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Management Programme



School of Management Studies

ASSIGNMENT Course Code Course Title Assignment Code Coverage : : : : MS - 27 Wage and Salary Administration MS-27/TMA/SEM - II /2012 All Blocks

Note: Answer all the questions and send them to the Coordinator of the Study Centre you are attached with. 1. Explain the role and structure of compensation. Describe how the compensation functions and responsibilities are being carried out in any organisation you are familiar with. Briefly describe the organisation you are referring to. Explain the constitutional perspective on wages. Describe the norms for fixation of wages of any organisation you are aware of. What is the role played by the International Labour Organisation on wage fixing machinery? Define job evaluation. Discuss the objectives and procedure of job-evaluation. Describe the methods and systems of job-evaluation in any organisation you are familiar with. How job-evaluation is linked with wage fixation, explain with suitable examples. Define and discuss the meaning and classification of incentives. Describe the various incentive systems which have been followed in any organisation you are familiar with. Discuss the merits and demerits of the incentive systems. Explain the concept of tax planning. Describe the tax planning for employee compensation of any organisation you are familiar with. What is the distinction between tax planning and tax avoidance?





Answer1 Compensation is one of many human resource (HR) tools that organizations use to manage their employees. For an organization to receive its money’s worth and motivate and retain skilled employees, it needs to ensure that its compensation system is not an island by itself. Not only is it important for an organization to link compensation to its overall goals and strategies, it is important that its compensation system aligns with its HR strategy.
There are three levels of compensation strategy that exist within an HR department. The first level is a strategy that is only understood and supported by the HR department. The second is a strategy that is supported by the HR department and translated into practical solutions, policies and decisions that guide compensation decisions. The third level, which should be an organization’s ultimate goal, is the most difficult to achieve. It is a compensation strategy that supports a pay-for-performance system that transforms and permeates all levels of the organization.

Compensation pay structure in India
Pay structure in a company depends upon several factors. E.g… wage settlements. Labour market situation. Company’s nature and size. etc. Pay structure consists of certain grades. Scale and range of pay in each scale. Each scale has aminimun and a maximum limit. Jobs places within a particular grade carry the same value though the actual pay in a grade depends upon length of service and or performance of the employee. Pay structure in India generally consists of the following components. 1- Basic wage/salary 2-Dearness allowance (D.A.) and other allowances. 3- Bonus and other incentives. 4- fringe benefits or perquisites. Hard variables • • • • Salary Augmented pay- overtime, extra pay, one time stuff Indirect pay –things needed for work, uniform allowance, etc. Parks pay – discount on company’s products, etc.

Soft variables • • • • Opportunity for advancement Opportunity for growth Psychic income – doing personally meaningful work Quality of life – workplace flexibility, work-life balance

Explain about the pay structure of ESIC as example in the 2nd part of this answer.

The Payment of Wages Act, 1936

It extends to the whole of India. It shall come into force on such date as the Central Government may by notification in the Official Gazette appoint. It applies in the first instance to the payment of wages to persons employed in any factory to persons employed (otherwise than in a factory) upon any railway by a railway administration or either directly or through a sub-contractor by a person fulfilling a contract with a railway administration and to persons employed in an industrial or other establishment specified in sub-clauses (a) to (g) of clause (ii) of section 2. The State Government may after giving three months' notice of its intention of so doing by notification in the Official Gazette extend the provisions of this Act or any of them to the payment of wages to any class of persons employed in any establishment of class of establishments specified by the Central Government or a State Government under subclause (h) of clause (ii) of section 2 : Provided that in relation to any such establishment owned by the Central Government no such notification shall be issued except with the concurrence of that government. Nothing in this Act shall apply to wages payable in respect of a wage-period which over such wage-period average one thousand six hundred rupees a month or more. The Minimum Wages Act 1948 This act provides for fixing minimum rates of wages. Wages shall mean all remuneration payable to an employed person on the fulfillment of the contract employment and includes HRA. It Includes (i) a basic rate of wages and special allowance call the cost of living allowance (ii) a basic rate with or without cost of living allowance plus any concession on the supply of essential commodities. It excludes (i) The value of rent free accommodation, supply of light, water, medical ..... (ii) Contributions paid by the employer towards the PF or any scheme of social insurance (iii) Travelling allowance / Travelling concession (iv) Gratuity The appropriate government may fix-: A minimum rate of wages for time work ("a minimum time rate"). A minimum rates of wages for piece work ("a minimum piece rate"). A minimum rate of wages on a time work basis ("a guaranteed time rate") A minimum rate of overtime work done (“a overtime rate") Equality on wages: A very important and useful provision for women’s welfare and well-being is incorporated under Article 42 of the Constitution. It imposes an obligation upon the State to make provisions for securing just and humane conditions of work and for maternity

