Professional Documents
Culture Documents
Compensation Management MBA HR
Compensation Management MBA HR
6
Compensation
Management
M.B.A.
COMPENSATION MANAGEMENT
Wage is a monetary payment made by the employer to his employee for the work done or
services rendered. It is a monetary compensation for the services rendered. A worker may be paid
Rs. 100 per day or Rs. 4500 per month. This is wage payment. The worker gives his services and
takes payment called wage payment. Industrial workers are paid remuneration for their services in
terms of money called wage payment. Wages are usually paid in cash at the end of one day, one
month or one week. Money wage is the monetary compensation or price paid by the employer to
his employee for the services rendered. Such compensation is also called wage or salary or
reward given by an organization to a person in return to a work done.
Definition:
According to Milkovinch and Boudreau, “Compensation refers to all forms of financial returns,
tangible services, and benefits employee received as part of their employment relationship.”
1. Internal & external Equity: A very important objective in administering wage and salary
is to achieve internal and external equity. Internal equity means similar pay for similar work.
Differences in wages between jobs should be in proportion to the differences in the worth of the
jobs.
2. Fair wages: A fair wage is something more that the minimum wage providing the bare
necessities of life. A fair wage depends on several factor- productivity of labor, prevailing rates of
wages in the same or similar occupations in the same or neighboring region, place of industry in
the country’s economy, employer’s capacity to pay and so on.
3. Attract competent talent: Through proper wage salary administration, the organization
seeks to attract talented, well qualified and hardworking people.
4. Retain good employees: Through fair and competitive wages and salaries, the
organization aims at retaining competent employees who are doing a good job. The purpose is to
reduce employee turnover.
5. Satisfy employee needs: A key objective of adequate wages and salaries is to help
employees fulfill their various needs. It creates a sense of security and enhances the self-worth of
the employees.
6. Motivate employees to higher productivity: A well planned wage and salary system
motivates employees to work hard, resulting in higher levels of productivity.
IMPORTANCE OF WAGE PAYMENT:
1. To worker:
Wage payment is important to all categories of workers. Wage is a matter of life and death to
workers/employees. Their life, welfare and even social status depend on wage payment. It is only
source of income to large majority of workers. They and their unions always demand higher
wages and other monetary benefits.
Majority of labour problems and disputes are directly related to wage payment. The efficiency of
workers and their interest and involvement in the work depend on wage payment. Even their
attitude towards employer depends on wage payment. In brief, wage payment is a matter of
greatest importance to workers. Wage problem is the most pressing and persistent problem before
the entire labour force.
2. To employer:
Wage payment is equally important to employers as their profit depend on the total wage bill. An
employer in general is interested in paying low wages and thereby controls the cost of production.
However, low wages are not necessarily economical. In fact they may prove to be too costly to
the employer in the long run. E.g. In garment manufacturing company if tailors are not paid
properly then it is difficult for the company to retain them. An employer has a moral and social
responsibility to pay fair wages to his worker as they are equal partners in the production process.
He should give fair wages which will benefit to both the parties. Employees will offer full co-
operation to the management when they are paid attractive wages. On the other hand, strikes and
disputes are likely to develop when workers are paid low wages or when they are dissatisfied and
angry due to low wage rates. It is possible to earn more profit by paying attractive wages to
workers. E.g. Reliance, Citi Bank, Motorola are earned huge profits because of their higher pay
packages.
3. To government:
Government also give special importance and attention to wages paid to industrial workers as
industrial development, productivity, industrial peace and cordial labour- management relation
depend on the wage payment to workers. Government desires to give protection to the working
class and for this minimum wages act and other Acts are made. In India, wages are now link
with the cost of living. This is for the protection of workers. Government is the biggest employer
in India and the wage rates of government servant and employees of public sector organisations
are decided by government only. Revision of pay scale of government employees made for
adjusting their wages as per the cost of living. For this, “Pay Commission” is appointed and pay
scale is adjusted as per the recommendations made.
In India, wage payment is very critical, controversial and delicate issue for all categories of work
force. This is due to poverty, rising prices, mass unemployment and rising population. Wage
payment indeed a vexatious problem and needs to be tackled from economic, social and
humanistic angles.
Hence it can be said that fair wages are determined on industry cum region basis. When fair
wages are paid employees enjoy higher standard of living. It is accepted fact that wages must be
fair and reasonable. Wages is fair when the employee is able to meet its essential needs and enjoy
reasonable standard of living. ”Equal pay for equal work” serves as base of fair wage.
According to Encyclopaedia of social science,”Fair wages are equal to those received by the
workers performing work of equal skill, difficulty or unpleasantness.”
5. Job requirements:
Jobs are graded according to the relative skill responsibility and job conditions required.
7. Productivity:
Productivity is another criterion and is measured in terms of output man-hour. It is not due
to labour efforts alone. Technological improvements, greater ingenuity and skill by the labour are
all responsible for the increase in productivity.
2. 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.
3. Fringe benefits:
These are monetary benefits provided to employees. They include the benefit of: (a) Provident
fund, (b) Gratuity, (c) Medical care, (d) Hospitalization payment, (e) Accident relief, (f) Health
and Group insurance, (g) Subsidized canteen facilities, (h) Recreational facilities, and (i)
Provision of uniforms to employees.
4. Perquisites:
There are special benefits offered to managers/executives. The purpose is to retain competent
executives. Perquisites include the following: (a) Company car for traveling, (b) Club
membership, (c) Paid holidays, (d) Furnished house or accommodation, (e) Stock option
schemes, etc.
5. 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.
SYSTEMS OF WAGE PAYMENT:
It is the oldest and simplest method of wage payment used extensively in the industrial as well as
government departments. Wages are paid as per the time spent by the workers in the factory. The
production given by them is not taken into consideration. The employer buys the hours of the
workers and pays them accordingly. Time rate system is also called as day wage system. In the
time rate system, efficiency, sincerity, ability is not given attention and all the workers are paid at
one and the same rate as per the period spent in the factory.
1) Easy and simple: Time rate is easy to understand and simple to follow and calculate. Wage
calculations are also easy and quick. Each worker knows how much wage payment he is entitled
to at the end of the month. This gives convenience to employer and employees.
2) Guarantee of minimum wage: It gives the guarantee of certain minimum wage payment to
every worker irrespective of their working capacity. Workers get a regular and stable income and
this gives a sense of security to all workers as regards wage payment.
3) Maintains quality of production: Quality of production is maintained here as the workers are
not in a hurry to complete the work. They do not rush the job and spoil the quality because of the
temptation to earn more. Workers tend to work slowly and with care. Even accidents are less as
workers use the machines in a careful manner.
4) Support from trade unions: Workers and trade unions accept and support time rate system as all
workers are placed in one category as regards wage payment. This ensures unity among workers.
Trade unions normally prefer time rate system of wage payment.
5) Avoids quarrels among workers: Time rate avoids heart burning and quarrels among the
workers as uniform wages are paid to all. Here efficiency, honesty and sincerity of workers are
not given any special weightage. Wage rate is the same for sincere and lazy workers.
6) Convenient in modern factory system: Time rate payment is convenient in modern factory
system where production process is continuous and integrated. It is not possible to measure the
work completed by one individual worker and hence time rate system is convenient.
1) Not scientific: Time rate is not scientific system of wage payment as there is no direct linking
between wages and production/productivity. Wages bill may increase without corresponding
increase in the production. This will bring loss to the employer / management.
3)No distinction between workers: In the time rate system no distinction is made between
efficient and lazy workers, both are paid at one rate which is unfair. This system gives
punishment to sincere and efficient workers. They are discouraged as they are paid less than what
they deserve. They may even leave the job.
4) No initiative to workers: Time rate fails to encourage workers to take more interest and
initiative in their work. In fact, it encourages them to follow “go slow” policy. This is because
wage payment is not linked with the production given.
5) Labour cost may increase: In the time rate system, there is a possibility of increase in the
labour cost without corresponding increase in the production. Workers may work with slow
speed, give less production but collect the wage as per time or day fixed.
6) Strict supervision: In the time rate strict supervision on the workers is essential as payment is
for period and not production. This raises the expenditure on supervision.
7) No effect on productivity/ efficiency: Time rate fails to raise productivity and efficiency of
labour force. It is not an incentive system of wage payment.
This is another basic system of wage payment. It is just opposite to the time rate. It is also treated
as an incentive wage system as it encourages workers to produce more and also to earn more. In
the piece rate system, wages are paid as per the output or production given by the worker and not
as per the time spent by the worker in the factory. Payment is by results in terms of output given.
Wage rate is fixed per piece of work or for certain quantity of production. The production given
by a worker at the end of the day is counted and payment is made accordingly.
2) Distinction is made between efficient and inefficient workers: Distinction is made between
efficient and inefficient worker and full justice is done to efficient worker as he gets payment in
proportion to the production given. Efficient workers support the piece rate system but it is not
preferred by unskilled and inefficient workers. They get less payment under this method as their
capacity to produce is less.
3) Encourages workers to take initiative in the work: Piece rate system encourages workers to
take more interest and initiative in the work as every worker gets full reward of his efforts. There
is direct efforts-reward relationship in the piece rate system.
4) Fair to employer and employees: This system is fair to employers as well as employees. The
employees get income in proportion to production given by them and the employer gets
production in proportion to the wage paid.
5) Incentive system: This system serves as the incentive system. Workers work efficiently
and take interest in the work due to corresponding benefit/ reward in the form of higher wage
payment.
6) Limited supervision adequate: In this system strict supervision on the workers is not
necessary as workers work sincerely. This is because their wage payment is directly linked with
their sincerity and ability.
7) Freedom of work to workers: Workers get more freedom of work and there is effective
control on the cost of production in the piece rate system.
8) Brings cordial relations: Piece rate brings cordial labour- management relations and
industrial peace.
2. Workers suffer even when they are not at fault: Sometimes workers suffer in wage
payment even when they are not fault. Due to power failure, etc they may not be able to give
production and naturally they will not be eligible for wage payment even when they remain
present in the factory for the whole day.
4. Disturbs unity of workers: Piece rate affects the unity among workers as wage payment
will not be uniform to all workers. This will lead to quarrel among workers. Trade unions oppose
piece rate system on the ground that it will lead to rivalry among workers and destroy unity
among them.
5. Not fair to trainees: Piece rate system is not fair to trainees, as their capacity to produce is
less and naturally they will get less wages.
Meaning:
Wages are paid as per the time spent by workers.
Wages are paid as per the output or production given by workers.
Old/new system:
Oldest and simplest method of wage payment.
Modern and incentive system of wage system.
Guarantee of wages:
Gives guarantee of certain minimum wage payment to every worker.
Fails to give guarantee of minimum wage payment to every worker.
Support:
Employees and trade unions support time rate system.
Employers and efficient workers prefer piece rate system.
Understanding of system:
Easy to understand and simple to administer.
Complicated system as various recorded and registers are required to be maintained
Distinction between workers:
Distinction is not made between efficient and inefficient workers as all are paid at one and same
rate.
Distinction is made between efficient and inefficient workers. Efficient worker is paid more while
an inefficient worker is paid less.
Effect on production:
Encourages workers to follow go-slow policy and naturally production suffers.
Encourages workers to take more interest in the work and naturally production increases.
Quality of production:
Quality, workmanship of production are not affected, raw materials, machinery are utilised
properly. The spoiled work is also negligible.
Quality, workmanship of production may suffer. Increase in spoiled work and wastage of raw
materials.
Supervision:
Strict supervision is necessary as workers are paid as per the period spent.
Strict supervision is not necessary as workers are paid in proportion to the production given.
Suitability:
Suitable to manufacturing units, also suitable when individual contribution is not easily
measurable.
Suitable when contribution of individual worker is measurable and work is standardised and
repitive in character.
