Compensation Management

COMPENSATION MANAGEMENT
(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Dr. Padmpriya Irabatti
COURSE DESIGN AND REVIEW COMMITTEE

Ms. Jaya Khare Prof. Dr. K. S. Anandram
Prof. Vijay Masarkar Prof. Arvind M. Joshi
Prof. Dr. Prasanna Deshmukh Prof. Jamshed Kushigara
Dr. Ashish Tavkar Prof. Sudhir Sant
COURSE WRITER
Prof. Sateeshchandra Joshi
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2010 (Revision 03, 2015)
Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
Compensation Management deals with a wide variety of topics such as cost concepts, compensation
structure, comparison of compensation structure and their surveys, payroll preparation, tax implications
for compensation, social impacts of compensation restructure, legal framework and recent trends in
compensation management.
These topics are very important from the point of view of every employee in an organisation. The
tools and techniques required to face the competition arising out of globalisation and liberalisation
are elaborately discussed and covered in this book.
This SLM on “Compensation Management” is written in a very simple language to enable the students
to learn the basics involved in Compensation Management.
I hope that the students will make maximum use of the topics discussed in this book and enrich their
knowledge for the future growth and development of their careers.
Prof. Sateeshchandra Joshi
iii
ABOUT THE AUTHOR
Prof. Sateeshchandra Joshi is a visiting faculty in most reputed Management Institutes in Pune. He
has been actively associated with Institutes like IMCC, IBMR, SIMIR, CMRD, S.P. College, Sun
Computer Education and Sinhagad College of Pharmacy.
He is actively connected with the academic activities of the University of Pune.
He also has a rich industrial experience of about 18 years with Corporates like Bajaj Auto Limited and
Fujitsu ICIM Limited. He had been handling Compensation Management portfolio while in Industry.
He has been extending consultancy services on Compensation Management, Payroll operations,
Statutory compliances matters to I.T. Companies and other organisations in and around Pune for the
last 10 years.
Based on his practical and academic experience and the current industrial scenario, the author has
made every effort to update the information, which can be useful to students of management.
iv
CONTENTS
Unit No. TITLE Page No.