relief. Some of the legislations which promoted the objectives of this Article are the Workmen’s Compensation Act, 1923, the Employees State Insurance Act, 1948, the Minimum Wages Act, 1948, the Maternity Benefit Act 1961, the Payment of Bonus Act, 1965, and the like. In the case of Dattatraya v. State of Bombay,[46] the Court held that legal provisions to give special maternity relief to women workers under Article 42 of the Constitution does not infringe Article 15 (1). Recently, in the case of Municipal Corporation of Delhi v. Female Workers (Muster Roll),[47] the Supreme Court held that the benefits under the Maternity Benefits Act, 1961 extend to employees of the Municipal Corporation who are casual workers or workers employed on daily wages basis.

ILO Article 1  1. Each Member of the International Labour Organisation which ratifies this Convention undertakes to create or maintain machinery whereby minimum rates of wages can be fixed for workers employed in certain of the trades or parts of trades (and in particular in home working trades) in which no arrangements exist for the effective regulation of wages by collective agreement or otherwise and wages are exceptionally low.  2. For the purpose of this Convention, the term trades includes manufacture and commerce. Article 2 Each Member which ratifies this Convention shall be free to decide, after consultation with the organisations, if any, of workers and employers in the trade or part of trade concerned, in which trades or parts of trades, and in particular in which home working trades or parts of such trades, the minimum wage-fixing machinery referred to in Article 1 shall be applied. Article 3  1. Each Member which ratifies this Convention shall be free to decide the nature and form of the minimum wage-fixing machinery, and the methods to be followed in its operation:  2. Provided that- (1) before the machinery is applied in a trade or part of trade, representatives of the employers and workers concerned, including representatives of their respective organisations, if any, shall be consulted as well as any other persons, being specially qualified for the purpose by their trade or functions, whom the competent authority deems it expedient to consult;  (2) the employers and workers concerned shall be associated in the operation of the machinery, in such manner and to such extent, but in any case in equal numbers and on equal terms, as may be determined by national laws or regulations;  (3) minimum rates of wages which have been fixed shall be binding on the employers and workers concerned so as not to be subject to abatement by them by individual agreement, nor, except with general or particular authorisation of the competent authority, by collective agreement.

Article 4  1. Each Member which ratifies this Convention shall take the necessary measures, by way of a system of supervision and sanctions, to ensure that the employers and workers concerned are informed of the minimum rates of wages in force and that wages are not paid at less than these rates in cases where they are applicable.  2. A worker to whom the minimum rates are applicable and who has been paid wages at less than these rates shall be entitled to recover, by judicial or other legalised proceedings, the amount by which he has been underpaid, subject to such limitation of time as may be determined by national laws or regulations. Article 5 Each Member which ratifies this Convention shall communicate annually to the International Labour Office a general statement giving a list of the trades or parts of trades in which the minimum wage-fixing machinery has been applied, indicating the methods as well as the results of the application of the machinery and, in summary form, the approximate numbers of workers covered, the minimum rates of wages fixed, and the more important of the other conditions, if any, established relevant to the minimum rates. Article 6 The formal ratifications of this Convention under the conditions set forth in the Constitution of the International Labour Organisation shall be communicated to the Director-General of the International Labour Office for registration. Article 7  1. This Convention shall be binding only upon those Members whose ratifications have been registered with the International Labour Office.  2. It shall come into force twelve months after the date on which the ratifications of two Members of the International Labour Organisation have been registered with the Director-General.  3. Thereafter, this Convention shall come into force for any Member twelve months after the date on which its ratification has be registered. Article 8 As soon as the ratifications of two Members of the International Labour Organisation have been registered with the International Labour Office, the Director-General of the International Labour Office shall so notify all the Members of the International Labour Organisation. He shall likewise notify them of the registration of the ratifications which may be communicated subsequently by other Members of the Organisation. Article 9  1. A Member which has ratified this Convention may denounce it after the expiration of ten years from the date on which the Convention first comes into force, by an act communicated to the Director-General of the International Labour Office for registration. Such denunciation shall not take effect until one year after the date on which it is registered with the International Labour Office.  2. Each Member which has ratified this Convention and which does not, within the year following the expiration of the period of ten years mentioned in the preceding paragraph, exercise the right of denunciation provided for in this Article, will be bound for another period of five years and, thereafter, may denounce this Convention at the expiration of each period of five years under the terms provided for in this Article. Article 10

At such times as it may consider necessary the Governing Body of the International Labour Office shall present to the General Conference a report on the working of this Convention and shall examine the desirability of placing on the agenda of the Conference the question of its revision in whole or in part.