The wage plan should be highly incentive means it should encourage workers to take more
initiative and interest in the work, produce more and also earn more. The wage plan which serves
all these purposes is called incentive wage plan. Such an incentive plan is beneficial to both -
employers and employees as well as it is useful for the rapid industrial growth.
ILO defines incentives as "payment by results". Incentives can also be described as "incentive
systems of payment".
According to Dale Yoder, “Incentive wages relate earnings to productivity and may use
premiums, bonuses, or a variety of rates to compensate for superior performance” Piece rate
system is the oldest incentive wage plan which is also useful for attracting and retaining qualified
personnel in the organisation and for motivating personnel to higher levels of performance. In
many incentive plans, a combination of time rate and piece rate systems is used. Such
combination creates an ideal incentive plan.
Individual incentive plan is meant for individual employees. He has to work hard i.e. efficiently,
produce more and share the monetary benefits for himself. The benefit is directly linked with his
ability, efficiency and capacity.
In the group incentive plan, the incentive is not for individual employee but for the group of
employees working in one department or section. Such group incentive plan may cover the entire
labour force of a production unit. The group will work collectively, give more production and
share the benefit. Initially the benefit will be given to the group and thereafter, it will be divided
among the members of the group.
Management is interested in group incentive plan while employees are interested in individual
incentive plans. Production activities are now conducted in an integrated manner and naturally
incentives should be offered to the employees. Group incentive plans are better as they encourage
team spirit and develop cooperation and understanding among the employees. This avoids
wastages and promotes productivity.
Simplicity:
A good incentive plan is one which is easy to understand and simple to operate. An average
worker must be able to know the incentive offered and what he is expected to do. The monetary
as well as non-monetary benefits offered must be made clear to all workers.
Encourage initiative:
A good incentive plan should create initiative among workers to work more and to earn more. It
must offer more income to workers and more profit/production to the firm or company.
PROFIT-SHARING:
Profit-sharing usually involves the determination of an organisation'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 profit-sharing, 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 realise
that their efforts may result in higher profits, which will be returned to the workers through profit-
sharing.
FEATURES OF PROFIT-SHARING:
The main features of the profit-sharing schemes are:
(a) The agreement is voluntary and based on joint consultation made freely between the
employers and the employees.
(b) The payment may be in form of cash, stock of future credits of some amount over and
above the normal remuneration that would otherwise be paid to employees in a given situation.
(c) The employees should have some minimum qualifications, such as tenure or satisfy some
other conditions of the service which may be determined by the management.
(d) The amount to be distributed among the participants is computed on the basis of some
agreed formula, which is to be applied in all circumstances.
(e) The amount to be distributed depends on the price earned by the enterprise.
(f) The proportion of the profits distributed among the employees is determined in advance.
Objectives of Profit-sharing:
ADVANTAGES OF PROFIT-SHARING:
1) Extra income to workers: Workers get extra cash payment due to profit-sharing arrangement.
This money is useful for raising their welfare. Workers can purchase costly consumer durables
out of this money available at one time. Thus, profit-sharing provides better life and welfare to
workers. It creates contended labour force with higher standard of living. Profit-sharing plan acts
as a good supplement to regular wages paid to employees. In fact, profit-sharing is aptly
described as a form of added remuneration.
2) Workers take more initiative and interest in the work: Due to profit-sharing arrangement,
workers/ employees take more interest in the work. This develops team spirit among the
employees because their share in the profit depends on their collective initiative, efforts and hard
work. In this sense, profit-sharing is useful for motivating employees. It encourages employees to
be regular, stable and efficient as the benefits of these elements are offered to them through
profit-sharing. Here, efforts and reward are directly and proportionately linked. This encourages
employees to take keen interest in the work and develops team spirit.
Profit-sharing acts not only as supplement to regular wages (i.e. as an incentive wage plan) but
also as a motivating factor to all employees. It creates common objective before employer and
employees and diverts their energies for achieving one common objective.
3) Increase in production and productivity: Profit- sharing acts as a driving force for more
production and productivity. It motivates workers for raising production as they get direct and
immediate benefit of additional efforts on their part. The benefits of increase in production are
available to employer and employees.
4) Fair to employer and employees: Profit-sharing gives mere remuneration to workers along with
more profit to employer. Employer pays a part of profit to workers but he is not adversely
affected as profit is paid only when it exceeds a particular limit agreed by both the parties. This
arrangement is, certainly fair to both parties. There is an element of social justice in it.
5) Ensures cordial industrial relations: Profit-sharing creates cordial labour-management
relations. It. reduces industrial disputes, strikes and lock-outs. This is because both have common
objective and both are likely to suffer due to industrial disputes, strikes and lock-outs. Thus,
profit-sharing reduces industrial disputes and leads to friendly relations between employer and
employees.
Thus, profit-sharing agreement encourages workers to work efficiently and also avoid dispute and
quarrels with the employer. It acts as a natural and self-imposed check on industrial disputes.
Profit-sharing creates team spirit in the higher cadres of management as well as in the rank and
file of workers.
2) Unfair to efficient workers: Profit-sharing is a group incentive plan. It gives equal benefit to all
workers. Distinction is not made between good and bad workers. As a result sincere and efficient
workers get less than what they deserve while insincere and inefficient get more than what they
deserve.
3) Opposition from trade unions: Trade unions and workers feel that bonus payment is better than
profit:-sharing. They generally oppose to profit-sharing and demand bonus from the employer as
it is a cheap alternative to profit-sharing.
4) Disputes on calculation of net profit: In profit-sharing, the net profit is to be calculated at the
end of the financial year. There is a possibility of difficulties as regards the calculation of the net
profit. The employer may like to manipulate the accounts and show less profit while workers may
calculate it as high. Such quarrel affects both the parties as it leads to dispute and delay in
payment. In brief, ascertaining net profits is one sensitive problem in profit-sharing.
6) Not useful during depression: Profit-sharing as a method of extra remuneration to workers can
be used during the period of prosperity when profits are high. It cannot be used during the years
of depression. Even newly established companies are not in a position to introduce profit-sharing
scheme for their employees.
7) Opposition from conservative employers: The concept of profit-sharing is not fully acceptable
to conservative employers. They feel that profit is the reward for the risks and uncertainties. They
also argue that workers must be prepared to share profit as well as loss in the business.
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 organisation over a
long period. They foster loyalty and acts as a security base for the employees.
• Different from regular wages: Fringe benefits are different from regular wages as such
benefits are those payments, which an employee enjoys in addition to wages he receives. It is a
supplementary payment and provides support to an employee.
• Employee motivation: Fringe benefits are not given to employees for performing certain
jobs. The purpose is to encourage them to take more interest in the assigned work.
• Useful but avoidable expenditure: Fringe benefits constitute a labour cost for the
employer.
• Not directly linked with efforts: Fringe benefits are not direct reward for the efforts made
or the production given by an employee.
• Beneficial to all employees: Fringe benefits are a labour cost but its benefits should be
made available to the entire labour force and not to a small group of employees.
Wage: wage refers to hourly rate or daily rate of pay It is the most frequently used pay basis for
production and maintenance employees (blue collar workers) generally; wage earning employees
are paid only for the actual hours of work.
Forms of compensation:
The three specific forms of compensation are pay, incentives, and benefits.
1. Pay: It is the basic compensation an employee receives usually as a wage or salary
2. Incentive: it is the compensation that rewards an employee for efforts beyond normal
performance expectations. Bonus, commission, and profit sharing plans are incentives
3. Benefit: It is additional compensation to an employee as part of organizational
membership. Health insurance, pension, vacation pay are benefits.
Macroeconomic Compensation:
Develop a compensation program that recognizes the lifestyle and standard of living of all
employees. To survive in a complex, competitive global economy, all organizations, private and
public must be able to focus on the effective and efficient delivery of the products they are
designed to offer. A key factor in promoting effective delivery of essential goods and services is
the provision of a performance based remuneration system for all workers. Compensation
Management provides a step by step approach for designing a remuneration system that
recognizes job requirements; employee related knowledge and skills and performance related
incentives that link individual, team, work unit, and organization performance. Total
remuneration also includes a host of benefits that protect and expand the lifestyle and health of
workers and their families.
More than ever before, the compensation professional must be able to support all activities that
will make the organization more successful. From the beginning of these organizational redesign
efforts, compensation professionals have been called upon to identify:
1. Jobs in which worker efforts can be combined
2. Unneeded jobs and
3. Possibly jobs in which incompetent, obsolete or unneeded employees are being hidden.
In addition, these same compensation professionals are being asked to redesign compensation and
reward programs to improve employee morale and motivation while keeping labor costs within
specified limits. To assist their organizations in competing while functioning within these often
conflicting requirements, compensation professionals have had to increase their knowledge and
skills dramatically. Because of these advances in knowledge and skills, the importance of the
compensation profession has risen in the managerial professional world.
For the human resources compensation specialist, the assignment to ensure accomplishment of
organizational strategy begins with determining,
1. The work that must be performed by some work unit or individual.
2. The kinds and levels of knowledge and skills required.
3. The quality of people needed to promote organizational success.
4. The rewards the organization can offer to its members that promote a work culture that
ensures accomplishment of organizational strategy.
Compensation System:
The compensation system results from the allocation, conversion and transfer of a portion of the
income of an organization to its employees for their monetary and in kind claims on goods and
services.
Monetary claims on goods and services are wages and salaries paid to an employee in the form of
money or any other form that is quickly and easily transferable to money at the favoritism of the
employee. As medium of exchange, money enables an employee to purchase certain kinds and
amounts of goods and services available in the marketplace.
The total compensation package may be described in many ways, but the classification scheme
used in eight dimensions. Each dimension has a number of compensation components. Each
component has a variety of features. The structuring of features, components, and dimensions
into a compensation system is a job for the compensation specialist. The eight dimensions of
compensation system are;
1. Pay for work and performance: Pay for work and performance includes money that is
provide in the short term like weekly, monthly and annual bonuses/awards and that
permits employees to pay for and contract for the payment of desired goods and services.
2. Pay for time not worked: The number of hours worked per week and the number of days
worked per year have decreased.
3. Loss of job income continuation: Job security is and always has been the primary
consideration for most workers. They want assurance that their jobs and the income
derived from working will continue until they are ready to retire.
4. Disability income continuation: The possibility always exists that a worker will incur
health or accident disability because of these disabilities employees are frequently unable
to perform their assignment.
6. Spouse income continuation: Most employees with family obligations are concerned with
what might happen if they are no longer able to provide money that will allow their
families to maintain a particular standard of living.
7. Health, Accident and liability protection: when a health problem occurs, employees must
be concerned not only with income continuation but also with payment for goods and
services required in overcoming the illness or disability.
8. Income Equivalent payment: Employees usually find them highly desirable and both
employer and employees find certain tax benefit in them. Perks are tax free to employees
and tax deductibles to employers.
Through work, employees have an opportunity to improve their lifestyle. The analysis of lifestyle
demands and the opportunity for maintaining a current lifestyle and improving it in the future
underscore the importance of job earned compensation.
Compensation Strategy:
Support organization mission and strategy through compensation strategy and tactics that
integrate major organizational groups of employees, organizational leaders, including those
occupying the executive suites and those incharge of human resources and compensation
practices, must be able to recognize and integrate the long-term strategic objectives of the
organization with its short-term tactical requirements. An understanding of how organizational
strategy and its related tactics interact and become integrated is becoming increasingly important
to managers at all elves performing various organizational assignments.
To improve cost and quality competitiveness is an environmental where social and political
problems are becoming increasingly more sensitive and information overload is a problem facing
all organizations and their employees information regarding work requirements, performance
stands, and organizational recognition and rewards programming must be readily available,
complete and accepted.
