One of the most important elements in human resource management is compensation or remuneration. Therefore, it is necessary to frame sound policies and practices for employee compensation.

Remuneration is the compensation an employee receives in return for his or her contribution to the organisation.

Remuneration is concerned with needs, motivation and rewards. Managers, therefore, analyse and interpret the needs of their employees so that reward can be individually designed to satisfy these needs. It is very difficult for human resource management to fix wages and wage differentials, salaries acceptable to employees and their leaders.

Remuneration may be defined as money received in the performance of work, plus many kinds of benefits and services that organisations provide their employees. Money is a direct compensation, known as wages, gross pay.


Benefits are indirect compensation, it includes, life insurance, accident insurance, health insurance, employees contribution to retirement benefits such as gratuity, pension, pay for vacation, pay for illness/ sickness, simply it includes payment for welfare and social security.

Learn about:-  1. Introduction and Meaning 2. Definitions 3. Objectives 4. Components  5. Factors 6. Methods 7. Function and Roles  8. Theories.

Remuneration: Meaning, Definitions, Objectives, Components, Factors, Methods, Function, Roles and Theories


  1. Introduction and Meaning of Remuneration
  2. Definitions of Remuneration
  3. Objectives of Remuneration
  4. Components of Remuneration
  5. Factors of Remuneration
  6. Methods of Remuneration
  7. Functions and Roles of Remuneration
  8. Theories of Remuneration

Remuneration – Introduction and Meaning

One of the most important elements in human resource management is compensation or remuneration. Therefore, it is necessary to frame sound policies and practices for employee compensation. Remuneration is the compensation an employee receives in return for his or her contribution to the organisation.


It must be in proportion, to what services rendered by him/her to an organisation. Remuneration occupies an important place in the life of an employee. Therefore it must be adequate and fair. His or her all the needs should be satisfied by this remuneration. Employee remuneration is significant because of his contribution only the cost of production would be minimised. Remuneration or compensation is very important function of human resource management.

Remuneration is concerned with needs, motivation and rewards. Managers, therefore, analyse and interpret the needs of their employees so that reward can be individually designed to satisfy these needs. It is very difficult for human resource management to fix wages and wage differentials, salaries acceptable to employees and their leaders.

Wage or salary is very important from employees point of view because it contributes a major share of their income. Pay is a powerful motivational factor. It provides recognition, a sense of accomplishment, social status.

Hence formulation and administration of sound remuneration policy is must to attract excellent personnel and to retain them in an organisation is the prime responsibility of any organisation. The basic purpose of sound remuneration policy is to establish and maintain an equitable wage and salary structure.


It also helps in maintaining union management relations, which mostly spoils because of inadequate, unsatisfactory wages and salaries. Remuneration is often one of the largest components of cost of production. It influences the survival and growth of an organisation to the greatest extent.

It also influences the distribution of income, consumption, savings, employment and prices. It has a lot of importance in an underdeveloped economy like India where it becomes necessary to take measures for reduction of the concentration of income to overcome the inflationary trends etc. Thus the wage or salary policy of an organisation should not become an evil to the economy.

Remuneration – Definitions

Remuneration may be defined as money received in the performance of work, plus many kinds of benefits and services that organisations provide their employees. Money is a direct compensation, known as wages, gross pay. Benefits are indirect compensation, it includes, life insurance, accident insurance, health insurance, employees contribution to retirement benefits such as gratuity, pension, pay for vacation, pay for illness/ sickness, simply it includes payment for welfare and social security.

A wage is the remuneration paid for the service of labour in production, periodically to an employee or worker.


International Labour Organisation defined the term wage as a remuneration paid by the employee for the services of hourly, daily, weekly and fortnightly employees. It also means that remuneration paid to production and maintenance or blue collar employees.

Salary normally refer to the monthly rates paid to clerical, administrative and professional employees called as white collar workers. The term salary is defined “as the remuneration paid to the clerical and managerial personnel employed on monthly or annual basis.”

