Lecture 1 : Compensation Management

Compensation of employees for their services is important responsibility of human resource management.
Every organization must offer good wages and fringe benefits to attract and retain talented employees with the
organization. If at any time, the wages offered by a firm are not competitive as compared to other firms, the
efficient workers may leave the firm. Therefore, workers must be remunerated adequately for their services.
Compensation to workers will vary depending upon the nature of job, skills required, risk involved, nature of
working conditions, paying capacity of the employer, bargaining power of the trade union, wages and benefits
offered by the other units in the region or industry etc., Considering that the current trend in many sectors
(particularly the knowledge intensive sectors like IT and Services) is to treat the employees as “creators and
drivers of value” rather than one more factor of production, companies around the world are paying close
attention to how much they pay, the kind of components that this pay includes and whether they are offering
competitive compensation to attract the best talent.
Definition
Gary Dessler in his book Human Resource Management defines compensation in these words “Employee
compensation refers to all forms of pay going to employees and arising from their employment.” The phrase ‘all
forms of pay’ in the definition does not include non-financial benefits, but all the direct and indirect financial
compensations.
According to Thomas J. Bergmann(1988) compensation consists of four distinct components:
Compensation = Wage or Salary + Employee benefits +Non-recurring financial rewards+ Non-pecuniary
rewards.
Compensation refers to a wide range of financial and non financial rewards to employees for their services
rendered to the organization. It is paid in the form of wages, salaries and employee benefits such as paid
vacations, insurance maternity leave, free travel facility, retirement benefits etc., Monetary payments are a
direct form of compensating the employees and have a great impact in motivating employees.
Objectives of Compensation Management

To Establish a Fair and Equitable Remuneration Effective compensation management objectives are to
maintain internal and external equity in remuneration paid to employees. Internal equity means similar pay for
similar work. In other words, compensation differentials between jobs should be in proportion of differences in
the worth of jobs. External equity implies pay for a job should be equal to pay for a similar job in other
organizations. Payments based on jobs requirements, employee performance and industry levels minimize
favoritism and inequities in pay.
To Attract Competent Personnel:A sound wage and salary administration helps to attract qualified and
hardworking people by ensuring an adequate payment for all jobs. For example IT companies are competing
each other and try their level best to attract best talents by offering better compensation packages.
To Retain the Present Employees By paying competitive levels, the company can retain its personnel. It can
minimize the incidence of quitting and increase employee loyalty. For example employees attrition is high in
knowledge sectors (Ad-agency, KPO, BPO etc.,) which force the companies to offer better pay to retain their
employees.
To Improve Productivity Sound wage and salary administration helps to improve the motivation and morale
of employees which in turn lead to higher productivity. Especially private sectors companies’ offer production
linked compensation packages to their employees which leads to higher productivity.
To Control Cost Through sound compensation management, administration and labour costs can be kept in
line with the ability of the company to pay. If facilitates administration and control of pay roll. The companies
can systematically plan and control labour costs.
To Improve Union Management Relations Compensation management based on jobs and prevailing pay
levels are more acceptable to trade unions. Therefore, sound wage and salary administration simplifies
collective bargaining and negotiations over pay. It reduces grievances arising out of wage inequities.
To Improve Public Image of the Company Wage and salary programme also seeks to project the image of
the progressive employer and to company with legal requirements relating to wages and salaries.
To Improve Job Satisfaction If employees would be happy with their jobs and would love to work for the
company if they get fair rewards in exchange of their services.
To Motivate Employees: Employees All have different kinds of needs. Some of them want money so they
work for the company which gives them higher pay. Some of them value achievement more than money, they
would associate themselves with firms which offer greater chances of promotion, learning and development. A
compensation plan that hits workers’ needs is more likely to motivate them to act in the desired way.
Peace of Mind Offering of several types of insurances to workers relieves them from certain fears, as a result
workers now work with relaxed mind.
Increases Self-Confidence Every human being wants his/her efforts to get acknowledgment. Employees gain
more and more confidence in them and in their abilities if they receive just rewards. As a result, their
performance level shoots up.
Significance of Compensation Management
Labour plays vital role in bringing about the process of production/business in motion. The other factors being
human, has expectations, emotions, ambitions and egos. Labour therefore expects to have fair share in the
business/production process. Therefore a fair compensation system is a must for every business organization.
The fair compensation system will help in the following:
● An ideal compensation system will have positive impact on the efficiency and results produced by
employees. It will encourage the employees to perform better and achieve the standards fixed.
● It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and
the set standards would be more realistic and achievable.
● Such a system should be well defined and uniform. It will be apply to all the levels of the organization
as a general system.
● The system should be simple and flexible so that every employee would be able to compute his own
compensation receivable.
● It should be easy to implement, should not result in exploitation of workers.

