Compensation Management

Definition of wage and concepts related to wage

The concept of wage has been examined according to various branches of
science and discussed in different contexts in different periods and certain approaches
have been created. While the wage is considered a cost element that affects the
development of the industry in terms of business, it is a determining factor in the income
and living standards of working people in terms of social policy. In economic terms,
wage refers to the price paid for human physical or intellectual labor, which is one of the
factors of production. Wage, as a multifaceted concept, is defined in different ways and
is also referred to by different names due to differences in the way it is paid.
Wage is the value in kind and/or cash paid in return for all intellectual and/or
physical labor (effort) that contributes directly or indirectly to the production of goods
and/or services.
While wage stands out with its economic aspect, it is also an important concept
with its social aspect. Wage is the only source of income for the worker and his/her
dependent family to meet their basic needs. For this reason, today the wage is
considered not only as compensation for the time worked (time-labor relationship), but
as an income that should enable the worker and his family to live humanely and
healthily. In this context, in addition to the actual wage, which is the equivalent of labor,
various payments, monetary or in kind, are made to the worker within the framework of
the social wage concept, without the employer in return for performing any work, in
accordance with the provisions of the contract or legislation. Week and holiday holidays,
annual paid leaves, marriage, birth and death benefits, or wages paid to workers on
days they do not work due to compelling reasons, can be given as examples of
payments referred to as additional wages, social wages or side payments.
Social wages are payments in monetary or in kind made to employees by the
employer in accordance with the provisions of the contract or legislation, without the
need for any work, other than the actual wage in return for their labor.
 One of the most basic elements in determining the wage is time. The working time-
wage relationship has been a much-discussed issue since the Industrial Revolution until
today and has been updated according to economic and social developments. Working
hours should be determined in such a way that, on the one hand, the employer can
meet the workforce requirements to the extent required, and on the other hand, the
worker can protect his mental and physical health and his relations with his social
environment, especially his family, without worrying about financial losses. Working
hours, which are shaped according to the economic and social structures of countries,
constitute the basis for many legal regulations regarding wages.

Concepts Related to Wage

In order to better understand wage, which is a multifaceted and complex concept,
some concepts related to wage need to be explained. Concepts related to wages can
be classified as follows:
Main (Root) Fee – It is the amount of wages that must be paid or agreed upon per
unit of production or unit of time. In time-based wage systems, this amount may be
hourly wage, daily wage, weekly wage or monthly wage. Wages based on production
are wage amounts determined per piece, per meter, per kilogram or per ton.
Bare Wage and Dressed Wage – Bare wage refers to the basic wage that is in
return for the employee's labor, work or work. Apart from this wage, which is given
different names such as the main wage, bare wage, basic wage, payments to the
worker such as bonuses, premiums, commissions, dividends, and social assistance
benefits such as food, vehicle, clothing, fuel, housing and similar monetary or
measurable benefits are called "wages". It is called "attachments". The "dressed wage"
is formed by adding the bare wage, wage supplements and social benefits. The wage
that is the basis for calculating severance and notice pay is the adjusted wage.
However, employee receivables such as bonuses, annual leave pay, week holidays,
general holidays, and overtime wages are calculated on the bare wage (basic wage).
Gross Wage and Net Wage – Gross Wage and Net Wage Gross wage includes
the total payments made by the employer to employees within the scope of the wage.
Net wage is income from gross wage and includes stamp taxes, social security
deductions, union dues, etc. It refers to the available wage remaining after deductions
are deducted and received by employees. Net pay can be calculated with the following
simple formula:
Net Wage = Gross Wage – Deductions
Nominal Wage and Real Wage – Nominal wage is the amount of money an
employee receives in return for his labor. The real wage determines the amount of
money the worker receives, the amount of goods and services he can buy in the
market, that is, his purchasing power. The real wage varies depending on the general
level of prices. If the increase in the general level of prices (inflation) is more than the
increase in nominal wages, the worker's nominal wage increases but his real wage
decreases. If the nominal wage increase rate is higher than the inflation rate, it means
that the real wage increases. While the nominal wage, which affects the costs, is
important for the employer, the real wage, which determines the standard of living of the
employee and his family, is more important.
Wages in Kind and Wages in Cash – Wage in kind is any payment made by the
employer to the worker in goods rather than money in return for a job. Cash fee means
that the fee is paid in money or cash. Nowadays, payments in kind are mostly seen in
social benefits provided to employees by employers, apart from wages, and are mostly
determined by collective agreements.
Wage Limit and Wage Income – Wage Rate and Wage Income The basic unit
value or amount assigned to a certain quality of labor is expressed as the wage rate.
Accordingly, according to the applied wage system, the wage amount determined per
unit of time or product (output) is called wage rate. The pay rate may be determined by
the value of the job or the person's skill and competence level. For example, $15 per
hour or $5 per unit of product or $2500 per month. Wage income refers to the
employee's wage earnings in a certain period. Fee income is calculated as follows:
Wage Income = (Wage Rate X Number of Units) + Fee Supplements + Social
Helps

