COMPENSATION MANAGEMENT

MODULE 1 – INTRODUCTION
Wages and salaries are the remuneration paid or payable to employees for work performed on behalf of
an employer or services provided. Normally, an employer is not permitted to withhold the wages or any
part thereof, except as permitted or required by law. Employers are required by law to deduct from wages,
commonly termed "withhold", income taxes, social contributions and for other purposes, which are then
paid directly to tax authorities, social security authority, etc., on behalf of the employee. Garnishment is a
court ordered withholding from wages to pay a debt.
Wages and salaries are typically paid directly to an employee in the form of cash or in a cash equivalent,
such as by cheque or by direct deposit into the employee's bank account or an account directed by the
employee. Alternatively, all or a part may be paid in various other ways, such as payment in kind in the
form of goods or services provided to the employee,[1] such as food and board.
For tax purposes, wages and salaries normally do not include other non-cash benefits received by an
employee, such as flights, payment of school fees etc. These are usually referred to as fringe benefits.
In the national accounts, in accordance with the System of National Accounts, wages and salaries are the
sum of remuneration paid to employees, including the values of any social contributions, income taxes,
etc., payable to employees. For administrative convenience, or due to a legal requirement or some other
reason all or a part of such payments may actually be withheld by the employer and paid directly to tax
authorities, etc., on behalf of the employee. However, labour-related expenses of a business, such
as payroll taxes, pension fund contributions, social insurance schemes, workers' compensation insurance,
etc., are not counted as wages and salaries for national accounts purposes. Similar concepts apply to
general accounting treatment of labour expenses.
Wages and salaries in cash consist of such amounts payable at regular intervals, such as weekly, monthly
or other intervals, including payments by results and piecework payments; plus allowances, such as those
for working overtime; plus amounts paid to employees away from work for short periods (e.g., on
holiday, sick leave, etc.); plus ad hoc bonuses and similar payments; plus commissions, gratuities and tips
received by employees.
Wages and salaries in kind consist of remuneration in the form of goods or services that are not necessary
for work and can be used by employees in their own time, and at their own discretion, for the satisfaction
of their own needs or wants or those of other members of their households.

Factors Affecting Employee Compensation – External and Internal Determinants of Compensation

The compensation awarded to the employee is dependent on the volume of effort exerted, the nature of
job and his skill. Besides, there are several other internal and external factors affecting the compensation.
I. External Determinants of Compensation:
1. Labour Market Conditions:
The forces of demand and supply of human resources, no doubt, play a role in compensation decision.
Employees with rare skill sets and expertise gained through experience command higher wage and salary
than the ones with ordinary skills abundantly available in the job market. But the higher supply of human
resources for certain jobs may not lead to reduction of wages beyond a floor level due to Government‘s
prescription of minimum wage levels and employee union‘s bargaining strength.
Similarly, this factor by itself does not result in lower pay if the vast majority of available resources are
unemployable due to poor skill and low talent. Thus, it is clear that law of demand and supply applies to
labour market only to a limited extent.
2. Economic Conditions: Organizations having state-of-the-art technology in place, excellent
productivity records, higher operational efficiency, a pool of skilled manpower, etc., can be better pay
masters. Thus, compensation is the consequence of the level of competitiveness .prevailing in a given
industry.
3. Prevailing Wage Level:
Most of the organizations fix their pay in keeping with the level for similar jobs in the industry. They
frequently conduct wage survey and accordingly seek to keep their wage level for different jobs. If a
particular firm keeps its pay level higher than those of others in the industry, its employee cost becomes
heavier which may escalate the end cost of the products. This will affect the competitiveness of the firm.
On the other hand, if a firm keeps its pay level lower than the prevailing rates, it may not recruit the
skilled and competent manpower.
4. Government Control:
Government through various legislative enactments such as Minimum Wages Act, 1948, Payment of
Wage Act, 1936, Equal Remuneration Act, 1976, Payment of Bonus Act, 1965, dealing with Provident
Funds, Gratuity, Companies Act, etc., have a bearing on compensation decisions. Therefore, firms have to
decide on salaries and wages in the light of the relevant Acts.
5. Cost of Living:
Increase in the cost of living, raise the cost of goods and services. It varies from area to area within a
country and from country to country. The changes in compensation are based on consumer price index
which measures the average change in the price of basic necessities like food, clothing, fuel, medical
service, etc., over a period of time. Allowances like Dearness Allowance. City compensatory allowances
are paid to meet the increasing cost of living and parity among employees posted at different geographies.
6. Union’s Influence:
The collective bargaining strength of the trade unions also influence the wage levels. Trade unions enjoy
an upper hand in certain industries like banking, insurance, transport and other public utilities. Therefore,
wage structure in such industries and in such Union-active regions, salary and wage need to be fixed and
revised in consultation with the unions for ensuring smooth industrial relation.
7. Globalization:
It has ushered in an era of higher compensation level in many sectors of the economy. The entry of
multinational corporations and big corporates have triggered a massive change in the compensation
structure of companies across sectors. There is a salary boom in sectors like information technology,
hospitality, biotechnology, electronics, financial services and so on.
8. Cross Sector Mobility:
Contemporary companies find it difficult to benchmark the salaries of their staff with others in the
industry thanks to mobility of talent across the sectors. For example, hospitality sector employees are
hired by airlines, BPOs, healthcare companies and telecom companies.

II. Internal Determinants of Compensation:

1. Compensation Policy of the Organization:
Firm‘s policy regarding pay i.e., attitude to be an industry leader in pay or desire to pay the market rate
determines its pay structure. The former can attract better talent and achieve lower cost per unit of labour
than the ones that pay competitive pay.
2. Employer’s Affordability:
Those organizations which earn high profit and have a larger market share, a large business conglomerate
and multinational companies can afford to pay higher pay than others. Besides, company‘s ability to pay
higher pay is impaired by sector- specific economic recession and acute competition.
3. Worth of a Job:
Organizations base their pay level on the worth of a job. The wages and salaries tend to be higher for jobs
involving exercise of brain power, responsibility laden jobs, creativity-oriented jobs, technical jobs.
4. Employee’s Worth:
In some organizations, time rates are granted to all employees irrespective of performance. In such cases,
employees are rewarded for their mere physical presence on the job rather than for their performance.
However many private sector organizations follow performance-linked pay system. They conduct
performance appraisal more often than not which provides input for determin
5. Ability to Pay:
The level of compensation being paid to the employees depends to a large extent on the paying ability of
the organisation. In case the organisation is big and prosperous, its employees expect a better level of
salary and better perks and facilities from the management.
Such organisations generally compensate their employees at higher levels than their competitors, while in
case the firm is marginal and cannot afford to pay competitive rates its employees will always have a
tendency to leave the organisation for better paying jobs.
ing pay levels. It distinguishes the high-performer from the low-performer and the non-performer.
6. Employee Related factors:
In addition to all the above factors, employee related factors are also important in determining wage
structure. These factors include performing on the job, seniority experience, and membership in the
organization and their potential.
Trade Union‘s Bargaining Power:
The stronger and more powerful the trade union in any organization, the higher the wages. Trade union‘s
bargaining powers are often measured in terms of its membership, its financial strength and the nature of
its leadership.

BASE AND SUPPLEMENTARY COMPENSATION

(a) Basic Compensation:
Basic compensation refers to the basic pay of an employee which is usually expressed in terms of a pay
scale e.g. 5,000-200-10,000- 500 -20000 etc. This pay scale implies that an employee will get a basic pay
of Rs. 5000 per month on joining the organization. The employee will get an increment of Rs. 200 per
year till he/ she reaches the basic pay of Rs. 10,000 and after wards will be entitled to an increment of
Rs.500 per year till he / she reaches the pay of Rs. 20,000 per month and so on. Basic pay for a job is
decided though a process of systematic job evaluation. In many cases, Government fixed pay scales apply
which employers have to accept and implement.

(b) Supplementary Compensation:

Supplementary compensation refers to payment of allowances and provision of perks or perquisites.
Allowances refers to amounts of money which are given to employees regularly for particular purposes;
while perks refer to privileges enjoyed by a person because of his/her organizational status and
paid/provided in addition to wages/ salaries.

Following is an account of popular types of allowances and perks:

Allowances:
(i) House Rent Allowances (HRA): HRA is given by the employers to the employee to meet the
expenses in connection with the rent of the accommodation, which the employee might have to take.
(ii) Dearness Allowances (DA): DA is paid to employees to compensate them, at least partially, against
the phenomenon of rising prices. DA is decided as per an agreed formula, taking into account the
increase, in the cost of living.
(iii) City Compensatory Allowance (CCA): CCA is paid to employees to compensate them partly for
higher cost of living in cities, which differs from one type of city to another.
(iv) Conveyance Allowance: Conveyance allowance is an allowance granted to employees to meet the
expenditure incurred on conveyance in performance of duties of job; when free conveyance is not
provided by the employer.
(v) Uniform Allowance: It is an allowance which is granted to meet the expenditure incurred on the
purchase or maintenance of uniform for wear during the performance of duties of job.
(vi) Children Education Allowance: Amount paid at the rate of certain amount per child to meet the cost
of education of children (subject to a maximum of two children or more as per rules of the organisation)
is called children education allowance.,
(vii) Underground Allowance: This allowance is granted to an employee who is working in
uncongenial, unnatural climate in underground coal mines.
(viii) Miscellaneous Allowances:
Some other allowances payable to employees may be:
1. Medical allowance

2. Lunch / Tiffin allowance

3. Overtime allowance

4. Non-practicing allowance (in case of doctors)

5. Servant allowance etc.

Perquisites/Perks:
(i) Rent free accommodation or accommodation provided to employees at concessional rate. The
accommodation may be furnished or unfurnished.

(ii) Gas, electricity bill of employees paid or reimbursed.

(iii) Interest free or concessional loans to employees.

(iv) Leave Travel Concession (LTC) to employees.

(v) Free meals, tea and snacks, provided to employees.

(vi) Payment or reimbursement by the employer of club membership of the employee and expenses
incurred in a club by the employee.

(vii) Use of laptops and computers by employees, belonging to the employer.

(viii) Motor car/ other vehicles, provided by the employer to specified employees.

(ix) Provision by the employer of services of a sweeper, a gardener, a watchman or a personal attendant to
specified employees.

(x) Re-imbursement of medical treatment expenses, incurred on employee or members of his / her family.

