Compensation PDF

BBA III YEAR
UNIT-3 BY: DR. GAURI DHINGRA

ASSISTANT PROFESSOR
COMPENSATION S.S JAIN SUBODH P.G
MANAGEMENT (AUTONOMOUS)COLLEGE
JOB EVALUATION
Job Evaluation: It is a systematic and orderly process of
determining the worth of a job in relation to other jobs.
The objective of this process is to determine the correct
rate of pay. It is therefore not the same as job analysis. In
simple worlds, job evaluation is the rating of jobs in an
organization. This is the process establishing the value or
worth of jobs in a job hierarchy and compares the
relative intrinsic value or worth of jobs within an
organization.
Some renounced definitions of job evaluation are described below.
Dale Yoder described job evaluation as “a practice which seeks to

provide a degree of objectivity in measuring the comparative value of
jobs within an organization and among similar organizations”.
Edwin B.Flippo defines job evaluation as “a systematic and orderly

process of determining the worth of a job in relation to other jobs”.
Objectives of Job Evaluation
1. Establish a standard procedure for determining the relative worth of

each job in an organization;
2. Ensure equitable wage for a job and reasonable wage differentials
between different jobs in a hierarchical organization;
3. Determine the rate of pay for each job which is fair and equitable with
relation to other jobs in the plant, community or industry;
4. Eliminate wage inequalities;
5. Use as a basis for fixing incentives and different bonus plans;
6. Promote a fair and accurate consideration of all employees for
advancement and transfer;
7. Provide information for work organization, employees‟ selection,
placement, training and other similar purposes;
8. Provide a benchmark for making career planning for the employees in
the organization and;
9. Ensure that like wages are paid to all qualified employees for like work.
Method Useful Steps involved Advantages Disadvantages
to
Job Small 1. Develop brief job descriptions for each 1. Simple 1. Crude
Ranking firm job 2. Inexpensive method
2. Appoint a cross- functional committee to 2. Subjectivity
select top and bottom most job
benchmarks
3. Compare jobs to these benchmarks and
rank
them
Job Medium 1. Develop a standard of reach job based 1. Simple 1. Difficulties in fixation
Grading and large on the job description 2. Easy to understand of standards for
sized firm 2. Create scale of value for the standard 3. Inexpensive different jobs
job 2. Subjectively
3. Compare jobs to standards and assign
values
4. Based on value, draw
classification of jobs
Point All types of 1. Develop detailed job descriptions 1. Comparatively objective 1. Time
Rating firms 2. Interview job occupants to 2. Easy to interpret consuming
understand the jobs 2. Expensive
3. Create benchmark points for each skills
in terms of quality and
quantity
Factor All types of 1. Compare each job with five universal 1. Step-by-step formal 1. Complexity
comparison firms jobs factors such a)Responsibilities method 2. Time consuming
b) Skill 2. Easy to translate into
c) Physical efforts monetary terms
d) Mental effort
e) Working conditions 2.Assign value to
BASIC SALARY
What is Basic Salary?
Basic salary refers to the amount of money that an employee receives
prior to any extras being added or payments deducted. It excludes
bonuses, overtime pay or any other potential compensation from an
employer. The whole amount of basic salary is part of the take-home
salary. Basic salary is fully taxable.
Basic salary forms the core of the salary structure, constituting for
40-45% of the total CTC(COST TO COMPANY). Other salary
components like Gratuity, Provident Fund and ESIC(EMPLOYEE
STATE INSURANCE CORPORATION) are determined according to
the basic salary. The designation of the employee as well as the
industry in which he or she is in, are some of the components
factored in while assessing the basic salary.
Factors to Keep in Mind While Setting Basic Pay
Employers need to keep the following points in mind while
deciding on how much the basic pay for an employee should be:
• If basic pay is very high - In the instance that basic pay is

kept very high, then the employee’s tax liability will also increase,
given that this component is fully taxable. It also impacts the
liability of the organization since higher contributions would be
required for ESIC, PF, etc. 
• If basic pay is very low - In the instance that basic pay is

kept very low, the organization might not be able to meet the
minimum wage norms fixed by the respective state government.
Also, considering that minimum wages are regularly updated, the
organization could run the risk of falling below the set wage limit. 
How is Gross Pay Different from Basic Pay?
As mentioned above, the basic pay is the minimum sum of earnings that an
employee is to receive. The individual may receive additional money by
earning incentive bonuses or working overtime. The extra earnings made
from logging in overtime does not raise the employee’s basic salary.
Similarly, the monetary incentive paid out by the employer throughout the
year does not impact the basic salary. Basic salary will usually be less than
the gross salary.
On the other hand, gross pay includes not just the employee’s base pay, but
also any additional earnings. Say, if an employee puts in extra hours or is the
recipient of an incentive bonus, the additional earnings shall appear in the
individual’s gross pay. It must be noted that gross salary does not include
any deductions made. It is the salary paid after totalling all benefits and
allowances, but before making deductions like employee provident fund
(EPF) and taxes.
To sum it up, gross salary is made up of the following:
• Basic Salary
• Contribution to Pension/Provident fund, Group Life, etc.
•House Rent Allowance, Travel Allowance, Children Education
Allowance and other similar allowances
• Overtime and Bonus 
DEARNESS ALLOWANCE
Dearness Allowance
Dearness Allowance is cost of living adjustment allowance
which the government pays to the employees of the public
sector as well as pensioners of the same. DA component of
the salary is applicable to both employees in India and
Bangladesh.
Dearness Allowance can be basically understood as a
component of salary which is some fixed percentage of the
basic salary, aimed at hedging the impact of inflation. Since,
DA is directly related to the cost of living, the DA
component is different for different employees based on
their location. This means DA is different for employees in
the urban sector, semi-urban sector or the rural sector.
• Dearness Allowance rates 
The DA rates are set as per the salary of the government employee. A
percentage of the salary has been paid to the employee as his / her cost
of living. As per the 6 pay commission the rate in 2015 January was
th
113% where the rate has increased to 119% in July 2015. In January
2016, the Dearness allowance rates have reached at 125%. That means
the rate gets hiked by 6% for the central government employees.
•
• Dearness allowance calculator 
• Dearness allowance is calculated on the basis of Consumer Price

Index. Basically the allowance is based on the basic pay of the
employee.
• A fixed percentage is been settled for the DA then the amount
including housing rent allowance added to the basic salary and
received by the employee at the end of the month.
• DA percentage can be different depending on the area such as
urban or rural. While calculating DA for the pensioners, the current
price level or CPI is considered.
• Dearness allowance for central government employee 
For the central government employees, the rate for the DA is 125%
which is 6% higher than the last rate 119%. Since 1972, the regulations
and rates were settled for DA. Since then the rates kept revising in each
half of every year. In January 2015 the rate was settled at 113% for the
central government which was raised to 119% in the second half of the
same year. This year, in January, the rates again raised by 6% for the
central government employees and reached to 125%.
Dearness Allowance in 7th Pay Commission
• This is paid to the employees by the central government for
maintaining their standard of living. So employees who are working
under in central government offices shall get the benefits of DA.
• DA may also vary from Rural to Urban areas due to different
living conditions and cost of living in these areas.
• The central government also offers dearness allowance to its
pensioners and so if you have worked for the central government and
are currently drawing pension then you shall be eligible to get the
benefit of DA.
• Under the 6 CPC the government has recommended to offer DA
th
equivalent to 125 percent for its employees.

FRINGE BENEFITS
Fringe B e n e f i t s
fringe benefits refers to the extra benefits
provided to employees in addition to the
normal compensation paid in the form
of wage or salary.
Main f e a t u r e s
➢supplementary forms
➢paid to all employees
➢indirect compensation
➢help raise the living conditions
➢may be statutory or voluntary
Need f o r Fringe Benefits
✓ Employee demands.
✓ Trade unions demands.
✓ Employer’s preference.
✓ As a social security.
✓ To improve human relations.
Objectives o f Fringe B e n e f i t s
• To create & improve sound IR.
• To motivate the employees.
• To provide security to the employees.
• To protect the health of the employees.
• To promote employee’s welfare.
• To create a sense of belongingness.
• To meet the requirements of various
legislations relating to FB.
Types o f Fringe Benefits
❖ Payment for time not worked.
❖ Employee security.
❖ Safety & health.
❖ Workmen’s compensation.
❖ Health benefits.
❖ Voluntary arrangements.
❖ Welfare & recreational facilities.
❖ Old age & retirement benefits.
Items c ov ered u n d e r f r i n g e
benefits
As per the Finance Bill, fringe benefits shall be deemed
to have been provided if the employer has incurred
any expense or made any payment for the purposes
of:
a) entertainment
b) festival celebrations
c) gifts
d) use of club facilities
e) provision of hospitality of every kind to any person
whether by way of food and beverage

(f) maintenance of guest house
(g)conference
(h) employee welfare
(i) use of health club, sports and similar
facilities
(j)sales promotion, including publicity
(k)conveyance, tour and travel, including
foreign travel expenses
(o)consumption of fuel other than industrial
fuel
(p) use of telephone
(q)scholarship to the children of the
employees
WIPRO
• Cash compensation
• Social security & well-being
• Development & education
• Employee stock purchase program
• 5% discount of wipro stocks
• Leave of absence programs
• Relocation program
• Railway half-fare season ticket
• Family service: areas of childcare
• Homecare & eldercare
• Bonus for recommending new employees
• Special conditions for insurance
• Sickness & accident income plan
• Social security
• Development & education
• Cash compensation
• Providing transit passes & van pooling
• Airways fair
• Travelling & food
BONUS
Payment of Bonus Act
The payment of Bonus Act, 1965 aims to regulate the amount of
bonus to be paid to the persons employed in establishments
based on its profit and productivity. The act is applicable to the
whole of India for all establishments which had twenty or more
persons employed on any day during the year.
Objectives of the Act
The objectives of the Bonus Act (Payment of bonus Act) are as
follows:
• To impose a legal responsibility upon the employer of every
establishment covered by the Act to pay the bonus to employees.
• 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 establishments
which fall under any of the below listed:
• It applies to any factory or establishment which had 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.
Eligibility for Bonus
Any employee is eligible for availing bonus if the following
conditions are satisfied:
• The employee receiving salary or wages up to Rs.
21,000 per month
• The employee engaged in any work whether skilled,
unskilled, managerial, supervisory etc.
• The employee who have worked not less than 30
working days in the same year.
Number of Working Days
An employee will be considered “working” in a year if the
following conditions are satisfied:
• 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 during the work.
• The employee has been on maternity leave with salary
in the accounting year.
Payment of Minimum and Maximum Bonus
• The minimum bonus will be 8.33% of the salary during the year,
or
◦ 100 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.
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.
INCENTIVES
Incentives payments
Incentives Programme
■ Wage incentives include all the plans that
provide extra pay for extra performance In
addition to regular wages for the job.
■ It implies monetary inducements offered to

employees to perform beyond acceptance
standards.
Different Types of Variable Pay
Plans
Cash Profit Sharing
Stock Ownership or
Options
Balanced Scorecard
Productivity / Gain-
Sharing
Team / Group
Incentives
Short Term Pay-for-Performance
Plans
■ Merit Pay
■ Lump-Sum Bonuses
■ Individual Spot Awards
■ Individual Incentives
Long-Term Incentive Plans
Employee Stock Ownership Plans

