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  • CompensationManagement

    (As per New Syllabus of VIth Semester BBM, Bangalore University w.e.f. 2012-13)

    Prof. A M SarmaFormer Member of the Faculty

    Tata Institute of Social SciencesDeonar Mumbai - 400 088.

    Email ID: arsola 1939@hotmail.com


  • AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of thepublisher.

    First Edition : 2015

    Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,Ramdoot, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170/23863863, Fax: 022-23877178E-mail: himpub@vsnl.com; Website: www.himpub.com

    Branch Offices :New Delhi : Pooja Apartments, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,

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    Phone: 0712-2738731, 3296733; Telefax: 0712-2721216Bengaluru : No. 16/1 (Old 12/1), 1st Floor, Next to Hotel Highlands, Madhava Nagar,

    Race Course Road, Bengaluru - 560 001.Phone: 080-22286611, 22385461, 4113 8821, 22281541

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    Lucknow : House No 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549

    Ahmedabad : 114, SHAIL, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847

    Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam,Kochi 682011. Phone: 0484-2378012, 2378016 Mobile: 09387122121

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  • PrefaceLaying down a sound compensation and reward system is one of the most

    complex assignments in an industrial organisation. Hence, attempts are to bemade for effective implementation of compensation and benefit plans for thesuccess of an organisation in todays highly competitive business environment.

    The book Compensation Management deals with different aspects ofcompensation and reward systems as they are known today. It contains five unitsand a skill development exercise. Unit 1 deals with job evaluation andperformance appraisal; Unit 2 throws light on compensation management; Unit 3focuses on wage and salary administration; Unit 4 explains rewards and incentivesystems; and Unit 5 gives an account of the role of regulatory bodies incompensation management.

    The skill development exercise is in three specified areas: (a) fringe benefitsoffered by two multinational companies; (b) role of regulatory bodies such aswage boards and pay commissions in fixing compensation; and (c) a list ofincentive schemes with specific reference to sales personnel.

    The book primarily covers the course contents for BBM 6th Semester ofBangalore University. Obviously, it will be useful to the students pursuing thatcourse. But at the same time, it will be of help to other students desirous oflearning more about compensation and reward management.

    A M Sarma

  • SyllabusObjectives

    The objective is to enable the students to understand the various aspects of CompensationManagement.

    Unit 1: Job Evaluation and Performance Appraisal 10 HrsJob Evaluation, Definition, Traditional and New Techniques, PerformanceAppraisal, Basic Concepts, Performance Standard, Appraisal methods.

    Unit 2: Compensation Management 10 HrsCompensation, Definition, Classification, Types, Incentives, Fringe Benefits

    Unit 3: Wage and Salary Administration 20 HrsTheories of Wages, Wage Structure, Wage Fixation, Wage Payment, SalaryAdministration, Difference between Salary and Wages, Basis for CompensationFixation, Components of Wages, Basic Wages, Overtime Wages, DearnessAllowance, Basis for Calculation, Time Rate Wages and Efficiency BasedWages, Incentive Schemes, Individual Bonus Schemes, Group Bonus Schemes,Effect of Various Labour Laws on Wages, Preparation of Pay Roll.

    Unit 4: Rewards and Incentives 10 HrsRewards for Sales Personnel, Pay, Commission, Performance-based Pay System,Incentives, Executives Compensation Plan and Packages

    Unit 5: Regulatory Bodies for Compensation Management 10 HrsWage Boards, Pay Commission, Compensation Management in Multi-nationalOrganisations.

    Skill DevelopmentList out the fringe benefits offered to employees of any two companiesDiscuss the role of regulatory bodies in compensation managementList out various incentives schemes of wage payments

  • Contents








    APPENDIX A 129

    APPENDIX B 142

  • UNIT





    Just as the job analysis becomes the basis for the job description, so too, the job descriptionbecomes the basis for job evaluation. Simply stated, job evaluation is the process of determiningthe value of a job within a firm relative to all other jobs in that firm. It is a systematic (notscientific) method for the objective determination of the relative worth of a job in comparisonwithin and outside an organisation. It is a procedure for measuring the relative contribution ofeach job and for ranking these jobs in accordance with these measurements. It helps to eliminatewage inequities and to establish a basis for sound salary and wage structure.

    Differences in the rates paid for different jobs and skills influence how fairly employeesbelieve they are being treated. In this context, job evaluation assumes great significance. Nomatter how job evaluation is designed, its ultimate use is to help design and manage a work-related, business-focussed, and agreed-upon pay structure.


    The British Standard Institution (1969) defined job evaluation as a generic term coveringmethods of determining the relative worth (equity) of jobs. Job evaluation is a systematic(quantitative and qualitative) method, for determining the relative worth of a job in comparisonwith in and outside organisation. It helps to eliminate job inequities and to establish a basis forsound salary and wage structure.

    Job evaluation is a method used to describe, analyse, compare and evaluate jobs within a unit,a branch, or an industry on the basis of the work content and the job requirements in order toplace them under particular wage or salary grades.

  • 2 Compensation Management

    The major steps in job evaluation are as follows:

    1. Define types of jobs.2. Collect job information and write job descriptions.3. Select relevant factors.4. Define the gradation of the factor degrees.5. Choose benchmark jobs.6. Determine relative value of the factors.7. Determine a point scale for each factor.8. Apply the system to each job or group of jobs.9. Create an internal job hierarchy by giving point scales to all the jobs.

    10. Draw wage grades by taking into consideration overlapping and extent of spread.11. Examine market rates to ensure that wage levels would not fall below them.

    Job evaluation is a systematic attempt which provides a basis of comparing jobs anddetermines the relevant worth of different jobs in an organisation. It has two basic objectives: (a)to compare jobs and determine their level within each occupational group; and (b) to comparejobs between occupational groups. Achieving the first objective is important for promotions,career planning and personnel development. Achieving the second objective is of interest becauseof wage comparisons. Job evaluation attempts to achieve both objectives by determining the rankorder of all the jobs. It is thus a systematic and orderly process of determining the value of eachjob in relation to other jobs in the organisation. It is the job that is to be rated and not the man. Itis an important tool of personnel administration and has an important role to play in wagedecisions. It provides a systematic framework which may serve as the basis for wagedetermination, but does not entirely solve the problem.

    Job evaluation systems are useful in achieving internal equity of pay between different jobsin the organisation. The process of job evaluation uses selected criteria to compare jobs within anorganisation so that they can be ordered for the purpose of assigning differential pay. Jobevaluation systems provide a rational for paying different rates for different jobs. It is the pr