1 Compensation and Costs - Concepts and Context 1-34
1.1 Introduction
1.2 Concept of Compensation / Reward
1.3 Essentials of an Equitable and Ideal Compensation and Reward
System
1.4 Characteristics of a Good Compensation System
1.5 Role of Compensation and Reward in an Organisation
1.6 Advantages of a Fair Compensation System
1.7 Need for designing a Compensation Policy
1.8 Importance of a Compensation / Reward System in a Business
Organisation
1.9 Concept of Cost
1.10 Various Cost Concepts / Elements of Cost
1.11 Cost Sheet Orientation and understanding of Problems
1.12 Cost associated with Personnel Functions
1.13 Concept of Cost to the Company / Organisation
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Control Systems for Labour Costs 35-72
2.1 Introduction
2.2 Direct and Indirect Labour
2.3 Role of various Departments
2.4 The Personnel Department
2.5 Industrial Engineering Department
2.6 Types of Workers
2.7 Payroll Department
2.8 Wage Analysis
2.9 Cost Accounting Treatment of Wages Components
Summary
Key Words
Suggested Reading
v
3 Compensation Systems: Merits and Demerits 73-102
3.1 Introduction
3.2 Compensation / Reward Management Process
3.3 Components of Remuneration
3.4 Reward System
3.6 Aspects of Reward Management
3.7 Various Compensation Systems and their Merits and Demerits
Summary
Key Words
Suggested Reading
4 Wage and Salary Administration 103-134
4.1 Introduction
4.2 Nature and Purpose of Wage and Salary Administration
4.3 Wage Surveys
4.4 Administration of Wages and Salaries
4.5 Principle of Wage and Salary Administration
4.6 Components of Wages
4.7 Theory of Wages
4.8 Wage Differentials
4.9 Importance of Wage Differentials
4.10 Wage Differentials in India
4.11 Executive Compensation Plans
Summary
Key Words
Suggested Reading
5 Legal Framework for Wage and Salary Administration 135-150
5.1 Introduction
5.2 Methods of Wage Fixation in India
5.3 Norms for Fixation of Wages in an Industry
5.4 Retirement Benefits related Enactments
5.5 Wage Boards
5.6 Collective Bargaining
Summary
Key Words
Suggested Reading
vi
6 Compensation Structures 151-172
6.1 Introduction
6.2 History and Past Practices
6.3 Elements of Management Compensation
6.4 Types of Compensation Systems
6.5 Role of Compensation and Rewards in Modern Organisations
6.6 Salary/Compensation Surveys
6.7 Job Evaluation, Internal and External Equity
6.8 Objectives of Job Evaluation
Summary
Key Words
Suggested Reading
7 Compensation Surveys 173-216
7.1 Introduction
7.2 Wages and Salary Administration in Hospitality Industry – A
Survey
7.3 Duration of Pay Revision
7.4 Labour Turn-out
7.5 Compensation Survey - IT/Telecom Industries
7.6 Methodology
7.7 Perception of Current Compensation and Benefit Policies
7.8 Emerging Trends in Compensation and Benefits
7.9 Benchmarking with the Best in Compensation and Benefits
Policies
7.10 Sector-wise Scenarios
7.11 Aspects of Wage Surveys
7.12 Wage Administration Rules
7.13 Compensation and Benefits in Perspective
7.14 Compensation and Benefits: A Tool to attract Talent
7.15 Compensation and Benefits as a Tool to drive Performance and
build Workforce Capability
7.16 Role of Compensation and Benefits in arresting Attrition
7.17 Compensation Structures Today
Summary
Key Words
Suggested Reading
vii
8 Pay Structure Today and Tomorrow 217-232
8.1 Introduction
8.2 Compensation Structure
8.3 Types of Compensation
8.5 Tax Planning and Payroll Components
8.6 Perquisites
8.7 Budget : How to save Income Tax
8.8 What does the Budget hold for Retail Investors
8.9 Pay Structure: Today and Tomorrow
8.10 New Trends in Compensation, Expectations of the Executive Cadre
vis-a-vis Rational Pay Structure
Summary
Key Words
Suggested Reading
9 Incentives, Reward System and Pay Restructuring 233-266
9.1 Introduction and Meaning of Incentive
9.2 Determinants of Incentives
9.3 Wage Incentives
9.4 Features of Profit Sharing
9.5 Pre-requisites of a Good Wage Incentive Scheme
9.6 Non-monetary Incentives
Summary
Key Words
Suggested Reading
10 Process and Steps for Preparation of Payroll 267-284
10.1 Introduction
10.2 Wage and Salary Determination
10.3 The Wage Determination Process
10.4 Possible Deductions from Wage/Salary
10.5 Possible Inputs to the Payroll Process
10.6 Possible Outputs from the Payroll Process
10.7 Preparation of Payroll/Wage Sheet
Summary
Key Words
Suggested Reading
viii
11 Tax Planning and Payroll Components 285-302
11.1 Introduction
11.2 Income from Salaries
11.3 Provident Funds
11.4 Approved Superannuation Fund [Sec. 10 (13)]
11.5 Deductions from Salaries [Sec. 16]
11.6 Distinction between Different Types of P.F.
11.7 Meaning of Salary for Different Purposes
11.8 Value of Rent-Free Accommodation
Summary
Key Words
Suggested Reading
12 Emerging Issues and Trends 303-324
12.1 Introduction
12.2 An Individual’s Lifestyle
12.3 Marriages and Family Values
12.4 Consumerism
12.5 Society
12.6 The New Environment
12.7 Business Process Re-engineering
12.8 Minimising downsizing Pains
Summary
Key Words
Suggested Reading
13 Constitutional and International Labour Standards and Norms 325-342
13.1 Introduction
13.2 Constitutional Perspective
13.3 Factors indicating the Requirement of a Wage Policy for India
13.4 Different Living Standards
13.5 The Correlation
13.6 Geographical Differences
13.7 Same Job v/s Same Pay
13.8 Managing the Payroll
Summary
Key Words
Suggested Reading
ix
x
Compensation and Costs - Concepts and Context
UNIT
1
Structure:
1.1 Introduction
1.2 Concept of Compensation / Reward
1.3 Essentials of an Equitable and Ideal Compensation and Reward System
1.4 Characteristics of a Good Compensation System
1.5 Role of Compensation and Reward in an Organisation
1.7 Need for designing a Compensation Policy
1.8 Importance of a Compensation / Reward System in a Business Organisation
1.9 Concept of Cost
1.10 Various Cost Concepts / Elements of Cost
1.11 Cost Sheet Orientation and understanding of Problems
1.12 Cost associated with Personnel Functions
1.13 Concept of Cost to the Company / Organisation
Summary
Key Words
Suggested Reading
Compensation and Costs - Concepts and Context 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concept and the meaning of compensation and cost
----------------------
• Justify the need for designing the compensation policy
---------------------- • Specify the role of compensation and reward in an organisation
---------------------- • Analyse costs associated with personnel functions
---------------------- • Explain the characteristics of a good compensation system