(xi) Contribution by the employer to recognised provident fund, kept for the benefit of employees.
WAGE COMPONENTS:

1) Minimum Wage

A minimum wage is one which has to be paid by an employer to his workers irrespective of his ability to
pay. According to the above committee,

―Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the
preservation of the efficiency of the workers. For this purpose, minimum wage must provide some
measure of education, medical requirements and amenities. ―

Subsequent to the committee‘s report, Government enacted legal provisions regarding minimum wages
under the Minimum Wages Act. 1948. This Act does not define the concept of minimum wages but
empowers the Central Government as well as State Governments to fix minimum wages from time to
time. Wherever this Act applies, the payment of minimum wages is mandatory. In 1957, Indian Labour
Conference elaborated the concept of fixation of minimum wars which were termed as need-based
minimum wages. For the calculation of wages, the Conference suggested the following guidelines:

1. The standard working class family should be taken to consist of three consumption units for the
earner; the earnings of women, children and adolescents should be disregarded.
2. The minimum food requirements should be calculated on the basis of the net intake of 2.700 calories
per adult.
3. The clothing requirements should be estimated at a per capita consumption of 18 yards per annum per
person.
4. In respect of housing. the norms should be the minimum rent charged by the Government in any area
for houses provided under subsidized housing scheme for low-income groups.
5. Fuel, lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total
minimum wage.

2) Fair Wage

The concept of fair wage is linked with the capacity of the industry to pay. The Committee has defined
fair wage as follows:

―Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of
the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry
to pay. ―

Thus, fair wage depends on different variables affecting wage determination. Such factors are labour
productivity prevailing wage rates, the level of national income and its distribution and the capacity of
industry to pay. At present, the concept of fair wages is followed by the most business organisations.

3) Living Wage

Along with the minimum wage the Committee on Fair Wages has given the concept of living
wage which has been defined as follows:

―A living wage is one which should enable the earner to provide for himself and his family not only the
bare essentials of food, clothing and shelter but a measure of frugal comfort including education for his
children, protection against ill-health, requirements of essential social needs and a measure of insurance
against the more important misfortunes including old age. ―
Living wage is more than the concept of minimum wage. Such a wage is determined keeping in view the
national income and paying capacity of industrial sector. The Committee also observed that since the
national income did not support the payment of living wage. It should be implemented in three phases. In
the initial stage the wages to be paid to the entire working class were to be established and stabilized. In
the second phase fair wages were to be established in the community and industry. In the final phase the
working class was to be paid the living wage.

WAGE THEORIES

1. Wages Fund Theory:

This theory was developed by Adam Smith (1723-1790). His theory was based on the basic assumption
that workers are paid wages out of a pre-determined fund of wealth. This fund, he called, wages fund
created as a result of savings. According to Adam Smith, the demand for labour and rate of wages depend
on the size of the wages fund. Accordingly, if the wages fund is large, wages would be high and vice
versa.

The wage fund theory has been criticised as given below:

(1) Wage Fund is an Imaginary Concept:
The theory assumes that there is a fixed wage fund created by an entrepreneur. But in actual practice such
fund is not realistic and it is an imaginary concept.

(2) Efficiency of Workers Ignored:

The theory assumes that the wage fund is fixed and wage rate can be increased only by reducing the
number of workers. But in actual practice we see that by increasing the efficiency of workers we can raise
their wages. The differential wage rate is an example of this factor which has not been taken into
consideration by the theory.

(3) The Demand for Labour is a Derived Demand:

The theory assumes that the demand for labour depends upon the wage fund. But in actual practice we see
that the demand for labour depends upon the demand for various goods and services which are produced
by the labour.

(4) Increase in Wages do not Affect the Profit:

The theory explains that with the increase in wages the profit will decrease. But when productivity and
production increase wages and profit will also increase. Hence, increase in wages will not affect profit of
the capitalists.

(5) Wage Differentials are not Explained:

The wage fund theory does not explain the causes of wage differentials in different parts of the country
and different industries.

(6) Trade Unions Ignored:

The theory has not taken into consideration the pulls and pressures of trade unions in influencing and
determining the wage rates. Trade unions play an important role in wage determination.
4. Residual Claimant Theory of Wages:
The theory was propounded by an American economist F.A. Walker. According to Professor Walker the
total production of an industry is distributed among land, labour, capital and entrepreneur in the form of
rent, wages, interest and profit. When the rent, interest and profit are distributed among landlord,
capitalist and entrepreneur, the remaining share goes to labour which is residual claimant.

2. Subsistence Theory:
This theory was propounded by David Recardo (1772-1823). According to this theory, ―The labourers are
paid to enable them to subsist and perpetuate the race without increase or diminution‖. This payment is
also called as ‗subsistence wages‘. The basic assumption of this theory is that if workers are paid wages
more than subsistence level, workers‘ number will increase and, as a result wages will come down to the
subsistence level.

On the contrary, if workers are paid less than subsistence wages, the number of workers will decrease as a
result of starvation death; malnutrition, disease etc. and many would not marry. Then, wage rates would
again go up to subsistence level. Since wage rate tends to be at, subsistence level at all cases, that is why
this theory is also known as ‗Iron Law of Wages‘. The subsistence wages refers to minimum wages.

The theory has been criticised on the following grounds:

(1) The theory is one sided. It emphasises on the supply of labour but does not explain the demand for
labour.

(2) The theory does not take into consideration the productivity of labour while determining the wages
rate. Higher the productivity of labour higher will be the wage rate and lower the productivity lower will
be the wage rate.

(3) Subsistence level cannot be easily measured because it depends upon the number of members of the
family, nature and wants of the labour.

(4) The theory has explained that there is a direct relationship between wage rate and population growth.
But we know with the increase in wage rate the standard of living of workers will improve and they will
believe in ―small family is the happiest family‖.

(5) The theory emphasizes on the exploitation of workers. The wage rate should not be more than that
subsistence level workers. But in actual practice we see that the wage rate should be based on the
productivity of labour.

3. The Surplus Value Theory of Wages:

This theory was developed by Karl Marx (1849-1883). This theory is based on the basic assumption that
like other article, labour is also an article which could be purchased on payment of its price i e wages.
This payment, according to Karl Marx, is at subsistence level which is less than in proportion to time
labour takes to produce items. The surplus, according to him, goes to the owner. Karl Marx is well known
for his advocation in the favour of labour.

4. Residual Claimant Theory:

This theory owes its development to Francis A. Walker (1840-1897). According to Walker, there are four
factors of production or business activity, viz., land, labour, capital, and entrepreneurship. He views that
once all other three factors are rewarded what remains left is paid as wages to workers. Thus, according to
this theory, worker is the residual claimant.
The theory has been criticised on the following grounds:
(1) One Sided Theory:
The theory takes into consideration the demand for labour while the supply of labour has been ignored.
Wage can be determined by demand and for supply of labour as is the case of commodity pricing.

(2) Residual Claimant is Entrepreneur:

The theory explains that the residual claimant of total production is labour but in actual practice we see
that the entrepreneur is the last factor of production who gets the share out of the total production in the
form of profit or loss. Hence, the residual claimant is entrepreneur and not labours.

(3) No Need of Separate Theory of Wages:

When rent, interest and profit are determined by the marginal productivity theory then the wages can also
be determined by the same theory and there is no need of separate theory of wage determination.

(4) Role of Trade Unions Ignored:

The theory has also ignored the role of trade unions in the determination of wages. In practice trade
unions play an important role in wage determination in different industries.

5. Marginal Productivity Theory:

This theory was propounded by Phillips Henry Wick-steed (England) and John Bates Clark of U.S.A.
According to this theory, wages is determined based on the production contributed by the last worker, i.e.
marginal worker. His/her production is called ‗marginal production‘.

Assumptions of the Theory:

The MP theory of wages is based on the following assumptions:
(1) All the units of labour are homogeneous.

(2) The ratio of factors can be changed.

(3) Perfect competition in factor market (labour) and commodity market.

(4) Perfect knowledge of market conditions.

(5) Perfect mobility of labour.

(6) Long run determination of wage rate.

(7) Operation of the law of diminishing returns.

(8) Marginal productivity is measurable.

(9) Full employment.

The marginal productivity theory of wages has been criticised on the same grounds as was done the
marginal productivity theory of distribution as given under:
(1) Output is the result of collective efforts of different factors of production. Marginal productivity of
labour cannot be easily calculated as the productivity is shared by other factors of production.
(2) All the units of labour are not identical or homogeneous because the efficiency differs from one unit
of labour to another. There are three categories of labour—skilled, semi-skilled and unskilled.

(3) Perfect competition is an unrealistic and imaginary assumption. In practice we find imperfect
competition.

(4) Assumption of full employment is also unrealistic because even developed countries have 5-10 per
cent of unemployment. Hence, there is less than full employment situation.

(5) Perfect knowledge of market conditions and perfect mobility of labour are also unrealistic
assumptions. Mobility of labour is also affected by non-economic factors. There is laziness and ignorance
on the part of buyers and sellers in factor market and commodity market.

(6) One sided theory as it explains the demand for labour and ignores the supply of labour which is
equally important in determination of wage rate.

(7) The theory is determining wage rate during long period. It fails to determine wages during short
period. In the long run we all are dead and there is no economic problem.

(8) The theory does not explain the causes of wage differentials prevailing in various parts of the country
as well as the different industries.

6. The Bargaining Theory of Wages:

John Davidson was the propounder of this theory. According to this theory, the fixation of wages depends
on the bargaining power of workers/trade unions and of employers. If workers are stronger in bargaining
process, then wages tends to be high. In case, employer plays a stronger role, then wages tends to be low.

Types of Wages:
1. Time Rate System:
Under this method of wage payment, the workers are paid the wages on the basis of time. In this system
of wage payment, the workers are paid the wages on the basis of time as, per hour, per day, per week, per
fortnight or per month etc. This system does not consider the production of the employees during this
time.

The amount of wages under this system is calculated as under:

Wages = Time spent by the worker × Rate of wages according to time.

Suitability of Time Rate System:

This system of Wage Payment is particularly suitable in the following circumstances:
1. When it is not possible to measure the production in terms of units or in any other terms.

2. When the work is of high standard.

3. When it is not possible to divide the production into units.

4. When the production is of the nature that it requires efficiency more than the speed.

5. When the worker is undertraining

Merits of Time Rate System:
1. Simplicity:
It is very easy to calculate the amount of wage under this system.

2. Certainty of the Amount of the Remuneration:

This system of wage payment provides certainty of the amount of wage payment to the employee. It
develops the feeling of confidence and certainty among them.

3. High Quality of Production:

As this system of wage payment has no concern with quantity of production, quality of production
produced by the workers under this system is very high.

4. Proper Utilisation of the Factors of Production:

As this system is not related with speed, the workers perform their work in very confident manner. They
make the best Utilisation of the factors of production.

5. Co-Operation between Labour and Capital:

This system of wage payment brings the industrial peace because it satisfies the workers and the
industrialists. Thus, it develops harmony and cooperation between labour and capital.

6. Best System for Artistic Work:

This system of wage payment is most suitable for artistic work.

7. Co-Operation and Unity of Workers:

As all the employees doing the work for same nature get the same amount of wages, this system develops
the feeling of co-operation and unity among the workers.

8. Suitable for the Health of Workers:

This system of wage payment is suitable from the point of view of health of workers.

Demerits of Time Rate System:

1. Need of Intensive Supervision:
This system requires intensive supervision over workers. It increases the cost of supervision.