The compensation system, therefore, must be able to transmit a message that is understood and
accepted by all employees that they are valued contributors to organizational success and that the
organization is willing to share the revenues from its products in an equitable manner with all
members. As organizations begin to modify their focus from an almost completely short-term
view to one that integrates short-term tactical operations with longer-term strategic
considerations, pay and compensation will change to respond to support the achievement of shor-
term goals and long-term objectives.
Microeconomic Factors:
a. Job description
b. Job Analysis.
c. Job evaluation
d. Pay structure
e. Salary surverys.
f. Policies and regulations.
• Job Descriptions A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties, location,
environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs
individually or for entire job families.
• Job Analysis The process of analyzing jobs from which job descriptions are developed.
Job analysis techniques include the use of interviews, questionnaires, and observation.
• Job Evaluation A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main techniques:
Ranking, Classification, Factor Comparison, and Point Method.
• Pay Structures Useful for standardizing compensation practices. Most pay structures
include several grades with each grade containing a minimum salary/wage and either step
increments or grade range. Step increments are common with union positions where the pay for
each job is pre-determined through collective bargaining.
• Salary Surveys Collections of salary and market data. May include average salaries,
inflation indicators, cost of living indicators, salary budget averages. Companies may purchase
results of surveys conducted by survey vendors or may conduct their own salary surveys. When
purchasing the results of salary surveys conducted by other vendors, note that surveys may be
conducted within a specific industry or across industries as well as within one geographical
region or across different geographical regions. Know which industry or geographic location the
salary results pertain to before comparing the results to your company.
• Policies and Regulations
The subsistence theory was an explanation of the general level of wages in terms of labor supply.
Any increase in the wage rate above the subsistence level would induce an increase in the birth
rate and therefore in the supply of labor. The expanded labor supply would force the wage rate
back to the subsistence level. Any decrease in the wage rate below the subsistence level would
result in starvation and a reduction in the labor supply. Although the market price of labor might
temporarily climb above or fall below the natural price, the two would converge in the long run.
In the industrial world, the theory erred in two ways: (1) improvements in technology have
greatly increased the ease and methods by which subsistence can be attained, and (2) cultural
forces have limited birth rates. Although Ricardo recognized the potential effects of the second
factor, he believed that labor supply rather than labor demand would determine the general wage
level in the long run. Although the iron law of wages seems to have been repealed in the
industrial world, it appears to still be in effect in many other parts of the world. Population
growth holds back economic development in many developing countries. Famine is still part of
the world scene. High unemployment in most of the industrial world and the effects of the Baby
Boom on the American labor force suggest further that Ricardo had a point.
There seems to be some truth in this modified form of the theory, because workers may not accept
wages below their established standard of living. However, the effect of standard of living on
wages in only indirect, because workers cannot get higher wages simply by raising their standard
of living unless higher wages are justified by higher productivity of labour. Moreover, wages and
standard of living are inter-dependent. It is difficult to say, which is the effect- whether wages
determine standard of living or the latter determines the former. In fact, workers are not
accustomed to any fixed standard of living.
4. WAGES-FUND THEORY
The short-term version of classical wage theory was the wages-fund theory. As described by John
Stuart Mill, this theory explained the short-term variations in the general wage level in terms of
(1) the number of available workers and (2) the size of the wages fund. The wages fund was
thought to come from resources accumulated by employers from previous years and allocated by
them to buy labor currently. Employers were thought to have a fixed stock of "circulating capital"
for the payment of wages. Dividing the labor force (assumed to be the population) into the wages
fund determined the wage. The theory erred in assuming that a fixed fund for the payment of
wages exists and that it accounts for labor demand. Most workers are paid out of current
production. Employers balance labor costs against other costs in determining labor demand. Both
employers and workers, however, often talk as if such funds exist and as if they determine the
amount of labor services needed. They may also accept the implication of the theory that any gain
to one group is a loss to others.
5. MARGINAL-PRODUCTIVITY THEORY:
Some of the modern economics explain the determination of wages by means of marginal
productivity analysis. According to this theory:
"Wages in perfect competition tend to be equal to the marginal net product of a labor. By
marginal net product of a labor is meant net addition or net subtraction made to the value of the
total produce of a firm when one unit is added or withdrawn from it".
When an entrepreneur employs a unit of labor, how much he pays to him as wages depend upon
the addition which he makes to the total revenue of the firm. If the addition made to the total
revenue by a labor is $5000, the rate of wages wilt be equal to $5000. The entrepreneur will not
pay him more than the return which he contributes to the total production.
The aim of the firm, as we already know, is to maximize profits. If the net product of a labor is
higher than the amount paid to him. the entrepreneur will go on employing more units of labor.
As he engages more and more units of labor, the net produce on the successive units begins to
diminish. It is not because the successive units of labor are in any way inferior to the previous
units but because of the operation of law of diminishing returns. When the net product of the
labor becomes equal to the rate of wages paid to him, the employer discontinues the employment
of further unit of labor, The last unit which he thinks just worth while to engage is called the
marginal unit. The net addition made to the total revenue of a firm by the marginal labor is called
the marginal net product. The rate of wages paid to the labor tends to be equal to the marginal net
product of the labor employed '<' the margin.
As we have assumed that all units of labor are of the same grade, the remuneration which is paid
to the marginal labor will be given to all the units of labor employed earlier. If any worker
demands more than the marginal net product of the labor, he will not be engaged by the employer.
Professor Taussing has reproduced the marginal productivity theory of wages in a slightly refined
form. According to him:
"Wages tend to be equal not to the marginal net product but the discounted marginal net product
of the labor employed at the margin".
When goods are produced, he says, they are not sold at the same time. There is a time lag
between the production and the sale of the commodities. The labor receives their remuneration
during the course of production. If the prices of goods fail, the entrepreneur will have to undergo
losses as he has paid the wage to the labor keeping in view the prices of the goods prevailing at
that time. As the entrepreneur has borne the risk, so he should pay little less that the actual
marginal net product of the labor keeping in view the risk of fluctuation of price. Secondly, the
entrepreneur has to pay interest on the capital invested. So a deduction at the current rate of
interest is to be made from the final output of the labor. Thus, we find that wages according to
Taussing tend to be equal not to the marginal net-product but discounted marginal net product of
a labor employed at the marginal.
The theory of marginal net product of wages has been criticized on the following grounds:
(i) The theory assumes that there is perfect competition, among the entrepreneurs and the wage
earners while in the real world there is no such perfect competition.
(ii) The theory assumes that all units of labor engaged are perfectly homogeneous but the fact is
otherwise.
(iii) The theory also assumes perfect mobility amongst the labor but the assumption does not held
good in the real life.
(iv) The theory emphasizes on the demand side of the problem and makes a wrong assumption
that the supply of labor remains constant.
It is dear now that marginal net product theory of wages is true only under certain assumed
conditions. In. spite of the flaws which have been discussed above, it offers a bit satisfactory
explanation of the wages.
There are various factors which influence the demand for labor. These factors in brief are as
under:-
(i) Demand for labor is a derived demand. The demand for labor is not a direct demand. It is
derived from the demand for the commodities and services it helps lo produce. If the demand for
a product is high in the market, the demand for labor producing that particular type of product
will also be high. In case, the demand for a commodity is small, the demand for that labor will
also be low.
(ii) Elasticity of demand for the product. If the demand for a particular product is inelastic, the
demand for the type of labor that produces this product will also be inelastic. The demand for
labor will be elastic, if cheaper substitutes of the product are available in the market or the
demand for the commodity it produces is elastic.
(iii) Proportion of labor cost to total cost. If the wages of workers account for only a small
proportion to total cost of a product, then the demand for labor will tend to be inelastic. In a
capital intensive industry, for instance, a slight increase in the workers wages with have little
effect on the unit cost of product; So, the rise in wages will not reduce the demand for labor.
(iv) Availability of substitutes for labor. If the substitutes of labor producing a particular product
are easily available in the market, the demand for labor will then be elastic.
After considering the various factors which influence (he demand for labor, we now take up the
demand price of labor.
Marginal Revenue Productivity (MRP). An employer hires labor in order to make profit. He,
while employing a worker, compares the cost of hiring a worker to the contribution he is expected
to make to the total revenue of the firm. So long as the addition made by the labor to the revenue
is greater than the cost of employing him, the entrepreneur will engage that labor. In other words,
we can say that so long as the marginal revenue product of labor is higher than the cost of
employing him, the employer employs that worker. The entrepreneur will continue hiring the
worker up to the point at which the cost of employing a worker is just equal to the marginal
revenue product of the labor.
The marginal revenue productivity of labor due to the operation of law of diminishing returns
decreases, as more workers are put to work. The wage rate also decreases with the fall in the MRP
of labor. Thus the demand curve for labor is downward, sloping (The demand curve for labor is
the MRP curve of the firm as each worker earns what his labor is worth). If we add up the
demand curves for labor of all the individual firms (the MRP curves) we get the demand curve of
the industry, it is the demand of the industry which determines wage rate for labor. The individual
firm in a competitive market has to accept wage rate set in the market.
Supply of labor is the number of hours of work which the labor force offers in the factor market.
The supply of labor for the entire economy is influenced by various factors such as wage rate,
size of population, age composition, availability of education and training, the length of training
period, provision of opportunities for women to work, the social security programmes etc., etc.
The supply of labor for the industry as a whole is less elastic in the short-run. The supply of labor
here depends on the availability of workers in the locality and from the nearby areas and the
willingness of the labor to work overtime. In the long-run, the supply of labor for the industry is
more elastic. The labor can be attracted by offering higher wages, providing training facilities,
making working conditions pleasant etc, So the supply of labor for the industry is of the normal
shape rising upward from left to the right.
Wage Determination:
So far we have discussed the forces operating behind the demand for and supply of labor in the
market. As regards the price or the wage of particular grade of labor, it is determined by the
interaction of the forces of. demand for and supply of labor in the competitive market.
MINIMUM WAGE
The concept of “Minimum Wage” stands for different standard of different countries. The fair
wage committee in India has observed that in India the level of the national income is so low at
present that it is generally accepted that the country cannot afford to prescribe by law a minimum
wage must provide not merely for the bare sustenance of life but for the preservation of the
efficiency of the worker. Thus, a minimum wage is one, which may be sufficient to enable q
worker to live in reasonable comfort having regard to all obligations to which an average worker
would ordinally be subject.
LIVING WAGE
According to the committee in fair wages,
“The living wage represented the higher level of wage and it would include all amenities which a
citizen living in a modern civilized society could afford. After considering various observations
made by Indian authorities, the committee on Fair wages observed, the living wages should
enable to male earner to provide for himself and his family the bare essential of food, clothing
and shelter but a measure of frugal comfort including duration for the children, protection against
ill health requirement of essential social needs and a measure of insurance against the more
important misfortunes including old age.”
FAIR WAGE
To bring improvement in the relations between labour and management the industrial truce
resolution was passed in 1947, which provided for the payment of fair wages of labour, govt. of
India appointed a Fair wages committee in 1948, and the committee report was published in
1949. Marshell and Pigou have defined fair wages. Marshell Says, “In any given industry wages
are fair relatively to wage in industry in general.” Lower limit of fair wages must be the minimum
wage for workers and upper limit will be the industry capacity to pay. However, between these
two limits following factors have to be considered:
a. The productivity of labour
b. The prevailing rate of wages in the same or neighboring locality
c. The place of the industry in the economy
d. The level of national dividend and its distribution
COMPONENTS OF A COMPENSATION SYSTEM
Compensation will be perceived by employees as fair if based on systematic components. Various
compensation systems have developed to determine the value of positions. These systems utilize
many similar components including job descriptions, salary ranges/structures, and written
procedures.
