Basic factors in determining pay rates

Direct financial payments

Pay in the form of wages, salaries, incentives, commissions and bonuses.

Indirect financial payments

Pay in the form of financial benefits such as insurance.

Employee compensation refers to all forms of pay going to employees and arising from their employment. It has two main components, direct financial payments (wages, salaries, incentives, commissions and bonuses). And indirect financial payments (financial benefits like employer paid insurance and vacations).

In turn, there are basically two ways to make direct financial payments to employees: base them on increments of time, or on performance. Time based pay is still the foundation of most employers’ pay plans. Blue collar and clerical workers get hourly or daily wages for instance and others. Like managers or Web designers tend to be salaried and paid by the week, month or year. The second direct payment option is to pay for performance. Piecework is an example. It ties compensation to the amount of production (or number of pieces) the worker turns out. For instance, you divide a worker’s target hourly wage by the standard number of units he or she is to produce in one hour. Then for each unit wage he or she produces, the person earns the calculated rate per piece. Sales commissions are another example of performance based (in this case, sales based) compensation. Of course employers also devise pay plans in which employees receive some combination of time based pay plus incentives.

We explain how to formulate plans for paying employees a time based wage or salary; subsequent chapters cover performance based financial incentives and bonuses and employees benefits.

Several factors determine the design of any pay plan: legal, union, company policy and equity. We’ll start legal factors both in India and the United States.

Legal considerations in Compensation

Employee compensation systems around the world operate within the framework of legislations. Fair compensation for work is an integral component of decent work as defined by the ILO. In India also various legislations influence the structure computation and payment of compensation wages). Generally the non managerial level of employees and a section of workers in the informal sector of economy are covered by wage legislations. The important wage related legislations are the Minimum Wages Act of 1948, the Payment of Wages Act of 1936 and the Equal Remuneration Act of 1976. Separate legislations have been enacted to cover bonus payment, retirement benefits, and social security benefits to employees in the formal sector.

Companies Act of 1956

The companies Act of 1956 sets the framework for remuneration of top management of Indian companies.

Till 1991, an upper ceiling of Rs 15,000 per month existed for top managerial remuneration. Similarly there were caps on profit sharing ad payable perquisites. The limits were later relaxed. Under section 198 of the act, the total remuneration payable to directors including managing directors (MDs) and whole time directors of publicly listed companies in any financial year should not exceed 11% of the net profits of the company. Further Section 309 (1) of the act requires the board of directors to fix the remuneration of directors. The remuneration committee one of the subcommittees of the board of directors of a firm, has the task of playing a key role in determining the salary structure of full time directors and senior management.

In the United States various laws specify things like minimum wages, overtime rates, and benefits. For example, the 1931 Davis Bacon act allows the secretary of labor to set wage rates for laborers and mechanics employed by contracts working for the federal government. Amendments provide for paid employee benefits. The 1936 Walsh – Healey public Contract Act sets basic labor standards for employees working on any government contract that amounts to more than $10,000 . It contains minimum wage, maximum hour and safety and health provisions and time and a half pay for work over 40 hours a week. Title VII of the 1964 Civil rights act makes it unlawful for employees to discriminate against any individual with respect to hiring compensation terms conditions or privileges of employment because of race, color, religion, sex or national origin.