• Justify the importance of the compensation system in a business
---------------------- organisation
----------------------
---------------------- 1.1 INTRODUCTION

----------------------
Concept of compensation/reward, essentials of an equitable and ideal
---------------------- compensation and/rewards systems, role of compensation and rewards in
an organisation, need for design of compensation policy, importance of
---------------------- compensation/reward system in business organisations are the various aspects
of compensation management.
----------------------
Concept of cost, various cost concepts, elements of cost, cost sheet
---------------------- orientation and understanding of problems, cost associated with personnel
functions, maintenance and recruitment costs, other indirect costs associated
----------------------
with direct and indirect workers, cost related to contract workers, concept of
---------------------- cost to the company/organisation, labour turnover, costs involved and causes of
labour turnover, impact of labour turnover on cost, controlling labour turnover
---------------------- are dealt with in this unit.
----------------------
1.2 CONCEPT OF COMPENSATION/REWARD
----------------------
Professionally, Work can offer many valuable outcomes to employees,
---------------------- including the opportunity to exercise their abilities, to contribute, and to
be compensated and rewarded through this valuable exchange process.
----------------------
Compensation refers to all forms, returns and tangible services and benefits that
---------------------- employees receive as part of employer- employee relationship.
It may be defined as the money received for performance of work, plus
----------------------
the many kinds of benefits and services that organisations provide to their
---------------------- employees. ‘Money’ is included under direct compensation (popularly known
as wages, i.e. gross pay), while benefits come under indirect compensation, and
---------------------- may consist of life, accident and health insurance, the employer’s contribution
to retirement, pay for vacation or illness, and the employer’s required payments
----------------------
for employee welfare as social security.
----------------------
2 Compensation Management
The literal meaning of the word compensation is to compensate i.e. to pay Notes
for. Compensation can be a payment made in exchange of effort/s, a service
rendered or a task done. It can be regarded as the fruit for the efforts put in. In ----------------------
some other context, it is also described as a return, refund or payment made for
the damage done or destruction or injury caused. ----------------------
Let us explain it this way, compensation/reward means the return an ----------------------

employee expects from the business process since employee participates and
----------------------
puts in his efforts to achieve the organisational goals. Thus, not only the wages/
salary paid to the employee but the direct as well as indirect benefits provided to ----------------------
the employee as his fair share in the prosperity of the business, is also regarded
as Compensation. ----------------------
Compensation is the total amount of the monetary and non-monetary pay ----------------------
provided to an employee by an employer in return for work performed as required.
. Thus, compensation is not confined to wages or salary. It is a comprehensive ----------------------
term and includes in addition to salary and wages, fees, allowances, extra
----------------------
amenities or facilities and incentive payments. The compensation levels vary
from industry to industry and unit to unit or company to company. The levels of ----------------------
compensation are also known as the wage level of that industry.
----------------------
Compensation includes a wide array of payments such as bonuses, profit
sharing, overtime pay, recognition rewards and checks, and sales commission. ----------------------
Compensation can also include non-monetary perks such as a company-paid
car, employee stock options in certain instances, company-paid residential ----------------------
arrangements, and other non-monetary, but taxable, income items.
----------------------
1.3 ESSENTIALS OF AN EQUITABLE AND IDEAL ----------------------