The components of a compensation system include:
• Job Descriptions A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties, location,
environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs
individually or for entire job families.
• Job Analysis The process of analyzing jobs from which job descriptions are developed. Job
analysis techniques include the use of interviews, questionnaires, and observation.
• Job Evaluation A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main techniques:
Ranking, Classification, Factor Comparison, and Point Method.
• Pay Structures Useful for standardizing compensation practices. Most pay structures include
several grades with each grade containing a minimum salary/wage and either step increments or
grade range. Step increments are common with union positions where the pay for each job is pre-
determined through collective bargaining.
• Salary Surveys Collections of salary and market data. May include average salaries, inflation
indicators, cost of living indicators, salary budget averages. Companies may purchase results of
surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing
the results of salary surveys conducted by other vendors, note that surveys may be conducted
within a specific industry or across industries as well as within one geographical region or across
different geographical regions. Know which industry or geographic location the salary results
pertain to before comparing the results to your company.
• Policies and Regulations
UNIT-2
WAGE FIXATION FACTORS
Wage laws differ considerably with regard to the bases or criteria adopted for fixing the wage
rates. The basis on which the rates are fixed is of primary importance where the object is to
prevent sweating, or to promote industrial peace. H the purpose of a law be to stimulate the
growth of organization, and thus prepare the way for the satisfactory regulation of wages by the
ordinary processes of collective bargaining, the basis on which the wages are fixed is of lees
importance than the machinery for fixing. The basis is also of secondary importance where the
object is to prevent unfair competition between employers, &8 here the essential condition ill the
standardization of rates. Thus, Richardson pointed out three main bases for fixing wages:
1. The relation of wages to other categories of workers.
2. The living wage.
3. The capacity of the industry to pay.
COMPENSATION
"If you pick the right people and give them the opportunity to spread their wings - and put
compensation and rewards as a carrier behind it - you almost don't have to manage them."
-Jack Welch
Compensation (meaning)
Compensation is a systematic approach to providing monetary value to employees in exchange for
work performed. Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction.
It's all negotiable. Every new job -- every performance review, in fact -- is an opportunity to negotiate
base salary, various kinds of bonuses, benefits, stock options, and other incentives that add to job
satisfaction and provide financial security. Taking control of your job search and conducting a smart
search that takes into account more than just financial considerations can also lead to that elusive
condition called happiness. Are you prepared to negotiate for happiness?
The negotiation process is an opportunity to define, communicate, and achieve what you want. But to
get the right job that pays what you deserve, you'll need to do your homework. The first step in the
negotiation clinic is to understand the negotiation basics.
Negotiation requires gathering information, planning your approach, considering different
alternatives and viewpoints, communicating clearly and specifically, and making decisions to reach
your goal. “The author Maryanne L. Wegerbauer” In her book, describes how each party in a
negotiation can fulfill specific needs and wants of the other party, a concept called "relative power."
According to Wegerbauer, understanding your strengths and resources; being able to respond to the
needs of the other party; and knowing your competition enable you to assess your bargaining
position more accurately.
Learn the power factors
What is your power over the other side of the table? Relative power, Wegerbauer says, is a function
of the following.
Business climate factors
• Overall state of the economy and the industry in which you compete
• Overall unemployment rate and the general employment picture
• Demand for industry- and profession-specific knowledge and skills
Company factors
• Profitability
• Position in the business cycle (startup, growing, stable, turnaround)
Hiring manager factors
• Urgency of the company's need to fill the position
• Decision-making authority
• Staffing budget
Applicant factors
• Other opportunities
• Technical expertise, unique knowledge/skill set
• Resources (financial depth, networks, etc.)
• Level of competition/availability of other candidates
• Career risk
Plan and communicate
A negotiation is composed of two major steps: planning (research and strategy) and communication
(information exchange and agreement. In the planning step, get as much information as you can up
front and, using both the company's written and unwritten signals, map your skills against what the
company values.
Give it time
Timing is also important. Remember that the best time to negotiate is after a serious job offer has
been made and before you have accepted it. Once you are clear about the initial offer, you can
express interest and even enthusiasm, but ask for more time to consider the job offer. Wegerbauer
suggests that this request is made "in light of the importance of the decision." Sometimes you can
split up the negotiating session into two meetings: one to firm up the job design and responsibilities
and the second to go over compensation and benefits. The key message here is not to make an
impulsive decision. If they really want you, there's time.
Consider the alternatives
You should be prepared with a rationale for everything to strengthen your position. Counteroffers
are an expected part of many negotiations, so be sure to remain flexible. Keep in mind that different
companies can give negotiations more or less latitude. Smaller companies may be more flexible than
large, bureaucratic companies. Unionized companies usually have very little room for individual
negotiations.
Negotiate for a win-win
Remember that the negotiation is not about strong-arm tactics or win/lose. It is a two-way process
where you and your prospective employer are each trying to get something you need. In a
negotiation, you're both designing the terms of a transaction so that each of you will receive the
maximum benefit from the final agreement.
Current trends
Productivity gains (4% in 2003-04), fast growth in real wages (40% over the last 5 years), a booming
but extremely competitive economy (GDP growth of 6%), simplification of tax rules and emergence
of knowledge-based industries such as Information Technology & Outsourcing Services, Healthcare
etc are key factors that have influenced compensation in India post liberalization. Compensation is
now characterized by a Total Cost of Employment approach, a rapid movement to flexible benefits,
and increasing levels of variable pay (variable pay now forms about 7% - 35% of fixed pay). Grade
structures have become organization specific and salary progression is driven by market forces and
individual performance. Average salary increases over 2003-04 ranged from 5% - 20%. The average
increase was 11%. While most organizations benchmark compensation nationally within a select
group of competitors, a few organizations are beginning to benchmark themselves internationally at
senior management levels. India has the fastest compensation increase rate in the Asian region at
11.7% and it also has the highest labour turnover in the region.
Key Characteristics
While all three schemes require the use of fair values of the share options or shares for the
recognition of the compensation expense over the vesting period, the impact on the company’s
financial position and financial results is different.
With share option and performance share grants, fluctuations in the values of the share options and
shares during the life of the grant do not affect the results of the company. This is because the
measurement of the share option or share is determined at the date of the grant and is not
subsequently revalued. In contrast, for SAR, the company is required to revalue the SAR at every
reporting date until the right is settled or expires. This is because the company has to measure its
liability (cash payment to employees) at the expected settlement amount. Hence, SAR schemes create
more volatility to the financial results. In addition, more resources are also required to perform the
revaluation at every reporting date.
SAR will continue to impact earnings even after the vesting period because the liability is re-
measured until the exercise date.
The compensation cost is a function of number of options or shares that are expected to vest by the
vesting date and the fair value of the option or share. In estimating the number of options or shares
expected to vest, only non-market based conditions, which are not based on the market performance
of the shares, are considered. These non-market based conditions include the continuance of service
over a period of time, and the meeting of a certain revenue target. If no employees meet the non-
market based vesting condition by the vesting date, the company does not incur any expense. No
performance shares would be issued for performance share schemes and no share options or SAR
would vest. If share options or SAR are vested by vesting date, the financial impact of the two
schemes is different.
For share option schemes, if the share options are not subsequently exercised by the employees (for
instance, because the options are out of the money), the company is not allowed to reverse the
expenses already charged to the income statement. For SAR schemes, the liabilities are stated at the
expected cash settlement. If the SAR is not subsequently exercised, the company is allowed to reverse
the expenses previously charged to the income statement.
Impact on Tax
Regardless of the above changes, charges to an entity’s income statement relating to share option or
performance share schemes, in form of capital or notional cost (such as cost of options granted), are
not tax-deductible. Compensation charges that represent actual outgoings (cash outflow or actual
liability) to the company may be deductible such as the buying back of its own shares, i.e. treasury
shares, to satisfy the obligation to the employees.
In addition, such share-based compensation costs must be directly related to the employee’s
employment compensation benefits in Singapore to be tax-deductible. The compensation costs to the
entity should match the services rendered by the employee to the same entity. Certain steps must be
taken to support the claim for a deduction.
Impact on Earnings Per Share
Share option and performance share grants have a dilutive effect on EPS, as shares will be issued.
For SAR schemes, shares are not issued; hence there is no dilutive effect on EPS.
Moving forward
Prior to the implementation of FRS 102, the design of the share compensation plan is often
dependent on non-financial factors as the company is not required to recognize an expense on the
equity instrument granted. However, with the implementation of FRS 102, it is critical for companies
to consider and analyse the financial impact, arising from the design and structure of the scheme, at
an early stage.
