiring skills and

 Fair Wage Committee recommended that wage

 The degree of skills

 Degree of skills and training period needed

 Nature of work to be performed

 Mental and physical exertions

 Risk involved in the job.

 Differences in efficiency of labor

 Demand and supply of particular type of labor

 These are based on occupation or position the employees

 It may be inter-occupational, inter-firm or inter-area.

 These are the differences in the pay for same kind of

 Two types of workers:- skilled and unskilled workers

 Due to industrialization more labor has to be drawn

 Skilled labour or workers are less in numbers so demand

 Reason behind Inter-Industry Wage differential

 It can be said as inter-area or geographical wage

 There are many other factors such as

 Wage differential due to gap between male and female

 Wage differential between agricultural sector and

 Unlike industrial sector, no industry-cum-region

 Wage differentials are necessary both in the interests of

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