2. Lack of Incentive:
This system of wage payment makes equal payment to both the efficient and inefficient workers.
Therefore, efficient workers do not get any incentive for more production.
3. Encouragement of Labour Unions:
This system encourages labour unions. Sometimes, these labour unions misuse their powers.

4. Misuse of Time by Workers:

Under this system of wage payment, the workers do not make proper Utilisation by their time.

5. Fall in the Quantity of Production:

Under this system of wage payment, the quantity of production decreases because the workers do not get
any incentive for increasing the production.
6. High Cost of Production:
As the production is low and the payment to the worker is more, this system increases the cost of
production.

7. It Kills the Efficiency of Workers:

As this system does not make any difference between efficient and inefficient workers, it kills the
efficiency of efficient workers.

8. Increase in Cost Per Unit:

This system increases the cost per unit of production. Under this system, the cost per unit of production is
uncertain because the quantity of production differs from time to time.

9. Difficult to Measure the Efficiency:

Under this system of wage payment, it is very difficult to measure the efficiency of workers because all
the workers of equal status are paid the wages at equal rate.

2. Piece Rate System:

Under this system of wage payment, the workers are paid the wages on the basis of quantity and quality
of work performed by them. Under this system, the rates of wages are determined according to quantity
and quality of work and the workers are paid according to these rates.

The amount of wages to be paid to a worker under this system is calculated as under:
Wages = Units of production × Rate per unit.

Suitability of Piece Rate System:

This system of wage payment is very suitable in the following conditions:
1. When the work is of standard nature.

2. When the work can be measured easily.

3. When there is a great need of increase in the production.

Merits of Piece Rate System:

1. Incentive to More Work:
This system encourages the workers to do more and more work because they get their wages according to
their work.

2. Proper Utilisation of Machines:

Under this system, the workers use their machines and equipment with proper care because they feel that
if their machine is out of order, their work will be held up and their wages will be low.

3. Increase in the Quantity of Production:

The system of wage payment gets more production because all the workers make their best efforts to
increase the production.
4. Best Utilisation of Time:
As the workers are paid according to their work, they make the best possible utilisation of their time.
They do not want to waste their time.

5. Decrease in the Cost of Production:

This system decreases the cost of production because the maximum production is done by the workers in
the minimum time. It decreases the cost per unit of production also.

6. Decrease in the Cost of Supervision and Administration:

This system of wage payment minimises the needs of supervision. It reduces the cost of supervision.

7. Easy and Simple:

This system of wage payment is very easy to understand and very simple to calculate.

8. Improvement in the Standard of Living of Workers:

Workers get more wages because they produce more. It increases their efficiency and productivity. It
increases their remuneration also which improves their standard of living.

9. Mobility of Workers:
This system of wage payment increases the mobility of workers because they can change their enterprise
easily.

10. Measurement of the Efficiency of the Workers:

This system provides an opportunity to measure the efficiency of the workers. It makes proper distinction
between efficient and inefficient working staff of the enterprise.

11. Justified:
This system of wage payment justified also because the workers are paid the wages according to the work
performed by them.

12. Helpful in Maintaining Industrial Peace:

This system brings industrial peace also because it satisfies both the workers and the employer.

Demerits of Piece Rate System:

1. Lack of Unity among Workers:
This system lacks the unity and mutual co-operation among workers. They feel themselves competitor to
each other.

2. Loss of Workers on the Failure of Machines etc.:

It because of any reason, the machines fail or the power fails, the work of workers is held up and they lose
their wages.

3. Misuse of the Factors of Production:

The workers do not pay proper attention towards the factors of production. They only want to increase the
speed of production.

4. Adverse Effect on the Health of Workers:

This system motivates the workers to do more and more work. It affects the health of workers adversely.
5. Low Quality of Production:
This system of wage payment does not pay any attention on the quality of production. As a result of it the
quality of production falls down.

6. Unsuitable for Artistic Work:

This system is not suitable for artistic work because artistic work cannot be paid only on the basis of
quantity of production.

7. Uncertainty of Wages:
As the amount of wages depends upon the quantity of production, the actual amount of wages to be paid
is always uncertain. The workers also cannot estimate their remuneration in advance.

3. Balance Method:
This method is a combination of time wage and piece wage methods. In this method, a worker is paid a
fixed wage based on the time rate with a provision of piece wage method. How? This is just like
minimum rent with a provision of short working recoupment in case of royalty. If a worker produces less
quantity in a period, he is given wages as per time rate and excess payment over piece rate is treated as
credit.
This credit is compensated in the period when he/she produces more than time rate wages. Thus, he is
given time wage whether he produces more or less than it, i.e., time wage. This wills be more clear from
an example. Suppose, the time wage is Rs. 500 per week and the piece wage rate is Rs. 10 per unit. As per
his production, his wages during the 4 weeks in a month

Wages under Balance Method:

This method ensures the worker the receipt of a fixed amount as wage in all cases. From workers point of
view, this method has relevance in work situation where work flow is flexible /irregular such as docks.
This method is also known as ‗debt method‘. The National Commission on Labour (NCL) has identified
different methods of wage payment by employee contribution.

Wage Differential
A wage differential refers to the difference in wages between people with similar skills within differing
localities or industries. It can also refer to the difference in wages between employees who have
dissimilar skills within the same industry. It is generally referenced when discussing the given risk of a
certain job. For example, if a certain line of work requires someone to work around hazardous chemicals,
then that job may be due a higher wage when compared to other jobs in that industry that do not
necessitate coming into contact with dangerous chemicals. There are also geographical wage differentials
where people with the same job may be paid different amounts based on where exactly they live and the
attractiveness of the area.
Wage differentials may be due to following causes:
1. Occupational Differences:
Occupations in an organisation widely differ from one another in terms of skill requirement and the extent
of requirement and the extent of responsibility. Accordingly, wages vary from occupation to occupation.
Such differences in occupations induce people/workers to undertake more challenging jobs, encourage
workers to develop their skills by way of education and training. It is varying skill requirement for
different occupation that shapes the manpower planning in an organisation-be it an industrial organisation
or educational institution.

2. Inter-firm Differentials:
There are wage differentials of workers in different plants in the same area and occupation. Factors like
differences in quality of labour employed by different firms, imperfections in the labour market and
differences in the efficiency of equipment‘s and supervision result in inter-firm wage differentials. Added
to these are differences in technological advance, managerial efficiency, financial capability, firm‘s age
and size, availability of raw material, power and transport facilities also account for differences in wages
among firms.

3. Regional Differences:
Not only wages differ among occupations, but these also differ in case of workers working in the same
occupation at different geographical regions. These differences are the result of working conditions
prevalent in different regions of the country For example; the Central Government employees serving in
the remote and disturbed areas like the North Eastern States of India are paid additional remuneration in
the form of the Remote Area Allowance. Sometimes, such wage differentials are used to attract people to
serve in particular regions.

4. Inter-Industry Differences:
These differences in wages surface in case of workers working in the same occupation and the same area
but in different industries. These differences are the result of varying skill requirements, level of
unionisation, nature of product market, ability to pay, the stage of development of an industry, etc.

5. Personal Wage Differences:

These differences arise because of the differences in the personal characteristics (age or sex) of workers
working in the same unit and occupation. Though provision of ‗equal pay for equal work‘ is certainly
there, but it is still not the reality. Instances are there when woman worker is paid less than her male
counterpart for doing the same job. Of course, there are other reasons also which cause wage differentials
between male and female workers.

MODULE 2 – JOB EVALUATION

Job evaluation:
In simple words, job evaluation is the rating of jobs in an organisation. This is the process of establishing
the value or worth of jobs in a job hierarchy. It attempts to compare the relative intrinsic value or worth of
jobs within an organisation. Thus, job evaluation is a comparative process.

According to the International Labour Office (ILO) ―Job evaluation is an attempt to determine and
compare the demands which the normal performance of a particular job makes on normal
workers, without taking into account the individual abilities or performance of the workers
concerned‖.

The objectives of job evaluation, to put in a more orderly manner are to:
1. Provide a standard procedure for determining the relative worth of each job in a plant.

2. Determine equitable wage differentials between different jobs in the organisation.

3. Eliminate wage inequalities.

4. Ensure that like wages are paid to all qualified employees for like work.

5. Form a basis for fixing incentives and different bonus plans.

6. Serve as a useful reference for setting individual grievances regarding wage rates.

7. Provide information for work organisation, employees‘ selection, placement, training and numerous
other similar problems.

8. Provide a benchmark for making career planning for the employees in the organisation.

The importance of job evaluation may be judged from the following advantages:

Rational wage structure—Job evaluation eliminates wage inequalities in the organisation and facilitates
the formation of a rational wage structure. With its help wage structure is designed on the basis of weights
allotted to different factors viz. skill, responsibility, supervision required etc.
Removal of Inequalities—Job evaluation evolves standard rates for similar or comparable job in the
organisation and thus eliminates wage inequalities. It removes internal as well as external inconsistency
wages paid in similar firms and social costs are also taken into consideration while fixing the value for the
job.
Good Industrial Relations - It is a common experience of all concerned that the biggest single factor
contributing to industrial disputes and dissatisfaction is inequalities in wage rates. Job evaluation
evaluates the job and the job holder. It helps in settling the disputes and grievances regarding wage rate
etc. It leaves no chance of favouritism to anyone. The method simplifies discussion of wage demands and
enables differences in wages justified.
Proper Emphasis on Job Factors-Job evaluation gives proper emphasis on job factors. It is made after
proper scrutiny of the various factors determined by the job analysis and presented by the job description
and the job specification. Thus job values are established only after taking various job factors into
consideration.
Scientific Selection and Recruitment - It helps in a scientific recruitment and selection of employees
because jobs are properly described and specified. Job evaluation involves job analysis and appraisal
which are of great use while recruiting personnel selection and placement can be made objectively by
matching the qualifications of the candidate with job specification. Job evaluation helps in keeping down
the cost of recruitment.
Performance Appraisal - Job evaluation helps in performance appraisal. It helps in the evolution of
uniform standards for all the jobs in the organisation. It becomes very easy to review job rates.
Training and Development - In a proper job evaluation system, the position of job is fixed. Every
worker knows the job description and job specifications of each job. He tries to develop his personality so
as to occupy higher position. Job evaluation helps in training the supervisors in the function of judging
and helping his personnel.

Advantages:

1. Sound Wage Policy

Job evaluation is basically an attempt to measure the real worth of each job by a process of expert
judgement. Therefore, any wage policy based on a scientific job evaluation is bound to be systematic and
sound.
2. Settlement of Wage Disputes
The chances for disputes and grievances regarding the individual rates of wages are very rare. Even if
there arises any disputes, it can be conveniently settled by referring to the job evaluation machinery.