(ESOPs)
Performance Plans (Performance

Share and Performance Unit)
Broad-Based Option Plans (BBOP)

Individual Incentives
■ Under a system of individual incentives, all

or a portion of an individual’s pay is tied to
their performance.
Group Incentives
■ Improve Organizational Performance
■ Organizational Measures
■ Measured Periodically
Team / Group Incentive Plans
■ Gain-Sharing Plans
■ Profit Sharing Plans
■ Earnings-at-Risk Plans
Individual Incentive Plans
Method of Rate Determination
Units of production per Time period per unit of
time period production
(1) (2)
Pay constant function of Straight piecework plan Standard hour plan

production level
Bedeaux plan
Relationship
between
production level (3) (4)
and pay
Taylor differential piece Halsey 50 - 50 method
Pay varies as function of rate system
Rowan plan
production level
Merrick multiple piece
Gantt plan
rate system
Types of Incentives Plans
The ILO classifies all the schemes of payment by results into
four categories:
Earnings vary Earnings differ
Earnings vary
Earning vary in Proportionately at different levels
less
the same proportion More than outputs of output
proportionately
as output
than output
❑ Straight Piece Work ❑ High Piece Rate ❑ Taylor’s Differential

❑ Standard Hour ❑ High Standard Hour Piece Rate
❑ Merrick Differential
❑ Halsey Plan
Piece Rate
❑ Rowan Plan
❑ Gantt Task System
❑ Barth Scheme
❑ Emerson’s Efficiency
❑ Bedaux Plan
plan
Halsey Plan
Rowan Plan
Barth Plan Time - Based
Bedaux Plan
Taylor’s Differential Piece Rate

Merrick Differential Piece Rate Output - Based
Gantt Task System
Emerson’s Efficiency plan
Halsey Plan
Std Time= 10 Hrs
Rate per hr= Re 1
Case 1 time taken= 10 Hrs

Earnings = 10* 1
Case 2 Time taken = 10 Hrs
earnings = 12* 1
earnings = 8*1
Bonus = ½*2*1 = Rs 1.00
Rs 9.00
Rowan Plan
Std Time= 10 Hrs
Rate per Hr= Re 1
Earnings = 10* 1
earnings = 12* 1
earnings = 8*1
Bonus = 2/10*8 = Rs 1.60
Rs 9.60
Barth Plan
Std Time= 10 Hrs
Rate per Hr= Re 1
Earnings = 10 * 10
= 10*1= Rs 10.00
earnings = 12* 10
= 10.95*1 = 10.95
earnings = 8*10
= 8.94 * 1 = 8.94
Bedaux Plan
Std Time= 10 Hrs
Rate per Hr= Re 1
Earnings = 12 * 1
= 12.00
earnings = 8*1
= 8.00
Bonus:
Std Bs = 10*60 = 600
Actual Bs = 8*60 = 480
Bs saved = 120
Bonus 75 * 120*1 = Rs 1.50
100 60
Total earnings = 8+1.50
= Rs 9.50
Taylor’s Differential Piece-Rate
Standard outputs: 100 Units
Rate per Unit: 10 paise
Differential to be applied:
120% of piece-rate at or above the standards
80% of piece-rate when below the standards
Case 1: Outputs = 120 units
Earnings = 120* 120 * 0.10 = Rs 14.40
100
Case 2: Outputs = 90 units
Earnings = 90* 80* 0.10 = Rs 7.20
100
Merrick Differential piece-rate
Straight piece-rates less than 83% of the Std outputs
110% of the base-piece rate for 83%-100% of the Std outputs
120% of the base-piece rate for more than 100% of the Std outputs
Case 1 Output = 80 units
Efficiency = 80 *100 = 80%
100
Earnings: As the efficiency is less than 83%, only the base pie-rate applies:
80*0.10 = 8.00
Efficiency = 90 *100 = 90%of
100
Earnings: As the efficiency is 83% but less than 100%, 110% the base pie-rate applies:
90*110*0.10 = 9.90
100
Efficiency = 110 *100 = 110%
100
Earnings: As the efficiency exceeds 100%, 120% of the base piece-rate applies:
110*120*0.10 = 13.20
Rate per Hr =Re 0.50
High piece-rate
Std Outputs
= Re 0.10
= 80 units
Gantt Task System
Time taken = 8 Hrs
Std Bonus = 20%

Earnings
As the output is less than the standard only time wages are paid to the worker
=8*0.50=Rs 4.00
Case 2 Output =80 units
Earnings
As the output is equal to the standard, the worker is entitled to time wage plus 20%
bonus
Time wages =8*0.50= Rs 4.00
Bonus =20*4 = Re 0.80
100
Total earnings = Rs 4.80
Case 3 Output =110 units
As the output is more than th Std, the worker is entitled to a high piece rate
10*0.10= Rs 11.00
Emerson’s Plan
Up to 67% of efficiency, the workr is determined by dividing the time taken by the Std
Time-rate
Up to 100% efficiency, 20% bonus is paid to workers
An additional bonus of Rs 1% is added for each additional 1% eficiency
Case 1 Output in 10 Hrs: 50 units
Efficiency: 50%( below 67%, the worker is eligible for 50% of the time wae as bonus)
Case 2 Output in 10 Hrs : 100 units
Efficiency : 100% (time-wage + 20% bonus)
Case 3 : Output in 10 Hrs : 130 units
Efficiency : 130%
At the rate of 20% at 100% efficiency and 1% increase for every 1% increase in
Efficiency, the worker is eligible for 50% of the time wage as bonus:
Time wag =10*1 Rs 10.00
Bonus =50*10.00 Rs 5.00
100
Rs 15.00
Conditions for Effective Incentives Plans
■ Plan is clearly communicated

■ Plan is understood
■ Rewards are easy to calculate
■
Employees participate in administering the plan
■ Employees believe they are being treated fairly
■ Employees believe they can trust the company
and that they have security
■ Rewards are awarded as soon as possible after the
desired performance.
PERFORMANCE LINKED PAY
Performance Management – How it is defined
Performance management can be defined as a continuous process of
assessing and measuring the performance of an individual and aligning
it with the organizational goals. It is the job of the HR people to design
an effective performance management system.
Expansion for the word “Perform”, best explains it.
P – Potential
E – Enthusiasm
R – Reliability
F – Flexibility
O – Orientation
R – Reengineering
M – Motivation
Why Performance management?
Before proceeding further, let us have a look on why performance
management is needed. If there is no measure to performance, there
will be no sign of feedback and continuous improvement. When
employees monitor and assess themselves on their performance, then
no lines can be drawn to link employee’s contribution with
organizational goals. At the end there will be a large gap which
remains unfilled thereby affecting the organization’s growth. In any
marketing firm, number of sales and customer service are the
determining factors. Sales persons should be motivated to improve the
number of sales in a day, by measuring their performance, giving them
actual feedback for their improvement and acknowledge them for their
outstanding performance.
Reward System
Many think that appraisal (measuring performance) is the only
necessary branch out from the performance management system, but
the system includes two other important subsystems,
Feedback system – for aligning performance with organizational
goals.
Reward system – for motivation and continuous improvement.
The reward systems include returns given to the employees in the form
of cash (benefits, pay raises) or recognition programs (intangible form).
The traditional approach of rewarding employees was only based on
their job description and not on how they perform. Even the benefits
and incentives are biased to the seniority position in a job. Though the
employee performs well, he has to wait in a queue to attain the
seniority for the pay raise. So this approach had no records for
motivation and continuous improvement in the minds of employees.
Why Link Reward to Performance
To connect two ends of the rope, a knot is required; to make it lengthy and useful for long run.
Likewise, the tie up between the reward and performance should be made for employee
retention and their commitment to work, which ultimately improvise the contributing factor of
the employee. Employees should perform well to be rewarded and the approach designed for
this is “Pay for Performance”. Apart from the base pay, which is based on job description, a
variable pay should be announced for their outstanding performance. Although the pay raise
motivates the employees to an extent, ultimately they want them to be appreciated and
recognized in a society for their work, here comes the employee recognition program. Many
employees become less committed to work not because of their low pay structure, but for the
lack of recognition. Both types of rewarding system should be ensured for higher motivation,
retention, engagement and job satisfaction.
A simple example for performance based reward system can be best explained by the game of
cricket. When a bowler or batsman performs well in a match, his performance is rewarded by
the cricket council through the title “Man of the Match” and cash award. It motivates the
winner and also the team players to perform well for their team.
Performance-Linked pay or pay for performance is money
paid relating to how well one works.  
Salesstaff receive more pay for selling more, and low

performers do not earn enough to make keeping the job worthwhile
even if they manage to keep the job.  
Many employers use this standards-based system for evaluating

employees and for setting salaries.
 
Performance-Linked pay programs
Merit pay 
Incentive pay 
Profit-sharing 
Ownership 
Gain-sharing 
Group incentives and Team awards
Benefits of Performance-based Rewarding approach
An effective Performance-based Rewarding approach can bring out multiple benefits to an
organization and employees,
Decreased attrition rate, which empowers employee retention in long run and
commitment. Due to decreased attrition rate and increased employee retention, recruitment
cost is less which helps in the financial stability of the organization.
Motivate employees to perform better, aligning with the organizational goals.
Employees get a clear insight of what should be done to meet the goals.
Employee involvement (Participation Management) is increased which results in
autonomy, more productivity and satisfaction. Employees feel that they are part of a big
success, enabling more confidence and innovation in work.
Rather than working on routine jobs, employees volunteer to work on challenging jobs
to increase their recognition levels in the working society. It enforces healthy competition
among individuals to perform better.
Employee gets a chance to learn and enhance their skills, which highlights their
development in career.
PROFIT SHARING
Profit sharing is the most popular method rewarding the
employees. Under it, the employees are paid in addition to the
regular wage, a particular share of the net profits of the business as
incentive.
Characteristics of Profit Sharing
The key features of profit sharing may be stated as follows:
1. It is based on an agreement between the employer and the
employees.  
2. It is a payment made after ascertaining the net profits of the

business. It  
is not therefore, a charge on profits.  
3. The amount paid to the employees is over and above their