COMPENSATION AND REWARDS SYSTEMS ----------------------
Employees desire a compensation system that they perceive as being ----------------------
fair and cosiders their skills and expectations. In HRM domain, Pay is a
major consideration because it provides employees with a tangible reward for ----------------------
their services, as well as a source of recognition and livelihood. In order to
understand the essentials of an equitable and ideal compensation system, it will ----------------------
be necessary to consider the following factors, on which the ideal compensation ----------------------
system shall be heavily depending upon:
1. Demand and Supply Position: One of the most important factors in ----------------------
determining an employee’s payment is Demand and Supply Position. Each ----------------------
job demands certain skills, personal qualities and technical education and
experience to perform the job. If the demand is more and supply less, ----------------------
then naturally the compensation payable will be high and vice-versa. For
example, if steno-typists were scarce in number, the compensation offered ----------------------
would be higher. The same thing can be said about Trained Nurses and the ----------------------
demand for such trained nurses in countries like USA, Canada, Australia.
The compensation offered for such jobs is definitely very high. ----------------------
----------------------

Notes 2. Nature of Business: If the product or service is of the nature of yielding
high profits, the compensation offered will naturally be relatively higher
---------------------- than what is paid for in such cases where other low profit yielding
businesses. For example, compensation paid to employees in companies
---------------------- like Reliance Industries Ltd., Bajaj Auto Limited, Maruti Udyog Ltd.
---------------------- would be definitely high as compared to other industries since these
are supposed to be high profit earning industries and as such capable of
---------------------- paying a high and handsome compensation.
---------------------- 3. Size of Business: Bigger the business, bigger the money involved and
hence the pay-packages are big too. Large organisations like multinational
---------------------- companies pay higher compensation than small industries.
---------------------- 4. Government Rules: In India, there are state and central acts for
minimising the disparity in wages and levels, for example, the Minimum
---------------------- Wages Act. Similarly, for providing Social Security benefits, payment of
Gratuity, Provident Fund, etc. are mandatory for employer falling under
----------------------
that category. For better working conditions, the Factories Act lays down
---------------------- many provisions. Various laws are available to protect the interest of
workers and to enforce minimum levels and uniformity for employees.
----------------------
5. Management Thinking: Every management (the people who run the
---------------------- organisation) has its own philosophy (i.e. the way of thinking). Every
organisation has its own values and beliefs. Some organisations have
---------------------- great concern about the employees and show a high sense of social
responsibility. They liberally provide non-statutory welfare benefits to
----------------------
their employees. Although the number is small, the compensation to
---------------------- employees is better, irrespective of the foregoing factors.
---------------------- 6. Nature of Job: Certain jobs in comparison to others are more difficult in
nature for example, teachers, nurses, social workers, doctors, cleaners,
---------------------- fire brigade, etc. These jobs have many different kinds of working
environment. Various skills and ability of facing stress, high pressure,
---------------------- long hours of work, continuous alertness and monotony are demanded
---------------------- by these jobs. Therefore, the availability of persons for such work is less.
For such work, the compensation has to be attractive to make employees
---------------------- sustain the work-pressure.
---------------------- Check your Progress 1

----------------------
State True or False.
---------------------- 1. Compensation/reward means the amount an employee pays to the
business.
----------------------
2. If the demand is more and supply less, then naturally the compensation
---------------------- payable will be high and vice-versa
---------------------- 3. Compensation is the total amount of the monetary and non-monetary pay.
4. Jobs of difficult nature attract lesser pay.
----------------------
Notes
Activity 1
----------------------
Jot down any four points of the essentials of an ideal compensation system
----------------------
applicable to your organisation.
----------------------
1.4 CHARACTERISTICS OF A GOOD COMPENSATION ----------------------

