Compensation Management refers to the establishment and implementation of sound policies, programmes and practices of employee compensation.

It is essentially the application of a systematic and scientific approach for compensating the employees for their work in a fair, equitable and logical manner.

Compensation Management is concerned with the compensation to employees for their work and contribution for attaining organisational goals.

Obviously, it is concerned with designing and implementing total compensation package. It is also known as wage and salary administration or remuneration management.


Learn about:-

1. Meaning of Compensation 2. Concept of Compensation Management 3. Objectives 4. Need and Significance 5. Components 6. Factors 7. Forms

8. Functions 9. Qualification 10. Policy Aims. 11. Government Influences on Compensation Management 12. Types 13. Employee Compensation Package 14. Future Trends.

Compensation Management: Meaning, Concept, Objectives, Components, Forms, Functions and Other Details

Compensation ManagementMeaning

Compensation Management as it is known today has been a very important source of attracting, retaining and motivating the required human resource for any organization. Although most employees specially at middle and senior levels claim that money does not play a very important role in their decision to change or to stay in an organization but in reality it is the money which motivate most of the employees.


The employees need to be compensated for the services which they render to an organization. It is not easy to workout suitable compensation package for the employees and keeps them satisfied. The experience is that the employees mostly remain dissatisfied with whatever wage or salary they are paid by the employers.

Therefore, the job of wage and salary administration has been complex and subtle, and littered with techniques to reduce the complexity and cope with the subtleties. Hence various methods to compensate the employees have been deployed but without success. Incentive payment schemes, at times have been considered as the answer to most problems.

The methods of appraisal of employees have been worked out to match the performance of the employees with proper compensation, but without complete success.

These days, the organizations are also beset with the problem of ‘take home salary’ concept. The employees are no more interested in knowing how much the company is spending on each of them but they are keen to known how much would be available to them in their hands.


This had brought into sharp focus the question of income tax planning. The organizations are findings newer and newer methods to help employees in planning their tax liability or how to minimise the tax payment by the employees. On the other hand the Government has been finding out the loopholes in income tax structure to plug the same.

Recently, there have been a number of cases where very large organizations have been caught for not deducting tax at source properly. As a result, today we find that the number of components of the compensation have been increased and the nomenclature of some of these components have been changed to keep the same out of income tax net by the management under pressure from their employees.

However, these efforts have not proved very helpful to the management as it continues to remain under stress – whether the methods being used in compensation, are part of tax planning or tax avoidance and at the same time, is it able to satisfy the employees and maintain positive image among its employees as well as in the society at large or not.

There is no doubt that the employees work for compensation in terms of money and their attempt is always to maximise the same. The employees, therefore, are anxious to minimise the income tax incidence.

The employees work for rewards and the employers seek higher productivity to keep cost per employee low. A balance is to be struck between these two parties – employer and employee with regard to compensation.

The compensation should be designed in such a fashion that the organization is able to attract, motivate, and retain competent employees and at the same time the employees perceive it fair and equitable.

The perception by the employees is important as the ratio between the input and output – i.e., services rendered and the reward for the same in terms of compensation, will determine the level of their satisfaction, which in turn, determine their contribution, motivation, and retention.

In India, the Government, specially through labour laws has been playing a very important and significant role in determining wages and also in making it mandatory for employers to provide welfare schemes to its work force. The employers and employees have to comply with the same, willingly or unwillingly.

Compensation ManagementConcept

An organisation’s goals or objectives can be achieved when its employees put in their best efforts in the right direction. Hence, they should be nurtured properly and paid well for their work, performance, services, etc. Besides wages or salaries, organisations provide different kinds of incentives, benefits and services to their employees.


Money paid to employees for their work in the form of gross pay is included under direct compensation; while benefits come under indirect compensation and they may consist of life, accident and health insurance, the contribution of an organisation to retirement i.e. retirement benefits, expenses incurred for employee welfare as social security etc.

All these things are nothing but the compensation the employees receive in return for their contribution to their organisation. From the viewpoint of an organisation, compensation management is a major function. Compensation Management is one of the most important topics in HRM. This is one area which needs all the attention as it can have a direct impact on all others.

