Compensation Policy Considerations - Macro Level & Micro Level

 

Compensation policies at the company level are subject to the overall legislative and other mandatory principles/framework established by the Government.

A variety of considerations, both objective and subjective, weigh the determination of compensation policies at the company level.

•       There is a need for a fit between organization design and company policies.

•       Companies also need to consider the policies of other companies,

•       the pressures of collective bargaining (for unionized staff) and the profile and expectations of the workforce.

•       There is often divergence in the interests of workers and management which need to be reconciled.

 

In actual practice compensation policies and structures are determined

(a) unilaterally by employer in situations where the employer could exploit the prevailing labour market situation;

(b) jointly by management and workers' union(s) through collective bargaining;

(c) through consultations among the three partners it government, management and labour representatives ii under the minimum wages legislation;

(d) wage boards and pay commissions; and,

(e) courts through adjudication. (The best method is collective bargaining.)

 

In companies which are managed professionally and in a democratic manner job evaluation, employee satisfaction surveys and compensation surveys across companies in the industry/region provide useful inputs in determining the policy framework. Companies which wish to establish with performance and profitability additionally need to have in place performance management systems with democratic goal setting pre-determined criteria and procedure for evaluation and a transparent mechanism for administering pay policies.

 

We examine the key considerations. in compensation policy at macro and micro levels, the divergence in the interests of workers and management

 

MACRO POLICY FRAMEWORK: KEY CONSIDERATIONS PUBLIC POLICY          

AT MACRO LEVEL

The key considerations in Public Policy concerning wages/salaries in India may be identified as following:

a)  End exploitation and provide remuneration to capital and labour such that "while in the interests of the consumers and the primary producers excessive profits should be prevented by suitable measures of taxation and otherwise. both will share the product of their common effort after making provision for payment of fair wages to labour, a fair return on capital employed in the industry and reasonable reserves for the maintenance and expansion of the undertaking" (Industrial Truce Resolution, 1947)

b)  A living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities ..." (Constitution of India, Article 43) The Fair Wages Committee observed that IA 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 a measure of frugal comfort including education for the children, protection against ill-health, requirements of essential needs and a measure of insurance against the more important misfortunes including old age.

c)  Fix statutory minimum wages in sweated industries and promote fair wage agreements in the more organised industries (Industrial Policy Resolution, 1948)

d)  Ensure equal pay for equal work (Constitution of India)

e)  Provide for wage differentials

f)  Regulate wages and salaries to eliminate/reduce undue disparities

g)  Link remuneration to productivity

h)  Compensate for rise in cost of living

i)   Determine fair wages over and above minimum wages with due regard to

 (i) the productivity of labour; (ii) the prevailing level of wages; (iii) the level of national income and distribution; and (iv) the place of industry in the economy of the country. According to the Fair Wages Committee, &minimum wage must provide not merely for the bare substance of life but for the preservation of the efficiency of the worker. The minimum wage must also provide for some measure of education, medical requirements and amenities.’?

Fair wage should be above minimum wage and below living wage. While the lower limit of the fair wage must obviously be the minimum wage, the upper limit is equally set by what may broadly be called the capacity of the industry to pay.

 

j)   The capacity to pay. However, Supreme Court ruled that `an employer who can not pay minimum wages has no right to exist.' The capacity to pay becomes a subject of consideration to 'determine fair wages over and above minimum wages

k)  Basic needs of Labour. The 15th session of Indian Labour Conference held in 1957 suggested that the minimum wages be need-based. The Second Central Pay Commission, observed that need-based wages should ensure the minimum human needs of the industrial worker irrespective of any other 'considerations.