Answer3 An assessment of the relative worth of various jobs on the basis of a consistent set of job and personal factors, such as qualifications and skills required. The objective of job evaluation is to determine which jobs should get more pay than others. Several methods such as job ranking, job grading, and factor comparison are employed in job evaluation. Research indicates, however, that each method is nearly as accurate and reliable as the other in ranking and pricing different jobs. Job evaluation forms the basis for wage and salary negotiations. Job evaluation is a process of determining the relative worth of a job. It is a process which is helpful even for framing compensation plans by the personnel manager. Job evaluation as a process is advantageous to a company in many ways:
1. Reduction in inequalities in salary structure - It is found that people and their






motivation is dependent upon how well they are being paid. Therefore the main objective of job evaluation is to have external and internal consistency in salary structure so that inequalities in salaries are reduced. Specialization - Because of division of labour and thereby specialization, a large number of enterprises have got hundred jobs and many employees to perform them. Therefore, an attempt should be made to define a job and thereby fix salaries for it. This is possible only through job evaluation. Helps in selection of employees - The job evaluation information can be helpful at the time of selection of candidates. The factors that are determined for job evaluation can be taken into account while selecting the employees. Harmonious relationship between employees and manager - Through job evaluation, harmonious and congenial relations can be maintained between employees and management, so that all kinds of salaries controversies can be minimized. Standardization - The process of determining the salary differentials for different jobs become standardized through job evaluation. This helps in bringing uniformity into salary structure. Relevance of new jobs - Through job evaluation, one can understand the relative value of new jobs in a concern.

According to Kimball and Kimball,“ Job evaluation represents an effort to determine the relative value of every job in a plant and to determine what the fair basic wage for such a job should be.” Thus, job evaluation is different from performance appraisal. In job evaluation, worth of a job is calculated while in performance appraisal, the worth of employee is rated. Job evaluation and wage linkage

Answer4 Incentive is an act or promise for greater action. It is also called as a stimulus to greater action. Incentives are something which are given in addition to wagers. It means additional remuneration or benefit to an employee in recognition of achievement or better work. Incentives provide a spur or zeal in the employees for better performance. It is a natural thing that nobody acts without a purpose behind. Therefore, a hope for a reward is a powerful incentive to motivate employees. Besides monetary incentive, there are some other stimuli which can drive a person to better. This will include job satisfaction, job security, job promotion, and pride for accomplishment. Therefore, incentives really can sometimes work to accomplish the goals of a concern. The need of incentives can be many:1. 2. 3. 4. 5. 6. 7. To increase productivity, To drive or arouse a stimulus work, To enhance commitment in work performance, To psychologically satisfy a person which leads to job satisfaction, To shape the behavior or outlook of subordinate towards work, To inculcate zeal and enthusiasm towards work, To get the maximum of their capabilities so that they are exploited and utilized maximally.

Therefore, management has to offer the following two categories of incentives to motivate employees:1. Monetary incentives- Those incentives which satisfy the subordinates by

providing them rewards in terms of rupees. Money has been recognized as a chief source of satisfying the needs of people. Money is also helpful to satisfy the social needs by possessing various material items. Therefore, money not only satisfies psychological needs but also the security and social needs. Therefore, in many factories, various wage plans and bonus schemes are introduced to motivate and stimulate the people to work. 2. Non-monetary incentives- Besides the monetary incentives, there are certain nonfinancial incentives which can satisfy the ego and self- actualization needs of employees. The incentives which cannot be measured in terms of money are under the category of “Non- monetary incentives”. Whenever a manager has to satisfy the psychological needs of the subordinates, he makes use of non-financial incentives. Non- financial incentives can be of the following types:a. Security of service- Job security is an incentive which provides great motivation to employees. If his job is secured, he will put maximum efforts to achieve the objectives of the enterprise. This also helps since he is very far off from mental tension and he can give his best to the enterprise. b. Praise or recognition- The praise or recognition is another non- financial incentive which satisfies the ego needs of the employees. Sometimes praise