● It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would
provide satisfaction to the workers.
● An ideal compensation system will have positive impact on the efficiency and results produced by
employees. It will encourage the employees to perform better and achieve the standards fixed.
● It will enhance the process of job evaluation. It will also help in setting up an ideal job evaluation and
the set standards would be more realistic and achievable.
● Such a system should be well defined and uniform. It will be apply to all the levels of the organization
as a general system.
● The system should be simple and flexible so that every employee would be able to compute his own
compensation receivable.
● It should be easy to implement, should not result in exploitation of workers.

● It will raise the morale, efficiency and cooperation among the workers. It, being just and fair would
provide satisfaction to the workers.
● Such system would help management in complying with the various labor acts.

● Such system should also solve disputes between the employee union and management.

● The system should follow the management principle of equal pay.

● It should motivate and encouragement those who perform better and should provide opportunities for
those who wish to excel.
 ● Sound Compensation/Reward System brings peace in the relationship of employer and employees.

● It aims at creating a healthy competition among them and encourages employees to work hard and
efficiently.
● The system provides growth and advancement opportunities to the deserving employees.

● The perfect compensation system provides platform for happy and satisfied workforce. This minimizes
the labour turnover. The organization enjoys the stability.
● The organization is able to retain the best talent by providing them adequate compensation thereby
stopping them from switching over to another job.
● The business organization can think of expansion and growth if it has the support of skillful, talented
and happy workforce.
● The sound compensation system is hallmark of organization’s success and prosperity.

● The success and stability of organization is measured with pay-package it provides to its employees.

Principles of Compensation Administration

Compensation policy should be developed by taking into consideration of the views of employers, the
employees, the consumers and the community.
● The compensation policy or wage policy should be clearly defined to ensure uniform and consistent
application.
● The compensation plan should be matching with overall plans of the company.

● Compensation planning should be part and parcel of financial planning

● Management should inform the wage/salary related policies to their employees. Workers should be
associated in formulation and implementation of wage policy
● All wage and salary related decisions should be checked against the standards set in advance in the
wage/salary policy
● To manage compensation related matters adequate information/data should be developed and stored for
future planning and execution.
● The compensation policy and programme should be reviewed and revised periodically in conformity
with changing needs.
Components of Compensation
Basic Wages/Salaries :Basic wages / salaries refer to the cash component of the wage structure based on which
other elements of compensation may be structured. It is normally a fixed amount which is subject to changes
based on annual increments or subject to periodical pay hikes.
Wages represent hourly rates of pay, and salary refers to the monthly rate of pay, irrespective of the number of
hours put in by the employee. Wages and salaries are subject to the annual increments. They differ from
employee to employee, and depend upon the nature of job, seniority, and merit.
Dearness Allowance:The payment of dearness allowance facilitates employees and workers to face the price
increase or inflation of prices of goods and services consumed by him. The onslaught of price increase has a
major bearing on the living conditions of the labour. The increasing prices reduce the compensation to nothing
and the money’s worth is coming down based on the level of inflation. The payment of dearness allowance,
which may be a fixed percentage on the basic wage, enables the employees to face the increasing prices.
Incentives Incentives are paid in addition to wages and salaries and are also called ‘payments by results’.
Incentives depend upon productivity, sales, profit, or cost reduction efforts.
There are:
(a) Individual incentive schemes, and
(b) Group incentive programmes.
Individual incentives are applicable to specific employee performance. Where a given task demands group
efforts for completion, incentives are paid to the group as a whole. The amount is later divided among group
members on an equitable basis.
Bonus
The bonus can be paid in different ways. It can be fixed percentage on the basic wage paid annually or in
proportion to the profitability. The Government also prescribes a minimum statutory bonus for all employees
and workers. There is also a bonus plan which compensates the managers and employees based on the sales
revenue or profit margin achieved. Bonus plans can also be based on piece wages but depends upon the
productivity of labour.