Dr. Akroyd, Consultant to the Second Central Pay Commission observed that

need-based minimum wages should be determined having regard to the  

following: (i) in calculating the need-based minimum wage, the standard

working class family should

be taken to consist of 3  consumption units for one earner;  the earnings of  women, children and adolescents should be disregarded; (ii) minimum food requirements should be estimated at a per consumption of 18 yards per annum which would give for the average workers' family of four, a total of 72 yards;

(iv) in respect of housing the norm should be the minimum rent charged by Government in any area for houses provided under the subsidized Industrial Housing Scheme for low income groups; and, (v) fuel, lighting and other emiscellaneous' items of expenditure should constitute 20 per cent of the total minimum wages.

a)  Wages should be adequate, sufficient and non-derogatory (IV Central Pay Commission).

b)  The effect of wages in one sector on the rest of the economy must be reckoned.

Practical Difficulties in implementation

In actual practice, one finds the following practical difficulties in implementation.

a)  Many terms like minimum wage; living wage and fair wage are not amenable for translation into money terms easily. It is difficult to operationalise the concept of a living wage and decent standard of life. It is not unusual to find workers, who by the measure of gross pay packet may constitute the middle class and be reckoned as relatively affluent by local community standards, but continue to live in abject poverty leading a sub-standard life.

b)  Minimum wages do not really matter. In the organized sector (particularly large and medium firms) most workers get much more than the minimum wages. In the unorganised sector, usually workers get less than the minimum wages. Widespread unemployment and underemployment make it difficult for even trade unions and government authorities to ensure strict compliance.

c)  The wages are not exploitative in the organized sector, but they are, usually, in the unorganised sector. In the organized sector, several firms may be usually found wanting in terms of norms of fairness due to bargaining pressures, etc.

d)  The concept of equal pay for equal work has a very limited and narrow application in Indian law and practice. The concept, as envisaged in the ILO Convention No. 100 focuses on equal pay for work of equal value. It is decided with reference to four attributes, i.e., skill, effort, responsibility and working conditions. In practice, however, collective bargaining, government interference and neutralization for rise in cost of living undermine the link between pay and the four attributes mentioned above. Wage differentials within the enterprise and across the enterprises were significantly compressed over the years. Differences in dearness allowance payment systems created additional disparities.

e)  So far linking wages to productivity remained a far cry. In the absence of systematic attempts at defining and measuring factor productivity most of the existing collective arrangements were borne out of relative bargaining power of parties and other expediencies based on short-term considerations. The IV Central Pay Commission observed that there were many short-comings in the conceptualisation and implementation of the productivity linked bonus schemes. In several instances bonuses were paid without productivity.

f)  The question whether real wages are maintained or declining in the organized sector depends on whether the reference point is the basic wage or the total emoluments. The subject has become quite contentions on three grounds: (i) elements and computation of index; (ii) method and degree of neutralisation;

(iii) elements of pay reckoned for neutralisation.

g)  It is difficult to determine whether wages are adequate, sufficient and non- derogatory. As Mahatma Gandhi observed, it is possible to pay for one's needs, not his greed. Whether wages are non-derogatory depends also on the occupational values in the society.

 

COMPANY COMPENSATION POLICY 

At Micro Level Considerations)

Compensation policies need to. be established in every . enterprise taking the following^" aspects into consideration, besides due regard to the provisions of public policy, job -evaluation and collective bargaining.

1.        ATTRACTION AND RETENTION

Usually an enterprise endeavours to recruit and, retain the best people available. One of - the ways of attracting and retaining the best and the brightest is to pay more than what they would get anywhere else for similar skills and levels.^' Some firm endeavour to be wage leaders'. ^This deliberate corporate strategy may create a situation of `wage islands' which pose problems from societal point of view.

Unlimited wage disparities cause distortions in_. the economy. Still, enterprises with prime concern for micro consideration may adopt this strategy subject to governmental restraints on account of national wage/income policies. Multinationals operating in developing countries usually pay much higher than the indigenous firms in both private and public sectors.