Employee Benefits:
Benefit Plan Costs
Health Care Plans
(PPO, POS, HMO, HSA)
Dental Care Plans
Retirement Plans
Flexible Benefit Plans
Disability Benefit Plans
Group Life & AD&D Insurance Plans
Benefits for Part-Time Employees
Domestic Partner Benefits Employee Policies and Programs:
Paid-Time Off (PTO)
Alternative Work Schedules
(including Telecommuting)
Recruiting and Hiring
Hiring Bonuses
Referral Bonuses
Retention Bonuses
Severance Practices
Workplace Environment
Career Planning & Professional Development
Military Leave Policy
Benefit Plan Costs
• Benefit Costs as Percent of Payroll
o Medical, Dental, Vision, Disability, Life, AD&D Plans
o Retirement Plans
• Benefits Costs as a Monthly Amount Per Employee
o Medical, Dental, Vision, Disability, Life, AD&D Plans
o Retirement Plans
Health Care Plans (PPO, HMO, POS)
• Monthly Premiums
o Premium Cost
o Percent of Premiums Paid by Company
• Deductibles
o Percent of Plans with Deductibles
o Annual Deductible Amounts
• Coinsurance
o Percent of Expense Covered by Plan
• Out-of-Pocket Maximums (OOP)
o Percent of Plans with OOP Maximums
o Annual OOP Amounts
• Lifetime Reimbursement Limits
o Percent of Plans with Lifetime Limits
• Office Visit and Prescription Co-Payments
• Domestic Partner Medical Benefits
HSA Qualified Health Plans
• Impact on Other Healthcare Options
• Monthly Premium Costs
• Percent of Premiums Paid by Company
• Annual Deductibles
• Out-of-Pocket Maximums (OOP)
• Lifetime Reimbursement Limits
• Prescription Expense Coverage
• Company Contributions
Dental Care Plans
• Types of Dental Plans Offered
• Timing of Employee Eligibility to Enroll
• Expenses Covered
• Costs of Monthly Premiums
• Percent of Monthly Premium Paid by Company
• Deductibles and Co-Insurance
• Out-of-Pocket (OOP) Maximums
• Orthodontic Expense Coverage
• Orthodontic Reimbursement Limits
Retirement Plans
• Types of Retirement Plans Available to Employees
o Defined Benefit Plan
o 401(k)
o Simple-IRA
o Profit Sharing Plan
o ESOP
o SEP-IRA
o Salary Reduction SEP
• Eligibility Requirements
• When do Employee Contributions Fully Vest
• Retirement Plan Costs
o as a Percentage of Payroll
o per Employee
• 401(k) Matching Policy
Flexible Benefit Plans
• Premium Conversion/Premium Only Plan (POP)
• Unreimbursed Medical Expenses (UME)
• Dependent Child Care Expenses (DCC)
• Dependent Adult Care Expenses (DAC)
• Adoption Assistance Expenses (AAE)
• Cafeteria Plan
• Transportation Benefit Plan
Disability Benefit Plans (Short- and Long-Term)
• Who Pays the Premium
• Eligibility for Disability Benefits
• Waiting Periods
• Duration of Plans
• Setting Amount of Disability Benefits
• Disability Payouts
Group Life & AD&D Insurance Plans
• Group Life Plans
o Benefit Amounts
o Cost Coverage
o Supplemental Life Insurance
• Accidental Death & Dismemberment (AD&D) Insurance
o Benefit Amounts
Benefits for Part-Time Employees
• Benefits Available
• Work Requirements for Eligibility
• Covering the Costs
Domestic Partner Benefits
• Domestic Partner Healthcare Benefits: Coverage
• Eligibility Requirements
Employee Policies and Programs covered:
Paid-Time Off Policies
• Number of Days Paid Time Off Provided by Type of Day:
o Holidays
o Floating Holidays
o Sick Days
o Vacation Days
o Personal Days
o Annual Leave Pool
o Other Paid Time Off
• Number of Days Paid Time Off Provided by Type of Model:
o Traditional Model with Specified Sick Leave
o Traditional Model without Specified Sick Leave
o Annual Leave Model
• Treatment of Unused Paid-Time Off:
o Unused Vacation Days
o Unused Sick Days
o Unused Annual Leave Days
o Time Limits on the Use of Carried-Over Paid Time Off
o Accrual of Paid Time Off
o Upon Termination
Alternative Work Schedules
• Types of Alternative Work Schedules Offered:
o Telecommuting
o Flexible Work Hours
o Compressed Work Weeks
o Job Sharing
o Part-time Professional Employment
• Eligibility
• Productivity of Employees in Alternative Work Schedules
• Methods Used to Monitor Productivity
• Tools/Assistance Provided to Telecommuting Employees
• Requirements for Telecommuting Employees
Recruiting and Hiring
• Recruiting Budgets
• Recruiting Sources
• Job Posting Websites
• Recruiting Tools
• Interviewing Applicants
• Pre-Employment Testing
• Pre-Employment Screening
Referral Bonuses
• Referral Bonus Eligibility by Employee Type and Level
• Referral Bonuses Awarded by Type of New Hire
• Referral Bonus Payments by Type of Hire
• Amount of Referral Bonus
• Timing of Referral Bonus Payouts
Hiring Bonuses
• Hiring Bonus Eligibility by Employee Type and Level
• Calculating Hiring Bonuses
• Hiring Bonus Amounts by Employee Type and Level
• Timing of Hiring Bonus Payouts
• Hiring Bonus Forfeiture and Repayment Policies
Retention Bonuses
• Retention Bonus Eligibility by Employee Type and Level
• Calculating Retention Bonuses
• Retention Bonus Amounts by Employee Type and Level
• Payment of Retention Bonuses
Severance Practices
• Severance Practices by Company Size
• Calculation of Severance
• Severance Pay Amounts
• Placement Services Offered
• Release Agreements
• Trends in Severance Amounts
Workplace Environment
• Dress Codes
• Work Space Allocation
• Company Sponsored Events and Activities
Career Planning and Professional Development Programs
• Career Planning Programs
o Conference Attendance
o Professional Memberships
o Tuition Reimbursement
o Trade Journal Subscriptions
o Technical Career Ladders
o Job Rotation / Cross Training
o Management Succession Planning
o Formal Mentoring
• Tuition Reimbursement
o Course Requirements to Receive Tuition Reimbursement
o Conditions of Tuition Reimbursement
• Professional Development Programs
o Management or Supervisory Skills
o Leadership Development
o Project Management
o Interpersonal Communication
o Team Building
o Conflict Management
• Training Budgets
Military Leave Policy
• Military Leave Policy
Key Compensation Components
Compensation has become a far more complicated issue than just deciding how much to pay your
employees. In addition to salary, employers must consider many other components — 401(k) plans,
stock options, bonuses and vacation — that have become part of compensation packages today.
Employees also have greater expectations of what should be included in their compensation
packages, and they may demand specific benefits that can be costly for small businesses.
Costly or not, building a fair and attractive compensation packages is critical for attracting and
retaining employees. When setting up your compensation package, consider the following
components:
Salary and wages. This is usually the single largest component of a compensation package and, not
surprisingly, the most common point of comparison used by employees and potential employees.
Salary should be tied to a person's skills and experience. Subsequent increases need to be based on an
employee's performance, value and contribution to an organization.
Check salary surveys and want ads, and scout out competitors to see if they are underpaying or
overpaying their staff. Paying too much is an unnecessary drain on your resources, but paying too
little will make it difficult to find and keep the best people.
Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the year, are one
way of providing performance incentives. Profit-sharing plans are a more formal way of doing this,
but they're not as effective for rewarding individual performance and compensating employees for
meeting their goals.
Long-term incentives. Stock options or stock grants not only provide long-term incentives to
employees, but they can also help retain valuable team members through your organization's crucial
start-up phase.
Health insurance. Employer-sponsored health insurance is fairly standard among medium-size
companies. And it's a benefit that has great value to employees. An employer-sponsored plan saves
employees money and gives them peace of mind in knowing that they won't be denied coverage, even
if they have existing health problems.
If you think you can't afford it, think again. Providing insurance to your employees sends the
message that you care about their health and the health of their families. To minimize costs, consider
having employees pick up part of the tab. Employees who have coverage through a spouse may want
to opt out of a plan, particularly if there's a cost associated with it.
Life and/or disability insurance. This is also a benefit that usually costs less when it's purchased by
an employer rather than an individual.
Retirement plans. 401(k) plans have become popular because they are relatively easy to administer
and are less expensive than traditional pension plans. Many employees like these plans because they
maintain some control over the amount of their contribution and how the money is invested. Most
small companies try to put some kind of savings or 401(k) plan in place, even if they don't contribute
money to them.
Time off and flexible schedules. This includes holidays, vacations, sick days and personal days. An
employer unable to offer competitive salaries may close part of the gap by offering more time off or
flexible work hours. Some employers make no distinction between sick, vacation and personal days
and allow employees a set number of days off each year to be used at their discretion. This prevents
employees from abusing sick days and keeps employees from feeling that they need to lie when a
child is ill or a personal emergency arises.
Miscellaneous compensation. Other forms of compensation to consider include employee assistance
programs, which can provide everything from psychological counseling to legal assistance; discounts
on company products; use of a company cars; and any other incentives that motivate employees and
give your company a competitive advantage.
Compensation package of a top executive
The total compensation package of a top executive will generally have some Combination of the
following components: base salary, short-term bonus based on Performance over the past twelve
months, long-term bonus based on performance over the past 3-5 years, stock options (qualified
and/or non-qualified), restricted stock, stock
purchase and profit sharing. Everything in addition to base salary is not typical of what the average
worker receives, and each item should be examined in dividable. On op of the above there will also be
a pension, all the usual insurance (health, dental, disability, life) and special fringe benefits ranging
from tax preparation to country club membership. Any practicing economist who has ever dealt with
the compensation package of a highly paid executive will have an understanding of the complexities
involved in valuation, compared to a normal wage earner.
Payroll Management
Human Resource is the most vital resource for any organization. It is responsible for each and every
decision taken, each and every work done and each and every result. Employees should be managed
properly and motivated by providing best remuneration and compensation as per the industry standards.
The lucrative compensation will also serve the need for attracting and retaining the best employees.
Compensation is the remuneration received by an employee in return for his/her contribution to the
organization. It is an organized practice that involves balancing the work-employee relation by providing
monetary and non-monetary benefits to employees. Compensation is an integral part of human resource
management which helps in motivating the employees and improving organizational effectiveness.
Components of Compensation System
Compensation systems are designed keeping in minds the strategic goals and business objectives.
Compensation system is designed on the basis of certain factors after analyzing the job work and
responsibilities. Components of a compensation system are as follows:
Types of Compensation
Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the
form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary
but it is the sum total of all rewards and allowances provided to the employees in return for their services. If
the compensation offered is effectively managed, it contributes to high organizational productivity.
Direct 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.
Indirect 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.
Need of Compensation Management
A good compensation package is important to motivate the employees to increase the
organizational productivity.
Unless compensation is provided no one will come and work for the organization. Thus,
compensation helps in running an organization effectively and accomplishing its goals.
Salary is just a part of the compensation system, the employees have other psychological and self-
actualization needs to fulfill. Thus, compensation serves the purpose.
The most competitive compensation will help the organization to attract and sustain the best talent.
The compensation package should be as per industry standards.
Strategic Compensation
Strategic compensation is determining and providing the compensation packages to the employees that are
aligned with the business goals and objectives. In today’s competitive scenario organizations have to take
special measures regarding compensation of the employees so that the organizations retain the valuable
employees. The compensation systems have changed from traditional ones to strategic compensation
systems.
Evolution 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.
Evolution of Strategic Compensation
In the traditional organizational structures, employees were expected to work hard and obey the bosses’
orders. In return they were provided with job security, salary increments and promotions annually. The
salary was determined on the basis of the job work and the years of experience the employee is holding.
Some of the organizations provided for retirement benefits such as, pension plans, for the employees. It was
assumed that humans work for money, there was no space for other psychological and social needs of
workers.
With the behavioral science theories and evolution of labour and trade unions, employees started asking for
their rights. Maslow brought in the need hierarchy for the rights of the employees. He stated that employees
do not work only for money but there are other needs too which they want to satisfy from there job, i.e.
social needs, psychological needs, safety needs, self-actualization, etc. Now the employees were being
treated as human resource.
Their performance was being measured and appraised based on the organizational and individual
performance. Competition among employees existed. Employees were expected to work hard to have the
job security. The compensation system was designed on the basis of job work and related proficiency of the
employee.
Today the compensation systems are designed aligned to the business goals and strategies. The employees
are expected to work and take their own decisions. Authority is being delegated. Employees feel secured
and valued in the organization. Organizations offer monetary and non-monetary benefits to attract and
retain the best talents in the competitive environment. Some of the benefits are special allowances like
mobile, company’s vehicle; House rent allowances; statutory leaves, etc.
Payroll Management Process
Calculation of gross salaries and deductible amounts is a tedious task which involves risk. Some of the
organizations use the traditional manual method of payroll processing and some go for the advanced
payroll processing software. An organization opts for any of the following payroll processing methods
available
Manual System
Manual payroll system is the traditional payroll system which involves pen and ink, adding machine,
spreadsheet, etc instead of computers, software and other computerized aids. The process was very popular
when there were no computerized means for payroll processing.
Now-a-days it is only few small scale organizations in the remote areas that use the manual payroll.
Sometimes the construction industry and manufacturing industry also use the manual payroll systems for
the contractual labour, as theses contracts are on daily/weekly basis.
There is full control in the hands of owner. But the process is tedious, time consuming and risky as it is
more prone to errors.
Accountant
Accountant is a professional having a degree/diploma course in finance/accountancy. He/she is responsible
for all the activities related to payroll accounting. He/she has the sound knowledge of accounting principles
and globally accepted standards.
The process adds costs to the organization. It involves paying someone who is responsible for calculating
the salaries of others. The financial control regarding salary goes in the hand of accountant.
Payroll Software
In today’s computerized environment, payroll system has also developed itself into automated software that
performs every action needed by the payroll process. It helps in calculating the payable amounts and
deductions very easily. It also helps in generating the pay slips in lesser time. Automated calculations result
in no errors. Data is validated automatically by the software.
It needs professionals to make use of the software for its efficient working.
Payroll Outsourcing
Payroll outsourcing involves a third party (an outsourcing company) in the calculations of salaries and
deductions. The outsourcing organization is responsible for all the activities of the payroll accounting. It
saves time and cost for the organization. If there is more number of employees (say more than 900-1000) in
the organization, payroll outsourcing would be very much beneficial.
The data is provided to the consultants/outsourcing firms. The various payroll functions undertaken by the
outsourcing organizations are as follows:
WHAT ARE THE LIMITS OF EXEMPTION IN L.T.C. is granted to an employee in connection with the
journey on leave by him or his family. It is exempt from income tax within certain limits as under : -
(a) Where journey is performed by rail; railway-fare in Second AC class by shortest route to destination.