Non-Monetary Benefits
These benefits give psychological satisfaction to employees even when financial benefit is not available. Such
benefits are:
(a) Recognition of merit through certificate, etc.
(b) Offering challenging job responsibilities,
(c) Promoting growth prospects,
(d) Comfortable working conditions,
(e) Competent supervision, and
(f) Job sharing and flexi-time.
Commissions Commission to managers and employees may be based on the sales revenue or profits of the
company. It is always a fixed percentage on the target achieved. For taxation purposes, commission is again a
taxable component of compensation. The payment of commission as a component of commission is practiced
heavily on target based sales. Depending upon the targets achieved, companies may pay a commission on a
monthly or periodical basis.
Mixed Plans Companies may also pay employees and others a combination of pay as well as commissions.
This plan is called combination or mixed plan. Apart from the salaries paid, the employees may be eligible for a
fixed percentage of commission upon achievement of fixed target of sales or profits or Performance objectives.
Nowadays, most of the corporate sector is following this practice. This is also termed as variable component of
compensation.
Piece Rate Wages Piece rate wages are prevalent in the manufacturing wages. The laborers are paid wages for
each of the Quantity produced by them. The gross earnings of the labour would be equivalent to number of
goods produced by them. Piece rate wages improves productivity and is an absolute measurement of
productivity to wage structure. The fairness of compensation is totally based on the productivity and not by
other qualitative factors.

Fringe Benefits Fringe benefits may be defined as wide range of benefits and services that employees receive
as an integral part of their total compensation package. They are based on critical job factors and performance.
Fringe benefits constitute indirect compensation as they are usually extended as a condition of employment and
not directly related to performance of concerned employee. Fringe benefits are supplements to regular wages
received by the workers at a cost of employers. They include benefits such as paid vacation, pension, health and
insurance plans, etc. Such benefits are computable in terms of money and the amount of benefit is generally not
predetermined. The purpose of fringe benefits is to retain efficient and capable people in the organization over a
long period. They foster loyalty and acts as a security base for the employees.
Profit Sharing Profit-sharing is regarded as a stepping stone to industrial democracy. Profit-sharing is an
agreement by which employees receive a share, fixed in advance of the profits. Profitsharing usually involves
the determination of an organization’s profit at the end of the fiscal year and the distribution of a percentage of
the profits to the workers qualified to share in the earnings. The percentage to be shared by the workers is often
predetermined at the beginning of the work period and is often communicated to the workers so that they have
some knowledge of their potential gains. To enable the workers to participate in profitsharing, they are required
to work for certain number of years and develop some seniority. The theory behind profit-sharing is that
management feels its workers will fulfill their responsibilities more diligently if they realize that their efforts
may result in higher profits, which will be returned to the workers through profit-sharing.