3. Better Control over Labour Costs

Job evaluation enables the management to exercise effective control over the labour costs, because they
can give appropriate pays for the each job.
4. Building up of Employee Morale
Since this system aims to reward employees‘ suitability, it will help to build up employee morale and
bring job satisfaction.
5. Proper Placement of Personnel
It helps in selecting the right man for the right job. Besides, this system facilitates to form a logical basis
for designing training programmes for the worker.
6. Elimination of Personal Bias
The evils of personal bias, favoritism, and arbitrary judgement on the part of the management in fixing
wage differential etc. are avoided, because wage rates are set by experts other than the management and
that too after a careful job evaluation programme.

7. Reliable in All
This system provides well-defined methods for measuring various jobs. Besides, it also helps to justify
the existence of different scales for different jobs. For these reasons, it is accepted by both workers and
the management without any hesitation.

Disadvantages:
1. Lack of Complete Accuracy
The accuracy claimed by it is not in fact accurate. The system considers the key factors independent of
others which is not so in reality. Consequently, the weights assigned to the factors are also less accurate.
This is particularly so if the factors are of highly technical in nature.

2. Unrealistic Assumptions
Job evaluation is based on the assumption that wage rates can be related to the work of a given job. It
completely ignores the fact that conditions in the labour market exercise greater influence in the
determination of wage rates.
3. Formation of the Committee
The formation of the job evaluation committee itself creates a serious problem. Only persons who are
capable of evaluating the jobs should be appointed as committee members. Besides, there is also
difference of opinion regarding the number of members. Authorities suggest 5 to 20 members. All these
factors make the installation of a job evaluation programme more costly.

4. Selection of a Suitable Method

The selection of a suitable method also posses a serious problem to the management. There are four
methods and each method has its own merits and demerits.

5. Number of Factors
There is no clear-cut opinion amongst the scholars as to how many factors should be used and what
weightage should be assigned to each factor. In many cases, 100 factors are used. This multiplicity of
factors creates confusion and so precise results cannot be obtained.

6. Equal Pay for Equal Job

This system presumes that job of equal content will be equally attractive to the employees. But this
presumption is unreal. For instance, a job offers little or no prospects for a rise or promotion; while
another job rated similar to it, has better prospects for the workers; the latter will attract more than the
former. Under such circumstances, the business firm has to pay more wages for the former job so as to
make it more attractive.

7. Unsuitable for Small Concerns

Installing and operating a job evaluation programme requires much time and money. Hence, it is very
difficult to introduce it in smaller concerns.

CONCLUSION
In conclusion, it may be remarked that job evaluation consisting of only a few factors can give good
results and hence a shortened system is more reliable. However, job values must be constantly watched.

Similarly, the job requirements may also change in course of time. Unless the job values and contents are
rechecked so as to include the changes, they will not represent the true position.

It is also highly necessary to adjust the job rating to changed situation and so it can be kept up-to-date at
all times. Thus, job evaluation system, in spite of the limitations, can produce reliable results.

Procedures of Job Evaluation

1. Selecting the group of job 6. Group or classify the job

2. Study the Job ( Job Analysis) 7. Convert job grades to money value along with wage survey

3. Prepare Job description 8. Obtain approval from union and management

4. Devise an evaluation plan 9. Establish a suitable Grievance Procedure

5. Establish a committee of rate

There are four basic methods of job evaluation currently in use which are grouped into two
categories:
1. Non-quantitative Methods:
(a) Ranking or Job Comparison (b) Grading or Job Classification

2. Quantitative Methods:
(a) Point Rating (b) Factor Comparison

The basic difference between these two methods lies in the sense that, under non-quantitative methods, a
job is compared as a whole with other jobs in the organisation, whereas in case of quantitative methods,
the key factors of a job are selected and, then, measured. The four methods of job evaluation are now
discussed one by one.

(1a). Ranking Method:

The ranking method is the simplest form of job evaluation. In this method, each job as a whole is
compared with other and this comparison of jobs goes on until all the jobs have been evaluated and
ranked. All jobs are ranked in the order of their importance from the simplest to the hardest or from the
highest to the lowest.

The importance of order of job is judged in terms of duties, responsibilities and demands on the job
holder. The jobs are ranked according to ―the whole job‖ rather than a number of compensable factors.

Ranking method is appropriate for small-size organisations where jobs are simple and few. It is also
suitable for evaluating managerial jobs wherein job contents cannot be measured in quantitative terms.
Ranking method being simple one can be used in the initial stages of job evaluation in an organisation.

Merits:
Ranking method has the following merits:
1. It is the simplest method.

2. It is quite economical to put it into effect.

3. It is less time consuming and involves little paper work.

Demerits:
The method suffers from the following demerits:
1. The main demerit of the ranking method is that there are no definite standards of judgment and also
there is no way of measuring the differences between jobs.

2. It suffers from its sheer unmanageability when there are a large number of jobs.

(1b). Grading Method:

Grading method is also known as ‗classification method‘. This method of job evaluation was made
popular by the U.S. Civil Service Commission. Under this method, job grades or classes are established
by an authorised body or committee appointed for this purpose. A job grade is defined as a group of
different jobs of similar difficulty or requiring similar skills to perform them. Job grades are determined
on the basis of information derived from job analysis.
The grades or classes are created by identifying some common denominator such as skills, knowledge
and responsibilities. The example of job grades may include, depending on the type of jobs the
organisation offers, skilled, unskilled, account clerk, clerk-cum-typist, steno typist, office superintendent,
laboratory assistant and so on.

Once the grades are established, each job is then placed into its appropriate grade or class depending on
how well its characteristics fit in a grade. In this way, a series of job grades is created. Then, different
wage/salary rate is fixed for each grade.

Merits:
The main merits of grading method of job evaluation are:
1. This method is easy to understand and simple to operate.

2. It is economical and, therefore, suitable for small organisations.

3. The grouping of jobs into classifications makes pay determination problems easy to administer.

4. This method is useful for Government jobs.

Demerits:
The demerits of this method include:
1. The method suffers from personal bias of the committee members.

2. It cannot deal with complex jobs which will not fit neatly into one grade.

3. This method is rarely used in an industry.

(2a). Points Rating:

This is the most widely used method of job evaluation. Under this method, jobs are broke down based on
various identifiable factors such as skill, effort, training, knowledge, hazards, responsibility, etc.
Thereafter, points are allocated to each of these factors.

Weights are given to factors depending on their importance to perform the job. Points so allocated to
various factors of a job are then summed. Then, the jobs with similar total of points are placed in similar
pay grades. The sum of points gives an index of the relative significance of the jobs that are rated.

The method has the following merits:

1. It is the most comprehensive and accurate method of job evaluation.

2. Prejudice and human judgment are minimised, i.e. the system cannot be easily manipulated.

3. Being the systematic method, workers of the organisation favour this method.

4. The scales developed in this method can be used for long time.

5. Jobs can be easily placed in distinct categories.

Demerits:
The drawbacks of the method are:
1. It is both time-consuming and expensive method.

2. It is difficult to understand for an average worker.

3. A lot of clerical work is involved in recording rating scales.

4. It is not suitable for managerial jobs wherein the work content is not measurable in quantitative terms.

(2b). Factor Comparison Method:

This method is a combination of both ranking and point methods in the sense that it rates jobs by
comparing them and makes analysis by breaking jobs into compensable factors. This system is usually
used to evaluate white collar, professional and managerial positions.

This method enjoys the following merits:

1. It is more objective method of job evaluation.

2. The method is flexible as there is no upper limit on the rating of a factor.

3. It is fairly easy method to explain to employees.

4. The use of limited number of factors (usually five) ensures less chances of overlapping and over-
weighting of factors.

5. It facilitates determining the relative worth of different jobs.

Demerits:
The method, however, suffers from the following drawbacks:
1. It is expensive and time-consuming method.

2. Using the same five factors for evaluating jobs may not always be appropriate because jobs differ
across and within organisations.

3. It is difficult to understand and operate.

Computer Assisted Job Evaluation

Computers can be used to assist directly with the job evaluation process.
There are many types of schemes:
There are two types of computer-assisted systems. First, there are job analysis-based schemes such as that
offered by Link Consultants in which the job analysis data is either entered direct into the computer or
transferred to it from a paper questionnaire. The computer software applies predetermined rules based on
an algorithm that reflects the organization's evaluation standards to convert the data into scores for each
factor and produce a total score. The algorithm replicates panel judgements both on job factor levels and
overall job score.
Secondly, there are interactive schemes using software such as that supplied by Pilat UK (Gauge) in
which the job holder and his or her manager sit in front of a PC and are presented with a series of
logically interrelated questions forming a question tree. The answers to these questions lead to a score for
each of the built-in factors in turn and a total score.
There are numerous benefits of computer-assisted job evaluation. Computer-assisted job evaluation
systems can provide for greater consistency. The same input information will always give the same output
result because the judgemental framework on which the scheme is based (the algorithm), can be applied
consistently to the input data. It offers extensive database capabilities for sorting, analysing and reporting
on the input information and system outputs. This method speeds up the job evaluation process once the
initial design is complete.

Concept of Internal and External Equity

What is External and Internal Pay Equity?

External equity and internal equity make up the two halves of fair pay. Both are key toward attracting and
retaining top talent, but they require substantially different approaches to manage.

External equity
Salary competitiveness versus the market. It is impossible to ensure fair pay without using industry and
regionally-specific market data to establish appropriate salary ranges for each position.

Internal equity
Equal pay for equal work within the organization. When organizations leverage market data to establish
pay ranges, they incorporate that data into their overall salary structure. Jobs of comparable value are
assigned to the same grade range, and the range of pay is the same for those jobs, which promotes equity.
This assures that employees within an organization are paid fairly versus each other.

How Companies Are Addressing Internal and External Pay Equity

The specific tactics that your organization should use to address pay fairness varies widely depending on
business goals. However, according to our Pay Practices and Compensation Strategy survey, there are
three approaches successful organizations consistently use to ensure pay fairness:

 Leverage market data to establish externally competitive pay ranges.

 Use analytics to ensure pay is internally equitable.
 Build a culture of pay transparency to foster positive employee perceptions of compensation
decisions in the organization.
External Equity in Compensation System – Leveraging Market Data
By using HR-reported market data, your organization can ensure it is keeping up with a rapidly moving
job market, and never falling short of fair pay for any of its positions. Nearly 17% of organizations in our
survey use market data to ensure pay is competitive. Additionally, 12.5% use market data to help
establish pay ranges for positions within the company‘s overall salary structure.
Unlike HR-reported data, consumer-reported should never be relied on for external pay points. The
correlation between accurate market data and fair pay is not coincidence. According to our survey, 23%
of companies that agree or strongly agree that their employees are paid fairly used market data.