The distinction between wage and salary does not seem to be valid in these days of human resources approach where all employees are treated as human resources and are viewed at par. Hence these two terms can be used as interchangeable. As such the term wage and salary can be defined as the direct remuneration, paid to an employee compensating his services to an organisation. Salary is also known as basic pay.

Remuneration – 12 Main Objectives

(1) To acquire qualified competent personnel


(2) To retain the present /existing employees

(3) To secure internal and externals equity means similar wages for jobs within an organisation. External equity implies payment of similar wages to similar jobs in comparable organisations.

(4) To ensure desired / positive behaviour of employees.

(5) To enhance employee morale and motivation.


(6) To keep control on labour and administrative cost.

(7) To protect in public as progressive employers and to comply the wage legislation.

(8) To satisfy people/employees to reduce the labour turnover, grievances and frictions over pay inequities.

(9) To pay according to the content, challenges, difficulty, risk of the job and according to the effort and merit of the employees.


(10) To facilitate pay roll administration of budgeting and wage and salary control.

(11) To simplify and facilitate collective bargaining procedure and negotiations.

(12) To facilitate growth and survival of the organisation and to promote organisation feasibility.

Remuneration – Components: Basic Wage, Dearness Allowance and Overtime 

Monappa (1998) identifies five wage components – basic wage, dearness allowance, overtime, bonus, and fringe benefits. Bonus and fringe benefits are considered separate dimensions of the compensation system.

1. Basic Wage:

It is a stable wage paid over a period of time – monthly, weekly or daily. It can also be considered as the normal rate for a specified level of output. Thus, for a particular job involving its varied requirements such as skills and training, it commands a price to get it done.

It does not fluctuate; rather, it progresses evenly over time in case of a running grade and remains stationary, otherwise. There are a number of considerations in the fixation of the basic wage embracing the statutory minimum wage, the awards of industrial tribunals, directives of the pay commission at the national and state levels and collective bargaining.

2. Dearness Allowance (DA):


The system of DA payment was used for the first time after World War I to enable the workers to meet the steep rise in prices of essential commodities such as foodstuffs. Although called by various names, the special allowance thus paid aimed at neutralising the high cost of living and protect the real wages of the wage earners. In other words, the major purpose of DA payment was to provide relief to the workers confronted with inflationary conditions by attempting to offset the cost of living with additional allowance.

Usually, the consumer price index (CPI) is issued to link DA with the cost of living. However, there prevail varying practices with respect to the fixation of DA across industries, regions, sectors and governmental and private undertakings. As National Commission on Labour (NCL) reports, “In some cases it was linked to the Working Class Consumer Price Index…in others it was not. It was at flat rate and was applicable in some cases to all employees irrespective of their wages; in others, it varied according to wage or salary slabs. A graded percentage, linked to wages or salaries, was also prevalent.”

In view of this divergence, the DA issue has been usually referred to tribunals and courts for adjudication.

The escalating system of DA linked to movement of the CPI numbers provides more immediate relief to the workers from the increasing rate of inflation. This system has a built-in mechanism to ascertain the points of neutralisation in terms of fluctuations in the CPI which is related to the cost of basic necessities of life. The correlation between the increases in the number of points of the CPI to the magnitude of money to be paid must be ascertained to settle the DA problem.

There are divergent suggestions with respect to the extent of neutralisation. The NCL had recommended that 95 per cent neutralisation should be allowed against rise in cost of living to those drawing a minimum wage in non-scheduled employments. There have also been suggestions to provide maximum (i.e., 100 per cent) neutralisation at low levels with a gradual tapering off as wage or as salary scale improves. Moreover, there has been a great deal of controversy between point-to-point adjustment and adjustment from slab-to-slab.

While DA can be equated to slab of pay in a way that the lower slabs receive a higher weightage and the higher slabs receive a lower weightage, the size of the slab itself, whether it should be 5 points or 10 points, is further a controversial issue. The Dearness Allowance Commission (1967) also called the Gajendragadkar Commission; felt that the slab system would work better than point-to-point adjustment. The NCL also recommended linkage of DA to a 5-point slab.