Fee Structure – It shows the relative status of the wages paid in a business
against each other and reveals wage differences. Employees may receive different
wages in different businesses for the same or similar work. This may also be the case
for workers working in the same enterprise. Sometimes, completely different workers
can be paid the same wage if they are considered equal in terms of the qualifications of
the work they perform. Businesses can freely determine wages within the framework of
certain principles, through individual agreements with workers or through collective
bargaining with unions if the business is unionized. The most important of these
principles is the obligation to pay "equal pay for equal work". However, the obligation to
pay equal wages for equal work should not be understood as a practice of paying the
same wage to every employee. The obligation to pay equal wages for equal work
means paying the same wage to workers who do the same job and have the same
performance and seniority in the same workplace. However, here is seniority; It should
be determined not only on the basis of the working period at the workplace, but also by
taking into account many factors, including the knowledge and experience acquired by
the worker during his time at the workplace, the positions he has worked in, the rewards
and punishments he has received. If two people working in a business have the same
qualifications and do similar jobs, but their wages are not equal, this is wage inequality.
This situation can cause serious problems for the business, both legally and in terms of
labor peace. For example, an employer who does not act in accordance with the
principle of equal treatment and discriminates among his employees is expected to pay
compensation.
Wage Systems – Wage systems refer to the rules and order that determine how
wages will be calculated and paid to employees. Businesses may use different wage
systems depending on their structural characteristics and human resources policies.
Today, while some wage systems are losing their importance, depending on the
attitudes of businesses and unions, employees' expectations and competitive
conditions, others are becoming more and more important.
Wage Level – It refers to the general average wage level of wages paid to
employees in a business. In order to understand whether the wage level is high or low,
wages must be compared with a criterion. It is possible to compare wages by business
area, region or internationally. Average wages are used in wage comparisons at
regional or international levels. It is appropriate to use nominal wages for comparisons
made within the same region and the same time period. In comparisons made for
different regions, different countries or different time periods, real wages must be taken.

Compensation Management
Activities regarding how to design and implement monetary payments made to all
employees in an organization in return for their work constitute one of the most
important functions of human resources management. This function, also called “wage
and salary management” or “remuneration”, covers the policy, structure, system and
practices regarding the remuneration of employees working in businesses.
Compensation management includes wage policies, wage structure and wage
systems, and refers to a dynamic process and a system consisting of various stages.
Compensation management is the set of activities carried out to determine and
implement the most appropriate wage possible for both the organization and the
employees.
Traditional wage systems focus on revealing the value of each job, rather than the
competencies or skills of the employee, and the work itself is analyzed in determining
the basic wage, not the employee performing the job. In new wage approaches, the
focus shifts from jobs to employees. Today, wage management is no longer a subject
addressed with the traditional "payrolling" approach, and the relationship of wages with
the investment, motivation, satisfaction and performance dimensions, as well as the
value of the job and the person, has begun to be taken into consideration. However, job-
focused compensation systems may still be appropriate for many companies. This
depends on the company's structure, policies and market conditions. For example,
traditional wage systems are likely to be more successful in companies where jobs do
not change frequently and are standard, workforce turnover is low, hierarchical structure
is supported, and technology is relatively stable.
The objectives of compensation management, which is a basic human resources
function that should be designed and carried out from a strategic perspective, can be
listed as follows:
 To comply with the relevant laws in force,
 To ensure cost effectiveness for the organization,
  To ensure internal, external and individual equality for workers,
 Improving organizational performance,
 Competing with other businesses to attract and retain qualified people,
 To reduce production and productivity loss by preventing negative
developments in labor relations,
 Working in harmony with unions,
 To reward and encourage high level performance,
 It is to increase the living standard and welfare level in society.