2.        INTERNAL CONSISTENCY

Compensation policies should take into account the differentials in skills, and levels in respect of both responsibility and authority. A sense of proportion needs to be maintained to achieve internal consistency so that wage/salary levels conform to the differences .in hierarchy and skills. III-conceived differentials may lead to conflict among work groups. In a fabrication unit, after wage revision the welders were getting less than gardeners. The technical staff in the organisation resented this by sloganeering and protests: Should, grass-cutters (gardeners) get more than gas-cutters (welders)? At the macro level similar questions (e.g., should a peon in a rural bank get more than a school teacher in the same village?) arise due to occupational values in the society and skill endowment at a given stage of economic development. But at the micro level, internally within the firm, such questions need careful examination each time decisions are taken to review salary scales.

1.        EXTERNAL CONSISTENCY

The simplest and most widely used criteria is to consider what is generally known as the going rate in the labour market for comparable jobs in the industry/region. While deciding wage rates in public sector, comparison may be made of wage rates in private sector for comparable jobs. It is possible that public sector units may fix relatively lower wage rates than private sector units because the former affords a greater -sense of job security. But if the differentials are significant enough, public sector may find it difficult to attract the right talent. For key jobs if the rates are not uniform, inter and intrasectorally and among industry groups, there may be imbalances in the distribution of skills and talents.

4   ABILITY TO PAY

As already mentioned, wherever minimum wage legislation is applicable, enterprises should pay minimum wages irrespective of their capacity to pay. Over and above the minimum wages, enterprises pay more depending upon their ability to pay. Also, enterprises vulnerable to union pressures may end up paying more than this due to the coercive bargaining power of the unions. It is not uncommon to see enterprises paying much less than what they can pay just because the employees are not organised.

5     LINKING PAY TO PERFORMANCE

Linking pay to performance is sound and makes good sense. However in the organised sector in India, the compensation policies have, unfortunately, a remote relationship, if ever, between pay and performance. Analysis of the components of total wage/salary reveals that over the years a substantial part of the rise in the pay is intended to meet the rise in the cost of living. While basic wage/salary and even bonus is not usually related to performance, many enterprises have a wide range of production incentive systems.

It is important for any organization which wishes to establish any linkage between pay and performance to design the organization, jobs and work flow in such a manner where employees covered by the performance linked pay system are able to make a difference to the outcomes of their work. This means democratization of workplace with locus control in the hands of those who perform work.

Another key problem with linking pay with performance concerns the absence of criteria and tools to measure performance objectively and the inability to evolve mutually satisfactory norms of sharing the fruits of performance between labour and capital.

6. LABOUR COSTS AND PRODUCTIVITY

Wages and salaries can be linked to the productivity and profitability of an enterprise. Growing and profit-earning enterprises find it easier to pay more than stagnant and loss-incurring enterprises though it is the latter category which would be most hard pressed to attract and retain skills. Again wage costs as a percentage to total costs would be higher in labour intensive firms than capital intensive firms and in assembly-type units than in process units. For instance, in India, the labour cost as a percentage of total cost could be around 60 in coal mining against barely 2 or 3 per cent in petro- chemicals or fertilizers. In most manufacturing firms it does not exceed 15 to 16 per cent. Capital intensive process units can thus afford to pay substantially more than labour intensive units because the impact of higher wages and salaries on output costs is not so acute as in labour intensive units. 

Also in recent years, productivity bargaining is gaining ground in India too. For example, the ITC increased the pay scales of unionised employees substantially through wage agreement whereby the union agreed to cooperate with the management in maintaining the share of labour cost in the ex-factory cost per cigarette at the same level over a five-year period. Many firms have entered into wage agreements which entailed a trade off between more jobs versus more wages. For example Premier Automobiles Ltd could accomplish a major productivity bargaining agreement.

Several other chemical and engineering firms had, in recent years, "entered into similar agreements. However, such agreements raise questions about their effects on level of employment in the economy, particularly in the context of widespread unemployment and on the firm in the event of a recession. The counter argument is, "What is the point in keeping wages low, if you can not keep the labour costs too low?" Quite often firms in India find labour is cheap, but not the cost of labour.