Another controversy with respect to DA relates to its relationship with capacity to pay. The NCL felt that the capacity to pay was not a relevant consideration of payment of DA at the minimum level. At other levels or where DA is fixed on the basis of collective bargaining or other methods, the “capacity to pay” may be a relevant consideration. Last but not the least, there is a controversy whether DA has to be fully or partly merged with the basic wage.

The merger of full DA or its larger part, with the basic wage is preferred by the workers and their representatives. This arrangement would provide more stability to their pay packets and enable them to enjoy more liberal perquisites in view of increased basic wage or salaries. However, it would increase the wage cost of the employer. Of course, many progressive employers have welcomed the merger of a certain portion of DA with the basic wages and salaries of their employees.

3. Overtime:

The overtime meets the exigencies of increased work load. Frequently, on working days, overtime rates are one and a half times the normal wage, while on holidays; these rates are two times the normal wage. However, in many work situations in India, it is used to accomplish vested interest to increase earnings. Indeed, the normal work is not done by workers unless their supervisors sanction the overtime.

Usually, it is done by them only on an overtime basis. Keeping in view this malpractice, many organisations have restricted overtime to the bare minimum and that too when sanctioned by the higher management. It was probably this misuse of the overtime which propelled the Fourth Pay Commission to recommend that it should be withdrawn from non-industrial employees. Accordingly, overtime cannot be considered the regular and guaranteed component of the wages.

Criteria of Wage Fixation:

The criteria of wage fixation in India should be considered in the context of the principles of wage policy.


The main principles that have weighed with wage fixing authorities may be described under the following heads:

i. The Needs of the Workers:

The needs of the worker and his family are the main consideration in fixing wages. The needs are considered in terms of an adequate diet, clothing, bedding and footwear requirements, fuel and lighting; and miscellaneous requirements. The size of the family is pertinent for assessing the needs of the worker and his family.

The committee on Fair Wages and Indian Labour Conference (15th session, 1957) suggested that the needs should be reckoned in terms of three equivalent adult consumption units that are in terms of a family comprising of husband and wife and two children below 12 years of age. The norms regarding the needs of the workers for a need based minimum wage which were recommended by the bipartite Indian Labour Conference. The concepts of minimum wage, living wage and fair wage were set out by the Committee on fair wage.

Another important principle is that only the earnings of one earner are reckoned in relation to the needs of the family. The arguments in favour of this principle are that members other than the head of the family are inadequate. However, employment for other members is not always available.

ii. Capacity of the Industry to Pay:


In fixing a minimum wage for the worker the capacity of the industry to pay is not a prime consideration. Many Tribunals have applied this criterion as a negative test rather than as a positive determining factor of the minimum wage. In fixing wages higher than the minimum, the capacity to pay has always been a relevant consideration.

iii. Prevailing Rates of Wages:

The prevailing rates of wages in the locality or neighbouring localities is only a secondary consideration in the fixation of minimum rates of wages as otherwise in low wage pockets there will be no hope for the workers to rise to a standard of living above the poverty line or subsistence standard. On the other hand, in arriving at a fair wage, this is an important consideration.

If in an industry or a locality a wage is fixed in total disregard of the rates prevailing in the same or neighbouring localities it would cause disruption in employment due to workers striving to move from one industry to another, one unit of industry to another and from one locality to another causing tensions and dis-equilibrium.

iv. Level of the National Income:

The problem of wages of the industrial workers cannot be considered in isolation. The prosperity of the industrial workers and the community would have to advance simultaneously. The Royal Commission on Labour in India (1929) had observed – “Indian industry is not a world in itself, it is an element and by no means the most important element, in the economic life of the community, Care must be taken, therefore, to ensure that, in adopting measures for the betterment of industry or of industrial workers, the interests of the community as a whole are not overlooked.”