normal pay.  
4. The amount to the paid is determined based on some agreed

formulas.  
Merits of Profit Sharing
The advantages are profit sharing are as follows:
1. Better employer-employee relations - This is possible, as the
employer is ready to share the profits of the enterprise with his
employees.
2. Increase in productivity -The employees make every possible effort
to increase productivity because they know very well that higher
profits for the enterprise would mean higher bonus for them.
3. Better living standards - It helps to increase the living standards of
the employees as the amount received is in addition to the usual
wages.
4. Reduced costs of supervision - The workers themselves are duty
conscious and, therefore, they need no close supervision. Thus, costs
of supervision are reduced.
5. Promotion of team spirit - The employees know the importance of
teamwork, as only such an effort would result in higher output.
Limitations of Profit Sharing
The limitations of profit sharing are as follows:
1. Regular income not assured: Payment to workers, by way of profit sharing, at a particular rate
depends upon the profits of the enterprise. If the enterprise makes low profits or incurs losses,
it will not be in a position to pay bonus as agreed.
2. Suppression of profits: Attempts may also be made to suppress true profits so that the
employees need not be paid their share. This is done by manipulating accounts.
3. No inducement: Payment under the profit sharing scheme will be made to the employees once
or twice a year when accounts are closed. Such payments at longer intervals may not really
motivate employees. Daily or weekly incentive payments are far more superior to profit
sharing.
4. All workers paid alike: Payment to workers under profit sharing is made without considering
their relative level of efficiency. This amounts to doing injustice to those who have really made
target attainment possible.
EMPLOYEE STOCK OPTION
PLAN
. Attracting and retaining competent professionals is an uphill task Employee Stock
Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the
ownership of stocks in the company. It is one of the profit sharing plans. Employers have
the benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides
for tax benefits to the employers. Organizations strategically plan the ESOPs and make
arrangements for the purpose. They make annual contributions in a special trust set up for
ESOPs. An employee is eligible for the ESOPs only after he/she has completed 1000 hours
within a year of service. After completing 10 years of service in an organization or reaching
the age of 55, an employee should be given the opportunity to diversify his/her share up to
25% of the total value of ESOPs. Law has also provided an amendment for the employees
who have attained the age of 60 and their ESOP shares are allotted after December 31, 1986.
The amendment provides those employees with an option to diversify their shares up to
50%.  
ESOP Rules
An ESOP is a kind of employee benefit plan, similar in some ways to
a profit-sharing plan. In an ESOP, a company sets up a trust fund,
into which it contributes new shares of its own stock or cash to buy
existing shares. Alternatively, the ESOP can borrow money to buy
new or existing shares, with the company making cash contributions
to the plan to enable it to repay the loan. Regardless of how the plan
acquires stock, company contributions to the trust are tax-deductible,
within certain limits.
Shares in the trust are allocated to individual employee accounts.
Although there are some exceptions, generally all full-time
employees over 21 participate in the plan. Allocations are made
either on the basis of relative pay or some more equal formula. As
employees accumulate seniority with the company, they acquire
an increasing right to the shares in their account, a process known
as vesting. Employees must be 100% vested within three to six
years, depending on whether vesting is all at once (cliff vesting)
or gradual.
When employees leave the company, they receive their stock, which
the company must buy back from them at its fair market value (unless
there is a public market for the shares). Private companies must have
an annual outside valuation to determine the price of their shares.
In private companies, employees must be able to vote their allocated
shares on major issues, such as closing or relocating, but the company
can choose whether to pass through voting rights (such as for the board
of directors) on other issues. In public companies, employees must be
able to vote all issues.
Merits of Employee Stock Option
To Understand the Company as Shareholder
It promotes mutually of interest between the employees and the employer. The employee
is encouraged to consider the view-point of a shareholder. He is also led to read company
literature such as operating results, balance sheet and annual report sent to him as a
shareholder which he/she would have probably ignored as an employee.
To Know About the Future Progress of the Company
The employees get an opportunity to attend the meetings of the shareholders and have
detailed information about the progress and future plans of the company.
To Motivate the Employee and Create Saving Habits
It promotes thrift, efficiency and security on the part of the employees. The employees
feel that they are not merely servants but masters also. The stake in company profit and
loss is a great motivating force towards increased efficiency.
Developing Interest in Investing in Company
Worker’s income is supplemented by dividends. In the beginning, it
may not be very alluring but when some more shares are acquired by a
worker out of the dividends received, his interest goes on increasing.
To Maintain Relationship Between Company and Employee

The management also gains because of better cooperation, lesser
supervision, reduced labour turnover. Improved industrial relations,
better understanding on the part of workers, and elimination of waste
and enhancement of efficiency.
Uses for ESOPs
1. To buy the shares of a departing owner: Owners of privately held companies can use
an ESOP to create a ready market for their shares. Under this approach, the company can make
tax-deductible cash contributions to the ESOP to buy out an owner’s shares, or it can have the
ESOP borrow money to buy the shares (see below).  
2. To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in
their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or
shares of existing owners. The company then makes tax- deductible contributions to the ESOP
to repay the loan, meaning both principal and interest are deductible.  
3. To create an additional employee benefit: A company can simply issue new or treasury
shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income.
Or a company can contribute cash, buying shares from existing public or private owners. In
public companies, which account for about 5% of the plans and about 40% of the plan
participants, ESOPs are often used in conjunction with employee savings plans. Rather than
matching employee savings with cash, the company will match them with stock from an ESOP,
often at a higher matching level.  
Demerits of ESOP
1. Though voluntary in nature, some employees may feel they are
being forced to join.  
2. Employees earnings at present and in future become subject to a

greater risk (that of  
performance of their employer)  
3. It is being used as a management tool to fend off takeover

attempts. Holders of employees owned stock often align with
management to turn down bids that would not only benefit outside
stock holders but would also replace existing inefficient management
and restructure operations.  
4. There is no direct relationship between the effort and reward 

 
Employees Stock Ownership Plan (ESOP) Vs. Employees Stock
Option Scheme (ESOS)
In contrast to the ESOP, the ESOS is simply a scheme through which
participation of employees in the shareholding of the company is
encouraged. The employees can be allotted shares through the
preferential allotment route every financial year or they may be given
shares by way of reservation in a if fresh issue. Shares are issued under
ESOS directly to the employees. However, in an ESOP, shares are
issued to a trust which held the shares for the benefit of a group of
employees. The companies get tax benefits for making contribution to
the ESOP in USA. However, in India, such provisions are yet to be
incorporated in the Income Tax Act 1961.
Employees Stock Option Scheme in India
The Securities and Exchange Board of India (SEBI) guidelines
for disclosure and Investor Protection explain that ESOS is a
voluntary scheme on the part of the company to encourage
employee’s participation in the company. A suitable percentage
of reservation can be made the issue for the employees of his
company. However, under the existing guidelines, 5% of the
new issue may be reserved for the ESOS subject in a maximum
of 200 shares per employee who agree to participate to the
ESOS. Further, the membership of the ESOS should be
restricted only to the permanent employees of the company.
CORPORATE CONSIDERATION
IN COMPENSATION
❖ FOUR FACTORS TO BE CONSIDERED FOR
CORPORATE CONSIDERATION
❖ LEGAL FRAMEWORK
❖ MAJOR INSTITUTIONS (WAGE BOARD AND
PAY COMMISSION)
❖ TAX PLANNING
❖ INTERNATIONAL COMPENSATION
FACTOR-I
LEGAL FRAMEWORK
Labour Legislations
● The Employee’s Provident Fund And Miscellaneous

Provisions Act, 1952
● The Employee State Insurance Act, 1948
● The Equal Remuneration Act, 1938
● The Industrial Disputes Act, 1947
● The Factory Act, 1948
● The Minimum Wages Act, 1948
● The Payment of Wages Act, 1936
● The Payment of Bonus Act, 1965
● The Payment of Gratuity Act, 1972
Introduction
Labour is one of the principal factors of production in

all kinds of establishments whether big or small,
organized or organized, industrial or commercial.
With a view to ensure job security and satisfaction

the lobour to give them their due wages alongwith
certain employment benefits and to prevent
exploitation of labour by the capitalists, several
legislations have been made covering a number of
aspects concerning labour
Employees Provident Fund Act
Objective
The act is enacted with the objective of instituting a
compulsory contributory fund for the future of the
employee after his / her retirement or for his / her
dependents in case of his / her early death
Scope
✂Every factory or establishment employing more than 20
employees
✂Once the Act applies to any organization, it shall continue
to be governed by the Act irrespective of the the fact that
the no. of employees fallen below20
Exemption from the Act
✂A newly established organization for the initial period of

3 years from the date of its set up
✂Cooperative society employing less than 50 employees
Eligibility of Employees
2. Every employee in receipt of wages upto Rs 5000/- pm
shall be eligible to be a member of Family Pension
scheme
3. In case his pay increases beyond Rs 5000/-, he
continued to be a member of Family pension scheme but
the contribution payable shall be limited to the amount
payable on monthly pay of Rs. 5000/-
4. An employee become a member of the scheme from the
date of joining the organization
5. An employee ceases to be a member after attaining the
age of 60 years
The Schemes under the Act
1. Employee Provident Fund Scheme

Establish provident fund for the employees
2. Employees Family Pension Scheme
Provide Family pension to the employees and their
family after superannuation / death or total permanent
disablement
3. Employees Deposit Linked Insurance Scheme
Provide life insurance benefit to the employees and
their family members
Terms related to the Act
Contribution
Employer’s contribution to PF & Pension Fund
12% of wages, etc
Employer’s contribution to EDLI Fund
0.5% of wages, etc
Employee’s contribution to PF & Pension Fund
12% of wages, etc
C. Govts contribution to Pension Fund
1.16% of wages, etc
Interest accrued
The amount deposited in PF, Pension Funs & EDLI Fund is invested
in specified securities. The rate of interest is determined by the C.
Govt which is 9% p.a. at present
Employee State Insurance Act
● Objective:
This is the first major legislation on Social Security to
provide protection to worker in contingences such as
illness, long term sickness or any other health risk due
to exposure to employment injury or occupational
hazards. Under the scheme medical facilities are also
made available to the legal dependents or insured
person. The scheme is extended to retired personnel
as well as to permanently disabled workers and their
family.
● The act applies in the non seasonal organization

employing 20 or more persons or organization using
power & employing 10 or more persons
● The Employees covered are those whose earnings is

up to Rs. 6,500/- per month comes under its purview
● Every eligible organization has to get registered under

the ESIC
● The eligible employee has to fill up the declaration

form
● The amount of contribution for a wage period shall be

as follows:
● Employer’s contributes equal to 4.75% of the wages

payable to an employee
● Employee Contributes a sum equal to 1.75% of the wages
payable to the employees
● If contribution is not paid in time, the rate of damages

is 5% to 25% and the prosecution by the State Govt.
Equal Remuneration Act
Objective:
● The equal remuneration act provides for payment of
equal remuneration to men and women workers and
for the prevention of discrimination on the ground of
sex against women in the matter of employment and
for matters connected therewith or incidental thereto.
● Under the act it is duty of employer to pay equal

remuneration to men and women workers for the
same work of a regular nature
Equal Remuneration Act
● No discrimination for wages or for recruitment &