Compensation Management is concerned with the compensation to employees for their work and contribution for attaining organisational goals. Obviously, it is concerned with designing and implementing total compensation package. It is also known as wage and salary administration or remuneration management.

Every organisation requires suitable human resources to achieve its objectives. To get the effective results, the employees must be paid and compensated properly even though this is not the only motivator for the employees to work. Any unjustifiable inequality or an unacceptably low level of reward definitely causes great dissatisfaction among employees.


Hence, sound wage and salary policies and programmes are very essential to attract, induct, retain and develop the employees working in the organisation in order to get the best results from them. Wage and salary administration or compensation management is considered as one of the vital areas of “Human Resource Management”.

Compensation Management refers to the establishment and implementation of sound policies, programmes and practices of employee compensation. It is essentially the application of a systematic and scientific approach for compensating the employees for their work in a fair, equitable and logical manner. The factors affecting the determination of fair and equitable compensation are many and are very complex.

Compensation Management includes various areas such as job evaluation, surveys of wages and salary analysis of relevant organisational problem, development of suitable wage structure, framing of rules for administering wages and salaries, wage payment, incentive, control of compensation cost etc. Hence, in the era of globalisation, privatisation, liberalisation, compensation management has become very complex and depending upon the size of the organisation, it may be helpful to induct a specialist to handle this specific portfolio under HRM.

Wages and salaries mean different things to different people and organisations. From the view point of employees, white collar or blue collar, a salary or a wage is an income and a return they get for offering their services to their organisation. From the view point of an organisation or management, wages and salaries constitute a cost of production. A wage or salary is a price paid to an employee for hiring his services.


Compensation is defined as the consolidated amount, allowances received and various other kinds of benefits and services which are offered by the organisation to their employees. In other words, compensation refers to all forms of financial returns, services and benefits received by the employees from their organisation as a part of their employment relationship.

Such compensation may be received in the form of cash i.e. wages/salaries, bonus, overtime payments, incentives (i.e. gross payment). This is called as ‘direct compensation’. While benefits that come under indirect compensation may consist of life, accidents and health insurance, pay for vacation or illness, retirement benefits and so on.

Thus, in short, compensation is direct and indirect monetary benefits and rewards received by employees on the basis of the value of the jobs, their personal contributions and overall performance. Such rewards are given to employees by their organisation according to the ability of the organisation to pay and the legal provisions.

Compensation Management – 8 Main Objectives

A well-developed remuneration system should aim at achieving the following objectives:

1. To attract competent and qualified persons towards organization by offering fair wage and incentive.

2. To retain present employees by paying competitive remuneration.


3. To establish fair and equitable remuneration so as to avoid pay disparities.

4. To improve production, productivity and profitability of the organization.

5. To minimise un-necessary expenditure and to control cost through a device of internal check and establishment of standard.

6. To improve and maintain good human relation between employer and employee through a process of payment of bonus, profit sharing and other fringes benefits.

7. To enhance the name and fame of the company through a proper system of wage payment.

8. To ensure prompt and regular payment of wage and salary to all the employees.

Compensation ManagementNeed and Significance

Compensation refers to the rewards, an employee gets after offering his/her mental and physical efforts, wherein he/she compares his/her worth. Any dissatisfaction may result into a conflict or a dispute. This dissatisfaction not only affects the performance of the employee but also imbalances the equity between human capital investment and expected returns to the organization.


As such it is a most sensitive issue in any organization or HRM as employers, employees and the government have observed that 95% of the industrial disputes in any organization in India are related to wage/salary or method of payments.

Compensation decisions have become more complex in this competitive age because of an unbalanced demand and supply ratio. The HRM of every organization is required to make some systems to scrutinize the wage and salary differentiations or disparities to ensure a motivated environment in the organization.

The perceptions of employees and employers about compensation are changing and the emphasis is being laid on how important is pay for the employees and how it affects investment to hire competitive employees and how it compares with three main factors, namely, job contents, work environment, and pay attraction to retain an employee.

The expensive growth of some of the sectors like IT, Telecom, BPOs and financial institutions has triggered off huge demand for talent at all levels. The consultants and HR professionals are continuously surveying and studying the paradigm shifts of concepts, perceptions and the need for revising the compensation systems.