(b) Where places of origin and destination are connected by rail but the journey is performed by any other
mode then Second AC class fare by shortest route to the place of destination.
(c) Where place of origin of journey and destination, or part thereof, are not connected by rail and journey
is performed by any other transport; then
(i) If a recognised public transport system exists between such places the first class or deluxe class fare of
such transport by shortest route, or,
(ii) If in other case, Second AC class fare for the distance of the journey by the shortest route, as if the
journey has been performed by rail.
Exemption will, in no case exceed actual expenditure incurred in the performance of journey.
Leave Travel Concession Rules have been amended on the recommendation of the Fifth Pay Commission
to extend the facility of travel by air economy Y- Class to certain categories of employees of the Central
Government with effect from 1st October, 1997.
Consequently, where the journey is performed on or after 1st October, 1997 by air, an amount not
exceeding the air economy fare of the National Carrier by the shortest route to the place of destination.
Also, where the entitlement was previously for air-conditioned Second Class Rail fare, it has been upgraded
to air-conditioned First Class Rail fare. [l.T. (First Amendment) Rules 1998, O.O.I. Gazette Notification
No. S.O. 34(E) dt.
WILL THIS CHANGE APPLY ONLY TO GOVERNMENT EMPLOYEES OR DOES IT APPLY ALSO
TO EMPLOYEES OF OTHER SECTORS ?
The assessee can claim exemption in respect of two such journey(s) in a block of 4 years. For this purpose,
the first block of 4 years was calendar year 1986-89. For a block of 4 years, the journey performed in the
first year following that block year is also eligible for exemption. Also, such journey will not be taken into
account for determining the tax exemption for the succeeding block.
Yes, certainty. In case the L.T.C. is encashed without actually performing the journey the entire amount
received by the employee would be taxed in his hands.
Conveyance allowance : It is exempted from Tax if it doesn't exceed Rs 800 per month viz Rs 9600 p.a.
Basic(@ 40% of CTC)= 20000
HRA(@50% of Basic)=10000
Conv. Allow=800(tax exempt upto 9600pa)
Medical Allow=1250(IT Exempt upto 15000 pa)
Special Allow=5000
Children Education Allow=200(Maxim 2400pa (2 children); tax exempt subjected to School/colledge going
children)
PF=780+780=1560.
Helper Allow=2000
uniform allow= 3000
LTA=6190(tax exempt twice in a block of 4 yrs )
The New Standard in 'Employee Incentive' Surveys:
Adding scaling mathematics to traditional incentive surveys gives organizations a new competitive
edge. Employers can now discover what incentives matter most to employees and which ones
correlate with short-term versus long-term employee motivation.
Forward-thinking organizations want to know what incentives are valued most strongly by their
employees. The service industry now has the ability to answer this question more specifically and
accurately than ever before thanks to a new application to traditional Employee Incentive Surveys.
Furthermore, this advancement is more cost effective than typically statistical approaches like raw-
score sums, percentages and averages that may be highly misleading but are still used by high profile
survey firms.
The innovation is in the data analysis - not the content or presentation of the survey questions per se.
With the statistical gold standard of Item Response Theory (IRT), companies can actually obtain
mathematical hierarchies of incentives for their employees based on scaling analyses of employees'
ratings of those incentives. In other words, companies gain linear measures of employee incentives
from what was otherwise imprecise ordinal data. Also, IRT will clearly identify demographic
differences (e.g., men vs women) as well as variations that might exist between divisions or
departments of an organization. Finally, IRT methods provided a powerful method to highlight the
similarities and differences between short-term and long-term employee incentives.
Case in point is the worldwide consulting firm, HVS (www.hvs.com). HVS has commissioned
Organizational Climate Surveys for several years as part of its quality and excellence programs. The
company's 2007 survey measured 72 different monetary and non-monetary incentives on the degree
to which they would stimulate short-term versus long-term personal satisfaction in employees. Over
200 employees - spanning 17 offices worldwide - participated in the study. Employee Incentive
Surveys seem to yield consistently impressive response rates due to the relevant subject matter. For
instance, the HVS study had a 56% response rate compared to the ~20% rate that is standard for
most questionnaire research. It is also noteworthy that the HVS respondents were not offered any
reward to encourage their participation.
Unprecedented Insights
Analyses revealed that the HVS employees' appraisal of all 72 potential incentives could be thought
of as forming a single, mathematical hierarchy. In other words, the 72 employee incentives could be
ordered such that incentives towards the top part of the list represented highly rated incentives,
incentives towards the middle of the list were rated as mediocre, and those near the bottom of the list
were given relatively low ratings. Moreover, this hierarchy has the desirable property that endorsing
the higher incentives implies that employees already also endorse the lower ones. Therefore, in
practice, Managing Directors should first consider the employee incentive at the #1 position in the
hierarchy, next at the #2 and so forth (NOTE: the full hierarchy is not presented in this article). This
same hierarchy also implies that the incentive at the #60 position on the hierarchy (e.g., 'Overnight
trip with officemates') is generally not as effective as the incentive at the #20 spot (e.g., 'Holiday party
where significant others / family are invited'). So even though incentive #60 might cost more money,
it is not perceived by employees as meaningful as a less costly alternative.
This raises the issue of monetary versus non-monetary incentives. The HVS study revealed that non-
monetary incentives were often rated as high as or higher than monetary incentives. This is entirely
consistent with the idea that - besides fair compensation - employees remain with organizations that
consistently provide feelings of belonging, appreciation and worth for employees. The finding of a
single, mathematical hierarchy for employee incentives allows HVS Managing Directors to make
informed, evidence-based choices when it comes to implementing employee incentive programs.
Furthermore, analyses revealed that the ratings of some incentives were biased towards being long-
term motivators. Thus, Managing Directors can make even more targeted choices for incentives
based on a particular agenda - 'Does this office want to motivate employees more for the short-term
or more for the long-term?' Short-term motivators might apply to associated who are not expected to
remain with the office more than 1-3 years, whereas long-term motivators might apply to support
staff and other employees with whom you want to establish and nurture a lasting employment
relationship.
Below are shown representative items from the mathematical hierarchies for short-term motivators
versus long-term motivators at HVS. Generally speaking, monetary-based incentives seemed more
highly valued as short-term motivators, whereas employees perceived incentives concerning
recognition and appreciation as more long-term motivators. Again, incentives towards the top part of
these lists are incentives for which employees gave relatively high ratings, incentives towards the
middle of the list were rated as mediocre and incentives towards the bottom part of the list were
given relatively low ratings. Therefore, the rule-of-thumb for HVS is to consider using these
incentives in order from top to bottom - taking into account the office's resources and income. That
is, Managing Directors should first consider the employee incentive at the #1 position, next at the #2
and so forth.
1. Peer evaluations.
2. Photo within office to recognize employee of the month.
3. Quarterly social outings at a local restaurant / bar.
4. Gift for being awarded employee of the month.
5. Verbal feedback from supervisor for a job well done.
6. Casual dress code on Friday.
7. Office message sent to recognize employment anniversary.
8. Area to display personal photos and information.
9. Company-subsidized child-care.
10. Out of office events, e.g. attending a sporting event.
The importance of some employee incentives relative to other incentives in these Tables might seem
counterintuitive or 'wrong.' However, keep in mind these hierarchies are data-driven - they reflect
the ratings (and hence value systems and mindsets) of HVS employees rather than HVS
management. Thus, what management deems motivating may not always be what staff members find
motivating. And, since the incentive hierarchies differ somewhat across departments, it should not be
surprising to find variations between companies as well. This is why Employee Incentive Surveys
offer valuable insights and why objective analysis of quantitative data is preferred over opinions and
suppositions from management and consultants.
HVS' employee incentive survey cost relatively little to conduct in terms of time and money, but it
produced findings that served as a reliable and sobering indicator of the value system of its
worldwide employees. This gives HVS a significant competitive advantage in attracting and keeping
its top talent in an industry laden with high employee turnover. Of course, the specific findings about
the effectiveness of certain incentives at HVS study are not meant to generalize to other companies.
The example presented here are illustrations of the type of outcomes that organizations can expect
from such surveys. The IRT methodologies used in the HVS Employee Incentive Survey set a new
standard in the industry and can be efficiently duplicated for other businesses and for other
industries. To that end, some helpful guidelines are suggested:
a) Carefully identify incentives to be rated by employees via a panel review, i.e., invite Human
Resources professionals, senior management and department heads to assist in creating the list of
incentives to be evaluated.
b) Conduct the survey online to maximize efficiency and accuracy of the data collection.
c) Use a third party for the study to emphasize the impartiality and anonymity of the survey to
employees.
d) If needed, create different sections of the survey to differentiate (1) incentives your company now
uses versus (2) incentives the company is contemplating for the future.
e) Make it clear to employees at the start that the incentive survey merely aims to collect information
for consideration; it is not necessarily a promise to implement new incentives in the short- or long-
terms.
THE AMERICANS WITH DISABILITIES ACT (ADA) became effective in 1992. The law
"prohibits employment discrimination against qualified individuals with disabilities. A qualified
individual with a disability is defined as an individual with a disability who meets the skill,
education, experience and other job-related requirements of a position held or desired, and who,
with or without a reasonable accommodation can perform the essential functions of the job."
THE REHABILITATION ACT prohibits companies from discriminating against individuals with
a disability and requires the establishment of an affirmative action plan for individuals with a
disability. Affirmative Action plan hiring goals are not required.
THE VIETNAM ERA VETERANS' READJUSTMENT ASSISTANCE ACT of 1974 provides
veteran re-employment rights and requires that an Affirmative Action plan be written for veterans.
Affirmative Action plan hiring goals are not required.
EXECUTIVE ORDER 11246 was signed by President Johnson in 1964. It created Affirmative
Action. Executive Order 11246 applies to "federal contractors and subcontractors having a
contract or contracts with an executive branch agency or department exceeding $10,000 during
any 12-month period. Federal contractors with 50 or more employees and at least one covered
contract for $50,000 or more are also required to prepare written affirmative action plans for their
establishments. Affirmative action plans must be updated at least annually." Companies are
required to establish female and minority hiring goals and to demonstrate that a "good faith"
effort is being made to attract and retain females and minorities, especially into positions that they
have not traditionally held. Consulting firms are available to write Affirmative Action Plans. The
cost is generally a few thousand dollars per year, depending on the size of the organization.
Software packages are also available to help write an Affirmative Action Plan.
THE EQUAL PAY ACT of 1963 "prohibits sex discrimination in the payment of wages to men
and women performing substantially equal work under similar working conditions in the same
establishment."
THE AGE DISCRIMINATION IN EMPLOYMENT ACT (ADEA) "prohibits private employers
having 20 or more employees from discriminating against their employees and job applicants
who are at least 40 years old on the basis of age."
HARASSMENT LAW is based on court interpretation of the Civil Rights Act of 1964. The first
regulations were written by the EEOC in 1980. Harassment occurs if an individual perceives to
have been harassed, even if the alleged harasser did not intend to harass. Harassment includes
"verbal or physical conduct which results in a hostile or intimidating work environment that
interferes with work performance or otherwise adversely affects employment opportunities."
Examples of harassment may include jokes, name calling, derogatory comments, and offensive
pictures. The law states that if the company knew, could have known, or should have known of
the harassment, and if the harassment unreasonably interfered with the individual's work
performance or created an intimidating, hostile or offensive work environment, then the company
is liable.
STATE EQUAL EMPLOYMENT LAWS typically provide the same anti-discrimination
protections as federal laws, plus some additional. For example in the state of California, it is
illegal to discriminate in employment on the basis of marital status and sexual orientation.