selection process
● The employer is required maintain register in terms of

equal remuneration act
● There are heavy penalties ranging from Rs 500/- to

Rs, 5,000/-
Factories Act
Objective:
● The factory act is to provide safety measures and to
promote the health and welfare of workers employed
in factories
Applicability:
● The act applies to those industries which qualify the
definition of Factory under the act
Factories Act
● To safeguard the health and safety of worker and
extends to provided adequate plant machinery and
appliances, supervision over workers to provide
healthy and safe environment, proper system of
working and extends to give reasonable instructions
● The act talks about Health, Safety, Hazardous
processes, Welfare, Working hours of Adults,
Prohibition on employment of young persons, Annual
leave with wages
●
The penalties are ranging from Rs 5000/- to Rs.
35,000/- and prosecution by State/Central Govt.
Industrial Disputes Act
Objective:
● The act aimed to brining conflicts between employer and

employee to an amicable settlement and at the same time it
makes provision for some of the other problems that may arise
from time to time in an industrial or commercial undertaking which
comes under the purview
● The ID act seeks to pre empts industrial tensions, provide the

mechanism of dispute resolutions and set up the necessary
infrastructure so that the energies of partner in production may
not be dissipated in counter productive battles and assurance of
Industrial justice may create a congenial climate
Industrial Disputes Act
The Act talks about Works committee, Board of Conciliation,
●
Industrial courts/tribunals, Arbitration, Prohibition on lock out
and strikes, lay off, retrenchment, transfer of undertakings,
unfair labour practices & closure
● The penalties ranges from Rs. 1000/- to Rs. 5000/-

and prosecution up to 6 months for violation of rules
Minimum Wages Act
● Wages are remuneration which the workers are

entitled for the work performed by them
● The employers always think of how to decrease the

employee/production costs, while the workers see wages in
terms of their preoccupation, better housing, children
education, medical requirements, minimum recreations,
provision for old age, marriage etc
● The Govt. also enjoins in regulating the wags in the

country through Minimum Wages Act to protect the
interest of workers
Minimum Wages Act
Objectives
● To provide for fixing minimum rates of wages in certain
employment and the provisions of the act are intended to
achieve the object of doing social justice to the workers
employed in the scheduled employment by prescribing
minimum rates of wages for them
● The act prevents exploitation of labour as such the

authorities under the act are empowered to announce and
fix the minimum wages from time to time keeping in view
the market inflation and cost of living index.
Minimum Wages Act
The act prescribes the minimum wages of different
category of employee.
● It provides the basic rates of wages and special

allowance i.e. cost of living allowance
● Cash value of concessions for supplied of essential
commodities
● An all inclusive rates
Minimum Wages Act
● The other provisions such as the wages must be paid

in cash, manner & procedure of fixing and revising
minimum rates of wages , Hours of work and holidays,
Extra wages for overtime, Rest day, Employer’s
obligations and maintenance of records
● It also talks about penalties & prosecution for any

violation of provision prescribed under the act.
● The payment of Bonus Act applies to certain person
employed in every factory and establishment
employing not less than 20 person on any day during
an accounting year
● An employee under the act means any person

engaged for hire/reward other than apprentice
including supervisory, managerial staff drawing salary/
wages not exceeding Rs.3,500/- per month. However,
in case of the employees in he salary/wages range of
Rs, 2,500/- to Rs 3,500/- per month for the purpose of
payment of bonus, their salaries/wages would be
deemed be Rs 2,500/- per month
● The organization covered under the act are required to pay
Bonus minimum of 8.33% and maximum of 20%
● The infancy benefit for the new establishment is for the first 5
accounting years in which the employer sells goods/services
The overtime is not wages as such no bonus on
● overtime
The commission paid to employee is not remuneration as
● such no bonus on Commissions
The Dearness Allowance is part of wages and attract
●
Bonus
● The bonus is calculated basis allocable surplus in the

accounting year as per the accuracy of Balance Sheet
& Profit & Loss Account
● The bonus can be forfeited if the employee is sacked

on account of fraud, riotous or violent behavior at the
premises of the establishment or for theft
● The act provides penalties & prosecution for any

violations of provisions/rules
Payment of Gratuity Act
● The act applies to every shop & establishment in which 10 or
more person are employed or were employed on any day of the
preceding 12 months. Once covered will continue to be under
coverage even if the employee number goes down
● The act applies to all person drawing a salary up to Rs. 3,500/-.

The maximum limit of gratuity is Rs 3,50,000/-
● Gratuity is payable to an employee on termination of his

employment after he has rendered continuous service for not less
than 5 years on reaching the age of superannuation or on his
retirement/resignation or on his death or disablement due to
accident or disease.
Gratuity is calculated on Basic Rate plus Dearness
●
Allowance but does not include any bonus, commission,
house rent allowance, overtime wages and any other
allowance
● In case of a monthly rated employee, the fifteen days

wages shall be calculated by dividing the monthly rate
of wages last drawn by him by twenty six and
multiplying the quotient by fifteen
●
Forfeiture of Gratuity can be done only if the service of
employee is terminated for his riotous or disorderly conduct
or any act of violence on his part or any act of moral
turpitude provided such an act is conducted during the
course of employment
The payment mode is by Cheque or Bank Draft in
● Favour of employee or his legal heirs
The act provides penalties for violation of provisions and
● right to appeal
The time limit for claiming gratuity is 12 months and 60 days
● for filling an appeal
Payment of Wages Act
●
The payment of wages act regulates the payment of wages
to certain classes of person employed in industry and its
importance cannot be underestimated
The act not only guarantees, payment of wages in time
●
and without any deduction except those authorized
under the act
The act provides the responsibility for payment of wages,
● fixation of wage period, time and mode of payment of
wages, permissible deductions as also casts upon the
employer a duty to seek the approval and permission for
the fine imposed, if any
● Wages under this act means all remuneration

expressed in term of money and includes over time,
bonus holiday or any other leave period
● The payment has to be made before the expiry of the

seventh day after the last day of the wages period if less
than 1000 workmen are employed and in other case on the
10th day
● Payment is to made on working day and that too in

cash and by Cheque where the employee has given
consent in writing
The deduction allowed are fines, deduction for actual period
●
of absence, for willful damages to goods & property, for
house accommodation, for amenities provided. All deduction
to be made within 60 days and the total deduction should
not exceed 50% of the total wage. The total deduction in the
case of Cooperative society should not exceed 75%. The
fine should not exceed 3%.
● The employer has to maintain register for record/

evidence and required to deposit the unpaid wages/
bonus with the labour department
FACTOR -III
INSTITUTIONS INVOLVED
WAGE BOARD
The institution of wage boards has come to be widely accepted in India as a viable wage determination
mechanism. The boards have been successful in fulfilling their primary object of promoting industry-wise
negotiations and active participation by the parties in determination of wages and other conditions of
employment.
Wage boards are set up by the Government, but in selection of members of wags 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 labour,
Management and Public. Labour 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 OBJECTIVES OF WAGE BOARDS :
(a) To work out wage structure based on the principles of fair wages as formulated by the
Committee on Fair Wages.
(b) To work out a system of payment by results. 
(c) To envolve a wage structure based on the requirements of social
justice. 
(d) 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.
GROWTH AND DEVELOPMENT OF WAGE BOARDS
The history of wage boards in India dates back to the 1930’s. The Royal Commission on Labour
recommended the setting up of tripartite boards in Indian industries. It said :
We would call attention to certain cardinal points in the setting p of (wage – fixing) machinery of this
kind. The main principle is the association of representatives of both employers and workers in the
constitution of the machinery. Such representatives would be included in equal members, with an
independent element, chosen as far as possible in agreement with or, after consultation with, the
representatives of both the parties.
Take decisions regarding wage adjustments suo motu or on reference from parties or from the
government.
No action was taken during that plan period. However, the Second Plan emphasized the need for determining
wages through industrial wage boards. It observed.
The existing machinery for the settlement of wage disputes has not given full satisfaction to the parties
concerned. A more acceptable machinery for settling wage disputes will be the one which gives the parties
themselves a more responsible role in reaching decisions. An authority like a tripartite wage board, consisting
of an equal number of representatives of employers and workers and an independent chairman, will probably
ensure more acceptable decisions. Such wage boards should be instituted for individual industries in
different areas.
This recommendation was subsequently reiterated by the 15th Indian Labour
conference in 1957 and various industrial committees. The government decision to
setup the first wage board in cotton textile and sugar industries in 1957 was also
influenced by the Report of the ILO.
The appointment of a wage board often results from the demands for labour
unions. It has been reported: The formation of wage boards in all industries has
been the result of demands and pressures on the part of trade unions. In their
efforts to secure the appointment of wage boards, trade unions have to repressurise
not only the government but also the employers whose formal or informal consent
to their establishment must be obtained.
In India, the Bombay Industrial Relations (Amendment) Act of 1948 may be regarded as perhaps the earliest
legislation included a provision for the establishment of wage boards in any industry covered by the act.
Accordingly,
the first wage board was set up in Bombay for the cotton textile industry. The principal purpose of starting
wage boards was to relieve the IndustrialCourts and Labour Courts of a part of their adjudication work.
The amending act of 1953 has tried to avoid multiplicity of proceedings under the Act.
It empowered Industrial Courts and Labour Courts wage boards to decide all matters connected with or
arising out of any industrial matter or dispute.
Industries Covered 
The first non – statutory wage board was set up for the cotton textile
and sugar industries in 1957. Since then, 24 wage boards covering most of the major
industries, have been setup by the Centre: cotton textiles, sugar, cement, working journalists
and non – working journalists (twice each), jute, tea, coffee and rubber plantations, iron ore,
coal mining, iron and steel, engineering, ports and docks, leather and leather goods,
limestone and dolomite. On 17th July 1985, three wage boards were constituted, one each for
working journalists, non – working journalists and the sugar industry. But no central act
contains any provision for setting up wage boards. They are set up by a resolution of the
government; and they come to an end with the submission of their reports.
COMPOSITION AND FUNCTIONS OF WAGE BOARDS
The wage boards is, as a rule, tripartite body representing the interest of labour, management and the public. Labour and management
representatives are nominated in equal numbers by the government, after consultation with and with the consent of major central
organizations. Generally, the labour and management representatives are selected from the particular industry which is investigated. These
boards are chaired by government – nominated members representing the public.
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 :
a. Determine which categories of employees (manual, clerical supervisory,  

etc.) are to brought within the scope of wage fixation.  
b. Work out a wage structure based on the principles of fair wages  

formulated by the committee on fair wages.  
c. Suggest a system of payment by results.  
d. Work out the principles that should govern bonus to workers in  

industries.  
The board 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 industrys
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 labour unions, employers
associations, interested individuals, academic organisaitons and
government agencies.
2. The second step is to give a public hearing at which leaders of  

labour 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.  
In evolving a wage structure, the board takes into account:
. (a) the needs of the industry in a developing economy including the need for
maintaining and promoting exports:  
. (b) the requirements of social justice, which ensures that the workman who
produces the goods has a fair deal, is paid sufficiently well to be able at least to
sustain himself and his family in a reasonable degree of comfort, and that he is not
exploited;  
. (c) the need for adjusting wage differentials (which is in relation to occupational
differentials; inter-firm differentials; regional or inter-area differentials; inter-
industry differentials and differentials based on sex) in such a manner as to provide
incentives to workers for improving their skills.  
Pay Commission
WHAT IS A PAY COMMISSION ?
o The pay commission is an administrative system that the
government of India set up in 1956 to determine the salaries
of government employee.
o Since India independence, seven pay commission have been
set up on a regular basis to review and make recommendation
on the work and pay structure of all civil and military
divisions of the government of India.
o Headquarter in Delhi, the commission is given 18 months
from the date of its constitution to make its
recommendations.
ALL PREVIOUS PAY COMMISSION
First Pay Commission:
o First pay commission was established on January, 1946 and