7   COST OF LIVING

Dearness Allowance (DA) and City Compensatory Allowance (CCA) now form integral part of most wage structures. The general principle underlying these allowances is to neutralize at least a portion of the increase in the cost of living. Where these allowances do not form part of the wage structure, ad hoc and lumpsum, increases in pay are unilaterally announced by managements to partially provide for such neutralization. It may be observed in certain private sector organizations which follow both the systems, the ad hoc pay increases are (usually for staff and managerial employees) at least equal to the increase in DA sanctioned to those governed by the DA scheme (usually workmen) since the time ad hoc pay increase was sanctioned last till the current ad hoc pay increase. Wage and salary increase related to increase in cost of living usually poses additional burden on the employer without corresponding improvement in productivity. The additional financial burden is met by adjusting the prices, if the market can bear and public policy allows.

Otherwise the pressure is on firms to cut costselsewhere or seek productivity improvements to absorb the increase in wage costs.

8     MERIT AND SENIORITY PROGRESSION

Merit progression refers to the practice of rewarding a person according to one^'s

When the person's performance is outstanding or distinctively above average, the organization may like to reward him with extra (over and above the normal) increment(s). There are, of course, other less used ways of rewarding merit/superior performance. These include, production incentive and profit-sharing schemes, bonus, promotions, job enlargement and job enrichment.

Usually most pay-scales provide for step increases over a time scale. Annual increments in basic pay accrue to the employee as he accumulates experience till he reaches the end of the pay scale. Some organizations provide for time bound promotions and stagnation allowances too. Time-bound promotions refer to the practice of promotion to the next grade after the person completes service in the present grade for a specified number of years. Stagnation allowance refers to the practice of sanctioning extra increments or lumpsum amount after the person reaches the end of the pay-scale.

As a result of the above practices, the senior employees get more pay (higher basic and consequential increases in other benefits like DA, Provident Fund, etc., which are usually expressed as a fraction or. percentage of basic pay) than their juniors even though both would be doing same or similar work. The logic for seniority progression is that as a person accumulates experience, his skills get sharpened and productive efficiency goes up. This may, in jobs requiring manual skill and dexterity continue to happen only up to a point and thereafter, because of age, and other considerations, the productive efficiency may decline. In jobs requiring mental skills (teaching, for instance), there may not be any similiarly evident saturation or declining point unless the person becomes senile.

9.       MOTIVATION

"Money may not be everything but everything else may be way behind!" Company compensation policy can be an effective tool to motivate people for superior performance. There is a lot of debate on whether after a point money ceases to be a motivating factor, due to several reasons such as individual preferences, consequential trade offs (in terms of family and social obligations, etc), taxation policies, etc. A wide variety of non-monetary incentives have therefore been devised to compensate, reward, sustain and improve superior performance.

10.        INTEGRITY

James Burnham predicted in his famous book, Managerial Revolution, which he wrote half-a-century ago, that the future belongs to professional managers who would be the `rulers'. Berle and Means pointed out the divorce between ownership and control, in their well-acclaimed book, "The Rise of the Modern Corporation". Now, professional managers have access to and control over resources. They do not, of course, usually own them. As we have seen in Chapter 4, integrity has been identified as one of the most important attributes in selection criteria for managerial employees who wield control over corporate resources. Having given them the power, there are many like the veteran civil servant L K Jha, who argued that it is important to compensate them adequately enough to keep them out of temptation, L K Jha once asked, ^"whether we can afford not to pay more for civil servants who wield such enormous power?" The question is indeed ticklish. To paraphrase Mahatma Gandhi, companies can give enough to meet a person's needs and to let him lead a life befitting the position he occupies, but no company can give a person enough to meet his greed.

DIVERGENT PERSPECTIVES OF MANAGEMENT AND LABOUR