Types of Compensation / Base and Supplementary Compensation

Total compensation returns are more transactional. They include pay received directly as cash (like base, merit,
incentives, cost of living adjustments) and indirectly as benefits (like pensions, medical insurance, programs to
help balance work and life demands, brightly coloured uniforms). Programme to pay to people can be designed
in a wide variety of ways, and a single employer typically uses more than one.
● Direct /Base Compensation
Direct compensation refers to monetary benefits offered and provided to employees in return of the services
they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance,
leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a
regular interval at a definite time.
i) Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a
day, a week, a month, etc. It is the money an employee receive from his/her employer by rendering his/her
services
ii) House Rent Allowance
Organizations either provide accommodations to its employees who are from different state or country or they
provide house rent allowances to its employees. This is done to provide them social security and motivate them
to work.
iii) Conveyance
Organizations provide for cab facilities tto their employees. Few organizations also provide vehicles and petrol
allowances to their employees to motivate them
iv) Leave Travel Allowance
These allowances are provided to retain the best talent in the organization. The employees are given allowances
to visit any place they wish with their families. The allowances are scaled as per the position of employee in the
organization.
v) Medical Reimbursement
Organizations also look after the health conditions of their employees. The employees are provided with medi-
claims for them and their family members. These medi-claims include health-insurances and treatment bills
reimbursements.
vi) Bonus
Bonus is paid to the employees during festive seasons to motivate them and provide them the social security.
The bonus amount usually amounts to one month’s salary of the employee.

vii) Special Allowance

Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest
loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate
them which improve the organizational productivity
● Indirect /Supplementary Compensation
Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services
provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization,
Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.
1. Leave Policy
It is the right of employee to get adequate number of leave while working with the organization. The
organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves,
statutory pay, etc.
2. Overtime Policy
Employees should be provided with the adequate allowances and facilities during their overtime, if they
happened to do so, such as transport facilities, overtime pay, etc.
 3. Hospitalization
The employees should be provided allowances to get their regular check-ups, say at an interval of one year.
Even their dependents should be eligible for the medi-claims that provide them emotional and social security.
4. Insurance
Organizations also provide for accidental insurance and life insurance for employees. This gives them the
emotional security and they feel themselves valued in the organization.
5. Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with their families. Some
organizations arrange for a tour for the employees of the organization. This is usually done to make the
employees stress free.
6. Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which benefits them after they
retire from the organization at the prescribed age.
7. Holiday Homes
Organizations provide for holiday homes and guest house for their employees at different locations. These
holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make
sure that the employees do not face any kind of difficulties during their stay in the guest house.
8. Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due
to their personal problems and valid reasons.

Factors Considered in Deciding the Compensation

Employers decide on what is the right compensation after taking into account the following points.
The Job Description of the employee that specifies how much should be paid and the parts of the compensation
package. The Job Description is further made up of responsibilities, functions, duties, location of the job and the
other factors like environment etc. These elements of the job description are taken individually to arrive at the
basic compensation along with the other components like benefits, variable pay and bonus. It needs to be
remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the
location of the employee and governmental policies along with the grade of the employee. Hence, it is common
to find a minimum level of HRA that is common to all the employees and which increases in proportion to the
factors mentioned above.
The Job Evaluation that is a system for arriving at the net worth of employees based on comparison with
appropriate compensation levels for comparable jobs across the industry as well as within the company. Factors
like Experience, Qualifications, Expertise and Need of the company determine how much the employer is
willing to pay for the employee. It is often the case that employers compare the jobs across the industry and
arrive at a particular compensation after taking into account the specific needs of their firm and in this respect
salary surveys and research results done by market research firms as to how much different companies in the
same industry are paying for similar roles. The components of compensation that have been discussed above are
the base requirements for any HR Manager who is in charge of fixing the compensation for potential
employees. Hence, all HR professionals and managers must take this following aspect into account when they
determine the compensation to be paid to employees

Factors Considered in Deciding the Compensation

● External Factors

[Link] and Supply of Labour: Wage is a price or compensation for the services rendered by a worker. The
firm requires these services, and it must pay a price that will bring forth the supply which is controlled by the
individual worker or by a group of workers acting together through their unions. The primary result of the
operation of the law of supply and demand is the creation of the going wage rate. It is not practicable to draw
demand and supply curves for each job in an organization even though, theoretically, a separate curve exists for
each job.