One of the principles of wage fixation, therefore, is that the wage fixed should be one which the national economy could sustain and should be in keeping with the income of comparable sections of the population or in other words, the general pattern of income distribution.

v. Cost of Living:

Many wage fixing authorities have considered cost of living as a factor in determining the minimum wage rates. For example, the Industrial Court, Bombay, after fixing a minimum wage of Rs.30/- per month for the Cotton Textile Workers, in Bombay city on the basis of the needs of the workers, fixed Rs.28/- per month for the Cotton Textile Workers in Ahmedabad and Rs.26/- for the workers in Sholapur on the consideration that the cost of living in Ahmedabad and Sholapur was lower than in Bombay City. Later, an Industrial Tribunal in Nagpur also fixed minimum rates of wages in the Textile Industry there on the same basis.

vi. Productivity:

As a criterion for fixing wages, productivity has not so far been taken into account by wage fixing authorities. In spite of a specific directive in the terms of reference of several wage boards that consideration relating to a fair wages should also take into account the need for linking wage to productivity and the desirability of extending the system of payment by results, most of them have refrained from doing so on account of the practical difficulties involved. However, in recent years, the wage policy in India has stressed the importance of productivity as a factor in wage fixation.

vii. Hazards of Occupation:

In some industries like Coal mining, the arduous nature of work and the hazards of occupation are taken into account while determining wage rates.

viii. Requirements of Social Justice:

For a long time industrial workers were exploited by the employers; they have been the weaker of the two bargaining parties. Economic and social justice demand not only that their exploitation should cease but also that they should be compensated in part for ill usage in the past. In her book ‘Social Foundation of Wage Policy’ Mrs. Barbara Wooton (1955) has emphasized that determination of wage structure in modern industry involves, to some extent, ethical and social considerations.

ix. Wage structure for Clerks:

The late justice Rajadhyaksha, in his award in the dispute between the Posts and Telegraph Department and its non-gazetted employees (1946), postulated that in the case of clerical employees who may be assumed to belong to the lower middle class the needs would be 80 per cent more than those of industrial workers. Following this postulate the Industrial Court Bombay and the Bank Award Commission applied a coefficient of 80 per cent to the minimum wages of industrial workers to determine the initial stage of the wages of the clerks.

Remuneration – 2 Major Factors: Internal and External Factors

Employee remuneration and its structure are influenced by a variety of factors—some are related to and exist within the organization (called internal factors) and others exist outside the organization (called external factors).

Factor # 1. Internal:

Among the internal factors which have an impact on employee remuneration are the company’s business strategy, worth of a job, employee’s relative worth, and the employer’s ability to pay. Collective bargaining and the productivity levels are also internal to the organization.

(i) Company’s Business Strategy:

For a business which is pursuing an aggressive strategy to achieve rapid growth, its remuneration levels will be higher than what the com­petitors pay. A business pursuing a defensive strategy, because of declining fortunes of the company, will keep its remuneration levels at average or below average levels than the prevailing market rates.

(ii) Job’s Worth:

Organizations decide the worth of a job in two ways – formally, through a system of job evaluation, or informally, through the opinion of people familiar with the job. Job evaluation helps in establishing rational and satisfactory wage differentials among jobs.

However, when the worth of a job is decided informally, pay rates may be influenced heavily by the labour market conditions or, in case of unionized organizations, by collective bargaining. Informally deter­mined remuneration rates are generally higher.

(iii) Employee’s Relative Worth:

An employee’s worth is determined by the efficiency with which he/ she performs his/her job, his/her loyalty towards the organization, and his/her seniority in the organization. Of these, performance is highly valued in organizations. Superior performance always commands a higher pay.

For determining performance-based remuneration, orga­nizations use an objective performance appraisal system that differentiates between those employees who deserve a higher pay and those who do not. Managements prefer performance and loyalty to effect pay increases while unions view seniority as the most objective criterion for pay increases.

(iv) Employer’s Ability to Pay:

Remuneration payable to workers also depends upon the paying ability of the employer, which is a function of the financial condition and profitability of the firm. Financially well-off and profitable organizations are always in a better position to pay higher pay.

Factor # 2. External:

The major external factors that influence employee remuneration include labour market conditions, prevailing area wage rates, cost of living, collective bargaining capacity, and government laws and regulations.

