What are the basic objectives of compensation administration?

What are the basic objectives of compensation administration? Discuss the factors that are usually considered for determining compensation structure. Briefly explain the characteristic features of executive compensation.


Ans. The wage policies of different organisation vary somewhat. Marginal units pay the minimum necessary to attract the required number and kind of labour. Often, these units pay only the minimum wage rates required by labour legislation, and recruit marginal labour. At the other extreme, some units pay well above the going rates in the labour market. They do so to attract and retain the highest caliber of the labour market. They do so to attract and retain the highest caliber of the labour force. Some managers believe in the economy of higher wages. They feel that, by paying high wages, they would attract better workers who will produce more than the average worker in the industry. This greater production per employee means greater output per man hour. Hence, labour costs may turn out to be lower than those existing in firms using marginal labour. Some units pay high wages because of a combination of favourable product market demand, higher ability to pay and the bargaining power of a trade union. But a large number of them seek to be competitive in their wage programme, i.e., they aim at paying somewhere near the going rate in the labour market for the various classes of labour they employ. Most units give greater weight to two wage criteria, viz., job requirements and the prevailing rates of wages in the labour market. Other factors, such as changes in the cost of living, the supply and demand of labour, and the ability to pay are accorded a secondary importance.

A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for wage and salary administration are:
a) The organization’s ability to pay;
b) Supply and demand of labour;
c) The prevailing market rate;
d) The cost of living;
e) Living wage;
f) Productivity;
g) Trade Union’s Bargaining power;
h) Job requirements;
i) Managerial attitudes;
j) Psychological and sociological factors; and
k) Levels of skills available in the market.
a) The organisation’s ability to pay: Wage increases should be given by those organisations which can afford them. Companies that have good sales and, therefore, high profits tend to pay higher wages than those which running at a loss or earning low profits because of the high cost of production or low sales.
b) Supply and Demand of Labour: The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organizational wage structure and level. If the demand for certain skills is high and the supply is low, the result is a rise in the price to be paid for these skills.
c) Prevailing Market Rate: This is also known as the ‘comparable wage’ or ‘going wage rate’, and is the most widely used criterion. An organisation’s compensation policies generally tend to conform to the wage-rates payable by the industry and the community. This is done for several reasons.
d) The Cost of Living: The cost-of-living pay criterion is usually regarded as an automatic minimum equity pay criterion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. In recognition of the influence of the cost of living, “escalator clauses” are written into labour contracts.
e) The Living Wage: Criterion means that wages paid should be adequate to enable an employee to maintain himself and his family at a reasonable level of existence. However, employers do not generally favour using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need.
f) Productivity: Productivity is another criterion, and is measured in terms of output per man-hour. It is not due to labour efforts alone. Technological improvements, better organisation and management, the development of better methods of production by labour and management, greater ingenuity and skill by labour are all responsible for the increase in productivity.
g) Trade Union’s Bargaining Power: Trade unions do affect rate of wages. Generally, the stronger and more powerful the trade union, the higher the wages. A trade union’s bargaining power is often measured in terms of its membership, its financial strength and the nature of its leadership.
h) Job Requirements: Generally, the more difficult a job the higher are the wages. Measures of job difficulty are frequently used when the relative value of one job to another in an organisation is to be ascertained. Jobs are graded according to the relative skill, effort, responsibility, and job conditions required.

i) Managerial Attitudes: These have a decisive influence n the wage structure and wage level since judgement is exercised in many areas of wage and salary administration – including whether the firm should pay below average, or above average rates, what job factors should be used to reflect job worth, the weight to be given for performance or length of service, and so forth, both the structure and level of wages are bound to be affected accordingly.
j) Psychological and Social Factors: These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. Psychologically, persons perceive the level of wages as a measure of success in life; people may feel secure; have an inferiority complex, seem inadequate or feel the reverse of all these.
k) Skill levels available in the market: With the rapid growth of industries, business trade, there is shortage of skilled resources. The technological development, automation has been affecting the skill levels at faster rates. Thus the wage levels of skilled employee are constantly changing and an organisation has to keep its level upto suit the market needs.