[Link] of Living: Another important factor affecting the wage is the cost of living adjustments of wages. This
tends to vary money wage depending upon the variations in the cost of living index following rise or fall in the
general price level and consumer price index. It is an essential ingredient of long-term labour contract unless
provision is made to reopen the wage clause periodically.

[Link] Union: Organized labor is able to ensure better wages than the unorganized one. Higher wages may
have to be paid by the firm to its workers under the pressure or trade union. If the trade union fails in their
attempt to raise the wage and other allowances through collective bargaining, they resort to strike and other
methods hereby the supply of labour is restricted. This exerts a kind of influence on the employer to concede at
least partially the demands of the labour unions.

[Link]: To protect the working class from the exploitations of powerful employers, the government has
enacted several laws. Laws on minimum wages, hours of work, equal pay for equal work, payment of dearness
and other allowances, payment of bonus, etc., have been enacted and enforced to bring about a measure of
fairness in compensating the working class. Thus, the laws enacted and the labour policies framed by the
government have an important influence on wages and salaries paid by the employers. Wages and salaries can’t
be fixed below the level prescribed by the government.
[Link] Wage Rates: Wages in a firm are influenced by the general wage level or the wages paid for similar
occupations in the industry, region and the economy as a whole. External alignment of wages is essential
because if wages paid by a firm are lower than those paid by other firms, the firm will not be able to attract and
retain efficient employees. For instance, there is a wide difference between the pay packages offered by
multinational and Indian companies. It is because of this difference that the multinational corporations are able
to attract the most talented workforce.

● Internal Factors

[Link] to Pay: Employer’s ability to pay is an important factor affecting wages not only for the individual
firm, but also for the entire industry. This depends upon the financial position and profitability of the firm.
However, the fundamental determinants of the wage rate for the individual firm emanate from supply and
demand of labour. If the firm is marginal and cannot afford to pay competitive rates, its employees will
generally leave it for better paying jobs in other organizations. But, this adjustment is neither immediate nor
perfect because of problems of labour immobility and lack of perfect knowledge of alternatives. If the firm is
highly successful, there is little need to pay more than the competitive rates to obtain personnel. Ability to pay
is an important factor affecting wages, not only for the individual firm but also for the entire industry.

[Link] Management Philosophy: Wage rates to be paid to the employees are also affected by the top
management’s philosophy, values and attitudes. As wage and salary payments constitute a major portion of
costs and /or apportionment of profits to the employees, top management may like to keep it to the minimum.
On the other hand, top management may like to pay higher pay to attract top talent.

[Link] of Workers To achieve the best results from the workers and to motivate him to increase his
efficiency, wages have to be productivity based. There has been a trend towards gearing wage increase to
productivity increases. Productivity is the key factor in the operation of a company. High wages and low costs
are possible only when productivity increases appreciably.

[Link] Requirements Job requirements indicating measures of job difficulty provide a basis for determining
the relative value of one job against another in an enterprise. Explicitly, job may be graded in terms of a relative
degree of skill, effort and responsibility needed and the adversity of working conditions. The occupational wage
differentials in terms of
a) Hardship,
b) Difficulty of learning the job
c) Stability of employment
d) Responsibility of learning the job and
f) Change for success or failure in the work.
This reforms a basis for job evaluation plans and thus, determines wage levels in an industry.

[Link] Related Factors:Several employees related factors interact to determine his remuneration. These
include
a)Performance: productivity is always rewarded with a pay increase. Rewarding performance motivates the
employees to do better in future.
b)Seniority: Unions view seniority as the most objective criteria for pay increases whereas management prefer
performance to effect pay increases.
c)Experience: Makes an employee gain valuable insights and is generally rewarded.
d)Potential: organizations do pay some employees based on their potential. Young managers are paid more
because of their potential to perform even if they are short of experience.

