1.What is compensation?

Compensation means all the money, benefits, and services an employee gets for their work. This
includes salary, bonuses, provident fund, gratuity, insurance, and other benefits an employee receives
as part of their job. Two important functions of compensation are-

• Equity function
• Motivation function

Equity is based on past & current performance& motivation with which the work has been performed
in the past & current performance.

2.Defined wage and salary administration as follows-

Wage and salary’ administration refers to the establishment and implementation of sound policies and
practices of employee compensation. It includes such areas as job valuation, surveys of wages and
salaries, analysis of relevant organizational problems, development, and maintenance of wage
structure, establishing rules for administering wages, wage payments, incentives, profit sharing, wage
changes and adjustments, supplementary payments, control of compensation costs and other related
items.

3.Compensation may be used to-

• Recruit and retain qualified employees.

• Increase or maintain morale/satisfaction.
• Reward and encourage peak performance.
• Achieve internal and external equity.
• Reduce turnover and encourage company loyalty.
• Modify (through negotiations) practices of unions.

Many employers focus on recruitment and retention of qualified employees, but the availability and
cost of qualified applicants depend on market factors beyond their control. Employers can set
compensation levels for new hires and advertise salary ranges, but they must compete with other
companies seeking to hire from the same applicant pool. Morale and job satisfaction are also
influenced by compensation. There must be a balance (equity) between the monetary value an
employer is willing to pay and how much an employee feels their work is worth. To save money, some
employers may freeze salaries or salary levels, but this can lower satisfaction and morale. On the other
hand, to reduce turnover, employers may choose to increase salaries and salary levels. Compensation
is also used to reward exceptional job performance, with examples such as bonuses, commissions,
stock, profit-sharing, and gain-sharing.

Employee compensation includes all forms of pay and rewards that employees receive for their work.
It consists of direct financial payments, such as wages, salaries, incentives, commissions, and bonuses,
as well as indirect benefits, like employee-paid insurance and vacations. Compensation plays a key role
in motivating employees, increasing productivity, and maintaining a strong employment relationship.
Several factors influence compensation, including labor market conditions, collective bargaining,
government regulations, and company policies.

4.A sound compensation structure tries to achieve this objective-

• To attract manpower in a competitive market.

 • To control wages &salaries & labor costs by determining rate change & frequency of
increment.
• To maintain satisfaction of employees by exhibiting that remuneration is fair adequate &
equitable.
• To induce & reward improved performance, money is an effective motivator.

For employees

• Employees are paid according to requirements of their jobs, highly skilled jobs are paid more
• compensation than low skilled jobs. This eliminates inequalities.
• The chances of favoritism (which creep in when wage rates are assigned) are greatly
minimized.
• Job sequences and lines of promotion are established wherever they are applicable.
• Employees morale and motivation are increased because of the sound compensation
structure.

To Employers

• They can systematically plan for and control the turnover in the organization.
• A sound compensation structure reduces the likelihood of friction and grievances over
remuneration.
• It enhances an employee’s morale and motivation because adequate and fairly administered
incentives are basic to his wants and needs.
• It attracts qualified employees by ensuring and adequate payment for all the jobs.

5.What are different types of compensation?

Direct /Base Compensation: Direct compensation refers to monetary benefits offered and provided
to employees in return of the services they provide to the organization. The monetary benefits include
basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements,
special allowances, bonus.

Basic salary: Basic salary is the fixed amount of money an employee earns for their work over a specific
period, such as a day, week, or month.

House Rent Allowance: Organizations either provide accommodations to its employees who are from
different state or country or they provide house rent allowances to its employees.

Conveyance: Organizations provide for cab facilities to their employees. Few organizations also
vehicles and petrol allowances to their employees to motivate them.

Special Allowance: Special allowance such as overtime, mobile allowances, meals, commissions, travel
expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to
provide them social security and motivate them which improve the organizational productivity.

Indirect or supplementary compensation: It includes non-monetary benefits that employees receive

for their work, such as insurance, paid leave, or other perks.

Overtime Policy: Overtime policy means employees should get proper benefits when working extra
hours, such as overtime pay and transport facilities.

Hospitalization: The employees should be provided allowances to get their regular check-ups, say at
an interval of one year.
Insurance: It also provides for accidental insurance and life insurance for employees. This gives them
the emotional security and they feel themselves valued in the organization.

Leave Travel: The employees are provided with leaves and travel allowances to go for holiday with
their families. Some organizations arrange for a tour for the employees of the organization.

Retirement Benefits: Organizations provide for pension plans and other benefits for their employees
which benefits them after they retire from the organization at the prescribed age.

Holiday Homes: Organizations provide for holiday homes and guest house for their employees at
different locations. These holiday homes are usually located in hill station and other most wanted
holiday spots.

Flexible Timings: Organizations provide for flexible timings to the employees who cannot come to work
during normal shifts due to their personal problems and valid reasons.

6.Objectives of compensation-

1)The first is equity, which may take several forms. They include income distribution through narrowing
of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing
power), the concept of equal pay for work of equal value compensation management strives for
internal and external equity.