Internal Equity in Compensation System – Leveraging Analytics

With external competitiveness in mind, you should analyze outlying jobs and employees in your
organization‘s salary structures to see if you are maintaining internal pay equity. To this end, 13.7% of
organizations use survey data and internal analytics to ensure pay is equitable, and an additional 12.2%
follow a formal compensation analysis process.
Furthermore, we suggest HR professionals self-audit and review these decisions frequently to keep up
with a fast-moving market and changing conditions within their organizations. Our survey shows that
10.7% of organizations review external data and internal equity at least once a year. Plus, an additional
9.5% have a system in place for reviewing pay decisions and approvals.

Why is Fair Pay Important?

Pay fairness is not achieved through a one-time initiative or assessment. Maintaining internal and external
equity should be an evergreen priority. The modern workforce wants to be paid equitably and
competitively, and your employees want to work for a company that takes pay fairness initiatives
seriously.
Pay Survey or Salary Survey

A salary survey is a tool specifically for remuneration specialists and managers to define a fair and
competitive salary for the employees of a company. The survey output is data on
the average or median salary for a specific position, taking into consideration the region, industry,
company size, etc. Input data is aggregated directly from an employer or employee.[1]
Salary surveys are differentiated based on their data source into those that

 obtain data from companies, or

 obtain data from employees.

Benefits of conducting the survey:

1) Ensures Employees are Paid Fairly

One of the most important reasons why you should consider conducting a salary survey is to be able to
pay your employees fairly. The main causal factors as to why many employees leave an organization is
that they can receive a better salary, bonus, paid time off, or other benefits at another organization.

While you will never be able to completely eliminate employee turnover, a compensation survey will
allow you to assess whether or not you are providing your employees with a fair compensation package.
If, after you receive the results of your salary survey, you find that you‘re underpaying your staff, you‘ll
then have the opportunity to develop a plan to improve compensation.

2) Provides Data When You Need It

Another reason why completing a compensation survey is beneficial is that it will ensure you have the
right data when you need it. Companies that are in a growth mode need to be able to hire the right talent
to do a variety of tasks. When you find someone that you‘d like to hire, being able to extend a fair offer
quickly will help you to land your top targets. When you complete a compensation survey on a regular
basis, you will have current market data available to you to ensure you are able to offer a job quickly.

3) Convenient Process

While completing a compensation survey used to be a time-consuming process, it can now be completed
very quickly, thanks to online survey software. By using online survey software, you not only receive
valuable information about salaries, but can do so quickly. The online survey tool will be able to tell you
what average salaries are in your marketplace, what some of your top competitors are paying, and what
the current trends are. This will allow you to receive real-time data very quickly at all times.

4) Beneficial for Employee Morale

Finally, a compensation survey can be good for employee morale. These surveys will help to show your
employees that you care about their wellbeing, particularly their financial wellbeing. You can then make
employees happier by giving compensation bumps or additional benefits.
Types of Pay Structure

A pay structure is a system that defines what each individual and job role is paid based upon their value to
the business and effectiveness in their role. For each type of pay structure, there are a variety of different
methods for deciding upon and separating employee pay, each with its own advantages and disadvantages

The most common types of pay structure

Pay structures and systems are vast and varied, with some businesses combining structures to create
bespoke solutions. Regardless of the approach that organisations opt for, they can usually be categorised
into one of the following four types of pay structure.

1. Individual Pay Rates/Spot Rates

Firmly positioned as the most recognisable type of pay structure, individual pay rates involve a fixed
salary based on each employee‘s job role within the organisation. This salary can be paid annually or
hourly and offers a rigid payment system.

The advantage of this approach is that it gives the organisation a pre-defined approach to wages and
salary, enabling easy and accurate estimation of hiring viability and employee value. However, this
approach makes it more difficult to engage employees, as it offers less room for any form of payment
progression within their job role. The only avenue for development and growth is through a direct
promotion which can be quite challenging to achieve. This risks employees becoming demotivated and
dissatisfied, whilst failing to reach their productivity potential.

However, for smaller organisations, individual pay rates might be the only viable option. In addition,
there is a solution to the employee engagement and progression problem, in the form of individual pay
ranges. These differ from individual pay rates, with employees being offered a salary within a predefined
scale (a pay range), rather than a fixed salary. The pay range varies from job to job but gives the business
more freedom to increase an employee‘s pay as a reward for good work. Similarly, employees understand
that whilst they might be hired at the bottom of the pay range, over time, they may be able to show the
value they provide and increase their salary to the top of the range, motivating them to become more
efficient and productive.

Pay ranges offer much more versatility than pay rates whilst still giving businesses a framework on which
to base their decisions. On the whole, they are a reliable choice for the majority of organisations.

2. Broad-graded pay structure

Broadbanding offers a very different approach to the individually-focused systems discussed so far. It
involves grouping broadly comparable jobs into a handful of pay grades.

It is important to explain what pay grades are and how they work: pay grades feature a minimum and
maximum salary available, with incremental increases between the minimum and maximum. Employees
begin at the bottom of the pay grade and through impressive performance, length of service or experience,
individuals move up the increments throughout the pay grade until they reach the maximum.

Broadbanding is almost entirely based on this system, with employers devising a handful of pay grades,
each with multiple increments, to cover the entire business. Most organisations which utilise
broadbanding create multiple pay grades for each of the management levels, including non-managerial
job roles, managerial job roles and executive job roles. The pay ranges within each of the pay grades are
usually decided based on the median of the average wages, with suitable room above and below to enable
growth and development.

3. Pay Spine

A pay spine is a company-wide pay structure that is especially effective due to its simplicity and clarity.
Pay spines cover all wages within the organisation, from the lowest entry-level salary through to senior
managerial or even executive pay levels. The spine is made up of individual pay points, each associated
with a predefined salary and incremental increases. Each job role is then assigned a range of pay points
which can be reached by staff within that position, usually based on loyalty.

The advantages of this system are that the path to payment increases are clear for employees, ensuring
that they know exactly where they are going and how to get there. However, progression is often loyalty-
based rather than representative of skill, meaning that staff can become resentful of higher-paid
colleagues if they feel they work harder. This can be balanced through the use of an additional evaluation
system for increasing pay points as well as loyalty, but it is dependent on your organisation‘s sector,
industry and culture.

4. Job Families

Finally, job families are a pay structure which strikes a balance between many of the other common pay
systems. Job families operate by grouping similar roles together and separating each individual role based
on knowledge and seniority.

Organisations utilising this structure usually create multiple job families for different departments.
Transitioning from one role to the next would usually be achieved through a combination of experience,
knowledge, and loyalty, depending on the business‘ choice of focus.

Job families work extremely well because they enable tight control of salary whilst still making
progression attainable and clear. Management can easily review and refine the payment systems within
each family without affecting the rest of the company and staff members can see exactly what they will
get for going above and beyond, as well as how to reach an increased pay packet.

Job families are versatile and, once implemented, they provide organisations with freedom and control
whilst still enabling transparency and progression for staff.

5. Career Family Pay Structure

A career family pay structure is a single graded structure where each grade has been divided into job
families, for example operations, finance, administration, marketing and IT. A career family pay structure
normally has 6 to 8 levels defined by the activities carried out and/or by the knowledge and skills or
competencies needed to perform these activities. Some job families may have more levels than others.

Jobs in the corresponding levels across each of the career families are within the same size range and
when a points factor job evaluation system is used, the same range of scores would be given. The pay
ranges in corresponding levels across the career families are the same.
 MODULE 4 – LAWS RELATED TO COMPENSATION

Payment of Bonus Act

The payment of Bonus Act, 1965 aims to regulate the amount of bonus paid to the persons employed in
certain establishments based on their profits and productivity. The act is applicable to the whole of India
for all establishment containing twenty or more persons employed on any day during the year. In this
article, we examine the various aspects of Payment of Bonus Act in detail. To know more
about Payments of Wages Act.

Objective of the Act

The objective of the Bonus Act(Payment of bonus Act), are as follows:

 To impose a legal responsibility upon an employer of every establishment covered by the Act to
pay the bonus to employees in an establishment.
 To designate the minimum and maximum percentage of bonus.
 To prescribe the formula for calculating bonus.
 To provide redressal mechanism.

Applicability of the Act

The Payment of Bonus Act implements to the following entities are listed below:

 It applies to any factory or establishment containing twenty or more workers employed on any day
during the year.
 The act does not apply to the non-profit making organisations.
 It is not applicable to establishments such as LIC, hospitals which are excluded under section 32.
 It is not applicable to establishments where employees have signed an agreement with the
employer.
 It is not applicable to establishments exempted by the appropriate government like sick units.

Departments, Undertakings and Branches

According to this section, any different departments or undertakings or branches of an establishment of
whether located in the same place or at different areas should be considered as parts of the similar
establishment for computation of bonus under the Act.

The separate balance sheet regarding profit and loss of the establishment in the year had to be prepared
and maintained concerning such department or undertaking, or branch should be treated as a separate
establishment for computation of bonus for the year.

Eligibility for Bonus

The person is eligible for availing bonus under the following conditions is explained below:
Any employee receiving salary or wages up to RS.21,000 per month and engaged in any work whether
skilled, unskilled, managerial, supervisory etc. is entitled to the bonus for every year if the employees
have worked for not less than 30 working days in the same year.
Disqualification of Bonus
The employees cannot utilise the bonus in case of undergoing with the following activities such as
dishonesty, theft, sabotage of any property of establishment, violent behaviour while on the premises of
the establishment.

Number of Working Days

An employee will be considered working in every year by including the following days which is specified
here.

 The employee who is under an agreement or as permitted by standing orders under the Industrial
Employment (Standing Orders) Act, 1946, the Industrial Disputes Act, 1947 or any other law
applicable to the establishment.
 The employee during employment has taken leave with salary.
 The employee who has been absent due to temporary disablement caused by accident arising out
of and in the course of his work.
 The employee during the accounting year has been on maternity leave with salary.

Payment of Minimum and Maximum Bonus

The minimum bonus will be provided 8.33 % of the salary during the year, or one hundred rupees will be
given in case of employees above 15 years and sixty rupees in the case of employees below 15 years,
whichever is higher. The maximum bonus is 20 % of the salary during the accounting year.

Timeline for Payment of Bonus

The payment of bonus should be paid in cash within eight months from the end of the accounting year or
within a month from the date of enforcement of the act.

Computation of Bonus
As per the Section 4 and section 7 together with the schedule 1 and two deal with the calculation of gross
profit and available surplus out of which 67% in case of companies and 60% in other cases would be
allocable surplus.

To compute the available surplus the sums, so deductible from the gross profits are

 All direct taxes under section 7

 The sums which are particularised in the schedule
 The allowance for investment or development in which the employer is allowed to deduct from his
income under the Income Tax Act.

Available Surplus = Gross Profit – ( deduct) the following :

 Depreciation is allowable in section 32 of the Income-tax Act.

 Development Allowance.
Inspectors under Section 20
Section 20 enables the relevant government to appoint Inspectors for this Act, by notification in the
official gazette.

Powers of inspectors:

 To require an employer to furnish information.