The paradigm shift from standard wage and salary to compensation or cost to the company is clearly visible in today’s hiring practices.


The satisfaction or dissatisfaction is a gap between the expectations of an employee and the feeling or the experience of worth. This feeling or experience is an outcome of efforts offered to perform, comfort felt at work place, cushion for inflation in compensation, and appreciation perceived by the employee. HRM, therefore, needs to design policy and practices to develop willingness to work and satisfaction toward worth.

Secondly, the compensation policy and the structure must be made attractive and adjustable so as to attract the talents, motivate the employees to use their hidden potentials, emphasize the need of self-improvement, and most importantly to retain the employees as they are the valuable asset to the organization.

Compensation Management – Compensation Consists of 4 Main Components

Compensation is the reward or remuneration paid to the employees in return for the service rendered. Such compensation package includes both monetary and non-monetary components.

In India compensation or pay structure generally consists of the following components:

1. Wage or Salary

2. Dearness and other allowances


3. Incentives

4. Fringe benefits and perquisites.

1. Wage or Salary:


The term wage refers to the remuneration paid to the workers appointed on hourly, daily or weekly basis in return for the service rendered.

It varies according to physical and mental requirement of the job. Wage may be minimum wage, fair wage and living wage.

i. Minimum Wage:

It is that wage which is sufficient to meet the basic need of a worker and his family. This minimum wage has to be paid to the worker irrespective of the capacity of the industry to pay. The Committee on fair wage has defined minimum wage as – “the wage must provide not only for the bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measures of education, medical requirements and amenities”.

ii. Fair Wage:

According to committee on fair wage “fair wage is the wage which is above the minimum wage but, below the living wage”. It is fixed between the minimum wage and capacity to pay by the industry. The lower limit of the fair wage is the minimum wage; the upper limit is set by the capacity of the industry to pay.

Fair wage depends on several factors like:

(a) The productivity of labour

(b) The prevailing rates of wage in the same or neighboring localities.

(c) The level of national income and its distribution.

(d) The place of industry in the economy of the country.

Thus, fair wage is determined on the basis of capacity of the industry to pay and region in which industry is located.

iii. Living Wage:

It is the wage that provides some of the comforts of life. It provides certain amenities considered necessary for the well-being of the worker. According to Fair Wage Committee “the living wage should enable the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter but also a measure of frugal (using only as much money or food as is necessary) comfort including education for children, protection against ill health, requirements of essential social needs and measure of insurance against the more important mis-fortunes including old age”.


The term salary refers to remuneration paid to the employees appointed on monthly or annual basis in return for the service rendered. Thus it refers to monthly rate of pay irrespective of number of hours put in by employees.

Take Home Salary:

It is the net amount of salary received by an employee after making all the deductions towards the payment of income tax, LIC premium and contribution to P.F. etc.

2. Dearness Allowance (DA):

Under section 3 of the Minimum Wages Act, DA is described as cost of living allowance. It is given to protect the real wages of workers during inflation. In India it has become integral part of the wage system.

Along with DA other allowances like City Compensatory Allowance (CCA), House Rent Allowance (HRA), Medical Allowance (MA), Education Allowance (EA), Conveyance Allowance etc., also form the part of compensation package.

However, inclusion of all these allowances in the compensation depends on nature and type of job, contents of job, place of job, terms and condition of appointment, capacity of employer etc.

3. Incentives:

Incentive is a reward paid in addition to wages whether monetary or not that motivates or compensates an employee for performance above the standard. Payment of incentive depends on productivity, sales and Profit of the organization.

4. Fringe Benefits and Perquisites:

Fringe Benefits:

It is a general term used to describe any of a variety of non-wage or supplemental benefits that employees receive in addition to their regular wages. These include such employee benefits as provident fund, gratuity, medical care, hospitalization, accident relief, paid holidays, health and group insurance, pension etc.

Perquisites (Perks):

Perquisites also called perks are the special benefits made available only to the top executives of an organisation. These may include company car, furnished house, stock option scheme, club membership, paid holidays etc.  

Compensation Management – 11 Major Factors Influencing Compensation

The amount of compensation received by an employee should take into account several factors such as the amount of effort put in, competitive rates prevailing in labour market, demand for and supply of labour, the firm’s ability to pay, labour policy, etc.