Various principles need to be taken into consideration in order to effectively carry

out wage management as a very important process that is closely related to the
strategic objectives of the business. These principles can be listed as follows:
Principle of equality: As stated before, the principle of equality, which we can
also express as the principle of equal pay for equal work, is to ensure a balance
between wages, taking into account factors such as responsibility, importance and
difficulty of the job.
Balanced wage principle: The wage should be satisfactory enough to provide the
employee with a certain standard of living, but measured and balanced enough not to
excessively increase the costs of the business.
The principle of conformity to the current wage: The wage paid to the
employee is equal to the wage paid for the same type of work in the wage market. This
principle is especially important in terms of retaining qualified employees and preventing
them from leaving to other businesses.
Principle of wage proportional to promotion: The wage of an employee in a
higher position or staff where he assumes new duties and responsibilities is higher than
his previous position. The fact that each senior position offers a higher wage than the
lower level position also increases the motivating effect of the wage on promotion.
Integrity principle: It is the implementation of a wage policy that covers all
employees, without making any wage discrimination between those who are known as
white-collar workers in the enterprise and who are in managerial positions, and those
who are defined as blue-collar workers and who work with their physical labor.
 Objectivity principle: Emotional reasons do not play a role in determining wage
increases, wages and wage increases are given to everyone objectively, to the extent
they deserve, without causing favoritism or unrest.
Principle of clarity: The wage system applied in the enterprise should be easily
understood by the employees. It is important that employees are constantly informed on
wage-related issues and their opinions and suggestions are taken into account.

Within the scope of wage management, a monetary value (root wage + additional
opportunities + social benefits + performance fee) and criteria for an increase in this
value (market conditions, seniority, economic indicators, legal regulations, etc.) are
determined for each job according to the basic objectives and legal regulations. . When
determining these, the management must first know the wage structure and the factors
affecting the wage level, and determine wage strategies and key policies.
Wage policies regarding wage management serve as a guide for human resources
managers and other managers in order to achieve the objectives stated above. Thanks
to wage policies, managers can increase employees' confidence in the wage system by
making consistent decisions about remuneration when faced with similar situations.
Policies regarding wage management mostly relate to the following issues:
 How to determine pay rates
 How to create a fee structure
 How will wage levels compare to market wage levels?
 How and on what basis wage increases will be made
 How to make wage increases in case of transfer and promotion
 What will be the entry-level wages and the wage gap between a new
employee and a more senior employee?
 What will be the scope of performance, knowledge, skills and competencies
and seniority that will affect the increases?
 Wage Systems
New studies are constantly carried out in line with current developments in working
life on the subject of wages, which has a very important role in the economic
development, social development and political stability of countries. Wage systems refer
to the rules and order that determine how wages will be paid to employees. Businesses
can apply different wage systems in accordance with the human resources
management policies they adopt, their own structural characteristics and traditions.
Changes are also taking place in wage systems depending on the change in
management approach and the differentiation in employees' understanding and
expectations regarding wages. While traditional wage systems remain valid, on the
other hand, new wage systems are created according to changes in the nature of
employees and the structure and characteristics of businesses.
Wage systems start with correctly determining job descriptions and requirements.
Wage levels and structures are created by directing the determined definitions to job
evaluation and wage research. In the next stage, it is implemented by taking into
account performance criteria.
Although the wage systems of businesses vary according to their fields of activity,
goals and policies, the main objectives of a good wage system can be summarized as
follows:
 To attract qualified potential employees to the business
 To ensure the continuity of qualified employees in the business
 Motivating employees
 Increasing the performance of employees
 Increasing employee productivity

Wage Systems Based Directly on the Labor Market

Using direct market wage levels for existing jobs in the business is one of the
easiest and most preferred methods as it does not require a complex methodology and
is not time consuming. Since it is assumed that the data obtained in this way will be
objective, it is thought that this method will be accurate and realistic in pricing jobs and
will also reflect the balance between supply and demand very well. However, there is no
single correct wage level for most jobs in the labor market. There are only fees that vary
from case to case and are determined by mutual agreement of the parties. Therefore, it
is possible to use this approach when all jobs in a business can be compared one to
one with jobs in the market. In addition, this system may be more suitable for use in
newly established businesses, research and development units and sales
organizations. It is possible for large businesses with many different jobs to charge
market-based wages only for comparable jobs. A job evaluation is required for
incomparable jobs.