becomes more effective than any other incentive. The employees will respond more to praise and try to give the best of their abilities to a concern. c. Suggestion scheme- The organization should look forward to taking suggestions and inviting suggestion schemes from the subordinates. This inculcates a spirit of participation in the employees. This can be done by publishing various articles written by employees to improve the work environment which can be published in various magazines of the company. This also is helpful to motivate the employees to feel important and they can also be in search for innovative methods which can be applied for better work methods. This ultimately helps in growing a concern and adapting new methods of operations. d. Job enrichment- Job enrichment is another non- monetary incentive in which the job of a worker can be enriched. This can be done by increasing his responsibilities, giving him an important designation, increasing the content and nature of the work. This way efficient worker can get challenging jobs in which they can prove their worth. This also helps in the greatest motivation of the efficient employees. e. Promotion opportunities- Promotion is an effective tool to increase the spirit to work in a concern. If the employees are provided opportunities for the advancement and growth, they feel satisfied and contented and they become more committed to the organization. The above non- financial tools can be framed effectively by giving due concentration to the role of employees. A combination of financial and nonfinancial incentives help together in bringing motivation and zeal to work in a concern.
Positive Incentives

Positive incentives are those incentives which provide a positive assurance for fulfilling the needs and wants. Positive incentives generally have an optimistic attitude behind and they are generally given to satisfy the psychological requirements of employees. For examplepromotion, praise, recognition, perks and allowances, etc. It is positive by nature.
Negative Incentives

Negative incentives are those whose purpose is to correct the mistakes or defaults of employees. The purpose is to rectify mistakes in order to get effective results. Negative incentive is generally resorted to when positive incentive does not works and a psychological set back has to be given to employees. It is negative by nature. For exampledemotion, transfer, fines, penalties.

Advantages and disadvantages of incentive schemes

Employee incentives are rewards doled out to workers at a company based on their individual or team performance, or the overall performance of the company. Incentives come in the form of raises, commission payments, one-time bonuses, stock options and indirect incentives such as plane tickets, concert tickets and extra vacation time. Incentives typically are determined and implemented by managers. Managers also determine which benchmarks will be used to determine which employees are eligible for the incentive offered.

Advantage: Healthy Competition
Employee incentives can generate healthy competition between individuals or teams of employees within a company. If only a certain number of employees receives incentives based on individual or group performance, that can make everyone work harder, if the incentive is compelling enough. Concurrently, commission schemes, which are another type of incentive, can spur sales staff to work smarter and harder, because a significant portion of their pay depends on performance incentives.

Disadvantage: Employee Resentment
In a perfect meritocracy, where the employees who work the hardest always reap the most rewards, incentives pose little problem. But no companies operate in an ideal world and thus incentives can breed resentment and discord among teams and employees. While it's easy to quantify a salesman's performance, it is harder to quantify a staff writer's

contribution to the department, even if the writer is adding just as much value to the company. That can lead those under an incentive scheme to feel unappreciated or the recipients of unfair treatment.

Advantages: Retention
Intelligently designed incentives can be a boon to companies looking to retain employees for the long term. Lucrative incentives, whether these are in the form of stock or bonuses, make it worthwhile for employees to stay at your firm, even if a salary offer from a competitor is more attractive. Incentives can also make employees feel as if their hard work is appreciated, thus reflecting well on their managers and the company as a whole.

Answer5 Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals. Here are some examples of tax planning by which an individual or firm can plan to reduce their tax liabilities. Residential status: Sometime by better tax planning a taxpayer can avoid becoming resident in a particular year. The advantage of this is that if he is non-resident in a particular year, he is not liable to be taxed for his overseas income in India. In case he becomes resident in India for tax purpose, he is taxed for his worldwide income. However, this may not have any effect if the tax paid abroad on overseas income is equal to more than the tax payable on such income in India, as the taxpayer is entitled to get credit of taxes paid abroad in case that income gets taxed in India. Individual’s investment: Taxpayer can plan investment in a manner so that overall return is optimum. This may involve analyzing different investment options taken into consideration, availability of tax deduction u/s 80C, exemption of interest/dividend income on a particular investment, capital gain, possibility of exemption from capital gain, rate of return, risk factor, liquidity etc. Employee’s remuneration: There is no effect on the tax liability in the hand of the employer on account of designing of salary package of employees. Still, every employer wants to design the salary package in a way so that the incidence of tax on the employee is kept to minimum. By doing this, the take home pay of the employee is increased. To design such a package it is necessary to understand how perquisites and benefits are taxed and which are those perquisites or benefits which are not taxed or taxed at concessional rate. It is also necessary to understand, how Fringe Benefit tax is payable, as it may be advisable for the employer to pay FBT instead of letting that benefit be taxed in the hand of the employee through allowances. New Business, What should be the form of ownership? : While starting his business, taxpayer can plan his taxes by evaluating tax implication in different choices available like individual proprietorship, partnership firm or company. Proprietorship is easy to establish with less cost and with no restriction on enjoyment of profit. The tax rate is also less because of slab system of taxation. However, it is suitable for small business only. Partnership firm: If there is more than one person having common interest in the business then it makes sense to incorporate it as partnership firm. The tax liability may be a little more than proprietorship but firm can reduce this tax liability by taking advantage of initial