 To visit any establishment at any reasonable time.
 To order certain production documents and examine the same.
 To take extracts from the records
 To examine the employers, his agent or servant or any other person found in charge of the
establishment.
 To execute such other powers as may be prescribed under the rules.

Duties of the Employer

The following duties to be carried out by the employer are explained below:

 To estimate and pay the annual bonus as required under the Act.

To maintain the following registers:

 The Register is showing the computation of allocating surplus in respective Form.

 The register should be maintained with the payment of the bonus to the employees.
 To co-operate with the Inspector, by producing the records maintained before inspection and such
other information as may be required by them.

Rights of Employers
The following rights to be claimed out by the employers are explained below:

 Right to notice any disputes relating to application or interpretation of any provision of the Act, to
the Labor Court or Labor Tribunal.
 Right to make a valid deduction from the bonus due to an employee, such as festival bonus paid
and financial loss created by the misbehaviour of the workers.
 Right to take the bonus of an employee, who has been dismissed from service for misbehaviour,
violent behaviour, fraud, misappropriation or sabotage of any property of the establishment.

Rights of Employees
The following rights to be claimed out by the employees are explained below:

 Right to claim bonus due under the Act and to request an application to the Government, for the
redemption of bonus amount which is unpaid, within one year of its being due.
 Right to notice any dispute to the Labor Court/Tribunal.
 Employees who are not eligible for the Payment of Bonus Act, cannot raise a dispute about the
bonus under the Industrial Disputes Act.
  Right to seek clarification and obtain information, on any item in the accounts of the
establishment.

Offences and Penalties

In case of violation of the provisions under the Act or rules then the penalty is imprisonment for six
months or may impose fine of Rs.1000 or with both.

In case of failure to comply with the directions or requisitions made the penalty is imprisonment for six
months or may impose fine of Rs.1000 or with both.

In case of offences by companies, firms, body corporate or association of individuals, its director, partner
or a principal or officer responsible for the conduct of its business, should be deemed to be guilty of that
offence, unless the person concerned proves that the crime was committed out of his knowledge or that he
exercised all due diligence.

Payment of Wages Act

Object of the Act :

The Payment of Wages Act regulates the payment of wages to certain classes of persons employed in
industry and its importance cannot be under-estimated. The Act guarantees payment of wages on time and
without any deductions except those authorised under the Act. The Act provides for the responsibility for
payment of wages, fixation of wage period, time and mode of payment of wages, permissible deduction
as also casts upon the employer a duty to seek the approval of the Government for the acts and permission
for which fines may be imposed by him and also sealing of the fines, and also for a machinery to hear and
decide complaints regarding the deduction from wages or in delay in payment of wages, penalty for
malicious and vexatious claims. The Act does not apply to persons whose wage is Rs. 24,000/- or more
per month. The Act also provides to the effect that a worker cannot contract out of any right conferred
upon him under the Act.

DEFINITIONS

"employed person" [sec 2 (i)] includes the legal representative of a deceased employed person;

"employer"[sec 2 (ia)] includes the legal representative of a deceased employer;

"industrial or other establishment"[sec 2 (i1)] means any -

(a) tramway service or motor transport service engaged in carrying passengers or goods or both by road
for hire or reward;
(aa) air transport service other than such service belonging to or exclusively employed in the military
naval or air forces of the Union or the Civil Aviation Department of the Government of India;
(b) Dock wharf or jetty;
(c) inland vessel mechanically propelled;
(d) mine quarry or oil-field;
(e) plantation;
(f) workshop or other establishment in which articles are produced adapted or manufactured with a view
to their use transport or sale;
(g) establishment in which any work relating to the construction development or maintenance of buildings
roads bridges or canals or relating to operations connected with navigation irrigation or to the supply of
water or relating to the generation transmission and distribution of electricity or any other form of power
is being carried on

"wages" [sec 2 (iv)] means all remuneration (whether by way of salary allowances or otherwise)
expressed in terms of money or capable of being so expressed which would if the terms of employment
express or implied were fulfilled by payable to a person employed in respect of his employment or of
work done in such employment and includes -

(a) any remuneration payable under any award or settlement between the parties or order of a court;

(b) any remuneration to which the person employed is entitled in respect of overtime work or holidays or
any leave period;

(c) any additional remuneration payable under the terms of employment (whether called a bonus or by
any other name);

(d) any sum which by reason of the termination of employment of the person employed is payable under
any law contract or instrument which provides for the payment of such sum whether with or without
deductions but does not provide for the time within which the payment is to be made;

Responsibility for payment of wages [Section 3].

Every employer shall be responsible for the payment to persons employed by him of all wages required to
be paid.

 In the case of the factory, manager of that factory shall be liable to pay the wages to employees
employed by him.
 In the case of industrial or other establishments, persons responsibility of supervision shall be
liable for the payment of the wage to employees employed by him.
 In the case of railways, a person nominated by the railway administration for specified area shall
be liable for the payment of the wage to the employees.
 In the case of contractor, a person designated by such contractor who is directly under his charge
shall be liable for the payment of the wage to the employees. If he fails to pay wages to
employees, person who employed the employees shall be liable for the payment of the wages .

Time Of Payment Of Wages. [Section 5]

 In railway factory or industrial or other establishment, if there are less than 1000 employees,
wages of employees should be paid before the expiry of the 7th day after the last day of the wage
period. (ex:- wages should be paid on starting of present month within 7 days i.e. before 7th date if
wage is paid on 1st in previous month )
  In other railway factory or industrial or other establishment, if there are more than 1000
employees, wages of employees should be paid before the expiry of the 10th day after the last day
of the wage period. (ex:- wages should be paid on starting of present month within 10 days i.e.
before 10th date if wage is paid on 1st in previous month )
 For employees of port area, mines, wharf or jetty, wages of employees should be paid before the
expiry of the 7h day after the last day of the wage period.

[Sec 5 (2)]
If the employee is terminated or removed for the employment by the employer the wage of that employee
should be paid within 2 days from the day on which he was removed or terminated.

Illustration: if the employee was terminated or removed from the employment by the employer on 10th
of this month, his wage should be paid within 2 days from the day on which he was removed or
terminated, i.e. his/her wage should be paid by 12th date of this month and this date should not exceed.

[Sec 5 (4)]
Except the payment of wage of the terminated employee, all the wages of the employees should be paid
by their employer on the working day only.

Section 6. (THE PAYMENT OF WAGES (AMENDMENT) ACT, 2017)

All wages shall be paid in current coin or currency notes or by cheque or by crediting the wages in the
bank account of the employee:

Provided that the appropriate Government may, by notification in the Official

Gazette, specify the industrial or other establishment, the employer of which shall
pay to every person employed in such industrial or other establishment, the wages only by cheque
or by crediting the wages in his bank account."

Limit for deductions [Sec 7 (3)]

The total amount of deductions from wages of employees should not exceed 50%, but only in case of
payments to co-operative societies, deduction from wages of employee can be made up to 75%.

PAYMENT OF UNDISBURSED WAGES IN CASE OF DEATH OF EMPLOYED PERSON. [Sec

25A]

 Paid by the employer to the person nominated by the employee.

 Wage deposited by the employer with the prescribed authority, the employer shall be discharged
of his liability to pay those wages.
 Where no such nomination has been made or where for any reasons such amounts cannot be paid
to the person so nominated, be deposited with the prescribed authority who shall deal with the
amounts so deposited in such manner as may be prescribed.

Wage Board reward system: Wage boards are set up by the Government, but in selection of members of
wages boards, the government cannot appoint members arbitrarily. Members to wage boards can be
appointed only with the consent of employers and employees. The representatives of employers on the
wage boards are the nominees of employers‘ organization and the workers‘ representatives are the
nominees of the national center of trade unions of the industry concerned.

The composition of wage boards is as a rule tripartite, representing the interests of labor, Management
and Public. Labor and management representatives are nominated in equal numbers by the government,
with consultation and consent of major Central Organizations. These boards are chaired by government
nominated members representing the public. Wage board function industry-wise with broad terms of
reference, which include recommending the minimum wage differential, cost of living, compensation,
regional wage differentials, gratuity, hours of work etc.

The wage boards functions in three steps:

1. The first step is to prepare a comprehensive questionnaires designed to collect information on the
prevailing wage rates and skill differentials, means of assessing an industry‘s paying capacity and
workloads, prospects for industry in the immediate future, and regional variations in the prices of
widely consumed consumer goods. The questionnaire is sent out to labor unions, employers
associations, interested individuals, academic organisations and government agencies.
2. The second step is to give a public hearing at which leaders of labor unions and employers
associations, not represented on the board, as well as others interested in the industry in question,
are given a verbal or oral bearing on issues dealing with wages, working conditions and other
items.
3. The third step is to convene secret sessions at which members of the board make proposals and
counter – proposals regarding the items covered under the terms of reference.

The main objectives of wage boards are;

1. To work out wage structure based on the principles of fair wages as formulated by the Committee on
Fair Wages.
2. To work out a system of payment by results.
3. To evolve a wage structure based on the requirements of social justice.
4. To evolve a wage structure based on the need for adjusting wage differentials in a manner to provide
incentives to workers for advancing their skill.

They function industry – wise with broad terms of reference, which include recommending the minimum
wage, differential cost of living compensation, regional wage differentials, gratuity hours of work, etc.

Wage boards are required to:

1. Determine which categories of employees (manual, clerical supervisory, etc.) are to brought within
the scope of wage fixation.
2. Work out a wage structure based on the principles of fair wages formulated by the committee on fair
wages.
3. Suggest a system of payment by results.
4. Work out the principles that should govern bonus to workers in industries.
 MODULE 5 – EMERGING ISSUES IN COMPENSATION MANAGEMENT

Components of Pay :

Basic Salary
Basic salary is the base income of an employee, comprising of 35-50 % of the total salary. It is a fixed
amount that is paid prior to any reductions or increases due to bonus, overtime or allowances. Basic salary
is determined based on the designation of the employee and the industry in which he or she works in.
Most of the other components, like allowances, are based on the basic salary. This amount is fully
taxable.

Allowances
Allowance is an amount payable to employees during the course of their regular job duty. It can be
partially or fully taxable, depending on what type it is. Allowances provided and the limits on it will
differ from company to company, according to their policies.

 Dearness Allowance - Dearness allowance is a certain percentage of the basic salary paid to
employees, aimed at mitigating the impact of inflation. It is paid by the government to employees
of the public sector and pensioners of the same.

