Session 1 Notes :

The term Compensation is defined as something of value given in exchange for

some other thing. Compensation can occur in two instances. The first instance refers to
the monetary payment paid to someone for work carried out by that person. The second
instance refers to the monetary payment given to a person who has suffered a loss or
injury. The first instance represents an ideal employer-employee scenario. Thus,
Compensation can refer to the payment given to an employee for his/her services or
work performed.

Remuneration is used to connote something broad, like a package, essentially implying

that it is not only a salary, but many other benefits that are included in this “package.” In
general, Remuneration is referred to as the payment made to an employee for his/her
services or work.
It is the whole package offered to an employee during his/her term of employment with
the employer. Monetary benefits include salary, overtime pay, vacation pay, bonuses
and performance-related payments. Non-monetary payments refer to benefits such as
the provision of a company vehicle, medical and/or hospital insurance, food and
shelter, pension or retirement schemes, family support schemes, child care,
subscriptions and any other benefits.

COMPONENTS OF COMPENSATION:

Monetary compensation package of employees generally consists of the following

components:
1. Basic Pay. The primary part of pay package is basic pay. For blue-collar workers basic
wage may be based on work done (price wage system) but for white-collar employees,
supervisory staff and managers, basic salary is generally time bound. Basic pay is generally
determined through job evaluation which is the process of systematically ascertaining the
relative worth of a job.
2. Allowances. Several allowances are paid in addition to basic pay. Some of these allowance
are given below:

Allowance:
Allowance is defined as a fixed quantity of money or other substance given regularly in
addition to salary for meeting specific requirements of the employees. As a general rule, all
allowances are to be included in the total income unless specifically exempted.

 Dearness Allowance. This allowance is given to protect real income against inflation.

Generally, dearness allowance (DA) is paid as a percentage of basic pay. DA is
location-based and varies over the urban, rural, or semi-urban towns and cities. Thus
the effective salary of an employee plus such DA helps offset the increasing prices
 and is constantly increased with larger cities getting higher dearness allowances than
the smaller ones.

a) Bonuses:
Bonus programs have been used in American business for some time. They usually reward
individual accomplishment and are frequently used in sales organizations to encourage
salespersons to generate additional business or higher profits. They can also be used,
however, to recognize group accomplishments. Indeed, increasing numbers of businesses
have switched from individual bonus programs to one which rewards contributions to
corporate performance at group, departmental, or company-wide levels.
According to some experts, small businesses interested in long-term benefits should probably
consider another type of reward. Bonuses are generally short-term motivators. By rewarding
an employee's performance for the previous year, they encourage a short-term perspective
rather than future-oriented accomplishments.
In addition, these programs need to be carefully structured to ensure they are rewarding
accomplishments above and beyond an individual or group's basic functions. Otherwise, they
run the risk of being perceived of as entitlements or regular merit pay, rather than a reward
for outstanding work. Proponents, however, contend that bonuses are a perfectly legitimate
means of rewarding outstanding performance, and they argue that such compensation can
actually be a powerful tool to encourage future top-level efforts.

b) Profit Sharing:
Profit sharing refers to the strategy of creating a pool of monies to be disbursed to employees
by taking a stated percentage of a company's profits. The amount given to an employee is
usually equal to a percentage of the employee's salary and is disbursed after a business closes
its books for the year. The benefits can be provided either in actual cash. A benefit for a
company offering this type of reward is that it can keep fixed costs low.

Profit-sharing is a process wherein you share the profits with your key employees and is often
described as a form of additional remuneration to keep the employees engaged and satisfied
in the job so that the rate of employee retention is higher. The share allocation is in addition
to the standard wages or salary that an employee receives and is not based on output or time.

The idea behind profit sharing is to reward employees for their contributions to a company's
achieved profit goal. It encourages employees to stay, because it is usually structured to
reward employees who stay with the company; most profit sharing programs require an
employee to be vested in the program over a number of years before receiving any money.
c) Stock Options:
 Stock options have become an increasingly popular method in recent years of
rewarding middle management and other employees in both mature companies and
start-ups.
  Employee stock-option programs give employees the right to buy a specified number
of a company's shares at a fixed price for a specified period of time (usually around
ten years). They are generally authorized by a company's board of directors and
approved by its shareholders. The number of options a company can award to
employees is usually equal to a certain percentage of the company's shares
outstanding.
 Like profit sharing plans, stock options usually reward employees for sticking around,
serving as a long-term motivator. Once an employee has been with a company for a
certain period of time, he or she is fully vested in the program. If the employee leaves
the company prior to being fully vested, those options are canceled.

 House Rent Allowance. Employers who do not provide living accommodation pay

house rent allowance (HRA) to employees. This allowance is calculated as mentioned
below.
o HRA - 50% of basic in metro and 40% non metro - Taxable, subject to minimum of
following
1) Actual rent paid.
2) Rent paid in excess of 10% of Salary.

3) 50% of basic in metro & 40% non metro.

 City Compensatory Allowance. This allowance is paid generally to employees in

metros and other big cities where cost of living is comparatively high. City
compensatory allowance (CCA) is generally a fixed amount per month.

 Provident fund :  stands for Provident Fund. It is a scheme for salaried employees
to invest during work life and enjoy the benefits after retirement. It is a compulsory,
government-managed retirement savings strategy for employees, who can contribute
a part of their savings towards their pension fund, every month.

 Gratuity fund : The Payment of Gratuity Act came into force in 1972. The act covers
all employees working in mines, companies, ports, plantations, and other such
organizations that have more than 10 employees. Unlike the provident fund, the
gratuity amount is fully paid by the employer without any contribution from the
employee. 
1. The employer may either pay their employees the gratuity amount from their
own account or may opt for a general gratuity insurance plan with a service
provider. The company then pays an annual contribution to the service
provider, and in return, the insurance company can pay the gratuity amount to
the employee.
 Paid leave means time away from work by an employee for which the employee
receives compensation, and is limited to sick time, vacation time, compensatory time
and leave that is provided as an aggregate amount for use at the discretion of the
employee for any of these same purposes.

 Workers' compensation is a government-mandated system that pays monetary

benefits to workers who become injured or disabled in the course of their
employment. Workers' compensation is a type of insurance that offers employees
compensation for injuries or disabilities sustained as a result of their employment.

 Employees' State Insurance Corporation (ESIC) is a government organization that

manages the Employees' State Insurance (ESI) scheme. The scheme basically
provides medical and financial assistance to the employees and their families. The
assistance is provided when an employee is unable to perform his duties due to
sickness, employment injury, or maternity.

Non-Monetary: It usually emerge from work itself also from work environment.

 Nominal wage, or money wage, is the literal amount of money you get paid per hour
or by salary. For example, if your employer pays you $12.00 an hour for your work,
your nominal wage is $12.00. Similarly, if your employer pays you a salary of
$48,000 a year, then your nominal wage would be $48,000.

 Real wage, or adjusted wages, is the amount of pay a person can expect to receive
after factoring in the current inflation rate. For example, if a person's nominal wage is
$12.00, their real wage is above or below that amount depending on the current
inflation rate. 

 Living Wage : The term living wage refers to a theoretical income level that allows
individuals or families to afford adequate shelter, food, and other necessities. The
goal of a living wage is to allow employees to earn enough income for a
satisfactory standard of living and prevent them from falling into poverty