SYSTEM ----------------------
Here, we will talk about the properties of a good compensation system. ----------------------
While there is no perfect compensation plan, there are many basic characteristics
of a good plan. Any system exhibits good characteristics when it is based ----------------------
on certain principles. Similarly, to make a compensation system good and
effective, it needs to be in the best interest of employees. To create an effective ----------------------
compensation plan the following principles and characteristics are as follows: ----------------------
1. The compensation should be in direct proportion to the efficiency and
----------------------
results. A worker with higher efficiency should be paid higher.
2. The standards of efficiency should not be too high. Standards should be ----------------------
fixed by taking into consideration the normal worker and normal working
----------------------
conditions.
3. The compensation should be based on job-evaluation. A job evaluation ----------------------
is a systematic way of determining the value/worth of a job in relation
----------------------
to other jobs in an organisation. The objective of job evaluation is to
determine which jobs should get more pay than others. It forms the basis ----------------------
of compensation negotiations too.
----------------------
4. The system should be fair to both, the employer and the employee. It
should be based upon scientific time and motion study to ensure a standard ----------------------
output to the employer and a fair amount of wages to the employee.
----------------------
5. The employee should be assured of a guaranteed minimum wage at a
satisfactory level irrespective of the work done by him. ----------------------
6. The system of compensation should be well defined, uniform and ----------------------
applicable as a general system.
----------------------
7. Skilled employees should be paid more as compared to the unskilled
employees. ----------------------
Skilled employees are to be compensated for the efforts put in by them to
----------------------
acquire the skill.
8. The system should follow the management principle of equal pay. ----------------------
9. There should be bare minimum exceptions to the system. ----------------------
10. The system should be flexible to allow necessary changes, which may ----------------------
arise from time to time.
----------------------

Notes 11. A good compensation system should be able to minimise employee
turnover, absenteeism and late attendance. It should be able to retain the
---------------------- best talent by providing them adequate compensation thereby stopping
them from switching over to another job.
----------------------
12. It should be transparent, clearly communicated to all the employees. It
---------------------- should be ensured that the employees have understood it properly and
they can then work out the compensation to be received on their own.
----------------------
13. The system should not hit the slow employees but rather induce them
---------------------- to achieve higher efficiency and efficient employees should be paid in
proportion to their efficiency.
----------------------
14. The system should not penalise the employees for reasons beyond their
---------------------- control.
---------------------- 15. It should be easy to implement, and it should not result in exploitation of
workers.
----------------------
16. It should be consistent with the provisions under the various Labour Acts
---------------------- in force from time to time. The system should not be imposed on the trade
union. Before application, its acceptance should be sought from the union
---------------------- in the form of an agreement.
---------------------- 17. It must not violate any local or national trade union’s agreements.
---------------------- 18. The system should co-relate to the capacity of the organisation to pay.

----------------------
Fill in the blanks.
---------------------- 1. A worker with higher efficiency should be paid ______________.
---------------------- 2. A good compensation system should be able to minimise
_____________.
----------------------
3. Any compensation system should not __________ any local or
---------------------- national trade union’s agreement.
----------------------
----------------------
Activity 2
---------------------- Evaluate the characteristics of the compensation system with respect to the
practices prevalent in your organisation
----------------------
----------------------
----------------------
----------------------
----------------------
1.5 ROLE OF COMPENSATION AND REWARD IN AN Notes
ORGANISATION
----------------------
Now, let us talk about the role of compensation and reward in an
organisation. This system holds an important place in any business organisation. ----------------------
In business, four M’s are the pillars of business. The four Ms are Men, Material, ----------------------
Machine and Money, Among these four pillars, ‘Men’ has been the most
important factor, it is impossible to imagine a business process without Men. ----------------------
Men, as in employees in general are greatly motivated by money. In ----------------------
fact, most are motivated by money; at least for their basic needs. Employee
motivation through compensation can come in various ways. It could take ----------------------
the form of raises, performance bonuses, commissions, profit sharing, or any
----------------------
number of “extra benefits” like, automobiles, vacations, or other tangible items
purchased and used as rewards. ----------------------
Land, Labour, Capital and Organisation are the four major factors of
----------------------
production.
Every factor contributes to the process of production/business. It expects ----------------------
a return from the business process such as Rent, which is the return expected ----------------------
by the Landlord, similarly the capitalist expects Interest and the organiser, i.e.
entrepreneur expects profits. The labour expects wages from the process. ----------------------
It is evident that other factors are non-human factors and as such labour ----------------------
plays a vital role in bringing about the process of production/business in motion.
The other factors, being non-human, depend heavily on labour for participating ----------------------
in the business/production process. Labourers are living beings and have
expectations, emotions, ambitions and egos. Labour therefore expects to have a ----------------------
fair share in the business/production process. ----------------------
1.6 ADVANTAGES OF A FAIR COMPENSATION SYSTEM ----------------------
Here, we will have a look on the benefits of having a compensation ----------------------