its submitted its report on May, 1947 to the Government of
India.
o Government employees should be paid a living wages.
o Also recommended for payment of dearness allowances.
CONTD ...
Second Pay Commission:

o The second pay commission was set up in August 1957, 10
years after independence and it gave its report after two years.
o The recommendations of the second pay commission had a
financial impact of Rs. 396 million. The chairman of the
second pay commission was Jagannath Das.
o The second pay commission reiterated the principle on which
the salaries have to be determined.
o It state that the pay structure and the working conditions of
the government employee should be crafted in a way so as to
ensure efficient functioning of the system by recruiting
persons with a minimum qualification.
CONTD ...
Third Pay Commission:
o The third pay commission set up in April 1970 gave its report
in March 1973, it took almost 3 years to submit the report,
and create proposals that cost the government Rs. 1.44
billion.
o The chairman was Raghubir Dayal.
o Appointment of temporary employees, equal payment should
be made for equal work, externally competitive compensation
to prevent misbalance with other employees.
o Dearness allowances should be treated as part and parcel of
compensation structure.
CONTD ...
Fourth Pay Commission:
o Constituted in June 1983, its report was given in three phases

within four year and the financial burden to the government
was Rs.12.82 billion. This commission has been set up on
18th March 1987.
o The chairman of fourth pay commission was P N Singhal.
o It recommended that dearness allowance should be paid.
CONTD ...
Criteria of paying cost of living
Basic pay Dearness allowances paid
Up to Rs. 3500 per month 80%
Rs.3500-6000 per month 75%
Above Rs.6000 per month 65%

CONTD ...
Fifth Pay Commission:
o The Fifth Pay Commission was set up in 1994 at a cost of Rs.

17,000 crore. The chairman of fifth pay commission was
Justice S. Ratnavel Pandian.
o 40% increase in pay with 30% reduction in manpower over a
three year period, increasing contract employment and
bringing about greater accountability of government
employees.
o Also emphasizes on new means of recruitment and bringing
innovation in training, performance appraisal, transfer
policies and greater accountability.
CONTD ...
Sixth Pay Commission:
o In July 2006, the Cabinet approved setting up of the sixth

pay commission. This commission has been set up under
Justice B.N. Shri krishna with a timeframe of 18 months.
o 40% increase in pay.
o Group ‘D’ category employees and compensation of

secretary level personnel has been recommended for
substantial rise. The pay differential between junior
employees and senior officer stands increased to 1:12.
CONTD ...
o The government of India accepted and implemented the

recommendation of it by the announcement made by Prime
Minister Dr. Man Mohan Singh on 14th April 2008.
o Certain recommendation were rejected.
1. Three closed holiday for government employees, flexi
work hours for women's and flexi weeks for disabled.
2. The government has notified and improved three pay bands
and charged grade pay.
7 PAYCOMMISSION
TH
o The government of India has initiated the process to

constitute the 7th Pay Commission along with the finalization
its terms of reference.
o On September 25, 2013 the finance minister P Chidambaram
announced that the Prime minister Manmohan Singh has
Approved the constitution of the 7th pay commission.
o Its recommendations are likely to be implemented with effect
from January 1, 2016.
o Justice A. K. Mathur will be heading the 7th Pay

Commission, announcement of which was done on 4th
February 2014.
CONTD ...
o Key members of this Pay Commission:
Name Designation Role in Commission
Justice Ashok Kumar Retired Judge of the Chairman

Mathur Supreme Court and
Retired Chairman,
Armed Forces
Tribunal
Vivek Rae Secretary, Ministry of Member (Full Time)

Petroleum and Natural
Gas
Dr. Rathin Roy Director, NIPFP Member (Full Time)
Meena Agarwal OSD, department of Secretary

Expenditure, Ministry
of Finance
KEY POINTS OF 7TH PAY COMMISSION
o The commission has recommended a 16% hike in basic
salary + increase in DA and allowances like HRA.
o The total increase will be 23.55% of the Gross salary (Basic
+ DA + Allowances).
o The minimum pay in govt. is recommended to be set at Rs.
18,000 per month.
o Maximum pay is recommended as Rs. 2,25,000 per month.
o Rs. 2,50,000 per month for Cabinet Secretary and others at
the same level.
o The rate of annual increment retained at 3%.
CONTD ...
o Short service commission officers will be allowed to exit the
armed forces at any point in time between 7 to 10 years of
service.
o Commission recommends abolishing 52 allowances, another
36 allowances subsumed in existing allowances or newly
proposed allowances.
o The commission has proposed a status quo on the retirement
age of central government employees. Retirement age for
staff employees is 60 years.
o Total impact of are expected to entail an increase of 0.65%
points in the ratio of expenditure on to GDP.
o Recommendations will impact 47 lakh serving govt.
employees, 52 lakh pensioners, including defence personnel.
CONTD ...
o One Rank One Pension proposed for civil government

employees on line of OROP for armed forces.
o Ceiling of gratuity enhanced from Rs. 10 lakh to Rs. 20 lakh,
ceiling on gratuity to be raised by 25% whenever DA rises by
50%.
o Military Service Pay (MSP) ,which is a compensation for the
various aspects of military service, will be admissible to the
defence forces personnel only.
CONTD ...
o Financial impact of implementing recommendations will

be Rs. 1.02 lakh crore-Rs. 73,650 crore to be borne by
Central Budget and Rs. 28,450 crore by Railway
Budget.
o The 16% hike in basic salary is much lower than the
35% hike employees got in the sixth Pay Commission.
IMPORTANT DEMANDS OF THIS PAY
COMMISSION
❖ Pay scales are calculated on the basis of pay drawn in pay
band + GP+ 100% DA by employees as on 01/01/2014.
❖ 7th CPC report should be implemented 01/01/2014. In future
five year wage revision.
❖ Scrap New Pension Scheme and cover all employee under
Old Pension and Family Pension Scheme.
❖ Ratio of minimum and maximum wage should be 1:12.5.
❖ General formula for determination of pay scale based on
minimum living wage demanded for MTS is pay in PB +
GP.
CONTD ...
❖ Annual rate of increment @ 3% of the pay.
❖ Fixation of pay on promotion = minimum two increments.
❖ Dearness Allowances on the basis of 12 monthly average of
CPI, Payment on 1st Jan and 1st July every year.
❖ Overtime Allowances on the basis of total Pay + DA+ Full
TA.
❖ Liabilities of all Government dues of persons died in harness
be waived.
❖ Transfer Policy Group ‘C and D’ Staff should not be
transferred. Donot should issue clear cut guideline as per 5th
CPC recommendation. Govt should form a Transfer Policy in
each department for transferring on Mutual basis on
promotion. Any order issued in violation of policy framed be
cancelled by head of department on representation.
CONTD ...
❖ The pay structure demanded is as under:-
(Open ended pay scales-Total 14 pay scales)
SRNO. PAY CLASS PAY

1 PB-1,GP Rs. 1800 26,000
2 PB-1,GP Rs. 1900 PB-1,GP Rs.2000 33,000
3 PB-1,GP Rs. 2400 PB-1,GP Rs.2800 46,000
4 PB-2,GP Rs. 4200 56,000
5 PB-2,GP Rs. 4600 PB-2,GP Rs. 4800 74,000
6 PB-2,GP Rs. 5400 78,000
7 PB-3,GP 5400 88,000
8 PB-3,GP 6600 102,000
9 PB-3,GP 7600 120,000
10 PB-4,GP 8900 148,000
11 PB-4,GP 10000 162,000
12 HAG 193,000
13 APEX SCALE 213,000
14 CABINET SECRETARY 240,000
CONTD ...
❖ New Pay scales minimum in comparison with
Sixth CPC Grade Pay.
MINIMUM OF THE NEW PAY
SL GRADE PAY OF 6TH CPC SCALE
1 1800 26,000
2 1900 31,000
3 2000 33,000
4 2400 41,000
5 2800 46,000
6 4200 56,000
7 4600 66,000
8 4800 74,000
9 5400 78,000
10 5400 IN PB-3 88,000
11 6600 102,000
12 7600 120,000
13 8700 139,000
14 8900 148,000
15 10000 162,000
16 12000 193,000
17 75000-80000 202,000
18 80000 Fixed 213,000
19 90000 fixed 240,000
CONTD ...
❖ Wages and service conditions of Garmin Dak Sevaks is to be
examined by 7th CPC itself. Detailed Memorandum will be
submitted by Postal Federations and GDS Unions.
❖ Transport Allowance-
X classified City Other Places

Rs. 7500+ DA Rs. 3750+DA
The stipulation for TA that the Govt. employee should be on

duty in his headquarters for certain number of days during the
calender month should be removed.
CONTD ...
❖ Deputation Allowance double the rates and should be paid
10% of the pay at same station and 20% of the pay at outside
station.
❖ Classification of the post should be executive and non-
executive instead of present Group A.B.C.
❖ Special Pay which was replaced with Special/Allowance by
4th CPC be bring back to curtail pay scales.
❖ Scrap downsizing, outsourcing and contracting of govt. jobs.
❖ Regularize casual labour and count their entire service after
first two year, as a regular service for pension and all other
benefits . They should not be thrown out by engaging
contractors workers.
CONTD ...
❖ Housing Facility:-
o To achieve 70% houses in Delhi and 40% in all other town
to take lease accommodation and allot to the govt.
employees.
o Land and building acquired by it department may be used for
constructing houses for govt. Employees.
CONTD ...
❖ House Building Allowance:-
o Simplify the procedure of HBA
o Entitle to purchase second and used houses
❖ Common Category - Equal Pay for similar nature of work be
provided.
❖ Compassionate appointment - remove ceiling of 5% and give
appointment within three months.
❖ Traveling Allowance:-
Category A1, A class city Other City
Executive Rs. 5000 per day + DA Rs. 3500 per day+ DA
Non- Executive Rs. 4000 per day+ DA Rs. 2500 per day+ DA
CONTD ...
❖ Patient Care Allowance to all Para-medical and staff working in
hospitals.
❖ All allowances to be increased by three times.
❖ Training:- Sufficient budget for in-service training.
❖ Leave Entitlement-
o Increase Casual leave 08 to 12 days & 10 days to 15 days.
o Declare May Day as National Holiday.
o In case of Hospital Leave, remove the ceiling of maximum 24
months leave and 120 days full payment and remaining half
payment.
CONTD ...
❖ Income Tax:
o Allow 30% standard deduction to salaried employees.
o Exempt all allowances.
o Raise the ceiling limit as under:
• General- 2 lakh to 5 lakh.
• Sr. Citizen – 2.5 lakh to 7 lakh.
• Sr. Citizen above 80 years of age -5 lakh to 10 lakh.
o No income Tax on pension and family pension and Dearness
Relief.
CONTD ...
❖ Effective grievance handling machinery for all non-