(i) Labour Market Conditions:

Labour market reflects the forces of supply and demand of workers within an area. These forces help to decide the pay rates required to recruit and retain competent employees. In general, higher wage rates will have to be paid when the demand exceeds supply, and if labour is available in sufficient supply, wage rates tend to be low.

(ii) Prevailing Area Wage Rates:

A formal wage structure should provide rates that are in line with those being paid by other employers for comparable jobs within an area. This serves the impor­tant function of providing external equity between one’s own organization and other organiza­tions competing for labour in the surrounding labour market.

(iii) Cost of Living:

Since wages and salaries represent the only means of livelihood to the employees, it is obvious that they should be sufficiently high to meet the cost of living and should be kept in tune with the increasing cost of living. Progressive employers are always guided by this consid­eration in determining wage levels.

It is a common experience in industrial organizations that if employers do not show enough awareness and sensitivity towards the trends in cost of living, labour unions will bring this to the notice of the employers and force them for a wage raise.

(iv) Collective Bargaining Capacity:

Employee remuneration is also determined, to a considerable extent, by the relative bargaining power of the employer and the labour unions. A strong labour union is generally able to force the employer to pay higher wage rates. The agreements negotiated by unions generally establish pay-rate patterns within the labour market. As a result, wages are generally higher in areas where organized labour is strong.

(v) Government Laws and Regulation:

There are numerous labour laws, at the Central and State lev­els, that affect employee remuneration. Some of the Central laws are the Payment of Wages Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965; and Equal Remuneration Act, 1976. In addition to labour laws, there are Wage Boards, Tribunals, and Fair Wages Committees which regulate wages pay­able to workers.

The basic aim of all the legal enactments and regulatory agencies is to protect the workers from the exploitation of powerful employers and also to ensure payment of fair wages that would provide a decent standard of living to them. For regulating remuneration to manage­rial personnel, provisions of the Companies Act, 1956, are applied.

Wage Board and Tribunal Awards also play a significant role in influencing the compensation to be paid.

Remuneration – 2 Important Methods: Time Rate Method and Piece Rate Method

Employee Remuneration refers to the reward or compensation given to the employees for their work performances. Remuneration provides basic attraction to a employee to perform job efficiently and effectively. Remuneration leads to employee motivation. Salaries constitute an important source of income for employees and determine their standard of living. Salaries affect the employees’ productivity and work performance. Thus the amount and method of remuneration are very important for both management and employees.

There are mainly two types of Employee Remuneration:

1. Time Rate Method

2. Piece Rate Method

These methods of employee remuneration are explained below in detail.

Method # 1. Time Rate Method:

Under time rate system, remuneration is directly linked with the time spent or devoted by an employee on the job. The employees are paid a fixed pre-decided amount hourly, daily, weekly or monthly irrespective of their output. It is a very simple method of remuneration. It leads to minimum wastage of resources and lesser chances of accidents.

Time Rate method leads to quality output and this method is very beneficial to new employees as they can learn their work without any reduction in their salaries. This method encourages employee’s unity as employees of a particular group/cadre get equal salaries.

There are some drawbacks of Time Rate Method, such as, it leads to tight supervision, indefinite employee cost, lesser efficiency of employees as there is no distinction made between efficient and inefficient employees, and lesser morale of employees.

Time rate system is more suitable where the work is non-repetitive in nature and emphasis is more on quality output rather than quantity output.

Method # 2. Piece Rate Method:

It is a method of compensation in which remuneration is paid on the basis of units or pieces produced by an employee. In this system emphasis is more on quantity output rather than quality output. Under this system the determination of employee cost per unit is not difficult because salaries differ with output.

There is less supervision required under this method and hence, the per unit cost of production is low. This system improves the morale of the employees as the salaries are directly related with their work efforts. There is greater work efficiency in this method.

There are some drawbacks of this method, such as, it is not easily computable, leads to deterioration in work quality, wastage of resources, lesser unity of employees, higher cost of production and insecurity among the employees.

Piece rate system is more suitable where the nature of work is repetitive and quantity is emphasized more than quality.