system which is fair in nature. Considering the important role of compensation ----------------------
& reward in an organisation, a fair compensation system is a must for every
business organisation. The fair compensation system will help in the following ----------------------
manner:
----------------------
1. If an ideal compensation system is designed, it will have a positive impact
on the efficiency and results produced by the employee. ----------------------
2. Such a system will encourage the normal employee to perform better and ----------------------
achieve the standards fixed.
----------------------
3. This system will encourage the process of job evaluation. It will also help
in setting up an ideal job evaluation system, which will have transparency, ----------------------
and the standards fixing would be more realistic and achievable.
----------------------
4. Such a system would be well defined and uniform. It will be applicable to
all the levels of the organisation as a general system. ----------------------

Notes 5. The system would be simple and flexible so that every employee/recipient
would be able to compute his own compensation receivable.
----------------------
6. Such a system would be easy to implement, so that it would not penalise
---------------------- the employees for the reasons beyond their control and would not result
in the exploitation of employees.
----------------------
7. It will raise the morale, efficiency and cooperation among the employees.
---------------------- It being just and fair would provide satisfaction to the employees.
8. Such a system would help the management in complying with the various
----------------------
labour acts.
---------------------- 9. Such a system would also bring about the amicable settlement of disputes
---------------------- between the employees’ union (if any) and the management.
10. The system should follow the management principle of equal pay.
----------------------
11. A good Compensation/Reward System helps in bringing peace in the
---------------------- relationship of employer and employees.
---------------------- 12. It facilitates growth and advancement opportunities to the deserving
employees.
----------------------
13. A good compensation system provides platform for happy and satisfied
---------------------- workforce thereby minimising the labour turnover, which helps in
organisation to enjoy the stability.
----------------------
14. Such a system is hallmark of organisation’s success and prosperity. The
---------------------- success and stability of organisation is measured with pay-package it
offers to its employees
----------------------
15. It aims at creating a healthy competition among the employees and
---------------------- encourages them to work hard and efficiently.
----------------------
Check your Progress 3
----------------------
Fill in the blanks.
----------------------
1. Four major factors of production are ________, ____________,
---------------------- ___________ and ____________.
2. An ideal compensation system will have a _______________ impact
----------------------
on the efficiency shown by the employee.
---------------------- 3. A good compensation system will encourage the process of
________________.
----------------------
----------------------
----------------------
----------------------
----------------------
1.7 NEED FOR DESIGNING A COMPENSATION POLICY Notes
After going through the role and essentials of a sound compensation ----------------------
system, it becomes imperative that every business organisation should set up
for itself a proper Compensation Policy. The management of the organisation ----------------------
must have a well-designed compensation policy.
----------------------
The Policy calls for deciding the criteria for promotions, up-gradations
etc. It would also be necessary to fix the standard expectations from each ----------------------
and every workman/employee. The policy should determine the norms to be ----------------------
followed for the Performance Appraisal or the Job Evaluation. It should also
chalk out the need for training, provisions of fringe benefits, welfare schemes, ----------------------
etc. It must prescribe the manner in which such benefits would be extended and
levels within the organisation to whom such benefits are extendable. ----------------------
The Incentive schemes and its details, Pay package structure, Tax ----------------------
implications etc. are matters of concern while designing the Compensation
Policy. ----------------------
----------------------
1.8 IMPORTANCE OF A COMPENSATION/REWARD
SYSTEM IN A BUSINESS ORGANISATION ----------------------
----------------------
It is said that ‘Money makes the mare go’ which is a suitable proverb. It
holds good for all the factors in the business organisation. Business is run for ----------------------
profit and every factor participating in the business process expects its fair share
in the prosperity of the business. The compensation/reward system plays a vital ----------------------
role in the business organisation. Its importance can be very well ascertained as
----------------------
follows:
1. Employee-employer relations become amicable, peaceful and smooth ----------------------
with the incorporation of a sound compensation/reward system.
----------------------
2. The system brings out the best out of every employee in the organisation.
It aims at creating a healthy competition among them. It encourages them ----------------------
to work hard and efficiently. ----------------------
3. Principle of equal work, equal wages is brought into force which in turn
also provides transparency and parity. ----------------------
4. The perfect compensation system provides for a platform for a happy ----------------------
and satisfied workforce. This minimises the employee turnover. The
organisation enjoys the stability. ----------------------
5. The business organisation can think of expansion and growth if it has the ----------------------
support of a skillful, talented and happy workforce.
----------------------
6. A sound compensation system is the hallmark of success and prosperity of
an organisation. The success and stability of the organisation is measured ----------------------
with the pay- package which it provides to its employees.
----------------------
7. Both the employer and the employees get benefited because of the sound
compensation system. ----------------------