executive staff.
o Spot settlement
o Maintain schedule of three meetings in a year
o Department Council be reviewed at all levels
o Arbitration Award be implemented within six month, if not be
discussed with Staff Side before rejection for finding out
some modified form of agreement.
CONTD ...
❖ Date of Increment -1st January and 1st July every year. In case
of employees retiring on 31st December and 30th June, they
should be given one increment on last ay of service, 31st
December and 30th June, and their retirements benefits should
be calculated by adding the same.
❖ Appoint Arbitrator for shorting all pending anomalies of the
6th CPC.
❖ General Insurance Active Insurance Scheme covering risk up
to Rs. 7,50,000/- to Non Executive & Rs. 3,50,000/- to
skilled staff by monthly contribution of Rs. 750/- & Rs. 350/-
respectively.
❖ Point to point fixation of pay.
CONTD ...
❖ Extra benefits to Women employees:
o 30% reservation for women
o Posting of husband and wife at same station
o One month special rest for chronic disease
o Conversion of Child Care Leave into Family Care Leave.
❖ Gratuity:
o Existing ceiling of 16.5 months be removed and Gratuity be
paid @ half month salary for every year of qualifying
service.
o Remove ceiling limit of Rs. 10 lakh for Gratuity.
FACTOR III-
TAX PLANNING
Introduction
• Constitution - Supreme
– All other laws, including the Income-tax Act, are subordinate to the
Constitution of India
• The Constitution provides that ‘no tax shall be levied or collected
except by authority of law’
• Corporate tax planning provides strategies that are significant in
minimizing taxes. Some valuable ways to save include:
– sponsoring a retirement plan
– writing off company assets
– claiming depreciation expense
– Taking deductions on business automobiles
– office expenses & self employment health insurance
Introduction
• A company owner needs to be aware of anything that might
impact taxes paid
• Corporate tax planning sources suggests making sure that write-
offs are legitimate business expenses
• Business tax planning includes taking advantage of
opportunities to provide :
– Tax relief, when possible
– Tax exemption, like Charitable contributions are a great way
for a company to save on taxes and help those in the
community
Canon Of Taxation
• Canons of Taxation are the main basic principles (i.e.
rules) set to build a 'Good Tax System'.
• Adam Smith gave following four important canons of
taxation, they are:
– Canon of Equity
– Canon of Certainty
– Canon of Convenience
– Canon of Economy
Canon Of Taxation
1. Canon of Equity:
⎫ Every person should pay to the government depending upon
his ability to pay
⎫ Rich people pay high ?
⎫ because without the protection of the government authorities (Police,
Defence, etc.) they could not have earned and enjoyed their income
2. Canon of Certainty:
⎫ The tax which an individual has to pay should be certain, not
arbitrary
⎫ The tax payer should know
∀ In advance how much tax he has to pay
∀ At what time he has to pay the tax, and
∀ in what form the tax is to be paid to the government
Canon Of Taxation
3. Canon of Convenience:
⎫ T h e mode and timing of tax payment should be as far as
possible, convenient to the tax payers
⎫ For example,
⎫ land revenue is collected at time of harvest
⎫ income tax is deducted at source
4. Canon of Economy:
⎫ This principle states that there should be economy in tax
administration
⎫ The maximum part of tax collection should be brought to the
government treasury
What is Tax ?
• "Taxes are dues that we pay for the privileges of
membership in an organized society."
• Tax is a compulsory payment made to the Government
for services it provides us, though people may not be
completely satisfied or convinced with these services.
– eg: Income tax is an instrument used by the government to
achieve its social and economic objectives
Types Of Taxation
Direct Tax Vs. Indirect Tax
Common Practices To Save Taxes
• Taxpayers generally plan their affairs so as to attract
the least incidence of tax
• Taxpayer spares no efforts in maximizing his profits
and attracting the least incidence
• The tax gatherer, on the other hand tries to break
the plans whose sole objective is to save taxes
• Three common practice to save taxes
– Tax Evasion
– Tax Avoidance
– Tax Planning
TAX PLANNING
• Tax planning can be defined as an arrangement of one’s
financial and economic affairs by taking complete legitimate
benefit of all
– deductions
– exemptions
– allowances and
– rebates so that tax liability reduces to minimum
• Tax laws are fully complied within its framework
• Not taking form of colorable devices
• Having no intention to deceit the legal spirit
• Planning of tax must be correct both in form and substance
TAX PLANNING
• Objectives of Tax Planning

1. Increase in disposable income
2. Shield against high taxation
3. Inequity in tax burden
4.Maximum deductions allowed to business persons,
minimal to others
5. Avoidance of litigation
6. Curb on tax evasion
TAX AVOIDANCE
• Tax avoidance is reducing or negating tax liability in
legally permissible ways and has legal sanction
• Tax avoidance is sound law and certainly not bad
morality for anybody to so arrange his affairs in
such a way that the brunt of taxation is the minimum
This can be done within the legal framework even by
•
taking help of loopholes in the law
TAX EVASION
• All methods by which tax liability is illegally avoided
are termed as tax evasion
• Tax evasion may involves:
– untrue statement knowingly
– submitting misleading document
– suppression of facts
– not maintaining proper accounts of income earned
(if required under law)
– omission of material facts on assessment
Methods of Tax Planning
• Various methods of Tax Planning may be

classified as follows :
1. Short Term Tax Planning
2. Long Term Tax Planning
3. Permissive Tax Planning
4. Purposive Tax Planning
Short Term Tax Planning
• Short range Tax Planning means the planning thought of and

executed at the end of the income year to reduce taxable
income in a legal way
• Example:
– Suppose, at the end of the income year, an assesse finds his taxes
have been too high in comparison with last year and he intends to
reduce it
– Now, he may do that, to a great extent by making proper
arrangements to get the maximum tax rebate u/s 88
– Such plan does not involve any long term commitment, yet it results in
substantial savings in tax
Long Term Tax Planning
Long range tax planning means a plan charted out
• – at the beginning of the income year
– to be followed around the year
– This type of planning does not help immediately as in the case of short
range planning but is likely to help in the long run
• e.g.
• If an assesse transferred shares held by him to his minor son or spouse,
though the income from such transferred shares will be clubbed with his
income u/s 64, yet is the income is invested by the son or spouse, then the
income from such investment will be treated as income of the son or spouse
Moreover, if the company issue any bonus shares for the shares
• transferred, that will also be treated as income in the hands of the son or
spouse
Permissive Tax Planning
• Permissive Tax Planning means making plans which

are permissible under different provisions of the law
– such as planning of earning income covered by Sec.10,
specially by Sec. 10(1)
– Planning of taking advantage of different incentives and
deductions
– planning for availing different tax concessions etc.
Purposive Tax Planning
• It means making plans with specific purpose to ensure the

availability of maximum benefits to the assessee
– through correct selection of investment
– making suitable programme for replacement of assets
– varying the residential status and
– diversifying business activities and income etc.
Methods of
Corporate Tax Planning
1. Tax Planning in Respect of Employee`s Remuneration
2. Tax Planing in Case of Amalgamation
3. Deduction of tax at source
4. Tax Consideration on capital structure
5. Tax Planning in respect of bonus share
Tax Planning in Respect of Employee`s
Remuneration
• Factors are considered in case of remuneration planning :
– One has to ensure that while calculating business income
of the employer, remuneration paid to employee are fully
deductable
– One has to see that remuneration received by the
employees is taxable in their hands at concessional rates
Tax Planning in Respect of Employee`s
Remuneration
• Deduction of remuneration in hand of employer:
– Remuneration to employees engaged in carrying on scientific
research
– Insurance premium on health of employees
– Bonus& commission to employees
– Employers contribution towards PF & Gratuity fund
– Employees contribution to staff welfare scheme
– Family Planning expenditure
– Payment of salary, allowances, perquisites
– Salary payable outside India
– Payment of salaries to relatives
– Payment of salaries exceeding 20,000 Rs.In cash or bearer cheque
Tax Planning in Case of Amalgamation
• Meaning of Amalgamation under the Income Tax Act [Sec
2(1B)]
"Amalgamation", in relation to companies,
– one or more companies with another company
[or]
– the merger of two or more companies to form one company
Tax Concessions
• Tax concessions are available if an amalgamation satisfies the
conditions of Section 2(1B) and the amalgamated company is
an Indian company:
– Non-chargeability of capital gain on the transfer of a capital asset
including shares held by a shareholder at the time of amalgamation
Tax Planning in Case of Amalgamation
– Eligibility of amalgamated company for the deduction in respect of
any asset representing expenditure of a capital nature on scientific
research
– Eligibility of the amalgamated company for the deduction in respect of
acquisitions of patent rights or copy rights
– Similar deduction in respect of expenditure on know-how as provided
in
– Amortization of expenditure for obtaining telecom licence fees
– Amortization of certain preliminary expenses
– Amortization of expenditure on amalgamation
– Amortization of expenditure on prospecting etc. for certain minerals
– Writing off bad debts
Tax Planing in Case of Amalgamation
– Deduction in respect of any expenditure for the purposes of