2)Efficiency is closely linked to fairness (equity) because both concepts can work together. Efficiency
in compensation means connecting wages to productivity, profit, skills, or performance (individual or
group). If rewards are given fairly based on performance, it is seen as equitable. However, if employees
feel the rewards are unfair, it may be seen as inequitable.

3)Macroeconomic stability through high employment levels and low inflation, of instance, an
inordinately high minimum wage would have an adverse impact on levels of employment, though at
what level this consequence would occur is a matter of debate.

4)Efficient allocation of labor in the labor market. This implies that employees would move to wherever
they receive a net gain, such movement may be form one geographical location to another or form on
job to another. The provision or availability of financial incentives causes such movement.

For example, Workers may move from low-wage to high-wage areas or learn new skills for better pay.
If wages are below market rates, employees leave, increasing turnover. If wages are above market
rates, more job seekers apply. When workers shift from declining to growing industries, labor is
efficiently reallocated.

7.Factors affecting employee compensation-

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

Ability to Pay: This means large or successful companies can offer higher salaries than their
competitors, while smaller companies may only match industry pay levels or sometimes pay less than
the standard.
Business Strategy: It affects employee pay. A company that wants skilled workers to stay ahead of
competitors will offer higher salaries. But if a company is satisfied with its current workers, it will pay
the same or less than others.

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.

Employee: The employee or a worker himself influences the compensation in one of the following
ways:

• Performance: Employees who perform better earn higher pay, which motivates them to work
more efficiently.
• Experience: As the employee devotes his years in the organization, expects to get an increased
pay for his experience.
• Potential: If talent goes unnoticed, it has no value. That’s why companies pay more to
employees with higher potential than 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:

Labor Market: Employee pay is influenced by the demand and supply of workers. If there are more
workers than jobs, wages are lower. If there are fewer workers than jobs, wages are higher.

Going Rate: The compensation is decided on the basis of the rate that is prevailing in the industry, the
amount the other firms are paying for the same kind of work.

Productivity: Compensation increases as production goes up. To earn more, workers need to improve
their efficiency, which can be affected by factors like new technology, better methods, and improved
management.

Cost of Living: Employee pay is influenced by the cost of living. If the general prices or consumer prices
go up or down, wages or salaries may be adjusted to match these changes.

8.Compensation management and its significance-

Compensation management is the act of providing monetary value to an employee for the work they
do by means of a company process or policy. Compensation and reward systems are essential in
business. People (Men) are the most important factor, as businesses can't function without them. Just
like others expect returns, workers expect fair wages for their contribution. A fair compensation system
is crucial to keep employees motivated and satisfied, ensuring business success. The fair compensation
system will help in the following:

➢ An ideal compensation system will have positive impact on the efficiency and results produced
by employees. It will encourage the employees to perform better and achieve the standards
fixed.
➢ It will enhance the process of job evaluation. It will also help in setting up an ideal job
evaluation and the set standards would be more realistic and achievable.
➢ Such a system should be well defined and uniform. It will be apply to all the levels of the
organization as a general system.
 ➢ The system should be simple and flexible so that every employee would be able to compute
his own compensation receivable.
➢ It should be easy to implement, should not result in exploitation of workers.
➢ The system should be simple and flexible so that every employee would be able to compute
his own compensation receivable.
➢ The system should follow the management principle of equal pay.
➢ It should motivate and encouragement those who perform better and should provide
opportunities for those who wish to excel.
➢ Sound Compensation/Reward System brings peace in the relationship of employer and
employees.
➢ It aims at creating a healthy competition among them and encourages employees to work hard
and efficiently.
➢ The system provides growth and advancement opportunities to the deserving employees.
➢ A good compensation system provides platform for happy and satisfied workforce. This
minimizes the labor turnover. The organization enjoys the stability.
➢ The organization is able to retain the best talent by providing them adequate compensation
thereby stopping them from switching over to another job.
➢ The business organization can think of expansion and growth if it has the support of skillful,
talented and happy workforce.
➢ The sound compensation system is hallmark of organization’s success and prosperity. The
success and stability of organization is measured with pay-package it provides.

9.Process of compensation design-

Determine the critical goals for the organization – First, the company needs to decide its main goals.
These could be things like increasing profits, improving customer service, or boosting employee
productivity.

Translate the critical goal into realistic performance expectations – Once the goals are set, the
company must turn them into clear and achievable performance expectations for employees. This
helps everyone understand what they need to do to contribute to the company’s success.

Establish specific performance responsibilities – The company then assigns specific tasks and duties
to employees, making sure everyone knows their role in achieving the goals. This ensures that work is
divided properly and employees are accountable for their performance.

Develop accurate performance measures – To make sure employees are meeting expectations, the
company needs a fair way to measure their performance. This could be through regular evaluations,
feedback, or performance tracking systems.

Compensate employees based on results and value received – Finally, employees are rewarded for
their hard work and contributions. Compensation can include salaries, bonuses, incentives, or other
benefits based on their performance and value to the company.

10.Essentials of a sound compensation design-

Internal Equity: It implies a proper relationship between wages paid for different jobs within the
company. For example, salary of a Sr. Manager is lower than a manager; there is lack of internal equity.