Let’s look into these issues more closely:

1. 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. In the short run, the economic influence on the ability to pay is practically nil. All employers, irrespective of their profits or losses, must pay no less than their competitors and need pay no more if they wish to attract and keep workers.

In the long run, the ability to pay is very important. During the time of prosperity, employers pay high wages to carry on profitable operations and because of their increased ability to pay. But during a period of depression, wages are cut because funds are not available. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profits.

2. Supply of and Demand for Labour:

The labour market conditions or supply and demand forces operate at the national, regional and local levels, and determine organisational 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. When prolonged and acute, these labour-market pressures probably force most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. The other alternative is to pay higher wages if the labour supply is scarce; and lower wages when it is excessive.

Similarly, if there is great demand for labour expertise, wages rise; but if the demand for manpower skill is minimal, the wages will be relatively low. Mescon says- “The supply and demand compensation criterion is very closely related to the prevailing pay, comparable wage and ongoing wage concepts since, in essence, all of these remuneration standards are determined by immediate market forces and factors.”

3. 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. First, competition demands that competitors adhere to the same relative wage level. Second, various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition.

Third, trade unions encourage this practice so that their members can have equal pay, equal work and geographical differences may be eliminated. Fourth, functionally related firms in the same industry require essentially the same quality of employees, with the same skills and experience. This results in a considerable uniformity in wage and salary rates.

Finally, if the same or about the same general rates of wages are not paid to the employees as are paid by the organisation’s competitors, it will not be able to attract and maintain a sufficient quantity and quality of manpower. Belcher and Atchison observe- “Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour, while other organisations pay lower wages because economically they have to, or because by lowering hiring requirements they can keep jobs adequately manned.”

4. 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.

When the cost of living increases, workers and trade unions demand adjusted wages to offset the erosion of real wages. However, when living costs are stable or decline, the management does not resort to this argument as a reason for wage reductions.

5. The Living Wage:

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. Also, they feel that the level of living prescribed in a worker’s budget is open to argument since it is based on subjective opinion.

6. 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. Actually, productivity measures the contribution of all the resource factors — men, machines, methods, materials and management.

No productivity index can be devised which will measure only the productivity of a specific factor of production. Another problem is that productivity can be measured at several levels — job, plant, industry or national, economic level. Thus, although theoretically it is a sound compensation criterion, operationally many problems and complications arise because of definitional measurement and conceptual issues.

7. 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. A strike or a threat of a strike is the most powerful weapon used by it.

Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation. However, for those remaining on the payroll, a real gain is often achieved as a consequence of a trade union’s stronger bargaining power.

8. 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.

9. Managerial Attitudes:

These have a decisive influence on 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. These matters require the approval of the top executives.

Lester observes “Top management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. Desires to improve or maintain morale, to attract high-caliber employees, to reduce turnover, and to provide a high living standard for employees as possible also appear to be factors in management’s wage policy decisions.”

10. 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. They may not take pride in their work, or in the wages they get.

Therefore, these things should not be overlooked by the management in establishing wage rates. Sociologically and ethically, people feel that “equal work should carry equal wages,” that “wages should be commensurate with their efforts,” that “they are not exploited, and that no distinction is made on the basis of caste, colour, sex or religion.”

To satisfy the conditions of equity, fairness and justice, a management should take these factors into consideration.

11. 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 employees are constantly changing and an organisation has to keep its level upto suit the market needs.

Compensation Management – 2 Main Forms

Employees give labour and in exchange for labour/service they want money and other benefits. Such money and other benefits are compensation. The term ‘compensation’ may be defined as the money paid for the job performed and the benefits/services provided to the employees.

The compensation is given in the following form:

I. Wage:

The dictionary meaning of the term ‘wage’ is the pay of artisans or labourers receiving a fixed sum by hour, day, week or month, or for a certain amount of work. In a narrow sense ‘wage’ is the remuneration paid to blue-collar workers for their services, usually on hourly rate or daily rate.

Thus we find that –

i. Wage is remuneration

ii. It is paid to workers, especially maintenance and production workers

iii. It is payment in exchange for service / labour

iv. It is paid generally on fixed hourly / daily rate.