[Link] Politics :Compensation surveys, job analysis, job evaluation and employee performance are all
involved in wage and salary decisions. Political considerations may enter into the equation in the following
ways:
i) Determination of firms included in the compensation survey: managers could make their firm appear to be a
wage leader by including in the survey those organizations that are pay followers.
ii) Choice of compensable factors for the job evaluation plan: Again, the job value determined by this process
could be manipulated
iii) Emphasis placed on either internal or external equity and
iv) Results of employee performance appraisal may be intentionally disported by the supervisor
Thus, a sound and objective compensation system may be destroyed by organizational politics.

Evaluation of Compensation
Today’s compensation systems have come from a long way. With the changing organizational structures
workers’ need and compensation systems have also been changing. From the bureaucratic organizations to the
participative organizations, employees have started asking for their rights and appropriate compensations. The
higher education standards and higher skills required for the jobs have made the organizations provide
competitive compensations to their employees. Compensation strategy is derived from the business strategy.
The business goals and objectives are aligned with the HR strategies. Then the compensation committee or the
concerned authority formulates the compensation strategy. It depends on both internal and external factors as
well as the life cycle of an organization

CASE STUDY
In 2007, the Indian subsidiary of a multinational refinery became a Government of India company. The
government company had announced an ambitious expansion programme which meant doubling the work force
in less than four years. In 2007 at the time of wage revision, the union and management agreed to a two-tier pay
structure. Those
already employed will be eligible for a higher grade and those who are (to be) recruited afresh will get a lower
grade though jobs are similar in skill, responsibility and effort. Both the union and the management justified
that this is an innovative practice widely followed in deregulated companies abroad, particularly the airlines in
North America.
Questions
a) Is it fair agreement
b) Would it contravene with the concept of equal pay for

Methods of Wage Payment

In devising system of wage determination, the critical question that emerges is whether the wage will be
linked to time spent on the workplace or output achieved during a specified period. This results into two
types of wages: time wage and piece wage. These two basic systems have their own relative merits and
demerits. Sometimes, in order to avoid hardship to employees, a combination of these two methods is
followed to ensure the payment of minimum wages. This method is known as balance method. Let us
see how these methods work.

Time Wage Method:

In time wage method, the wage is determined on the basis of time worked which may be hourly, daily,
weekly, monthly or any other time base. A worker is paid wage for the time worked irrespective of his
output during that time. Perhaps, this is the oldest and most prevalent system of wage payment.
For example,
If the worker is paid at the rate of Rs.20 per hour and he spends 50 hours during a week, the weekly
payment is:
Weekly wages = (Number of hours worked during the week) x (Rate per hours) = 50 x 20 = Rs.1000 per
week.

Merits of Time Wage:

This method is applied more commonly because it has certain inherent merits which are as under:
- There are certain jobs in which output within a specified period is not easily measurable, e.g. the job of
a peon. In such a case wage payment is linked to time.
- It is quite easy to understand and calculate the amount of wages to be paid.
- Thus, even an illiterate worker can understand it.
- Both employers and workers know well in advance the amount of wages payable and they can adjust
their budgets accordingly.
- It ensures the payment of regular and specific wages which is beneficial from social point of view.
- Product/service quality tends to be high as workers are not in hurry to produce more without regard to
quality.
Demerits of Time Wage:
Though adopted more commonly, time wage system suffers from a number of drawbacks and if the
workers are not adequately motivated for higher performance, this system can generate inefficiency in
the following ways:
- Since there is no direct linkage between performance and wages, employees tend to take easy
approach.
- This system does not differentiate between efficient and inefficient workers; gradually, inefficiency
percolates to efficient workers too.
- It de-motivates efficient workers for more output as they are put at par with inefficient ones.
- Labour cost of production becomes difficult to determine in advance because wages are not linked to
output.
- Since productivity is not a criterion for fixing wages. There is a possibility that wrong employees are
placed on the job.
Various merits and demerits of time wage system suggest that this system can be followed in some jobs
but not in all. This system is more suitable in the following situations:
- Where units of output are not measurable precisely like office work.
- Where individual employees do not have direct control on their outputs like assembly work.
- Where quality of work is more pronounced and requires creative imagination like artistic work.
- Where machinery and raw materials are quite sophisticated which require handling with utmost care
like processing of precious metals.
- Where work is of highly varied nature and standards of outputs cannot be ascertained like research
work.
- Where workers' unions oppose the introduction of piece rate system.
- Where supervision is good and the supervisors can estimate a fair day's work.