AFFIRMATIVE ACTION:
Job classifications identified for affirmative action are:
(1) officials and administrators
(2) professionals
(3) technicians
(4) protective service workers
(5) para-professionals
(6) office and clerical workers
(7) skilled craft workers, and
(8) service and maintenance workers.
Authority: The State Government, except in the case of central Government. undertakings spread
in more than one State. However, Rule making powers are vested in the State Government. Each
State Government will have its
own Rules.
Wages: ' wages ' cover all payments made to an employee including all allowances or those in
kind capable of being expressed in terms of money but does not include, (a) Bonus, (b) House
Rent, (c) contribution to Provident Fund or Pension Fund of the employee, (d) Travelling
allowance, (e) Gratuity and (f) Special expenses. Wages can be paid by cheques or credited to the
bank accounts of the employees with the consent of the employees. Employer is hefd responsible
for the payment of wages to persons employed.
Wage Period: Any period fixed by the employer not exceeding one month.
Time of Payment of Wages: Wages are to be paid to the employees after the expiry of the wage
period.
(a) before the expiry of seventh day in establishments employing less than 1000 persons and
(b) before the expiry of tenth day in establishments employing 1000 & more persons.
In the case of employees whose services are terminated by the employer, wages must be paid
before the expiry of the second working day from the day on which the employment is
terminated.
Total amount Of deductions not to exceed Seventy Five per cent of wages where deductions are
made for payments to co-operative societies and not to exceed Fifty per cent in other cases.
Deduction for loss: The deduction shall not exceed actual amount of loss or damage. However, it
can be made only after the employed person has been given an opportunity of showing cause
against deduction.
Deduction for service rendered: In the case of house accommodation or other amenities, the
accommodation or amenities must have been accepted by the employee.
Co-operative Societies and Insurance Schemes: Deductions will be subject to the Rules made by
the State Government.
Procedure: Claims arising out of wrongful deductions or delay in payments are to be made to the
appropriate Labour Court or Tribunal authorised by the State Government. Normally, there is a
special court designated as the Authority Under Payment of Wages Act'. The claim must be made
in appropriate form and according to the procedure laid down in the Rules framed by the State
Governments.
Appeal: Appeal against the order of the Authority can be filed before the Court of Small Causes
or a District Court.
Display: Abstracts of the Act and the rules must be displayed by the employer in English or a
language understood by majority of the employees in the factory or establishment premises.
RIGHT OF WORKERS, ETC. –the obligation of the employers, practically speaking the right of
employees
(i) obtain from the occupier, information relating to workers' health and safety at work;
(ii) get trained within the factory wherever possible, or, to get himself sponsored by the occupier
for getting trained at a training centre or institute, duly approved by the Chief Inspector, where
training is imparted for workers' health and safety at work;
(iii) Represent to the Inspector directly or through his representative in the matter of inadequate
provision for protection of his health or safety in the factory.
4) A workers has the right to claim wages for leave allowable to him, under the provisions of the
payment of wages act.
5) A workers has the right not to pay any fee or charge for the facilities for the facilities provided
by the employer.
Right of employers:
The obligation of the employee can also be reckoned as right of the employers. Beside some more
right have been vested in the employer under the factories act.
1) Right to carry on the plan of setting up a new factory or extension of an existing one, if no
adverse order is communicated to him within 3 months of the application for approval.
2) Right to appeal to the central government against the sate government’s refusal to grant
approval to his application for setting up a factory.
3) Right to retain a child or a young person not holding a certificate of fitness, from working in
the factory
4) right of appeal against the order of the inspector or chief inspector, to the prescribed appellate
authority, within 30 days of the service of the order.
5) Right to demand an application for leave from the workers and a medical certificate when
leave is availed on the ground of illness. Provision of overcrowding
(1) No room in any factory shall be overcrowded to an extent injurious to the health of the
workers employed therein.
(2) Without prejudice to the generality of sub-section (1), there shall be in every workroom of a
factory in existence on the date of the commencement of this Act at least 9.9 cubic metres and of
a factory built after the commencement of this Act at least 14.2 cubic metres or space for every
worker employed therein, and for the purposes of this sub-section no account shall be taken of
any space which is more than 4.2 metres above the level of the floor of the room.
(3) If the Chief Inspector by order in writing so requires, there shall be posted in each workroom
of a factory a notice specifying the maximum number of workers who may, in compliance with
the provisions of this section, be employed in the room.
(4) The Chief Inspector may by order in writing exempt, subject to such conditions, if any, as he
may think fit to impose, any workroom from the provisions of this section, if he is satisfied that
compliance therewith in respect of the room is unnecessary in the interest of the health of the
workers employed therein. Write short notes on any five
10. (1) The Central Government shall constitute a Medical Benefit Council consisting of -
(d) One member each representing each of the States (other than Union territories) in which this
Act is in force to be appointed by the State Government concerned;
(g) Three members, of whom not less than one shall be a woman, representing the medical
profession, to be appointed by the Central Government in consultation with such organizations of
medical practitioners as may be recognized for the purpose by the Central Government.
(2) Save as otherwise expressly provided in this Act, the term of office of a member of the
Medical Benefit Council, other than a member referred to in any of the clause (a) to (d) of sub-
section (1), shall be four years from the date on which his appointment] is notified: Provided that
a member of the Medical Benefit Council shall, notwithstanding the expiry of the said period of'
four years continue to hold office until the appointment of his successor is notified.
(3) A member of the Medical Benefit Council referred to in clauses (b) and (d) of sub-section (1)
shall hold office during the pleasure of the Government appointing him.
e) Important features of the minimum wages act 1948
WHEREAS it is expedient to provide for fixing minimum rates of wages in certain employments;
An Act to provide for certain benefits to employees in case of sickness, maternity and
"employment injury" and to make provision for certain other matters in relation thereto
4) An overtime rate
For different occupation, localities or classes of work and for adults, adolescents, children and
apprentices.
2) A basic arte of wages with or without the cost of living allowance and the cash value of the
concessions in respect of essential commodities supplied at concessional rates.
3) The act lays down that wages shall be paid in cash although it empowers the appropriate
government to authorize the payment of minimum wages either wholly or partly in kind in
particular cases.
4) It provides that the cost of living allowance and cash value of the concessions in respect of
supplies of essential commodities at concessional rates shall be computed by component
authority at certain interval.
5) The act empowers the appropriate government to fix the number of hours of work per day, to
provide for a weekly holiday and the payment of overtime wages of which minimum rates of
wages have been fixed under the act.
6) The act lays down for appointment of inspectors and other authorities to hear and decide
claims arising out of payment of wages at less than the minimum rates of wages or remuneration
for days of rest of work done on such days or of overtime wages
7) All establishments covered by the act are required to maintain registers and office records in
the prescribe manner
8) The act provides the procedure for dealing with complaints arising out of the violation of the
provisions of the act and for imposing penalties for offences under the act.
Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in
accordance with the provisions of this Act, provided he has worked in the establishment for not
less than thirty working days in that year. Where an employee has not worked for all the working
days in an accounting year, the minimum bonus of one hundred rupees or, as the case may be, of
sixty rupees, if such bonus is higher than 8.33 per cent of his salary or wage for the days he has
worked in that accounting year, shall be proportionately reduced. Bonus under the payment of
bonus act cannot be claimed by workers as a matter of right. The bonus formula under the act rest
on calculation of the available surplus and it envisages the following steps Computation of
available surplus. The available surplus in respect of any accounting year shall be the gross
profits for that year after deducting there from the sums referred to in section 6 : Provided that the
available surplus in respect of the accounting year commencing on any day in the year 1968 and
in respect of every subsequent accounting year shall be the aggregate of (a) The gross profits for
that accounting year after deducting there from the sums referred to in section 6; and (b) An
amount equal to the difference between- (i) the direct tax, calculated in accordance with the
provisions of section 7, in respect of an amount equal to the gross profits of the employer for the
immediately preceding accounting year; and (ii) the direct tax, calculated in accordance with the
provisions of section 7, in respect of an amount equal to the gross profits of the employer for such
preceding accounting year after deducting there from the amount of bonus which the employer
has paid or is liable to pay to his employees in accordance with the provisions of this Act for that
year.]
Section 6:
Sums deductible from gross profits. The following sums shall be deducted from the gross profits
as prior charges, namely:-
(a) any amount by way of depreciation admissible in accordance with the provisions of sub-
section (1) of section 32 of the Income-tax Act, or in accordance with the provisions of the
Agricultural Income-tax Law, as the case may be: Provided that where an employer has been
paying bonus to his employees under a settlement or an award or agreement made before the 29th
May, 1965, and subsisting on that date after deducting from the gross profits notional normal
depreciation, then, the amount of depreciation to be deducted under this clause shall, at the option
of such employer (such option to be exercised once and within one year from that date) continue
to be such notional normal depreciation;
(c) subject to the provisions of section 7, any direct tax which the employer is liable to pay for the
accounting year in respect of his income, profits and gains during that year;
(d) Such further sums as are specified in respect of the employer in the [Third Schedule]
b) Withdrawal or cancellation of trade union: A certificate of registration of a Trade Union may be
withdrawn o cancelled by the Registrar –
(1) On the application of the Trade Union to be verified in such manner as may be prescribed, or
(2) If the Registrar is satisfied that the certificate has been obtained by fraud or mistake, or that
the Trade Union has ceased to exist or has willfully and after notice from the Registrar
contravened any provision of this Act or allowed any rule to continue in force which is
inconsistent with any such provision, or has rescinded any rule providing for any matter,
provision for which is required by Section 6: Provided that not less than two months previous
notice in writing specifying the ground on which it is proposed to withdraw or cancel the
certificate shall be given by the Registrar to the Trade Union before the certificate is withdrawn
or cancelled otherwise than on the application of the Trade Union.
3) Section 10 provides that register may direct for withdrawal or cancellation of registration in the
following cases Trade union has ceased to exist Trade union has on its own applied for its
withdrawal or cancellation Allowed any rule to continue against the provision of this act
1) The appropriate Government may as occasion arises by notification in the Official Gazette
constitute a Board of Conciliation for promoting the settlement of an industrial dispute.
(2) A conciliation officer may be appointed for a specified area or for specified industries in a
specified area or for one or more specified industries and either permanently or for a limited
period.
(2) A Board shall consist of a Chairman and two or four other members, as the appropriate
Government thinks fit.
(3) The Chairman shall be an independent person and the other members shall be persons
appointed in equal numbers to represent the parties to the dispute and any person appointed to
represent a party shall be appointed on the recommendation of that party : Provided that, if any
party fails to make a recommendation as aforesaid within the prescribed time, the appropriate
Government shall appoint such persons as it thinks fit to represent that party.
(4) A Board, having the prescribed quorum, may act notwithstanding the absence of the Chairman
or any of its members or any vacancy in its number: Provided that if the appropriate Government
notifies the Board that the services of the Chairman or of any other member have ceased to be
available, the Board shall not act until a new chairman or member, as the case may be, has been
appointed. DUTIES OF CONCILIATION OFFICERS. - (1) Where an industrial dispute exists or
is apprehended, the conciliation officer may, or where the dispute relates to a public utility service
and a notice under section 22 has been given, shall, hold conciliation proceedings in the
prescribed manner.
(2) The conciliation officer shall, for the purpose of bringing about a settlement of the dispute,
without delay, investigate the dispute and all matters affecting the merits and the right settlement
thereof and may do all such things as he thinks fit for the purpose of inducing the parties to come
to a fair and amicable settlement of the dispute.
(3) If a settlement of the dispute or of any of the matters in dispute is arrived at in the course of
the conciliation proceedings the conciliation officer shall send a report thereof to the appropriate
Government or an officer authorised in this behalf by the appropriate Government together with a
memorandum of the settlement signed by the parties to the dispute.
