Compensation

Wage & Salary Administration

Basic concepts in wage & Salary
administration
1. Describe the basic issues involved in developing a
compensation strategy.
2. Discuss how organizations develop a wage and salary
structure.
3. Identify and describe the basic issues involved in wage
and salary administration.
4. Discuss the basic considerations in understanding benefit
programs.
5. Identify and describe mandated benefits.
6. Identify and describe non-mandated benefits.
7. Discuss contemporary issues in compensation and
benefits.

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How Would You Define Benefits?

• Rewards
• Incentives
• Things of value

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The Compensation is the monetary and non-monetary rewards given
to the employees in return for their work done for the organization.
Basically, the compensation is in the form of salaries and wages. There
are several internal and external factors affecting employee
compensation.

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Internal factors: The internal factors exist within the organization and
influences the pay structure of the company. These are as follows:
1.Ability to Pay: The prosperous or big companies can pay higher
compensation as compared to the competing firms whereas the smaller
companies can afford to maintain their pay scale up to the level of competing
firm or sometimes even below the industry standards.
2.Business Strategy: The organization’s strategy also influences the
employee compensation. In case the company wants the skilled workers, so
as to outshine the competitor, will offer more pay as compared to the others.
Whereas, if the company wants to go smooth and is managing with the
available workers, will give relatively less pay or equivalent to what others
are paying.
3.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
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performance.
4.Employee: The employee or a worker himself influences the
compensation in one of the following ways.
Performance: The better performance fetches more pay to the employee,
and thus with the increased compensation, they get motivated and
perform their job more efficiently.
Experience: As the employee devote his years in the organization,
expects to get an increased pay for his experience.
Potential: The potential is worthless if it gets unnoticed. Therefore,
companies do pay extra to the employees having better potential as
compared to others.

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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:

1.Labor Market: The demand for and supply of labor also influences the employee
compensation. The low wage is given, in case, the demand is less than the supply of
labor. On the other hand, high pay is fixed, in case, the demand is more than the supply
of labor.
2.Going Rate: The compensation is decided on the basis of the rate that is prevailing in
the industry, i.e. the amount the other firms are paying for the same kind of work.
3.Productivity: The compensation increases with the increase in the production. Thus,
to earn more, the workers need to work on their efficiencies, that can be improved by
way of factors which are beyond their control. The introduction of new technology, new
methods, better management techniques are some of the factors that may result in the
better employee performance, thereby resulting in the enhanced productivity.
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4.Cost of Living: The cost of living index also influences the employee
compensation, in a way, that with the increase or fall in the general price
level and the consumer price index, the wage or salary is to be varied
accordingly.
5.Labor Unions: The powerful labor unions influence the compensation
plan of the company. The labor unions are generally formed in the case,
where the demand is more, and the labor supply is less or are involved in
the dangerous work and, therefore, demands more money for
endangering their lives.The non-unionized companies or factories enjoy
more freedom with respect to the fixation of the compensation plan.
6.Labor laws: There are several laws passed by the Government to
safeguard the workers from the exploitation of employers.The payment of
wages Act 1936, The Minimum wages act 1948, The payment of Bonus Act
1965, Equal Remuneration Act 1976, Payment of Gratuity Act 1972 are
some of the acts passed in the welfare of the labor, and all the employers
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According to Monappa, the following factors determine the
level of wage/salary in the organised sector of the Indian
industry.

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Methods of Wage Payment

• Definition: A Wage is a monetary compensation given by the

employer to the employee (labor) for the amount of work done on
an hourly, weekly or monthly basis.

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1.Minimum Wage Method: the minimum amount of wage is paid to the
employee irrespective of the employer’s paying ability. It is based on the
concept that the wage is paid not for the bare sustenance of life, but for the
preservation of the efficiency of the worker. Thus, the minimum wage must
provide for education, medical requirements, and other essential amenities.

1.Fair Wage Method: The wage is said to be a fair wage when its amount
is similar to the rate that prevails in the same industry in the neighbourhood
or the rate that prevails throughout the country for the same kind of work. A
standard rate is maintained for the wage that prevails in the other similar
industries, and this rate is determined by the companies where exists an
unionized labor and is in large numbers.