Wages may be expressed in terms of money called nominal wages, or in terms of purchasing power with reference to some base year called real wages.

In broad sense, ‘wage’ refers to economic compensation paid by the employer to his workers in exchange for their labour / service, under some contract. So, wage includes basic wage and also allowance like overtime pay, holiday pay etc.

II. Salary:

Salary is a periodic, fixed payment for services, especially for official or professional services. It usually refers payment to weekly or monthly rated employees like clerical, technical, supervisory and managerial employees.

From the above it is observed –

i. Salary is economic compensation

ii. It is a periodic fixed payment

iii. It is paid to white-collar employees like office staff, technical staff, managerial staff, professional staff

iv. It is paid by employer in exchange for services rendered by above categories of employees

Thus, ‘Salary’ is defined as economic compensation paid by employer to his monthly / weekly rated white-collar employees for their services, under any contract / agreement.

Compensation Management – 4 Main Functions

Compensation management’s objective is to hire competent persons, to ensure the internal and external equity concept to improve employee’s satisfaction and to retain these valuable human resources or assets.

The main functions of Compensation Management are:

(1) The Equity Function

(2) The Welfare Function

(3) The Motivation Function

(4) The Retention Function.

(1) The Equity Function – It is the first and foremost important function of compensation which ensures that the employees are fairly paid and that their worth is appropriately compared. This function ensures that more difficult jobs are paid more and that they are fairly compensated in comparison to similar jobs in the market.

(2) The Welfare Function – This function is to take care of their psychological and social need satisfaction. The employees worry about the family, and the liability should be reduced and their self-esteem needs should be met to allow them to work without tension or unwanted stresses.

(3) The Motivation Function – The motivational function is to encourage an employee to take further challenges, perform better and develop oneself for superior positions. This function, therefore, takes care of career plans and training and development activities.

(4) The Retention Function – Today, human resources are being considered as a valuable asset to the organization and because of retaining and developing the knowledge bank, the retention of employees has become an important function of compensation management.

HRM manager thus endeavour to take care of above functions in managing the compensation to develop employees satisfaction and to fulfil employer’s objective.

Compensation ManagementQualification of Compensation Manager

1. Education:

MBA with specialization in HRM/ MA in social work/PG Diploma in HRM/MA in industrial psychology. A degree or diploma in Labour Law is desirable.

2. Experience:

At least 3 years experience in a similar position in a large manufacturing company.

3. Skill, Knowledge, Abilities:

Knowledge of compensation practices in competing industries, job analysis procedures, compensation survey techniques, performance appraisal systems. Skill in writing job descriptions, conducting job analysis interviews, making group presentations, performing statistical computations ability to conduct meetings, to plan and prioritize work.

4. Work Orientation Factors:

The position may require up to 15 per cent travel.

5. Age:

Preferably below 30 years. Preparing a job specification is always not easy. Regarding the human resource requirements of a job, there is scope for disagreement. For a clerical job, one bank may demand high school education; another bank may demand the services of graduates or even postgraduates.

Differences may also crop up when stating an attribute as a ‘desirable’ or ‘essential’ qualification. To avoid further confusion as rightly pointed out by Mathis and Jackson, while “writing any job specification, it is important to list only those SKAs (Skill, knowledge and Abilities) essential for job performance”.

Compensation Management – Main Aims of Compensation Policy

Before designing or developing a compensation policy, the management has to identify its main aim, and the company’s strategy is to hire staff, maintain, develop and retain the talents.

The main aims can be summarized as below:

1. To attract competent employees within its plans

2. To ensure stable earning and growth of the employees

3. To recognize the values of all jobs and positions

4. To encourage and motivate the employees to grow with the organization

5. To develop trust and confidence in the employees through transparent communication

6. To eliminate possible disputes or grievances

7. To effectively maintain and retain the talents

8. To effectively administer and manage the compensation and satisfaction of the employees

9. To simplify the bargaining process

10. To ensure desired behaviour and industrial harmony.

Compensation ManagementGovernment Influences on Compensation Management

The Government’s statutory responsibility is to protect the sweating workers, ensure social justice and formulate and enact legislations to control exploitation and provide security to the employed persons.

