1. Unit 4 HRM – Elaki Page 1
Compensation Management
Compensation is what employees receive in exchange for their contribution to the organization.
Total compensation = Direct (Base pay and Incentives) + Indirect Compensation (Benefits)
Concept of Wage and Salary:
Wage salary is essential the application of a systematic approach to the problem of ensuring that
employees are paid in a logical, equitable and fair manner.
Termed used as Wage, salary, earnings, nominal wage, real wage, take home salary, minimum
wage, statutory minimum wage, the need based wage, the living wage, the fair wage, incentives wage,
wage rate, standard wage rate.
Salary:
The term salary is defined as, “the remuneration paid to the clerical and managerial personnel
employed on monthly or annual basis.”
Wage:
The term wage is defined as “the remuneration paid by the employer for the services of hourly,
daily, weekly and fortnightly employees”.
 Minimum wage is the amount of remuneration which could meet the “normal needs of the
employee regarded as a human being living in a civilized society”
 Statutory minimum wage is the amount of remuneration fixed according to the provisions of the
minimum Wages act 1948
 The need based minimum wage is the amount of remuneration fixed on the basis of norms
accepted at the 15th
session of the Indian labour conference held at the new Delhi in July 1957
 Fair wage is the wage fixed between the minimum and the living wages. ”
 Living wage should enable the male wage earner “to provide for himself and his family not
merely the bare essential of food, clothing and shelter, but a measure ill-health, requirements of
essential social needs and a measure of insurance against the more important misfortunes,
including the old age.
Wages Policy in India
 Payment of Wages Act, 1936
 Industrial Dispute Act, 1947
 Minimum Wages Act, 1948
 Equal remuneration Act, 1976

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 Payment of Bonus Act, 1965
 Wage Board
Theories of wages:
1. Surplus Value Theory by Karl Marx (1818-1883):
 Acc to this theory Workers was an article of commerce which could be purchased on the payment
of subsistence price.
 The price of any product is determined by the labor TIME needed for producing it.
 The workers were not paid acc to their contribution.
Criticism
 Labor is treated as commodity
 Price cannot be determined by labor time
 No emphasis on productivity
 Not applicable in organized sector
2. MARGINAL PRODUCTIVITY THEORY by P H Wicksteed (England) & J B Clark(USA)
 It assumes that wages depend upon the demand for & supply of LABOR.
 “Wages are based on entrepreneur ‘s estimate of the value that will be produced by the last or
marginal worker”
 wages are paid on the base of economic worth
 Homogeneous factor of production
 Full employment of resources
 Perfect competition
 Perfect mobility of factor of production
 Law of diminishing returns
 Perfect knowledge
Criticism
 No importance to supply of labor
 In practice employer gives lower wages than marginal productivity of laborer

3. Unit 4 HRM – Elaki Page 3
 Unrealistic assumptions
3. Residual Claimant Theory by Francis A Walker (1840-1897)
 4 factor of production-land ,labor, capital & entrepreneurship.
 Wages = value of production – (rent+ interest+ profit)
Criticism
 Demand & supply factor ignored
 Based on wrong notion of residual clainmant
 Productivity & efficiency ignored.
4. Investment Theory by H M Gitelman:
 Acc to this theory workers are paid in terms of their investment in education, experience &
training.
 Worker must be having attributes.
 Higher attributes higher payments.
5. Bargaining Theory of Wages by John Davidson:
o Acc. To this theory Wages are determined by relative bargaining power of workers or trade
unions and of the employers.
o Applicable in organized sector.
o If union is strong workers will be paid more. & vica virsa.
Wage Differentials:
 Consequence of an equitable compensation program is that individuals are more likely to be
attracted to and take jobs in organizations where employees do not voice widespread concerns
about equity.
 Greater loyalty
 less turnover
 Higher commitment to achieve organizational performance objectives
 Reduced favouritism or personality preferences of managers and supervisors.
1. Interpersonal Differentials: Du e to sex, skills, age, knowledge and experience
2. Inter-occupational Differentials: more demanding, more risky jobs, knowledge, skills, demand
supply structure.
3. Inter-area Differentials: Cost of living, ability of employers to pay, demand of situation.

4. Unit 4 HRM – Elaki Page 4
4. Inter-Firm Differentials: Ability of employers to pay, employees bargaining
Wage Regulators:
3000 is the lowest salary given in any company.
1. Cost of living
2. Wage policy
3. Bargaining power/ comp ratable with other organizations
Incentives:
An incentive scheme is a plan or program to motivate individual or group performance. An
incentive program is most frequently built on monetary rewards (incentive pay or a monetary bonus), but
may also include a variety of non-monetary rewards or prizes”.
Other Incentives Schemes: (Individual and Group Incentives)
o Individual payment schemes include payment by results, piecework and bonuses, work
measurement (including measured day work) and appraisal and performance related pay
o Compensation system which links pay to a group's combined performance measured by reduction
in costs, increase in productivity, progress in attaining firm's objectives, etc.
Types of incentive scheme
o Piece rate scheme: Each unit produced over the target is rewarded with a bonus or commission
payment.
o Profit-sharing: Profits are shared equally or as agreed by partners.
o Profit-related pay: Employees are paid a bonus as a percentage of the profit amount made by a
company.
o Share-ownership: Employees are offered some shares or the possibility of purchasing some
shares as an incentive.
o Performance-related pay: Employees’ annual salary is linked to their performance in the job.
The size of payment is determined by the achievement of the set target.
Problems with the incentive schemes in practice
• Operating problems
• Product quality problems
• Quality of working life
• Jealous problems