Principles of remuneration

There is a difference between remuneration and compensation. Compensation is broader than remuneration. Even though both have the same common component, i.e., "financial rewards" that is received by a person via employment relationship with an organization.

Compensation has two intangible functions namely:

1. "Equity" function; and
2. "Motivational" function.

The compensation is required to be equitable. The compensation is required to be equitable. This means that, the reward system is needed to be proportional to the reward system that the individual has visualized to receive in lieu of their efforts. The second function is that of "motivational" function. This is because standard of living and social prestige of employee is directly related to the remuneration that they receive. This also pushes in individual to reshape their human behavior as per Dwivedi.

Remuneration can be understood either as wages or salary. While wages is expressed in the form of hourly payment / rate, that is paid in lieu of an individual's service. Salary is expressed as monthly rate. There is a difference between the level of the wage / salary and the structure of the wage / salary.

The level refers to the average of the rates that is paid to the individuals during the same job in a given industry, enterprise, region and nation etc. On the other hand, wage structure refers to the " hierarchy of jobs" wherein the wage rates are decided and fixed as per levels, as per Dwivedi. It would not be wrong to state that there has been a shift from traditional approach to modern approach, which includes "real wage" as well, i.e., standard of living.

Since a large part of remuneration is governed by broader self-governance framework, it is imperative to have an understanding of the principles. The meaning of principle is multiple. It could refer to the special applications across a wide field, which later crystallizes into a general scientific theorem or law. Alternatively, it could refer to a fundamental truth or proposition that serves as the foundation for a system of belief / behavior or for a chain of reasoning. For eg, basic principles of justice. In lay person's terms, lay person's terms, justice is virtuous disposition of the will to do that which is just ( Google Dictionary ).

It is important that "salary scales" / "remuneration in the form of financial rewards" are framed keeping the following factors in mind:

1. Structure of emolument

In simple terms, emolument refers to a salary, fee or profit from employment or office. So, the structure would be directly proportional to the qualification and abilities of each employee. In a specific level of salary, all employees would be treated with fairness and equity. The activity which is undertaken to assess this structure is job evaluation / interview.

2. Scales of Pay

It is important that, "scales of pay" are decided based on the "existing rates of remuneration" outside the industry at hand. This should be applicable for both the public sector and the private sector. Fairness, uniformity and consistency in payment is the basis for laying down rules for payment, that must be included in wage policies.

3. Social Criteria

The fifth central pay commission argued that, remuneration must be specific to an individual in a case to case basis. It is broader principle than (1) because this is not limited to job evaluation approach. It argues that the remuneration should pass the test of "need based" and "capacity to pay" approach. This would not make it "economically feasible".

4. Equal Pay for Equal Work

This principal means that all individuals with the same designation / position should be rewarded equally irrespective of the individual. "Value" addition is equal for all the individuals in one designation.

5. "Variations" in compensation

The compensation will be higher if the work is hazardous as compared to non-hazardous.

6. Level of consumer prices

This means that, every employee is also a consumer and the prices that they pay for buying their product / service would vary depending on variable factors.

7. Social considerations

This refers to the disparities that exist between the highest and lowest salary.

8. Making salaries commensurate with personnel requirement

This means that high skilled workers must receive higher salaries. This also directly affects the reputation and goodwill of the employees.

9. Employer's capacity to pay

This refers to the ability of the State as being a "good employer" to pay its employees that is comparable with employees in Union Government and State Government etc.

10. Legislation

Minimum wage legislation should take into account the social necessity and economic realities.

Note : This note is authored by me as a part of the Viral Note Series ("VNS").