1.Living Wage Method: The living wage is slightly higher than the fair
wage, in which the worker not only fulfill his basic needs of life viz. food,
clothing and shelter, but also avail the frugal comforts such as education of
children, insurance, protection against ill health, essential social needs, etc.
The rate of the living wage is determined on the basis of economic condition
prevailing in the country. Therefore, these wage rates may differ from
country to country.
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Wage/Salary Structure:

• Jobs offered by an organisation vary in terms of their values. Job value is

ascertained by job evaluation. Job evaluation is a systematic method of
appraising the value of each job in relation to other jobs in an
organisation.

• Once all jobs are assigned values, and then these are placed in a grade,
or say, a rate per job. These grades are arranged in a hierarchical order
starting with lower to higher jobs. Thus wage/salary structure consists
of the various salary grades and their different levels of single jobs or
group of jobs.

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Salary Structure is the structure or details of the salary being offered in terms of the
breakup of the various components that constitute the compensation. Salary Structure
is the set of parameters that define the salary. Two people can have the same salary
but still get different amounts of money every month this would happen when the salary
structure is different. Salary structure is a very important information which determines
the in hand pay, gross salary, allowances etc. All these variables are paid to the
employee as a part of his/her compensation and benefits. If an employee does not
have details of the components, he/she can not calculate the in hand as well as
savings parts like Employee Provident Fund.

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Salary Structure Components
The usual components of salary structure include:

1.Basic Salary:It is the taxable base income and generally not more than 40% of CTC.
Basic salary forms the basis of salary structure many a times. Most of the components
may be defined as percentage of basic salary.

2.House Rent Allowance: The HRA constitutes 40 to 50% of the basic salary.

3.Special Allowances: Makes up for the remainder part of the salary, mostly smaller
than the basic salary and completely taxable.

4.Leave Travel Allowance: The non- taxable amount paid by the employer to the
employee for vacation/trips with family within India.

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5.Gratuity: It is basically a lump sum amount paid by the employer when the employee
resigns from the organization or retires.

6.Provident Fund: Fund collected during emergency or old age. 12% of the basic
salary is automatically deducted and goes to the employee provident fund.

7.Medical Allowance: The employer pays the employee for the medical expenditures
incurred. It is tax free up to Rs.15,000.

8.Bonus:Taxable part of the CTC,usually a once a year lump sum amount, given to
the employee based on the individual’s as well as the organizational performance for
the year.

9.Employee Stock Options: ESOPS are Free/discounted shares given by the

company to the employees. Done to primarily increase employee retention.

These are just few of the components which can be included in a typical salary
structure but it may vary from company to company.

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There are certain rules that it is mandatory to give PF if the company is greater than n
number of employees in size. A smaller company may give some other components
and a bigger company may give a different set of components in their salary.

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How to devise a salary structure? :
The simplest way to devise a salary structure is outlined here as follows:
1. Ascertain and establish, on the basis of market rate surveys and studies of
existing salary structures, the most senior and most junior jobs to be covered
by the salary structure.
2. Based on above, draw up salary grade structure ranging from the lowest, 
limit along with the width of salary gaps between jobs and the size of overlap
between different grades.
3.Make a job evaluation exercise. This can be done by any method of job
evaluation. However, job evaluation by means of a simple ranking scheme is
preferable
4. Procure market rate data keeping in mind that there is likely to be a range
of market rates in existence in the labour market.
5. Finally, based on the results of job evaluation and market rate surveys and
studies arrange ‘ all jobs in the grades in an hierarchical order. In fact, it is the
stage where a good judgment is required.

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 There are two more elements involved in a
salary structure:
Salary Progression:
As the term itself implies, it refers to a sequence of progress in salary. In other
words, salary progression relates to increases in salary to merit. It relates
compensation/salary to performance on a consistent and equitable manner.
Broad banding:

Broad banding means a process reducing salary grades into limited ones. In other
words, broad banding means collapsing salary grades and ranges into a few broad
and wide levels or ‘bands’ each consisting of a relatively wide range of jobs and
salary levels. For example, Toyota has broad banded it’s all jobs into just five grades
or bands. Similarly, General Electricals has been able to restructure its all jobs into
three job classifications, viz., Division I: Production Members, Division II: General.
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Maintenance Team Managers; and Division III: All Tie and Dye Members
Pay Surveys

• Pay Surveys are surveys of compensation paid to employees by other

employers in a particular geographic area, industry, or occupational
group.

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Wages Versus Salaries

• Wages generally refer to hourly

compensation paid to
operating employees. The basis
for wages is time.
• Salary is income paid to an
individual on the basis of time.
• A maturity curve is a schedule
specifying the amount of
annual
increases a person will receive.