Notes 8. A sound compensation system helps the organisation to keep pace with
the changing environment. It helps the organisation to cope up with the
---------------------- wage levels in neighbouring industries.
---------------------- 9. The system provides adequate opportunities to those who wish to perform
better. The system provides for growth and advancement opportunities to
---------------------- the deserving employees.
---------------------- 10. Retaining the best talent by providing its employees with adequate
compensation, thereby stopping them from switching over to another job
---------------------- becomes possible with a good compensation/reward system.
---------------------- 11. A sound compensation system minimises complaints from the employees,
provides them with a congenial work environment to perform better
---------------------- and sets up for them the targets to be achieved. Definite targets help the
employees know their role in the organisation, which minimises wastage,
----------------------
and enhances the overall efficiency. It also helps the organisation to reduce
---------------------- the cost of production and to maximise profits.
----------------------
----------------------
Multiple Choice Single Response.
----------------------
1. A good compensation system brings ______ among employees.
----------------------
i. Healthy Competition
---------------------- ii. Tension
---------------------- iii. Bad blood
---------------------- iv. Absenteeism

2. The principle of equal work equal wages, when brought into force,
---------------------- results in
---------------------- i. Labour turnover
---------------------- ii. Tension
iii. Transparency and parity
----------------------
iv. Complaints
----------------------
----------------------
Activity 3
----------------------
Describe the various elements of cost and its relation to the organisation.
----------------------
----------------------
----------------------
----------------------
1.9 CONCEPT OF COST Notes
Here, in this section, we will talk in detail about what “cost” is. Costs ----------------------
are the monetary value of expenses for supplies, services, labour, products,
equipments, and other miscellaneous items purchased for business purposes ----------------------
or other accounting entity. Cost is the basic amount of expenses a businessman
----------------------
is likely to incur to be able to manufacture or process one unit of a proposed
product. ----------------------
Let us consider a business scenario. Prior to the starting of any business, ----------------------
a businessman has to prepare a rough sketch of the product he wants to
produce. He has to estimate the amount of money he is likely to spend to ----------------------
be able to produce just one unit of such a proposed product. The product is
made up only after spending some amount of money on raw material, labour, ----------------------
electricity, transportation, packing and packaging as well as advertisement and ----------------------
sales promotion. For example, if a businessman wants to start a business of
manufacturing a table fan, he will have to think of elements like raw material in ----------------------
the form of steel, body of the motor to be fitted inside the fan, paint, lubricants,
the salaries of technical workers, the non-technical staff, etc. After estimating ----------------------
the amount, he will need to spend on each of those items; he will be in a position ----------------------
to roughly work out the total cost (total of such expenditure) to produce one unit
of a table fan. Suppose the total of such expenses comes to Rs.350/-. After adding ----------------------
some more necessary elements of expenditure like packing, transportation to
the market place, sales promotion campaign, he might produce one unit of fan ----------------------
at Rs.500/-. ----------------------
After adding thereto the profit element he wishes to earn, he will be in a
position to fix up the selling price of the fan. Thus, by adding 20% of profits to ----------------------
the above expenditure of Rs.500/-, the selling price could be fixed at Rs.600/-. ----------------------
The above example depicts what is called as cost which is important to
----------------------
every businessman. The recording of these elements of expenditure is regarded
as Costing. It can be described as a process of accounting for costs, which begins ----------------------
with the recording of the income and expenditure or the bases on which they are
calculated and ends with the preparation of statistical data. Cost Accounting is ----------------------
thus the formal mechanism by means of which the costs of products or services
----------------------
are ascertained and controlled.
The most important consideration a businessman has while thinking about ----------------------
the production of any goods and services for his business is the operational
----------------------
portion of his business. He has to think of the two most important elements of
money management, viz. ----------------------
1. The cost of his product or services.
----------------------
2. And the budget of his business activity.
----------------------
The necessary data has to be collected in order to be able to estimate
the elements of the expenditure required to be incurred. It will focus on the ----------------------
objective of arriving at the cost per unit of his product or cost of service that he
intends to render. Cost of his goods and services is the starting point to exercise ----------------------