promoting family planning as
– Computation of written down value of the transferred fixed assets in
the case of amalgamated company.
– Continuance of deduction available
– Benefit of carry forward and set-off of accumulated losses and
unabsorbed depreciation
Deduction of tax at source
• In certain specified cases of income, tax at source
should be deducted by the person responsible for
making payment of such income
• Income-tax Act provides that such tax must be
deducted from the amounts of both residents and
non residents according to the rates prescribed in
Finance Act of that year.
Tax Consideration on capital structure
• A company's capital structure is the method a company uses
– finance its operations and growth utilizing various sources of funding.
• Capital structure is a mix of a company's long-term debt,
specific short-term debt, common equity and preferred
equity
– Two options for capital are debt and equity.
• Debt receives a tax break but increases the financial risk of a
company
• Equity does not share those same qualities
• Cost of Capital and its tax treatment for Debentures:
– The cost of capital for loans and debentures refers to
interest payable to lender or debenture holder
– An interest rate is the rate at which interest is paid by
borrowers for the use of money that they borrow from
a lender
• Tax treatment of interest:
– Interest on loans or debentures is 100% tax deductible while
calculating business income.
– In following cases ,interest will be allowed as deduction
• paid during the previous year itself
• if not paid, it must be paid on or before due date of furnishing of
return of income
– Interest on loan from any public financial institutions like
IDBI,ICICI,SFC.
– Interest on any loan taken from a scheduled bank
including a co-operative Bank
• Cost of Capital and its tax treatment for equity and preference shares:
– Dividend signifies cost of capital for owned capital
• Tax treatment of Dividend:
– Dividend paid to shareholders is not deductible as business expenditure.It has to be
paid out of after tax profits
– Such dividend distribution tax shall be payable @ 15% + surcharge @ 5% +
education cess @ 2% + SHES @ 1% of amount so declared, distributed or paid
• The amount referred to in IT Act Sec. 115-O, i.e. dividend to be distributed shall be
reduced by
– The amount of dividend, if any, received by the domestic company
during the financial year, if
• dividend is received from its subsidiary
• subsidiary has paid tax under this section on such dividend
• domestic company is not a subsidiary of any other company
Tax Planning in Respect of Bonus
Shares
⎫ Bonus share are issued to the equity shareholders, the value
of the share is not taxed as dividend distributed.
⎫ Bonus are issued to preference shareholders, on their issue it
is deemed to be dividend and liable to tax
⎫ Redeemable preference share are issued as bonus share on
their redemptions, the amount shall be taxed distributed
⎫ Expenses on issue of bonus shares allowed as deduction as
per supreme court judgment.
Corporate Tax Management
Managerial & Financial Decisions
⎫ Location & Nature of Business [NEW]
⎫ Deemed Dividend
⎫ Lease or Buy Decisions
⎫ Repair, Replace and Make or Buy Decisions
⎫ Capital Gains on Distribution of Assets by Companies in
Liquidation
⎫ Sale of Scientific Research Asset
⎫ Tax Management With Reference To Capital Structure
⎫ Conversion of Firm / Sole Proprietorship to Company
Deductions
• AVAILABLE TO CORPORATE Under Sec (80C to 80LA)
• Company assesses are entitled to claim following deductions
u/s 80 out of total income:
– Deduction u/s 80G for donations
– Deduction u/s 80GGA certain donation for scientific research or rural
development
– Profits from new infrastructure undertakings u/s 80IA
– Deduction to developers of Special Economic Zones (80IAB)
– Profits from new industrial undertaking u/s 80IB
– Deduction for setting up undertakings in special states U/s 80IC
Deductions
– Deduction in respect of profits & gains from business of hotels &
convention centres in specified area u/s 80ID.
– Deduction in respect of profits & gains of certain undertakings in
North-Eastern State u/s 80IE
– Profits from processing of bio-degradable waste u/s 80JJA
– Deduction in respect of employment of new workers u/s 80JJAA
– Deduction for income of offshore funds u/s 80LA
Income Tax
1. In Income Tax Act, 1961
(a)Income tax in India is governed by the Income Tax Act,
1961
(b) It came into force w.e.f. 1.4.1962
(c) The Act contains 298 sections and 14 Schedules
(d) The Finance Act shall bring amendment to this Act.
(e)The Law provides for determination of taxable
income, tax liability and procedure for assessment,
appeal, penalties and prosecutions
Income Tax
• The act is administered by Central Board of Direct Taxes
(CBDT) which is empowered to frame rules to ensure proper
governance of the Act.
• CBDT issues timely circulars to clarify any doubts regarding
the scope and meaning of the act and to act as a guide for
officers and assessees
Different Sources of Income
• Income includes :
– Profits or gains of business or profession
– Dividend
– Voluntary Contribution received by a Charitable / Religious
Trust or University / Education Institution or Hospital
– Export incentives, like Duty Drawback, Cash Compensatory
Support, Sale of licences etc.
– Interest, salary, bonus, commission or remuneration
earned by a partner of a Firm from such Firm.
– Profits and gains from the business of banking
carried on by a cooperative society with its members.
– Winnings from lotteries, crossword puzzles,races including
horse races,card games and other games of any sort or
from gambling or betting of any form or nature
whatsoever
– Deemed income u/s 41 or 59.
– Amount received under Keyman Insurance Policy including
bonus thereon.
– Capital Gains chargeable u/s 45
– Amount received under agreement for (a) not carrying out
activity in relation to any business, or (b) not sharing any
knowhow, patent, copyright etc.
– Gift as defined u/s 56 (2)(vi) (w.e.f. A.Y 2008-2009).
Any sum of money exceeding 50,000, received by an
Individual or a HUF from any person during the previous
year without consideration on or after 1.4.2007, then the
whole of aggregate of such sums will be taxable.
Income Tax
EXEMPTION Vs. DEDUCTION
• If an income is exempt from tax, it is not included in the

computation of income
• Exemption can never exceed the amount of income
• Deduction is generally given from income chargeable to tax

• Deduction can be less than or equal to or more than the
amount of income
• If amount deductible is more than the amount of income, the
resulting amount will be taken as loss
Rates of Income Act for Assessment Yr
2015-16
FACTOR-IV
INTERNATIONAL COMPENSATION
Compensation Approach in various countries
• In USA - Compensation package includes: base salary,

bonus, long term incentives & other benefits and peaks.
The base salary is the small part of the total package.
• In Europe – Paid less compensation than that of

American executives, but benefits and Employee perks
are much better in Europe than America.
• In Japan – The compensation levels of CEO’s of large

companies are just one-third of those of American
CEO’s. Japanese compensation is based on seniority of
employees.
Compensation- Two issues:
• Pay executives in different countries

according to the standards in each
country?
or
Equalize pay on a global basis?
• What should be the Method of payment

?
6
National differences in compensation
CEO HR Director Accountant Manufacturin

g Employee
Argentina $860,704 $326,874 $63, 948 $17, 884
Canada 742,228 188, 070 44,866 36,289
Germany 421,622 189,785 61,375 36,934
Taiwan 179,486 102,491 30,652 11,924
United 719,665 268,302 107,839 28,874

Kingdom
United States 1,403,899 306,181 66,377 44,680
Compensation issues
Payment
Type of Company
How much home-country

Ethnocentric expatriates should be
paid.
Pay can and should be

Polycentric
country-specific.
May have to pay its

Geocentric/ international cadre of
Transnational
managers the sa8me.
Employee Expectations and
International Organization’s
Compensation Policy
• Financial protection in terms of
benefits, social security and cost of
living in the foreign location
• Foreign assignment offers

opportunities for advancement
through income and/or savings
• Issues such as housing, education

of the children and recreation are
addressed
Note -: that the expectations of the employees often do not

coincide with the interests of the organization
Complexities of Global
Compensation
Varying Exchange Rate Varying Tax
Requirements Fluctuations Rates
for Facilities
Varying Cost of
Living Varying
Complexities of Inflation Rate
Compensation
Management
Employee Varying Local

Expectations Conditions
Consistency & Country

Equity Perspectives
Objectives Of Global
Compensation
Improve Recruit & Retain
Organizational Competent Employees Consistency &
Performance Equity in pay
Objectives of Employee
Benefit
Compensation mobility in a
management
Management Cost-effective
Competitive & Financial

Comparable protection t o
Organization employee
Ability to pay
Factors that affect Global Compensation
Founder’s
Philosophy
MNC’s Internal
Environment MNC’S External
Environment
•Goal Orientation &
compensation objectives • Parent Country
•Labour Market
• Competitive strategy
Characteristics
• Organisational Culture
• Local conditions
• Human Resource Structure
•Home & Host Country govt.
roles
•Employee-Employer
Relations
• Industry type
• Subsidiary role
• Competitor’s Strategies
• Level of Technology MNC’s Compensation
Package
Internal variables influencing International
Compensation Strategy
• Goal orientation
• UK-based foam manufacturer Zotefoam, where equality is a key aspect of HRM in
the company’s mission, the only perks that differentiate executives from other
workers are private health insurance and a car allowance – MD of the firm sees the
internationalizing firm as one with minimal status differences between levels in the
org. hierarchy
• Capacity to pay
• Cost constraints on the enterprise
• Competitive strategy
• If for eg., as part of the MNC competitive strategy, the IHRM strategy is to be a
market leader in employee compensation in order to compete for the most
competent candidates, then the levels of compensation might well be higher than
if the competitive strategy is based on, say, the provision of secure employment.
Cont….
• Organization culture
• It also influences the degree to which employees are compensated on

the basis of seniority, in contrast to personal connections or
performance
• Workforce characteristics
• Age, education level, qualifications and experience, along with
workforce tastes and preferences, and labor relations factors such as
nature of employment relationship (level of TU involvement within
MNCs) will result in different international compensation approaches
External variables influencing International
Compensation Strategy
• Nationality of the parent country
• In terms of culturally determined values and attitudes towards compensation policy and
practices – local culture influences international compensation strategy through the
dominant societal values, norms, attitudes and beliefs concerning for eg. bases for
compensation differences (performance, family connections, gender), degrees of
compensation differences between managerial and non- managerial employees, and the
propensity for using particular types of compensation (pay incentives and benefits)
• Labor market characteristics of supply and demand
• Education and skill levels, ages and experiences of those in the labor market
• Role of home and host country government in labor relations

• Affect the level of govt. regulation of the labor market and employment
relationship, including compensation of the workforce
Cont..
• Industry type
• Evidence from 2 global industries, scientific measuring and medical

instruments suggest that MNCs competing in a global industry may be
more likely to allocate rewards based on corporate and regional
performance rather than on subsidiary performance, as favored by MNCs
competing in a multi-domestic industry
• Different industry sectors also have different norms and practices for
international compensation (eg. service-sector and high technology
MNCs have been more likely than manufacturers to incorporate equity-
based options in their international compensation strategies
• Competitors’ strategies
• Even if the MNC is not seeking to be a market leader in international
compensation, it generally cannot afford to fall behind market rates
across its locations, as it will risk losing valuable employees to
competitors
Components Of Global Compensation
Package
Base Salary and Allowances Taxes Retirement Benefits
Incentive Pay
• Pay/Base salary • Cost of Living •Exchange Rate • Gratuity