exemption available in the hand of various individual partners by providing for their salary and interest within the given limit. This will work if the partners have no other source of income. In the case of company the tax rate is highest and the dividend is further subjected to tax. However, the limited liability and ability to raise finance are also important factors other than taxes. Also there is no limitation on the salary payable to Director. New Business, Location of Business: The correct selection of location of business also plays an important role in Management decision making. There are a few locational tax advantages in the Income Tax Act which must be considered while arriving at the decision. In other words, when one is trying to start a new business or start a new unit in the existing business, it can consider locating business in a place so that it get some tax exemption which will reduce the tax liability. Important sections of income-tax act which will help in this tax planning are: 1. Section 10A: Newly established undertaking in Free Trade Zone, Electronic Hardware Technology Park or Software Technology Park. 2. Section 10AA: Newly established undertaking in Special Economy Zone. 3. Section 10B: Newly established 100% Export Oriented Undertaking. 4. Section 10BA: Newly established manufacturing unit producing hand made article or things or artistic value with wood (not being imported) as the main raw material. At least 90% must be exported. 5. Section 80IB: Industrial undertaking located in industrial backward state or district. 6. Section 80IC: Undertakings or enterprises located in notified area in North Eastern State, State of Sikkim, Himachal Pradesh, Uttranchal. For units commencing production or undergoing substantial expansion on or after 1.4.2007 and located in North Eastern States or Sikkim, the provisions of section 80IE shall be applicable instead of this section. 7. Section 80ID: Undertaking doing business of hotel or convention centre in National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad, where the new hotel or the conventional centre is constructed on or after 1st of April 2007 and before 31st March 2010. 8. Section 80IE: Underaking located in North Eastern states or state of Sikkim who begun to commence production or complete substantial expansion on or after 31st march 2007 but before 31st March 2017 are covered under this section instead of section 80ID.

The interface between tax planning and tax avoidance has been a constant subject matter of debate between taxpayers, tax authorities and judicial authorities. In the recent years, we have been witnessing a significant change in the approach of tax and judicial authorities across the globe, who are closely scrutinising transactions entailing reduction of taxes. Tax incidence can be reduced through tax planning, tax avoidance or tax evasion. To begin with, there is a thin line separating 'tax planning' from 'tax avoidance'. Legitimate tax planning may reduce the incidence of tax but impermissible tax avoidance may lead to tax and penal consequences. Tax planning may be defined as an arrangement of one's financial affairs to take full advantage of all eligible tax exemptions, deductions, concessions, rebates, allowances permitted under the Income-Tax Act ,1961, so that the tax burden is minimised in the hands of the taxpayer without violating the legal provisions. For instance, tax planning can be done by investing in specified permissible avenues eligible for deduction under section 80C or investment in an SEZ unit. It is legitimate as the legislature intends optimum utilisation of these deductions and exemptions to promote economic activity in the country. Tax avoidance is reducing or negating tax liability in legally permissible ways by structuring one's affairs. Any such transaction would be valid only if it has commercial substance and is not a colourable device. The Supreme Court, in M/s McDowell and Co Ltd Vs Commercial Tax officer, 1985, (154 ITR 148(SC), held that for tax planning to be legitimate it must be within the legal framework and colourable devices cannot be part of tax planning. In deciding whether a transaction is a genuine or colourable device, it is open for the tax authorities to go behind the transaction and examine the "substance" and not merely the "form". The recent Vodafone controversy is an attempt by the tax authorities in this direction. In the case of Vodafone, the shares of a foreign company were transferred by one nonresident to another non-resident where the only principal asset of the foreign company was shareholding in the underlying Indian company. The tax authorities, disregarding the corporate veil, treated the transfer of shares of the foreign company as effectively resulting in transfer of shares of the Indian company and taxed the capital gains arising on such transfer of shares in India. The contention of the tax authorities was upheld by the Mumbai High Court and the matter is now pending before the Supreme Court.