Work-Based Wage Systems

In work-based wage systems, wages are calculated and paid taking into account
the time spent at work, the amount of work done or performance.
Time-Based Wage Systems – Time-based wage systems are one of the oldest
wage systems. This system is determined on an hourly, daily, weekly or monthly basis
only according to certain time standards determined by the business, without taking into
account the amount, quality and efficiency of the work. Although it is very simple to
understand and implement, it has very little motivating effect on employees because the
quality, productivity, performance increase that the employee shows at work and the
difference between less and more employees are not reflected in the salary. The
increase in wage income increases only proportionally depending on the time worked. It
ensures that the employee receives the wage for the time he/she is expected to be at
work during the baseline period. The time-based wage system has several positive
aspects. It is a very simple system and the employee's wage is easily calculated.
Knowing the wages that employees will receive in advance increases their sense of
security. It also reduces conflicts between employees and management. The most
important of the negativities arising from the system is that it causes victimization of
high performers. The lack of an incentive aspect requires more supervision of
employees. On the other hand, it is not a wage system suitable for increasing
productivity and production.
Wage Systems Based on the Amount of Work Produced – It is also called piece-
rate production systems and the wage is paid according to the amount of product
produced, not according to time. The time taken for production also plays a role in
determining the wage per piece, but the main factor in determining the wage is the
number of pieces produced. The wage the worker will receive is calculated by
multiplying the number of units produced by the wage determined for one unit. This
wage system can be applied more effectively in jobs where production units are
measurable, the work is standardizable, production quantity is more important than
quality, and does not require an effective surveillance system. However, if workers who
want to get paid more produce more, this may lead to a decrease in quality and an
increase in the risk of work accidents due to more wear and tear of employees. In
addition, when the working speed of senior workers is taken into account in the
establishment of the wage system, the calculated wage amount for workers who have
just started working may be below normal. On the other hand, production may be
interrupted due to situations not caused by the employee himself, such as lack of raw
materials or materials. In order to prevent this situation, the minimum wage must be
guaranteed in the implementation of this system.
Lump Sum Fee Systems – In lump sum fee systems, a fee is determined on the
basis of completing a job within a certain period of time. In this system, the scope of the
work, the duration of work and the fee are determined in advance. If the work is not
completed within the specified time, a deduction is made from the wage. If it is
completed in advance, no additional fee will be paid unless there is a special agreement
between the parties to the employment contract. The lump sum wage system is used in
jobs such as contracting, painting and cleaning, where it is difficult to measure how
much time and effort individual employees spend to complete a job.

Wage Systems Based on the Individual Doing the Work

Remunerating employees for the knowledge, skills or behaviors they acquire
regarding the work they do, rather than the amount of work done or the duration of
work, is among the most common wage systems in recent times. As an incentive
system for employees to improve themselves and rise to new positions, the wage
systems under this heading can also be expressed as a reward system. It can be
divided into two: knowledge and skill-based wage system and competency-based wage
system.
Wage Systems Based on Knowledge and Skills – It is the remuneration of
employees according to the depth and type of knowledge and skills they bring to the
organization or developed during their employment, and the rate at which they can
adapt these skills. While it was considered an alternative to the traditional pricing
approach when it was first used, it has started to be included in the pricing systems of
businesses since the 1990s. There are various reasons for using knowledge and skill-
based wage systems. The most important of these can be listed as follows:
 The need for a workforce that can quickly adapt to new technologies and
increase and improve production efficiency with less supervision.
 The need to make the existing workforce more useful and flexible in order to
overcome absenteeism, faulty production, work accidents and production
bottlenecks.
 The need to minimize organizational deficits such as absenteeism caused
by employees
 The need for self-confident, qualified and most importantly highly motivated
employees
 Creating an organizational structure that can work more effectively with a
small number of but versatile and skilled personnel profiles and the need for
this
In this system, which establishes a connection between the number and depth of
skills that employees have and the increase in wages, employees' individual
development, newly acquired talents, skills, knowledge and other characteristics that
add value to the business are rewarded. It is not the performance of the employee that
is rewarded, but the skills he/she has. However, acquiring new knowledge and skills can
be included in the performance evaluation system by being among the performance
elements. The most important stage in the process of establishing this wage system is
to accurately define the skills that the employee will use while performing the assigned
task or doing routine work. Skill refers to the dexterity, skill or mastery that an employee
will need to do any job in the enterprise. Skills can be technical skills such as using
equipment, problem solving, repair-maintenance, digital programming, as well as
managerial skills such as communicating, giving and receiving feedback, dealing with
conflicts, providing on-the-job training and team management.
Competency Based Wage Systems – Competency-based wage systems can be
defined as a basic wage system in which wage levels, differences and criteria are
structured depending on the competencies the employee has, demonstrates or
implements. Competence can be briefly defined as behaviors that reflect the
knowledge, attitudes and skills that individuals must have in order to fulfill their
responsibilities with better performance. Organizations that take into account
competencies as well as performance focus on individuals and compensate them
according to the skills they have. However, in order to obtain a wage increase in this
system, competencies that provide meaningful progress must be learned and
developed.
Competencies include the basic behaviors required for excellent performance in a
particular job or task and are often considered success factors. Therefore, within the
framework of the concept of competence, not knowledge is considered, but rather
behaviors that enable the "application" of knowledge in a way that creates success.
Likewise, how skills will be demonstrated to achieve success becomes important. On
the other hand, although competencies are not work motives themselves, they reveal
distinct behaviors related to motives. Many companies obtain an integrated system by
using competency models in all of their human resources applications, and today
competency models are accepted as a common language that creates the connection
between the organization, business and people.