 House Rent Allowance – A house rent allowance is that component of the salary which is paid to
employees for meeting the cost of renting a home. It offers tax benefits to the employees for the
sum that they pay towards their accommodation every year. Salaried individuals residing in rented
homes can claim this exemption and reduce their tax liability.
 Conveyance Allowance - Conveyance allowance, also known as transport allowance, is a kind of
allowance offered by employers to their employees to compensate for their travel expense to and
from their residence and workplace. Note - In Union Budget 2018, a standard deduction of Rs.
40,000 has been introduced in lieu of transport (Rs 19,200) and medical (Rs 15,000) allowances.
 Leave Travel Allowance - Leave travel allowance is eligible for tax exemption. It is offered by
employers to their employees to cover the latter's travel expense when he or she is on leave from
work. The amount paid as leave travel allowance is exempt from tax under Section 10(5) of
Income Tax Act, 1961. Leave travel allowance only covers domestic travel and the mode of travel
needs to be air, railway or public transport.
 Medical Allowance - Medical allowance is a fixed allowance paid to the employees of an
organization to meet their medical expenditure. Note - In Union Budget 2018, a standard
deduction of Rs. 40,000 has been introduced in lieu of transport (Rs 19,200) and medical (Rs
15,000) allowances.
 Books and Periodicals Allowance - Books and periodicals allowance is a type of allowance
provided to employees for helping them meet the expenses associated with purchase of books,
periodicals and newspapers. It is tax exempt to the extent of actual expenditure incurred towards
purchase of books and periodicals.

Gratuity
Gratuity is a lump sum benefit paid by employers to those employees who are retiring from the
organization. This is only payable to those who have completed 5 or more years with the company. The
gratuity amount is paid in gratitude for the services rendered by the individual during the period of
employment. According to the Payment of Gratuity Act, 1972, gratuity is calculated as 4.81% of the basic
pay. Most firms with a workforce of 10 or more employees come under the Act.

Employee Provident Fund

Employee Provident Fund is an employee benefit scheme where investments are made by both the
employer and the employee each month. It is a savings platform that aids employees to save a portion of
their salary each month, from which withdrawals can be made following a month from the date of
cessation of service or upon retirement. At least 12% of an employee‘s basic salary is automatically
deducted and goes to the Employee Provident Fund every month. The contributions are maintained by the
Employees Provident Fund Organization (EPFO).

Professional Tax
Professional tax is a tax levied on the income earned by salaried employees and professionals, including
chartered accountants, doctors and lawyers, etc. by to the state government. Different states have varying
methods of calculating professional tax. The maximum amount that is payable in a year is Rs. 2,500.
Employers deduct profession tax at prescribed rates, from the salary paid to employees, and pay it on their
behalf to the State Government. The revenue collected is used towards the Employment Guarantee
Scheme and the Employment Guarantee Fund.

Perquisites
Perquisites, also referred to as fringe benefits, are the benefits that some employees enjoy as a result of
their official position. These are generally non-cash benefits given in addition to the cash salary. Some
examples of perquisites include provision of car for personal use, rent-free accommodation, payment of
premium on personal accident policy, etc. The monetary value of perquisites gets added to the salary and
tax is paid on them by the employee.

ESIC
If a company has 10 or more employees (20 in case of Maharashtra and Chandigarh) whose gross salary
is below Rs. 21,000 per month, then the employer is required to avail ESIC scheme for such employees.
The employer's contribution will be 4.75% of gross salary, whereas the employee's contribution will be
1.75% of gross salary.

Future Trends

1. HR’s role in the organization will change

―Employees are becoming consumers of HR services and HR is seeing a shift in its role from
administrator to service provider.‖ – Stacey Harris, VP, Research and Analytics at Sierra-Cedar, Sierra-
Cedar 2017-2018 HR Systems Survey

HR and compensation professionals will need to reconsider how their roles and responsibilities fit into the
overall employee experience. Self-service and augmented-service offerings in HR will become the new
normal, and best-in-class organizations will begin to goal their HR leaders on employee service and
satisfaction metrics.

2. HR will prioritize employee experience to drive engagement

―Rather than focusing narrowly on engagement and culture, many leading organizations aim to improve
the employee experience as a whole.‖ – Josh Bersin, Founder of Bersin by Deloitte, The Employee
Experience: Culture, Engagement, and Beyond

Focusing on the complete employee experience, rather than considering employee engagement or
corporate culture standalone initiatives, will allow HR to deliver real, measurable results in 2018. Rather
than relying on once-annual engagement surveys, the most successful HR departments will leverage
ongoing employee net promoter score assessments to track their progress in real time.

3. More stakeholders will influence compensation decisions

According to 2017 Compensation Outlook survey, almost 50% of organizations have 2 or more people
involved in decisions about compensation structure, and more than 60% have 2 or more people involved
in decisions about compensation budgets.

As more managers, recruiters, and HR business partners join discussions about compensation, comp
professionals will need to adjust how they plan and budget to account for a new diversity of inputs.
Changes to the compliance landscape, like bans on inquiring about candidate salary histories during the
interview process, will mean that far-reaching and ever-evolving training programs will be required to
keep these organizational stakeholders up-to-date.

4. Communication and enablement will empower managers to do more

Only 42% of respondents to our 2017 Compensation Outlook survey believe that managers in their
organizations are capable of having effective compensation conversations with their employees.

―We ask [managers] to be the key translation point between business strategy and day-to-day employee
activity.‖ In compensation, this often means asking managers to do the heavy lifting around
communicating comp strategy to the organization. Successful compensation professionals will look to
close existing gaps in managers‘ comp knowledge and their ability to effectively communicate about pay.

5. Compensation’s conscience will pay dividends

Research from Aptitude Research Partners shows that when organizations make pay equity a priority,
they enjoy 13% higher employee engagement and are 19% more likely to exceed industry-average levels
of productivity.

HR and compensation professionals will need to refocus pay equity discussions around business
outcomes to drive action. Pay equity is a critical part of the overall employee experience, and making pay
equity a priority can positively impact an organization‘s bottom line. With research showing that less than
half of all organizations currently have a formal process in place to address pay equity, this work will start
with simply putting a process in place.
6. New jobs will emerge to support the AI economy

Gartner estimates that by 2020, Artificial Intelligence will eliminate 1.8 million jobs – and create 2.3
million jobs.

In the new AI-powered economy, HR will be challenged to recruit and retain roles that didn‘t even exist a
couple of years ago. In 2018, compensation professionals will need to think carefully about how to
competitively price the emerging hot jobs that AI will create.

7. Hot jobs will continue to outpace stagnant annual increases

75.2% of respondents to our 2017-2018 National Salary Budget Survey are planning no change to their
salary increase budgets from 2017 to 2018.

Annual salary increase budgets have remained flat at 3% for the last several years, and most
compensation professionals are forecasting no change in 2018. But salaries for hot jobs, like those that
will power the AI economy, are growing at a much faster rate as top talent remains scarce – meaning that
HR professionals will be facing a significant recruiting and budgeting challenge in 2018.

8. HR specialists will replace generalist roles

According to Sierra-Cedar‘s 2017-2018 HR Systems Survey, more than twice as many organizations are
looking to add headcount in HR specialist roles like recruiting, learning and development, and HR data
analytics than HR generalist roles.

The best-in-class HR department in 2018 will be focused, analytical, and highly specialized. With 22% of
large organizations looking to decrease future headcount in HR generalist roles, HR professionals should
focus on developing valuable, specialized skillsets that complement their previous generalist experience
in order to grow their careers.

9. Internal development will be key to driving retention and performance

―[Employees] aren‘t resistant to developmental opportunities that aren‘t necessarily upward, so long as
there is a clear line of sight between the opportunity and their eventual career growth.‖ – Lisa
Buckingham, EVP and Chief Human Resources, Brand, and Communications Officer at Lincoln
Financial Group, Generation ‘D’

Retaining top talent in 2018 will require organizations to think less linearly about career progression, and
to invest in tools that help map non-traditional career paths. To power this change, HR and compensation
professionals will need to develop smart internal job architectures that can easily identify jobs with
similar required years of experience, skills, and competencies across job families and functions.

10. Standalone AI won’t have a role in HR – AI will only work if it’s integrated into workflows

―Without solutions that infuse AI and machine learning into existing HR workflows, HR practitioners will
be hamstrung by the data science requirements of such applications. HR professionals shouldn‘t have to
hire data scientists to engage AI in their businesses – AI should come to them fully baked and ready for
use.‖ –Now Is the Time to Invest in AI Technology

As artificial intelligence becomes more common in HR applications, HR professionals will need to

determine which solutions will have the biggest impact on their business. In 2018, focusing on AI that‘s
fully integrated into existing HR workflows will allow HR to capitalize on their AI investment and easily
integrate promising new technology into their daily tasks.

Emerging issues in compensation management

Compensation management is more than providing a paycheck and cost of living increases. In many
organizations, employee performance relative to organizational goals serves as the basis for
compensation. Whether brought on by economic difficulties, changes in technology or other business
factors, human resources departments face challenges in effective compensation management.

Forms of Pay

Employee pay begins with a cash base and bonus pay, but may also contain non-cash forms of
compensation. The valuation of non-cash compensation is often most difficult for employees to
appreciate, but it offers the most opportunity for creativity on the part of the organization.

Underlying Pay Philosophy

―All organizations pay according to some underlying philosophy about jobs and the people who do
them‖, says KP Kanchana, a professor at CFAI National College in Bhopal, India. Compensation
programs must consider and value the work of those who provide internal support to the organization as
well as those who directly impact financial results. An organization‘s compensation strategy will
dictate the rate and timing of pay increases, which jobs are eligible for bonuses, and the level of
competitiveness with similar organizations.

Employee Incentives and Compensation

Pay-for-performance has become increasingly popular. Companies use compensation to reward and
boost the morale of high-performing employees, but also to motivate underachievers.

Presentation of Compensation

How a manager speaks regarding pay can inadvertently create ill will when the intention was to deliver
good news. It is important to use specifics when speaking with employees rather than categorize any
pay increase as ―good‖, ―significant‖ or some other qualifier. Employee perceptions of compensation
are based on individual values, needs and expectations.

Offering Competitive Pay

Businesses wishing to compete for the best of the available talent pool must offer a competitive
compensation program compared to other companies within their industry and at large.
Automation and Outsourcing

Automating compensation, including outsourcing some compensation functions, enables businesses to

standardize its system throughout the organization, eliminate paperwork and help departments to
communicate more effectively. It minimizes payroll errors and makes it easier to compensate
performance based on quantifiable measures. Organizations may also use technology to benchmark jobs
and survey employees.

Generational Differences in Expectations

People are living longer, and thus, working longer. In a look at physician compensation, Max Reibolt of
The Coker Group noted a difference in work ethic and expected compensation that fell along
generational lines. Older workers were more likely to work longer hours in exchange for their pay
while younger workers expected high levels of pay even when their productivity was aided by
technology.

Multinational Business Operations

Multinational corporations must balance the needs and expectations of employees from various
countries. Compensation must balance conformity with local laws and customs against global corporate
policies.

Controlling Labor Costs

Labor costs often constitute the largest line in a corporation‘s budget. In a tight economy, co mpanies
are faced with a flat, if not shrinking, pool of funds. The cost of labor is broader than the amount paid
to employees, taking into account recruitment, training, turnover, infrastructure and overhead, and the
impact of these things on productivity.