Protection
• Bonus • Housing Allowance • Pension
•Tax Equalization
• Stock-Option • Educational Allowance •Social Security
• International Market Measures
• Medical Allowance
•Tax Protection
• Insurance Allowance
• Relocation Allowance
• Hardship Premium
Base Salary and Incentive Pay
Base Salary
• Base salary is a fixed amount of money paid to an

employee by an employer in return for work
performed. Base salary does not include benefits,
bonuses or any other potential compensation from
an employer
• The base salary is either paid in the expatriate’s home

or parent country currency, or in the currency of the
expatriate’s host country
Incentives/Variable Pay
• A growing number of MNCs have dropped the ongoing

premium for overseas assignments and replaces it with a
one time, lump- sum premium
• Even in domestic MNCs are preferring one- time premiums

to periodic salaries.
Use of Long Term benefits
• Employee Stock Option Plan (ESOP)
This is plan established by a company wherein a certain

no. of shares are reserved for purchase and issuance to
key employees. Such shares usually vest over a certain
period to serve as an incentive for employees to build
long-term value for the company.
Use of Long Term benefits contd.
Restricted Stock Unit ( RSU)
• This is a plan established by a company, wherein units of stocks are

provided with restrictions on when they can be exercised.
• It is usually issued as partial compensation for employees.
• The restriction generally lifts in 3-5 years when the stock vests.
• IT companies are increasingly using RSUs as incentives since they afford a

lot more flexibility.
Use of Long Term benefits contd
Employee Stock Purchase Plan ( ESPP)
•This is a plan wherein a company sells shares to its

employees usually, at a discount.
•The company deducts the purchase price of these shares

every month from employees salary.
Allowances
Cost of Living Allowance –
•Payment made to the expatriate with a view to compensating

for differences in expenditure between the home or parent
country and the host country.
•Factors such as inflation differentials and the price level need

to be considered. Often, the cost of living allowance is difficult
to determine
Housing Allowance –
•Payment made to the expatriate with a view to ensuring that he

or she can maintain their home-country living standard in the
host country.
•Alternatively, an organization may provide housing facilities on

a mandatory or optional basis.
•Also, support services may be provided to the expatriate, for

example, by helping sell or rent the expatriate’s house in the
home country
Home Leave Allowance –
•Payment made to the expatriate with a view to facilitating their visit

back to the home country, once or twice a year. Home leave enables the
expatriate to renew business, family and social ties, and thus avoid
adjustment problems subsequent to repatriation
Relocation Allowance –
•Payment made with a view to enable the relocation of the

expatriate to the assignment location. Includes moving,
shipping, storage costs, subsidies for purchase of appliances
and (possibly) an automobile
Education Allowance –
•Payment made with a view to supporting the education of the

expatriate’s children, i.e. tuition, language class, school enrollment
fees, books and supplies, transportation to educational establishment,
room and boarding, school uniforms etc.
•Problems regarding the level of education required and adequacy of

schools in the host country, and transportation to other localities may
pose significant problems for organizations
• Miscellaneous Allowances –
• Depending on the level of seniority of the expatriate,

payments to him or her for club memberships, sport
associations, maintenance of household staff etc. may
be rendered
• In addition, the organization may render financial

assistance to the spouse for her or his loss of income
as a result of the transfer of the expatriate
Benefits –
•Support rendered to an expatriate in addition to th allowances

provided. There are several types of benefits, mor prominent
examples being:
•Social Security Benefits (home country or host country?)
•Paid Vacations for expatriate and family
•Rest and Rehabilitation leave (especially for expatriates base
in “hardship” assignment locations)
•Emergency Cases (severe illness, death)
Hardship Premium
•This is perceived as an inducement in the form of a salary

premium to accept an overseas assignment.
•Generally salary premiums vary from 5-40 % of the base

salary.
•Determining the appropriate level of payment can be difficult
Factors determining the hardship premium, usually expressed in terms of an expatriate’s

base pay, are typically:
Taxes
Taxation
• Problems , Issues and Challenges
• Dual tax cost : Expatriates paying taxes in both home

and host country.
• Need to consider personal and corporate taxes in

addition to income tax
• Modifying compensation packages to provide the

most tax-effective, appropriate rewards within the
overall compensation framework
Taxation
• Issues while considering benefits
• Whether or not to maintain expatriates in home country programs, particularly if the
company does not receive tax deduction for it.
Whether companies have the option of enrolling expatriates in host-country benefit

•
programs and /or making up any difference in coverage

•
Whether host-country legislation regarding termination affects benefit entitlement
•
Whether expatriates should receive home country or host country social
• security benefits
Whether benefits should be maintained on home country or host country basis, who
is responsible for the cost, whether other benefits should be used to offset any
shortfall and whether home country benefit programs should be exported to local
nationals in foreign countries
TAX EQUALISATION
• Organizations withhold an amount equal to the home country

tax obligation of the PCN and pay all taxes in the host country.
• Firms withhold an amount equal to home country tax
obligation, and pay all taxes in the host country
• By far the more common taxation policy used by multinationals
• Tax payments equal to liability of home country tax payer with
same income and family status are imposed on employee’s
salary and bonus
• Additional premiums or allowances are paid tax free
TAX PROTECTION
ν
The employee pays up to the amount of taxes he or she would
pay on remuneration in the home country.
ν In such a situation, the employee is entitled to any windfall

received if the total taxes are less in the foreign country than in
the home country.
ν Employee pays up to the amount of taxes he or she would pay

on compensation in the home country
ν
Employee is entitled to any windfall received if total taxes are
less in the host country than in the home country
• Ad-hoc
• Each expatriate handled differently , depending upon individual

package agreed to with the firm
• Laissez Faire
• Employees are ‘on their own’ in conforming to host-country and

home country taxation laws and practices
Retirement Benefits
• Gratuity
Gratuity is a defined benefit plan and is one of the many retirement
benefits offered by the employer to the employee upon leaving his
An employee may leave his job for various reasons, such as - job.
retirement/superannuation, for a better job elsewhere, on being
retrenched or by way of voluntary retirement.
Retirement Benefits
• Pension
A pension is a contract for a fixed sum to be paid regularly to a person,
typically following retirement from service.
Types of pensions
• Employment-based pensions (retirement plans)

• Social and state pensions
• Disability pensions
Retirement Benefits
• Social Security Measures
Social Security is a comprehensive approach designed to prevent deprivation,

assure the individual of a basic minimum income for himself and his
dependents and to protect the individual from any uncertainties.
• The Employees’ Provident Funds & Miscellaneous Provisions Act, 195

• The Employees’ State Insurance Act, 1948 (ESI Act)
• The Workmen’s Compensation Act, 1923 (WC Act)
• The Maternity Benefit Act, 1961 (M.B. Act)
• The Payment of Gratuity Act, 1972 (P.G. Act)
International living costs data
• Obtaining upto-date information on international living costs is
a constant issue for MNEs
• The MNEs take the services of consulting firms
• These firms conduct regular surveys calculating a cost-of-living

index that is updated in terms of currency exchange rates
• This data is a very important issue to expatriate employees and

forms the basis of many complaints if there are updating lags
on compensation package rise
Cont….
• MNEs must also respond to unexpected events such as
currency and stock market crash. For eg (Asian crisis)
• Such events have a dramatic impact on prices and the

cost of living
• MNEs must also decide what to include in the ‘basket-of-

goods’ which the consulting firms use to decide the living
costs
Criterion America Japan Russia Middle East
Orientation Performance Seniority - based Job – level Nationality group

-oriented based and job level
Components BS- Basic Salary, VB MW – Monthly BS- Basic Salary BS- Basic Salary, VB
– Variable bonus, LTI wage, BA – Basic FB – Fixed – Variable bonus,
– Long tern Allowance, OT – Bonus, NMB – Compulsory
incentives, CBC – Overtime, VB – Non monetary benefit
Compulsory benefit Variable bonus benefits) contributions, VBC-
contributions, VBC- Voluntary benefit
Voluntary benefit contribution
contribution
Link with Excellent linkage Moderate linkage Poor linkage Moderate Linkage
performance
Basis of Annual merit Seniority and Seniority in Job Job Level
Increase increase age, performance level
ratings, spring
wage negotiation
Influencing Achievement – Hierarchy; Material Material
Cultural orientation Patience Possessions Possessions
variables Material possession Status seniority
REFERENCES
https://www.slideshare.net/ramesh112/legal-framework-on-compensation-structure
https://www.slideshare.net/swatikamthe_86/incentives-plans
https://www.slideshare.net/visavadiya/incentive-11967459
https://www.slideshare.net/HRM751/job-evaluation-29030394
https://www.slideshare.net/kakhwarisandeep/job-evaluation-16452457
https://www.slideshare.net/appugk007/fringe-benefits-by-kappi
https://www.slideshare.net/Manisha_D_Vaghela13/payment-of-bonus-act-1965-159705
https://www.slideshare.net/preeti52/chapter-5-international-compensation
https://www.slideshare.net/saravananmurugan334/corporate-tax-planning-54087295
http://www.eiilmuniversity.co.in/downloads/Compensation-Management.pdf
http://www.pondiuni.edu.in/sites/default/files/Compensation-mgt-260214.pdf
https://examupdates.in/compensation-management/
Compensation Management: R.C Sharma & Sulabh Sharma, Paper Pack
COMPENSATION MANAGEMENT BOOK BY THAKUR PUBLICATION
Compensation Management :D K Bhattacharyya, Oxford Publication
Compensation Management in a knowledge Based World Richard :Henderson, Pearson

Education, India
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BBA III YEAR

UNIT-3 BY: DR. GAURI DHINGRA

Dale Yoder described job evaluation as “a practice which seeks to

Edwin B.Flippo defines job evaluation as “a systematic and orderly

1. Establish a standard procedure for determining the relative worth of

• If basic pay is very high - In the instance that basic pay is

• If basic pay is very low - In the instance that basic pay is

• Dearness allowance is calculated on the basis of Consumer Price

equivalent to 125 percent for its employees.

whether by way of food and beverage

applicable to the establishment.

■ It implies monetary inducements offered to

Employee Stock Ownership Plans

Performance Plans (Performance

Broad-Based Option Plans (BBOP)

■ Under a system of individual incentives, all

Pay constant function of Straight piecework plan Standard hour plan

❑ Straight Piece Work ❑ High Piece Rate ❑ Taylor’s Differential

Taylor’s Differential Piece Rate

Case 1 time taken= 10 Hrs

Case 1 Output = 70 units

■ Plan is clearly communicated

Salesstaff receive more pay for selling more, and low

Many employers use this standards-based system for evaluating

2. It is a payment made after ascertaining the net profits of the

3. The amount paid to the employees is over and above their

4. The amount to the paid is determined based on some agreed

To Maintain Relationship Between Company and Employee

2. Employees earnings at present and in future become subject to a

3. It is being used as a management tool to fend off takeover

4. There is no direct relationship between the effort and reward

● The Employee’s Provident Fund And Miscellaneous

Labour is one of the principal factors of production in

With a view to ensure job security and satisfaction

✂A newly established organization for the initial period of

1. Employee Provident Fund Scheme

● The act applies in the non seasonal organization

● The Employees covered are those whose earnings is

● Every eligible organization has to get registered under

● The eligible employee has to fill up the declaration

● The amount of contribution for a wage period shall be

● Employer’s contributes equal to 4.75% of the wages

● If contribution is not paid in time, the rate of damages

● Under the act it is duty of employer to pay equal

● No discrimination for wages or for recruitment &

● The employer is required maintain register in terms of

● There are heavy penalties ranging from Rs 500/- to

● The act aimed to brining conflicts between employer and

● The ID act seeks to pre empts industrial tensions, provide the

● The penalties ranges from Rs. 1000/- to Rs. 5000/-

● Wages are remuneration which the workers are

● The employers always think of how to decrease the

● The Govt. also enjoins in regulating the wags in the

● The act prevents exploitation of labour as such the

● It provides the basic rates of wages and special

● The other provisions such as the wages must be paid

● It also talks about penalties & prosecution for any

● An employee under the act means any person

● The bonus is calculated basis allocable surplus in the

● The bonus can be forfeited if the employee is sacked

● The act provides penalties & prosecution for any

● The act applies to all person drawing a salary up to Rs. 3,500/-.

● Gratuity is payable to an employee on termination of his

4. There is no direct relationship between the effort and reward 

a. Determine which categories of employees (manual, clerical supervisory,  

b. Work out a wage structure based on the principles of fair wages  

c. Suggest a system of payment by results.  

d. Work out the principles that should govern bonus to workers in  

2. The second step is to give a public hearing at which leaders of  