Remuneration – Function and Roles

Remuneration which is also called compensation and wage/salary mostly performs/ contributes to three critical aspects of human resource management viz., (i) attracting capable candidates for jobs, (ii) motivate the employees towards the achievement of organizational strategies/higher performance and (iii) retain the capable employees over a period of long-term.

It is widely believed that the base salary and allowances help to attract the capable candidates to the organisation, the variable remuneration or incentives motivate the employees towards the achievement of organisational strategies/higher performance and fringe benefits contribute to retain the employees to an extended period.

Organisations expect efficient performance from their employees in order to contribute to the attainment of the individual goals. Organisations reward their employees who contribute to the achievement of organisational goals.

One of the most important factors in human resource management is compensation management. The soundness of compensation management depends upon the amount of wage or salary paid to an employee for a fair day’s work. Despite the conclusions of morale studies wage or salary is significant to most of the employees as it constitutes a major share of their income.

Pay, in one form or another is certainly one of the main springs of motivation in our society. Salary provides more than means of satisfying the physical needs — it provides recognition, a sense of accomplishment, and determines social status. Hence, formulation and administration of sound remuneration policy to attract and retain right personnel in right position is the prime responsibility of any organisation.

An organisation has to balance fairly, financial and non-financial rewards and extrinsic and intrinsic rewards. Effective reward system requires not only that the absolute level of compensation paid by a organisation compares favourably but also requires that it satisfies the principle of internal equity and equity with the job content. The employee gets pay satisfaction if the perceived salary is equal to actual salary received, if the actual salary is less than the perceived salary, the employee is dissatisfied with the salary.

The influence of remuneration over distribution of income, consumption, savings, employment and prices is also significant. This aspect assumes all the greater importance in an undeveloped economy like India where it becomes necessary to take measures for a progressive reduction of the concentration of income and/or to combat inflationary trends. Thus, the wage policy of an organisation should not become an evil to the economy.

Remuneration – 7 Popular Theories: Relational Frame Theory and Expectancy Theory, Equity Theory, Subsistence Theory, The Wage Fund Theory and a Few Others 

1. Relational Frame Theory and  Expectancy Theory:

It advocates that a behaviour which has a rewarding experience is likely to be repeated. The implication for remuneration is that high employee performance followed by a monetary reward will make future employee performance more likely. Similarly high performance not followed by a suitable reward will make its recurrence unlikely in future. Like the RF theory, Vroom’s expectancy theory focuses on the link between reward and behaviour.

Motivation according to this theory is the productivity of valence, instrumentality and expectancy. Some other authors include variables like attractiveness, performance – reward linkage and effort-performance linkages, in their theories.

2. Equity Theory:

Adam’s equity theory advocates that an employee who perceives inequity in his or her rewards seeks to restore equity. This theory emphasises equity in pay structure of employee’s remunerations.

3. Subsistence Theory:

This theory was developed by the economists of the classical school in the mid 1800’s. They theory develops relationship between the wages and population, supply of labour and subsistence level. According to this theory wages tend to settle at subsistence level.

4. The Wage Fund Theory:

John Stuart Mill is associated with this theory. According to this theory wages depend upon two factors. Firstly the wage fund or the circulating capital set aside for employment of labourers, this is a fixed amount. Secondly, number of labourers seeking employment. Level of wages is determined by dividing Wage Fund by number of workers.

5. The Residual Claimant Theory:

According to this theory, after rent, interest and profits have been paid; the remaining amount goes to the workers as wages. In other words, the labour is the residual claimant.

6. Bargaining Theory of Wages:

According to this theory, wages are determined by the relative power of the Trade Unions. Wage level depends upon the relative bargaining power of the two parties. In many countries, the bargaining is guided by certain environmental factors such as economic condition, political machinery, Govt. policies, and legal aspects and so on.

7. Agency Theory:

The Agency Theory focuses on the divergent interests and goals of the organisation’s stakeholders namely employers and the employees (Principals and Agents). The Agency theory states that the Principal must follow a scheme which would align the interests of agents with Principal’s own interests. The contract scheme encompasses merit pay, stock option scheme, profit sharing and commissions. As profits go up, rewards increase. Remunerations fall when profits go down.