(4) If no such settlement is arrived at, the conciliation officer shall, as soon as practicable after the
close of the investigation, send to the appropriate Government a full report setting forth the steps
taken by him for ascertaining the facts and circumstances relating to the dispute and for bringing
about a settlement thereof, together with a full statement of such facts and circumstances, and the
reasons on account of which, in his opinion, a settlement could not be arrived at.
(5) If, on a consideration of the report referred to in sub-section (4), the appropriate Government
is satisfied that there is a case for reference to a Board, Labour Court, Tribunal or National
Tribunal, it may make such reference. Where the appropriate Government does not make such a
reference it shall record and communicate to the parties concerned its reasons therefore. DUTIES
OF BOARD. - (1) Where a dispute has been referred to a Board under this Act, it shall be the
duty of the Board to endeavor to bring about a settlement of the same and for this purpose the
Board shall, in such manner as it thinks fit and without delay, investigate the dispute and all
matters affecting the merits and the right settlement thereof and may do all such things as it thinks
fit for the purpose of inducing the parties to come to a fair and amicable settlement of the dispute.
(2) If a settlement of the dispute or of any of the matters in dispute is arrived at in the course of
the conciliation proceedings, the Board shall send a report thereof to the appropriate Government
together with a memorandum of the settlement signed by the parties to the dispute.
(3) If no such settlement is arrived at, the Board shall, as soon as practicable after the close of the
investigation, send to the appropriate Government a full report setting forth the proceedings and
steps taken by the Board for ascertaining the facts and circumstances relating to the dispute and
for bringing about a settlement thereof, together with a full statement of such facts and
circumstances, its findings thereon, the reasons on account of which, in its opinion, a settlement
could not be arrived at and its recommendations for the determination of the dispute.
(4) If, on the receipt of a report under-sub-section (3) in respect of a dispute relating to a public
utility service, the appropriate Government does not make a reference to a Labour Court, Tribunal
or National Tribunal under section 10, it shall record and communicate to the parties concerned
its reasons therefore.
(5) The Board shall submit its report under this section within two months of the date on which
the dispute was referred to it or within such shorter period as may be fixed by the appropriate
Government : Provided that the appropriate Government may from time to time extend the time
for the submission of the report by such further periods not exceeding two months in the
aggregate : Provided further that the time for the submission of the report may be extended by
such period as may be agreed on in writing by all the parties to the dispute.
(6) A report under this section shall be submitted within fourteen days of the commencement of
the conciliation proceedings or within such shorter period as may be fixed by the appropriate
Government : Provided that, Subject to the approval of the conciliation officer, the time for the
submission of the report may be extended by such period as may be agreed upon in writing by all
the parties to the dispute. Settlements:
(1) A settlement shall come into operation on such date as is agreed upon by the parties to the
dispute, and if no date is agreed upon, on the date on which the memorandum of the settlement is
signed by the parties to the dispute.
(2) Such settlement shall be binding for such period as is agreed upon by the parties, and if no
such period is agreed upon, for a period of six months from the date on which the memorandum
of settlement is signed by the parties to the dispute, and shall continue to be binding on the parties
after the expiry of the period aforesaid, until the expiry of two months from the date on which a
notice in writing of an intention to terminate the settlement is given by one of the parties to the
other party or parties to the settlement.
(3) An award shall, subject to the provisions of this section, remain in operation for a period of
one year from the date on which the award becomes enforceable under section 17A: Provided that
the appropriate Government may reduce the said period and fix such period as it thinks fit :
Provided further that the appropriate Government may, before the expiry of the said period,
extend the period of operation by any period not exceeding one year at a time as it thinks fit, so
however, that the total period of operation of any award does not exceed three years from the date
on which it came into operation.
(4) Where the appropriate Government, whether of its own motion or on the application of any
party bound by the award, considers that since the award was made, there has been a material
change in the circumstances on which it was based, the appropriate Government may refer the
award or a part of it to a Labour Court, if the award was that of a Labour Court or to a Tribunal, if
the award was that of a Tribunal or of a National Tribunal, for decision whether the period of
operation should not, by reason of such change, be shortened and the decision of Labour Court or
the Tribunal, as the case may be, on such reference shall be final.
(5) Nothing contained in sub-section (3) shall apply to any award which by its nature, terms or
other circumstances does not impose, after it has been given effect to, any continuing obligation
on the parties bound by the award.
(6) Notwithstanding the expiry of the period of operation under sub-section (3), the award shall
continue to be binding on the parties until a period of two months has elapsed from the date on
which notice is given by any party bound by the award to the other party or parties intimating its
intention to terminate the award.
(7) No notice given under sub-section (2) or sub-section (6) shall have effect, unless it is given by
a party representing the majority of persons bound by the settlement or award, as the case may be.
1. accounting year
2. allocable surplus
3. available surplus
4. salary or wage” means
Provided that an option once exercised by the employer under paragraph (b) of this sub-clause
shall not again be exercised except with the previous permission in writing of the prescribed
authority and upon such conditions as that authority may think fit;
salary or wage” means all remuneration (other than remuneration in respect of over-time work)
capable of being expressed in terms of money, which would, if the terms of employment, express
or implied, were fulfilled, be payable to an employee in respect of his employment or of work
done in such employment and includes dearness allowance (that is to say, all cash payments, by
whatever name called, paid to an employee on account of a rise in the cost of living), but does not
include-
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or supply of light, water, medical attendance or
other amenity or of any service or of any concessional supply of food grains or other articles;
(iii) any traveling concession;
(iv) any bonus (including incentive, production and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund
or for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the
employee or any ex gratia payment made to him;
(vii) any commission payable to the employee.
INCENTIVE
Management is all about managing men. The main task of any manager in an organization is to
get things done through his subordinates. And to get things done, motivating the employees and
keeping their morale up is very essential. There are a number of ways which different managers
in organizations employ to improve employee motivation, such as by treating the employees
fairly, setting achievable goals, giving positive reinforcement, following an effective discipline
policy, satisfying the employee needs and lastly, the most important of all, basing the rewards or
incentives on job performance. Although, all of the above methods of motivating employees
should be applied by a manager to increase work productivity, yet special attention should be paid
while deciding upon incentives for employees, as nothing can motivate an individual like them
1. Financial incentives for employees are the amount of increment they will get upon
achieving a particular target, i.e. if an employee does A amount of work, he will get B
amount of money.
2. Financial incentives are not the only types of incentives for employees, there are
companies which give incentives in the form of gift items or organizing events for the
high achieving employees as well.
3. Many organizations these days give rewards to their high performing employees in the
form of books, gadgets, restaurant passes and movie tickets.
4. Throwing parties for employees or having events such as special dinners for the
employees are some of the other employee incentive ideas used by companies these days
BENEFITS OF INCENTIVES
The incentives for employees, such as a rise in the salary of the high performing employee,
benefits the organization in two ways.
1: The employee who receives a pay hike gets even more motivated and thus, maintains his high
level of performance.
2: Other employees too get indirectly motivated to work harder in aspiration of receiving similar
incentives
BONUS PAY
Bonus pay is compensation over and above the amount of pay specified as a base salary or hourly
rate of pay. The base amount of compensation is specified in the employee offer letter, in the
employee personnel file, or in a contract. Bonus pay can be distributed randomly as the company
can afford to pay a bonus, or the amount of the bonus pay can be specified by contract.
1. Bonus pay is used by many organizations as a thank you to employees or a team that
achieves significant goals.
2. Bonus pay is also used to improve employee morale, motivation, and productivity.
3. As long as bonus pay is discretionary by the employer, it is not considered to be a
contract.
4. If the employer promises a bonus, however, the employer may be legally liable to pay the
bonus.
Profit sharing
1. Profit sharing refers to various incentive plans introduced by businesses that provide
direct or indirect payments to employees that depend on company's profitability in
addition to employees' regular salary and bonuses.
2. In publicly traded companies these plans typically amount to allocation of shares to
employees.
HOW IT WORKS:
1. The company contributes a portion of its pre-tax profits to a pool that will be distributed
among eligible employees.
2. The amount distributed to each employee may be weighted by the employee's base salary
so that employees with higher base salaries receive a slightly higher amount of the shared
pool of profits.
3. Generally this is done on an annual basis.
Disadvantages
1. The pay for each employee moves up or down together (no individual differences for
merit or performance).
2. Focuses only on the goal of profitability (which may be at the expense of quality).
3. For smaller companies, these plans may result in drastic swings in earnings for
employees which the employees may find difficult to manage their personal finances.
PERFORMANCE LINKED COMPENSATION:
Performance linked compensation is money paid to someone relating to how well one works. Car
salesmen, production line workers, for example, may be paid in this way, or through commission.
Business theorist Frederick Winslow Taylor was a great supporter of this method of payment,
which is often referred to as PRP. He believed that money was the main incentive for increased
productivity and introducing the widely used concept of 'piece work'.
This standards-based system is used for evaluating employees and setting salaries by many
employers. Standards-based methods have been in de facto use for centuries among commission-
based sales staff: they are paid more for selling more, and low performers do not earn enough to
make keeping the job worthwhile even if they manage to keep the job.
In addition to motivating the rewarded behavior, standards-based methods can provide a level of
standardization in employee evaluations, which can reduce fears of favoritism and make the
employer's expectations clear. For example, an employer might set a minimum standard of 12,000
keystrokes per hour in a simple data-entry job, and reassign or replace employees who cannot
perform at that level.
Employees would be secure in knowing that their performance was evaluated objectively
according to the standard of their work instead of the whims of a supervisor, or against an ever-
climbing average of their group.
Opposition
As a simple measure, this gives no regard to the quality of help given, for instance whether the
issue was resolved, or whether the customer emerged satisfied. Performance related pay may also
cause a hostile work attitude as in times of low custom, multiple employees may compete for the
attentions of a single customer. Where a customer has been helped by more than one employee,
further resentment may be caused if the commission is taken by whoever happens to make the
final sale. Macroscopic factors such as an economic downturn may also make employees appear
to be performing to a lower standard independent of actual performance.
Performance-based systems have met some opposition as they are being adopted by corporations
and governments. In some cases, opposition is motivated by specific ill-conceived standards, such
as one which makes employees work at unsafe speeds, or a system which does not take all factors
properly into account.
In other cases, opposition is motivated by a dislike of the consequences. For example, a company
may have had a compensation system which paid employees strictly according to their seniority.
They may change to a system that pays sales staff according to how much they sell. Low-
performing senior employees would object to having their income cut to match their performance
level, while a high-performing new employee might prefer the new arrangement.
Research
Academic evidence has increasingly mounted indicating that performance related pay leads to the
opposite of the desired outcomes when it is applied to any work involving cognitive rather than
physical skill. Research[1] funded by the Federal Reserve Bank undertaken at the Massachusetts
Institute of Technology with input from professors from the University of Chicago and Carnegie
Mellon University repeatedly demonstrated that as long as the tasks being undertaken are purely
mechanical performance related pay works as expected. However once rudimentary cognitive
skills are required it actually leads to poorer performance.
These experiments have since been repeated by a range of economists,[2][3] sociologists and
psychologists with the same results.[4] Experiments were also undertaken in Madurai, India
where the financial amounts involved represented far more significant sums to participants and
the results were again repeated. These findings have been specifically highlighted by Daniel H.
Pink in his work examining how motivation works.[5]
COMPENSATION TRENDS:
Compensation trends in India changed with liberalization in 1991.
• Government was the biggest job creator
• Guaranteed pay determined by agreement between employee unions and Government
• Private sectors made government pay scales as
CURRENT TRENDS
Factors that influenced compensation post liberalization
1. Increase in productivity gains
2. Fast growth in real wages
3. Faster GDP growth
4. IT and Outsourcing services
5. Average salary increases over 2005-06 ranged from 10% to 40%