The Government’s usual interest is to ensure fair compensation, remove pay disparity and safeguard ‘labour’ as the important element of economy. It, therefore, enforces related legislations to protect the interests of the nation at the workplace so as to provide a safety net for unemployment and fair wages to employed nationals.

For this, it influences the compensation in two ways – (1) Direct Influence, enforcing minimum and fair wages (2) Indirect Influence, to provide social security, health hazard protections and retiring benefits.

The Government in consultation with the Planning Commissions, Wage Boards and tribunals views the problems of the workers and evolves and enacts the following:

i. Enacting laws to ensure minimum wages and benefits, to protect certain groups of people to get employment, to control working hours per week

ii. Setting up tribunals to pass on fair judgement on compensation grievances

iii. Reviewing labour rates for different industries in the specific locations

iv. Dictating ceilings on wages to control the economy

v. Providing social security protection, pension or unemployment compensations.

Compensation Management – Types: Flexible Compensation or Cafeteria Style of Compensation (With Benefits)

It is a type of compensation which refers to compensation program that allows employees to choose what type and how much of each reward is desired during the coming year. It is also known as smorgasbord which allows employees to choose from a selection of employer provided benefits such as life insurance, health insurance, pension, unemployment compensation, and rest provided vacations etc. It was basically designed to enable senior executives, top professionals and managers to choose individually many of these benefits and services.

The demands of services depend on their age, their educational and income levels, their life style and other forms of preferences. Recent studies suggest that flexible or cafeteria compensation programs are becoming increasingly popular among employees. It provides an opportunity to contain the costs of the benefit package and provides benefits on a more tax-effective basis. It also increases loyalty and motivation of employees, which in turn enhances productivity.

Benefits provided in a cafeteria compensation approach are:

(i) Accidental death, dismemberment insurance

(ii) Bonus eligibility

(iii) Business and professional membership

(iv) Club membership

(v) Cash profit sharing

(vi) Automobile allowance

(vii) Medical assistance y

(viii) Housing allowance

(ix) Deferred Bonus or Deferred Compensation Plan

(x) Dental and eye care insurance

(xi) Education costs

(xii) Free or subsidized lunches

(xiii) Group Life Insurance

(xiv) Health maintenance fees

(xv) Interest-fee Loans

(xvi) Long-term disability benefit

(xvii) Recreational facilities

(xviii) Saving Plans

(xix) Sabbatical leaves

(xx) Sickness and accident insurance

(xxi) Stock bonus plan and stock purchase plan

Features of Cafeteria Style Compensation:

Under this programme, the employee is told that his total compensation mode is of, say Rs.2,000/- and then he can choose mix of salary life insurance, deferred compensation and other benefits that suit his particular needs. Each of the options carries a price and the employee can select up to Rs.2,000/- of salary – those items that he feels best suit his personal needs.

While adopting the programme, the management should remember that the most of younger employees are more concerned with “take home pay” than with “retirement benefits”. On the other hand, older employees are more concerned about retirement and pension programmes.

Types of Cafeteria Plans:

The two most popular types of cafeteria plan are:

(i) Pre-tax premium conversion plans

(ii) Flexible spending arrangements (FSA’s)

(i) Premium Conversion:

It is the simplest type of cafeteria plan which permits employees to pay their share of premiums for health coverage, life insurance and other qualified benefits such as disability insurance on a pre-tax basis. This plan converts what would otherwise be after-tax employee contributions to pre-tax contribution by means of an employee’s election prior to the beginning of the year, to reduce pay and to have the company contribute the amount of the reduction to pay for the coverage selected by the employee.

(ii) Flexible Spending Arrangements or Flexible Spending Accounts:

It lets employees pay for certain benefit’s expenses such as dental care, medical and dependent care expenses on a pre-tax basis periodically, employees can elect the amount of salary reduction dollars they wish to allocate to various elements in their plans.

There are two types of FSA’s:

(a) Health and

(b) Dependent care

In Health FSA employees may set aside money to pay for health plan deductibles and co-payments as well as other uninsured medical care expenses, such as dental or vision expenses, on a pre-tax basis.

In Dependent FSA, employees may be reimbursed for dependent care expenses that enable the employee and spouse to work. They are not subject to the uniform reimbursement requirement.