Piece Wage Method:

In piece wage method workers are paid wages according to the quantity of output during a specified
period. This may be calculated on the basis of number of units produced or the completion of a job
where output is not measurable in terms of individual units.
For example, If a worker produces 100 pieces per day and he is paid at the rate of Rs.1.2 per piece, the
daily wage is 100 x 1.2 = Rs.120.
Merits of Piece Wage:
Piece wage method has the following merits:
- There is a direct relationship between output and wages which works as a motivating factor to workers
to produce more.
- It differentiates efficient and inefficient workers and provides incentives to inefficient workers to
become efficient.
- This is fair and equitable so far as utilization of human resources is concerned.
- It requires less supervision if there is in-built system for product quality control.
- The organization can estimate its cost of production well in advance because wage cost is directly
proportional to output.
Demerits of Piece Wage:
Piece wage system has the following demerits:
- There is a problem in fixing piece rate in the absence of any standardized procedure.
- There is a tendency on the part of the employers to cut piece rate if workers' earnings are quite high.
- The method does not ensure minimum wages as output may be adversely affected by factors beyond
control.
- The product quality and machinery conditions are likely to suffer because workers concentrate more on
quantity rather than quality.
- There may be jealousy and interpersonal conflict among workers because of their uneven earnings at
the same workplace.
- Trade unions generally oppose this system because of the fear of discrimination among workers based
on their working.
Various merits and demerits of piece wage system indicate that this system is not suitable for all
conditions but only to specific conditions which are as follows:
- Where the output of each individual worker can be measured precisely.
- Where the quantity of output is a direct result of skills and efforts of individual workers.
- When the flow of work is regular and work interruptions do not occur.
- Where production methods are standardized and job is of repetitive nature.
- Where workmanship is not required.

Balance Method:
This method is a combination of time wage and piece wage methods. In this method, a worker is paid a
fixed wage based on the time rate with a provision of piece wage method. How? This is just like
minimum rent with a provision of short working recoupment in case of royalty. If a worker produces
less quantity in a period, he is given wages as per time rate and excess payment over piece rate is treated
as credit.

This credit is compensated in the period when he/she produces more than time rate wages. Thus, he is
given time wage whether he produces more or less than it, i.e., time wage. This wills be more clear from
an example.

Suppose, the time wage is Rs. 500 per week and the piece wage rate is Rs. 10 per unit. As per his
production, his wages during the 4 weeks in a month will be as shown in Table 15.1:
Table 15.1: Wages under Balance Method:

This method ensures the worker the receipt of a fixed amount as wage in all cases. From workers
point of view, this method has relevance in work situation where work flow is flexible /irregular
such as docks. This method is also known as ‘debt method’. The National Commission on
Labour (NCL) has identified different methods of wage payment by employee contribution. This
is borne out by Table 15.2.

Advantages:
a. This system provides incentives to workers to produce more,
b. It is simple in its working and the workers can easily calculate their wages.
Disadvantages:
a. It needs check on quality.
b. It needs careful piece rate fixing.
c. The entire benefit of extra payment goes to worker.