EMPLOYEE

REMUNERATION
 COMPONENTS OF REMUNERATION

An average employee in the organized sector is entitled to several benefits-both

Financial as well as non financial. To be specific, typical remuneration of an
employee comprises- wages and salary, incentives, fringe benefits, perquisites,
and non - monetary benefits.

Remuneration

Financial Non-financial

Fringe Perquisites Job Context

Benefits
Hourly and Incentives
P.F. Company car Challenging job
Monthly Rated Individual plans
Gratuity Club Responsibilities
Wages Group Plans
Medical care membership Recognition
Salaries Accident relief Paid holidays Growth prospects
Health and Furnished house Supervision
Group Stock option Working
Insurance, Schemes, etc. conditions
etc. Job sharing, etc.

direct Indirec
t
Components of Employee Remuneration
THEORIES OF REMUNERATION

Reinforcement and Expectancy Theories

The reinforcement theory postulates that a behavior which has a rewarding
experience is likely to be repeated. The implication for remuneration is that high
employee performance followed by a monetary reward will make future
employee performance more likely. By the same token, a high performance not
followed by a reward will make its recurrence unlikely in future.

Vroom’s expectancy theory focuses on the link between rewards and behaviour.
According to the theory, motivation is the product of valence, instrumentality and
expectancy.
Equity Theory
Adam’s equity theory posits that an employee who perceives inequity in his
or her rewards seek to restore equity. The theory emphasises equity in pay
structure of employees remuneration.

Agency Theory
The agency theory focuses on the divergent interests and goals of the
organization’s stakeholders and the way that employee remuneration can be
used to align these interests and goals.
IMPORTANCE OF AN IDEAL REMUNERATION SYSTEM

An effective system of remuneration is highly significant because several problems

relating to personnel centre around one element, namely, remuneration. Many
employees, for example, absent themselves from work often because they feel they
are not paid enough. They look for new and better prospects because the present
emoluments may not be attractive to stay on.

performance
Desire for
More pay strikes

grievances
absenteeism
search for Higher
Paying jobs Turnover

Psychological
Pay Lower Attractiveness Job Withdrawal
dissatisfaction Of job Dissatisfaction
Visits to the
Doctor
absenteeism
Poor mental
Health
Consequences of pay Dissatisfaction
 Employee get motivated to perform better when their past performance is
rewarded adequately

Feedback to

employees

Rewards Employee
Employee sets Performance Considers equity
expectations Is rewarded are given of performance
and goals
rewarded

Employee sets new goals and

Expectations based on prior experiences

Motivation and Performance Model

If employees see that hardwork and superior performance are recognised and
rewarded by the organisation, they will expect such relationships to continue in
the future. Therefore, they will set higher level of performance for themselves,
expecting higher levels of rewards.
 Influencing factors of
Remuneration
Labour Market

Co
st o
ty
ci e

f li
Business strategy
So

vin
Internal

g
Factors
remuneration
Employee
my

U
L
n
a
o

i
b
n

o
o
o

ns
Job evaluation &

ur
Ec

perf Appraisal
External
Factors
Legislation
 Factors Influencing Employee
Remuneration
 External factors
• Labour markets
• Cost of Living
• Labour unions
• Labour laws
• Society
• Economy
 Internal factors
• Business strategy
• Job evaluation & performance appraisal
• Employee
 Factors Influencing Employee
Remuneration
External factors
• Labour markets- A low wage may be fixed when supply of labour
exceeds the demand & higher wage when demand exceeds supply.
• Cost of Living –Cost of living as a criteria for wage fixation is that real
wages of workers should not be whittled down by price increases.
A rise in cost of living is sought to be compensated by payment of
Dearness allowance.
•Labour Unions- Presence or absence of labour organization often determine
the quantum of wages paid to employees.
•Labour laws- Central laws which have a bearing on employee remuneration
are:
Payment of Wages Act,1936
Minimum Wages Act , 1948
Payment of Bonus Act,1965
Equal Remuneration Act , 1976
Payment of Gratuity Act,1972
• Society-The requirements of a workman living in a
civilized & progressive society also came to be
recognized . Hence according to Supreme Court , the
social responsibility of period provides the background
for decisions on industrial disputes relating to wage
structure.
• Economy-The last external factor that has impact on
wages & salary fixation is the state of economy,
example- depressed economy will probably increase
the labour supply , which in turn should serve to lower
the going wage rate.
 Internal factors:
• Business strategy –Overall company strategy determine
the remuneration to its employees. Where strategy of
enterprise is to achieve rapid growth, remuneration should
be higher than competitors pay.