(i) The information regarding employee satisfaction with flexible compensation plans is limited. However, the employers hope that it will improve the understanding of the benefits provided.

(ii) These plans are very costly. The cost for development and administration exceeds those for traditional plans.


(i) Employees can choose benefits that meet their individual needs and adjust those choices annually as needs change.

(ii) It help employers control costs by ensuring that money is not spent on benefits, that employees neither want nor need.

(iii) By offering more flexible cafeteria type benefits, employers gain an edge in attracting and retaining valuable employees.

(iv) It helps in improving employer-employee relationships, as giving employees control over their benefits promotes goodwill and creates a partnership in the benefit programs between both the parties.

(v) Cafeteria plans address the wide variation in benefit needs of diverse employees.

(vi) It helps in developing better understanding of the benefit package, as employees are actively involved in the selection process

Compensation ManagementEmployee Compensation Package

While discussing compensation, it is easy to imagine in terms of ‘rupees per hour’. However, successful compensation packages are the ones which are more like a total rewards system that contains non­monetary, direct, and indirect elements.

A significant change has come into the compensation management system over the last few years. As a result, the very definition of compensation has been reconceptualized. The modern definition considers both intrinsic (intangible) and extrinsic (tangible) components of com­pensation. While extrinsic compensation covers both the monetary and non-monetary rewards, intrinsic compensa­tion reflects employee s emotional satisfaction through job accomplishment. Presently, more organizations are seen to be using this pattern.

Non-monetary compensation includes career and social rewards such as job security, flexible working hours, working from home, and opportunity for growth, praise and recognition, task enjoyment, and avenues of warmth and friendships.

Direct compensation is an employee’s base wage. It can be a monthly or annual salary, hourly wage or any performance-based pay that an employee receives, such as profit-sharing bonuses.

Indirect compensation varies widely from one organization to another organization. Indirect compensation includes everything from legally required public protection programmes such as social security to health insurance, post-retirement benefits, paid leave, child care and maternity benefits, housing facilities, etc.

In some organizations, employees can choose compensations suitable to them from a wide variety of compensation elements designed by the employer. Progressive HR mangers can create compensa­tion packages by combining many of these compensation alternatives to make them employee-friendly.

Recent studies reveal that pay should be tied to performance for organizational effectiveness. Of course, business performance cannot always be ensured by compensation. Successful managers must search and innovate to influence employees and their performances. Your organization may benefit from the tenure bonuses for long-time employees, equipment repair incentives to encourage good equipment maintenance, or bonuses for arriving at work on time.

Levels of employee motivation, need satisfaction, and employee retention are directly linked with designing and practising compensation packages. In order to design the policy, an organization must formulate both primary and secondary objectives.

Compensation ManagementFuture Trends in Compensation Management

In a globalized and liberalized business era, compensation management has concepts, plans and paradigms different from traditional wage and salary administration. It now involves total compensation management to have talented human resources and retain them as a knowledge bank.

The introduction of a performance related payments system and value added compensation systems are a much-debated topic among today’s HR Consultants and Human Resource Managers. However, these trends are facing tooting problems such as designing accurate and acceptable performance measurement, deciding feasible targets, and rewarding systems to satisfy the employees.

Fast growing industrial sectors are creating vast, wage and salary disparities and competition in hiring competent employees. Job-hopping is one of the results of these factors.

Variable pay, which covers performance and target, linked bonuses and sales or marketing incentives have been increasing in Indian industries after introduction of MNCs. Segregation of the total package into monthly, quarterly (performance based) and annual segments for extra benefits is currently being used by private sectors and MNCs.

Incentive schemes are playing another important role in this competitive era, and different types and forms of productivity and personal growth schemes are operating in our country.

Regarding benefits to the employees, especially to executives and above, stock option schemes, interest free loans for housing or conveyance, free medical insurance and foreign tours are likely to gain momentum in future. Perceptions on salary and pay hike issues are changing to satisfy the worth and motivate employees to perform better.

The employee’s involvement in systems, schemes to encourage skill and level of development, considering consolidated allowances and flexible pay systems, and spelling out clearly career advance are being debated as the future needs of compensation management.