External competitiveness: This means that a company's wages and salaries should match those
offered by other companies for similar jobs. If not, the company might struggle to attract and keep
skilled employees.
Built-in Incentive: Wage or salary plan should contain a built-in incentive so as to motivate employees
to perform better. Such an incentive can be developed through performance-based payment. A part
of the total payment should be linked to individual or group performance.

Link with Productivity: Some part of the total pay should be linked to productivity. Such linkage is
necessary because workers expect a share in productivity gains. This will help to control labor costs.

Maintain Real Wages: At least part of the increase in the cost of living should be neutralized so as to
protect the real wages of labor.

Increments: Compensation policy can be good motivator if pay increases are linked with merit. But
annual increments should partly be linked to seniority or years of service. The idea behind seniority-
based increments is that as a person gains more experience, their skills improve, and their efficiency
increases over time.

11.What are fringe benefits and its objectives?

Fringe benefits are indirect form of compensation given to employees in addition to the various forms
of cash pay- base pay, dearness allowance and inventive pay.

Objectives of fringe benefits:

❖ To create and improve sound industrial relations

❖ To boost up employee morale.
❖ To motivate the employees by identifying and satisfying their unsatisfied needs.
❖ To provide qualitative work environment and work life.
❖ To provide security to the employees against social risks like old age benefits and maternity
benefits.
❖ To help with the health of the employees and to provide safety to the employees against
accidents.
❖ To promote employee’s welfare by providing welfare measures like recreation facilities.
❖ To create a sense of belongingness among employees and to retain them. Hence, fringe
benefits are called golden hand-cuffs.
❖ To meet requirements of various legislation relating to fringe benefits.

12.Features of fringe benefits-

❖ They are the payments and benefits to an employee by his employer in addition to his normal
earnings.
❖ Fringe benefits are not linked to performance or efficiency of any employee, Difference in
fringe benefits may exist due to classification of employees based on organizational status.
❖ Fringe benefits are paid to all the employees based on their membership in the organization.
❖ Fringe benefits are indirect compensation because these are usually extended as a condition
of employment and are not directly related to performance.
❖ Fringe benefits involve labor cost for the employer and are not meant directly to improve
efficiency.
❖ Fringe benefits may be statutory or voluntary. Provident fund is a statutory benefit whereas
housing is a voluntary benefit.
❖ Fringe benefits raise the standard of living of the employee.

13.Factors determining /reasons for offering fringe benefits-

Social Security: The employers must pay in whole or in part for certain legally mandated benefits and
insurance coverage also known as social security. According to ILO, social security refers to the
protection which society provides for its members through a series of public measures against the
economic and social distress that otherwise would be caused by the stoppage or substantial reduction
of earnings resulting from sickness, maternity, employment injury, unemployment invalidity, old age
and health.

Paternalistic or Humanistic Consideration: Historically fringe benefits were introduced with

humanistic considerations to support wage compensation with certain infrastructure or facilities to
provide for health, education and housing as also social, cultural, religious and recreational activities.

Tax Considerations: Some individuals and organizations find clever ways to avoid their payment
obligations by changing how salaries are structured. The various fringe benefits like house rent,
education expenses, travel charges and many more are shown as re-imbursement of expenditures.

Utilization of Leisure Time: Organizations now recognize how personal life affects work. They
understand the need for rest and provide benefits like travel allowances and guest house facilities to
support employees during leave.

Competitive considerations: Companies offer various benefits like housing, education support, club
memberships, and training abroad to attract and keep employees, staying competitive with other
companies.

To Meet Price Rises: Due to rising costs, employees demand extra benefits. Employers use fringe
benefits as a negotiation tool when big salary hikes aren't possible.

To Attract and Retain Best Talents: Companies offer more benefits to attract and keep the best
employees. Competing companies feel pressure to provide similar perks. Since these benefits are not
direct rewards, they have become more popular.

Due to Government Legislation: The growing volume of labor legislation, particularly social security
legislation, made it imperative for employers to share equally with their employees the cost of old age,
survivor and disability benefits.

Collective Bargain by Trade Unions: The growth and strength of trade unions has substantially
influenced the growth of company benefits and services.

14.Types of fringe benefits-

For Employment Security: Benefits under this head include unemployment, insurance, technological
adjustment pays, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for
grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the
sons/daughters of the employees and the like.

For Health Protection: Benefits under this head include accident insurance, disability insurance, health
insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

For Old Age and Retirement: Benefits under this category include: deferred income plans, pension,
gratuity, provident fund, old age assistance, old age counseling, medical benefits for retired employees,
traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the
like.

For Personnel Identification, Participation and Stimulation: This category covers the following
benefits: anniversary awards, attendance bonus, canteen, cooperative credit societies, educational
facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational
programs, stress counseling, safety measures etc.

15.The fringe benefits are categorized as follows-

a) Payment for Time Not worked: Benefits under this category include: sick leave with pay, vacation
pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc.

b) Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive bonus,
shift premium, old age insurance, profit sharing, unemployment compensation, food cost subsidy,
housing subsidy, recreation.