MODULE 3 – COMPENSATION COMPONENTS

Fringe Benefits – Meaning and Definition

Besides base compensation and incentives, employees are provided various types of benefits and services
by the organizations. These benefits and services are not linked to employees‘ productivity but are
provided to different classes of employees either as a matter of statutory requirement or on voluntary
basis or a combination of both.
Such benefits are called by various names such as ‗fringe benefits‘, ‘employee welfare‘, ‗wage
supplements‘, ‗sub-wages‘, ‗supplementary compensation‘, ‗social security‘, etc. However, the term
fringe benefits is more common in practice. The term fringe benefits has not been defined precisely
because the items that are included in this category show great variation.
Some of the items are covered by statutory provisions while many others are provided voluntarily. As the
literal meaning of the term fringe is marginal, the question arises whether the statutorily-required benefits
should be included in the category of fringe benefits.
Fringe benefits refer to those benefits and services that are extended by the employer to his/her employees
over and above their wages and salaries, such as, housing facility, transportation facility, subsidised
meals, medical care, paid holidays, insurance cover etc.
These benefits are becoming very important in today‘s scenario, rather they form an integral part of the
compensation package of an organisation. The various types of fringe benefits protect employees from
risks that could jeopardize their health and financial security. They provide coverage for sickness, injury,
unemployment, and old age and death.
Fringe Benefits – Objectives
An organisation designs and establishes a benefit-and-service programme to achieve the following
ends:
(a) To keep in line with the prevailing practices of offering benefits and services which are given by
similar concerns;
(b) To recruit and retain the best personnel;
(c) To provide for the needs of employees and protect them against certain hazards of life, particularly
those which an individual cannot himself provide for;
(d) To increase and improve employee morale and create a helpful and positive attitude on the part of
workers towards their employers;
(e) To make the organisation a dominant influence in the lives of its employees with a view to gaining
their loyalty and co-operation, encouraging them to greater productive efforts;
(f) To improve and furnish the organisational image in the eyes of the public with a view to improving its
market position and bringing about product acceptance by it;
(g) To recognise the official trade union‘s bargaining strength, for a strong trade union generally
constrains an employer to adopt a sound benefits- and-services programme for his employees.
Other Objectives of Fringe Benefits:
1. To create and maintain good industrial relations and industrial peace.
2. To reduce labour turnover and absenteeism rates and retain experienced, efficient and honest workers.
3. To protect the workers from certain unhappy and unpleasant events of life, which the workers
individually cannot bear.
4. To boost the employee morale.
5. To protect the health of the employees and to provide safety to them from accidents.
6. To provide security to the employees against social risks like old age, maternity etc.
7. To create a sense of belongingness among the employees and strengthen their loyalty to the
organisation.
8. To motivate the employees by identifying and satisfying their unsatisfied long-felt needs.
9. To meet the requirements of various laws relating to fringe benefits.

Types of Fringe benefits

 Accidental and health insurance coverage

 Discounted or free meals in the cafeteria
 Employee stock options
 Interest-free loans
 Contribution to retirement plans
 Higher education assistance
 Car or cab facilities
 Employer-provided car, mobile or laptops
 In house Daycare or pet care facilities
 Access to health clubs
Individual and group variable compensation

Most employers regularly assess their employees‘ performance on one or more metrics. These metrics
include:

 Sales goals.
 Work attendance.
 Workplace safety.
 Quality and quantity of work output.

Many employers offer employees incentives in an effort to increase their performance metrics. Once an
employer decides that providing incentives is the way to motivate employees, the next choice is
between individual and group incentives. The decision of whether to provide individual incentives vs.
group incentives can be a difficult one to make, and because of this, some employers choose to offer
both rather than creating an either/or situation with their incentive plans.

Benefits of Individual Incentive Plans

Individual incentive plans reward employees for the strong contributions they personally make. A few
examples of individual incentives employers use to reward high achievers include:

 Comp time.
 Cash bonuses.
 Non-cash prizes.
 Stock shares.
 Profit sharing.
 Professional development opportunities.

The benefits of individual incentive plans include motivating employees to put their best efforts into
their work and pushing lower-performing employees to develop their skills and improve their output.
For the employer, individual incentive plans have the benefits of encouraging high-performing
employees to stay with the company and ensuring that individual employees are equitably compensated
for their output.

Drawbacks of Individual Incentive Plans

Individual incentive plans are not always perfect, though. In some workplaces, individual incentive plan
drawbacks outweigh their benefits, making them the wrong choice for those organizations. Potent ial
drawbacks include:

 Creating a fiercely competitive atmosphere that hinders teamwork.

 Causing lower-performing employees to become demotivated.
 Employees making unethical choices and cutting corners with their work in order to receive
incentives.

Value of Team Incentive Plans

Another way employers can reward successful employees is with team incentive plans. These prizes
reward entire teams for a job well done rather than the individual performers. These incentives are often
the same as incentives offered to individual employees.

Team incentive plans have a few different benefits than individual incentives. These include:
 Encouraging collaboration and communication among team members.
 Fostering a stronger sense of community among employees.
 Driving all members of the team to hold themselves accountable for the team‘s success.
 Promoting mentoring between senior and junior team members.

Drawbacks of Team Incentive Plans

A team incentive plan is not always the ideal way to promote strong employee performance, though.
Just like individual incentive plans, a team incentive plan can have drawbacks. These drawbacks
include:

 Creating resentment in employees who feel they ―pick up the slack‖ for less-motivated team
members.
 Employees with less experience or less expertise can feel pressured to perform above their comfort
levels.
 When the team fails to meet its objective to receive a reward, employees might blame each other
and single out an individual as the reason they failed to meet the objective.

Individual Incentives vs. Group Incentives

Whether individual incentives or a set of group incentives is the best way to reward employees for jobs
well done depends on the nature of the workplace and the work being performed. In some workplaces,
the right solution to the issue of individual incentives vs. group incentives is to offer both types of
reward.

Employers could offer team incentives for achievements that require an entire team‘s effort as well as
individual incentives like bonuses and career development opportunities to the individual employees
who go above and beyond what their roles typically involve. In some workplaces, offering both types of
incentives makes sense because teams and individual employees are assessed according to different
metrics.

For any incentive plan to be successful, the employer must make each reward and the benchmark for
earning each reward absolutely clear to employees. Incentives must also be offered equally. Holding
certain employees to a different standard than other employees at their level can create resentment and
in some cases be considered a form of discrimination.

Pay for Performance

The term ―pay-for-performance compensation‖ refers to performance-based pay programs where an
employee is incentivized and rewarded for achieving goals or objectives. Pay-for-performance plans are
extremely popular – according to our recent Pay Practices and Compensation Strategy survey, 75% of
organizations currently leverage pay-for-performance compensation as part of their overall compensation
plan.
Pay-for-performance compensation can come in many varieties depending on your organization‘s budget,
compensation philosophy, and organizational goals. When designing a pay-for-performance plan, you‘ll
want to consider the outcomes your organization is looking to achieve, the frequency with which you‘ll
reward employees, and the total increase you‘ll be budgeting to fund these programs.
In this article, the following questions will be answered:

 What is pay-for-performance compensation?

  What are the objectives for pay for performance?
 Why is pay for performance good?
 What should be in a pay for performance plan?

How Does Pay-for-Performance Compensation Work?

There are two general categories of pay-for-performance compensation: merit pay increases and variable
pay programs. As you look to implement a pay-for-performance program in your organization, you can
use either of these two types of pay-for-performance plans – or both – to incentivize employee
performance and drive your desired outcomes.

Variable Pay Programs

Variable pay programs encompass a variety of discretionary and non-discretionary bonuses that can vary
according to the payout period, the employees who are eligible, and the metrics that employees are
measured against. Unlike merit pay increases, variable pay programs are increasingly administered not
just annually but multiple times a year (e.g., once a quarter) and a mix of different variable pay programs
are often used in combination to achieve the desired results.
Discretionary bonuses are awarded on an ad-hoc basis to employees who demonstrate exceptional
performance, often without consideration of pre-defined goals and objectives. Some common
discretionary bonus types are:

 Spot bonuses – Reward employees ―on the spot‖ for achievements that deserve special
recognition.
 Project bonuses – Reward employees for completion or superior completion of a specific project.
 Retention bonuses – Typically awarded to long-tenured employees, or employees in hot jobs, to
decrease their flight risk.

Nondiscretionary bonuses are awarded when employees, teams, or the entire organization meets
specific, pre-defined goals and objectives. Based on the duration of the assessment period (the amount of
time over which performance is measured), they are considered either short-term incentives (STI) or long-
term incentives (LTI). Some common nondiscretionary bonus types include:

 Company-wide bonuses – these focus around specific improvement goals for the
organization, and reward employees based on how much improvement is made on these goals
within a certain period of time.
 Team-incentive bonuses – these focus around specific improvement goals for one team (e.g.,
marketing or sales) and are rewarded based on performance for that team.
 Individual incentive bonuses – these plans are often based on predetermined, measurable
business objectives (MBOs) that are evaluated periodically (e.g., each quarter) based on one
person‘s performance

Pay by Seniority

In a seniority-based pay scale, employees are paid a base salary and awarded the same increase at
regularly scheduled intervals. No differentiation is made based on how well a person performs a job --
only how long the person has been in the job. A pay scale based on seniority has some advantages over a
performance-based scale and is often used in government and with unionized jobs. Pay based on seniority
does not help private, non-union organizations to develop a high-performing workforce that improves
overall company performance.

Advantages

Seniority-based pay systems have some advantages over other pay systems. They are generally easy to
administer, since they are formula-driven with little variation. These systems eliminate any perceptions of
favoritism, since every employee is treated identically. They tend to produce a stable workforce of loyal
employees with relatively low employee turnover and create a cadre of highly-experienced incumbents in
a job who have been performing the same job for many years.
Disadvantages

Pay scales based on seniority have disadvantages that make them incompatible with a strategy to develop
a high-performing workforce. For example, since all employees are treated the same, there is no financial
incentive for an employee to do anything more than the minimum requirement for acceptable
performance. These systems tend to retain the average or below-average performers in a job, and higher
performing employees are more likely to leave an organization. Seniority-based pay encourages the status
quo and discourages innovative or creative thinking that might increase productivity by changing how a
job is structured or how employees perform the job.

What is Piece Rate?

The garment industry in Asia compensates factory workers daily based on what they produce, so
piece rate (the number of man-hours it takes to make a single garment) is the standard measure of output.
Piece rate also is used in price negotiations between producers and buyers because it avoids the necessity
to adjust for currency fluctuations and conversions.

Individual Piece Rate:

The number of cumulative man-hours it takes individual operators to produce a single piece of clothing. It
disregards quality, i.e., whether or not the garment is saleable.

Group Piece Rate:

The number of man-hours it takes a team to collectively produce a single piece of clothing that meets
quality standards and is saleable.