• Job evaluation & performance appraisal- Job evaluation

helps establish satisfactorily wage differentials among jobs .
Performance appraisal helps awards pay increases to
employees who show improved performance.

• Employee – Employee related factors like performance ,

seniority , experience, potential & even sheer luck determine
employee remuneration.
 Remuneration plans and
business strategy

Remuneration strategy must jell with corporate strategy. If

corporate strategy is to invest to grows, remuneration
strategy should be so designed to stimulate
entrepreneuranism.
 Linkage of Remuneration strategy to business
strategy
Business strategy Market Position Remuneration Blend of
and Maturity Strategy remuneration

Invest to grow Merging or Stimulate High cash with above

growth rapidly entrepreneurialism average incentive for
individual
performance.Modest
benefits

Manage earnings- Normal growth to Reward management Average cash with

protect markets. maturity skills moderate incentives
on individual, unit or
corporate
performance.Standar
d benefits

Harvest earnings- No real growth or Stress on cost control Below average cash
reinvest elsewhere decline with small incentive
tied to cost control.
Standard benefits.
Remuneration Model
Job Description

Job Evaluation

Job Hierarchy

Pay Survey

Pricing Jobs
 Business Today dated September 12 2004, carried a
story on salary raises from 2003-2004 in different
industries.
Table11.4 Raising Salaries
2003 (Increase in %)
2004
IT 15 17
1TES 23 25
TELECOM (SERVICES) 10 12

INSURANCE 23 25
BANKING (RETAIL) 12 15
PHARMA 20 22
MANUFACTURING 6 7
 Development of a wage-trend line

10 Non-key Job B
9 Key Job A
Wages or salaries

8
7
6 Wage-trend
line
5
4

100 200 300 400 500 600 700 800 900 1000
Point values
• In the Fig the vertical axis represents pay rates, horizontal
axis is used for points.

• Intersection of the points value & market determined

wage rate for a particular key job.

• Example , key job A in the fig is worth 500 points & is

paid is paid Rs. 60 per hour , similarly key job B earns
700 points & has a prevailing rate of Rs. 70 per hour.

• Key jobs can be used to draw a wage trend line,

employing a statistical technique called least squares
method of regression. This method relates point values to
wage rates in labour market.
 Challenges of Remuneration

Skill based pay

Monetary
Versus
Non-monetary Salary Reviews
Rewards

Remuneration
Employee
Pay Secrecy
participation

Below market
Or above Eliticism or
Market rates Comparable Egalitarianism
worth
 Skill-based pay and Job-based pay
Compared
Factors Job-based Skill-based
Pay structure Based on job performance Based on ability to
perform

Employers focus Job carries wage; Employee carries wage;

employee linked to job employee linked to skills

Employee focus Job promotion to earn Skill acquisition to earn

greater pay greater pay

Procedures Assess job content; Value Assess Skills; Value Skills

required jobs
 Skill-based pay and Job-based pay
Compared

Factors Job-based Skill-based

Advantages Pay based on value of Flexibility; Reduced

work performed workforce

Disadvantages Potential personnel Potential personnel

bureaucracy; bureaucracy; Cost
Inflexibility. controls.
 Concepts of Wages
• Minimum Wage: minimum wage is the one which
provide not merely for bare sustenance of life, but
also for the preservation of the efficiency of the
worker. It is usually determined through legislation.

• Fair Wage: Fair wage is understood in two ways. In

a narrow sense wage is fair if it is equal to the rate
prevailing in the same trade and in the
neighbourhood for similar work. And in a wider
sense it will be fair if it is equal to the predominant
rate for similar work throughout the country and for
trades in general.
 Concepts of Wages

• Living wage: Living wage is a step higher than

fair wage. It may be described as one which
should enable the wage earner to provide for
himself/herself and his/her family more than bare
essential of life, including education for children;
protection against ill health; requirement of
essential social needs etc. A living wage must be
fixed considering the general economic conditions
of the country.