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Determining What to Pay

• Job evaluation is a method for determining the

relative value or worth of a job to the organization
so that individuals who perform that job can be
compensated adequately and appropriately.
• Classification system attempts to group sets of jobs
together into clusters, which are often called
grades.
• The point system requires managers to qualify, in objective terms, the
value of the various elements of specific jobs.

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Pay-for-Knowledge and Skill-Based Pay
• Pay-for-knowledge involves
compensating employees for learning
specific information.

• Skill-based pay rewards employees for

acquiring new skills.

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Wage and Salary Administration

• Wage and salary administration

is the ongoing process of
managing a wage and salary structure.
• All managers must be sensitive to these costs and
must be vigilant about managing them properly.

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Pay Secrecy

• Pay secrecy refers to the

extent to which the
compensation of any
individual in an
organization is secret or
the extent to which it is
formally made available
to other individuals.

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Pay Compression and Pay Inversion
• Pay compression occurs when individuals with substantially different
levels of experience and/or performance abilities are being paid wages
or salaries that are relatively equal.
• Pay inversion occurs when the external market changes so rapidly that
the new employees are actually paid more than experienced employees.

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Mandated Benefits

• Unemployment Insurance is a mandated protection plan

that provides a basic substance payment to
employees who are between jobs.
• Social Security provides limited income to retired
individuals.
• Workers’ Compensation is insurance that covers
individuals who suffer a job-related illness or
accident.

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 Non-mandated Benefits
• Private Pension Plans are administered by the
organization and provide income to the employees at
their retirement.
• Defined benefit plans: a private pension plan where
the benefit is precisely known based on a simple
formula such as years of service.
Defined contribution plans: a private pension plan in
which the size of the benefit depends on how much
money is contributed to the plan.

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Additional Benefits

• Wellness programs
concentrate on keeping
employees from becoming
sick rather than simply paying
expenses when they do
become ill.
• Child care programs assist
parents with child care
expenses.
• Cafeteria-style benefits allow
employees to choose the
benefits they really want.

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Executive Compensation

Most senior executives

receive their
compensation in 2
forms:
1. base salary
2. a form of incentive pay
(usually a bonus which is
based on company
performance)

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 Gratuity calculation:
• Gratuity calculation for monthly rated, piece rated and seasonal
employees under Payments of Gratuity Act 1972: Payment of Gratuity
is a 'Defined benefit' provided to an employee as a lump sum, on his
retirement.
• The calculation for payment of Gratuity is made for each ‘completed
year of service’, or each continuous year of service. The employee is
said to have completed one continuous year of service if he/she had
provided an uninterrupted service in that period, including
interruptions on account of sickness, accident, leave, absence from
duty without leave, lay-off etc.
• The period, in which there has been a ‘break in service’ as per rules
and strike/lockout/cessation of work due to fault of the employee, is
not included for payment of gratuity.

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The period, in which there has been a ‘break in service’ as per rules and
strike/lockout/cessation of work due to fault of the employee, is not included for
payment of gratuity.
The one-year of continuous service is considered to have been completed if:
•the employee has worked for 190 days ‘below the ground’ in a mine or a firm which
works for less than six days in a year. Or,
•he has worked for 240 days in other cases.

Mandatory 5 years: The gratuity is paid to an employee on the termination of his

employment after he has served for five continuous years. In case of death of the
employee, five continuous years of services is not mandatory.
Gratuity Calculation
The Gratuity amount is calculated differently for monthly-rated, piece-rated and
seasonal employee. Here are some key points considered for gratuity calculation:
•The wage considered for calculation is the last drawn salary.
•Allowances other than Basic and DA are not considered for gratuity calculation.
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Gratuity calculation for monthly rated employees
15 days of wages (Basic + DA) of each year of completed service is considered for
calculation. The per-day wage of the employee is calculated by dividing the monthly
wage by 26.
Service rendered by the employee for more than six months is considered as one year.
For calculating the per day wage of the employee, the monthly wage (last drawn Basic +
Dearness Allowance) is divided by 26 and the result is multiplied by 15 x the number of
years of service; i.e.

Gratuity = (Basic + DA) x 15/26 x number of years.

The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh.

The employer can, however, pay more gratuity than the prescribed ceiling. The
payment of gratuity is made either to the employee at the time of his retirement, or
termination or to the legal heir in case of death of the employee.
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