Notes control over his finances. A businessman therefore needs to know the elements
of the cost of goods and services he intends to manufacture/ render.
----------------------
1.10 VARIOUS COST CONCEPTS / ELEMENTS OF COST
----------------------
---------------------- Now, let us talk about the elements of cost which are Material, Labour
and Expenses.
---------------------- The Material that is directly required for the actual production of goods
---------------------- and services, the value for such direct material constitutes important part of cost
of production.
----------------------
Labour that would be directly engaged with the production of goods/
---------------------- services is yet another constituent of the cost. It is the sum of all wages paid to
employees, the cost of employee benefits and payroll taxes paid by an employer.
---------------------- The cost of labor is broken into direct and indirect costs.
---------------------- The expenses that are directly related to such production are also essential
element of cost of the product or services. The total of the Direct Material,
---------------------- Direct Labour and Direct Expenses will be PRIME COST. Indirect Material,
Indirect Labour and Indirect Expenses added to PRIME COST along with other
----------------------
elements of expenses, will provide the businessman with the TOTAL COST OF
---------------------- PRODUCTION.
The businessman has to decide the percentage of profit he wishes to earn
----------------------
over and above the cost of production, addition of which shall ensure THE
---------------------- SELLING PRICE of the product. The businessman therefore needs to decide in
advance what should be the price of his product and services.
----------------------
Selling price = Cost of Production + Profit
---------------------- When manufacturers set the price of a good they take the cost of labor
into account. They follow this practice because they need to charge more than
----------------------
that good’s total cost of production. If demand for a good drops or the price
---------------------- consumers are willing to pay for the good falls, companies must adjust their the
cost of labor to remain profitable. This can be done in many ways, like they can
---------------------- reduce the number of employees, cut back on production, require higher levels
of productivity, reduce indirect labor costs or reduce other factors in the cost of
----------------------
production.
---------------------- This is a continuous process. The control on these elements of cost shall
help the businessman to keep a track of the expenses which he incurs on the
----------------------
production of goods and services. It would also be helpful for him to formulate
---------------------- the Budgetary Controls. The control system will provide the Standard Costs
and it will also help to monitor the Actual Costs. The variance provided by such
---------------------- control system calculated on the basis of difference between the Standard Cost
and Actual Cost, will help the businessman to know the areas where he needs to
----------------------
take the appropriate steps to avoid the wastages, curtail unnecessary expenses,
---------------------- etc.
----------------------
The business is a process that needs continuous monitoring. A Notes
comprehensive cost control exercise ensures the control on the costs so that
the resources in the form of money would be definitely utilised in the most ----------------------
economical and efficient manner.
----------------------
It is not just the production staff or the raw material which enables the
business enterprise to produce the goods and services, the indirect material, ----------------------
labour and expenses are also required to be calculated in the books. For
----------------------
example, accounting staff, administrative staff, stores workers, helpers also
help in completing the production process. ----------------------
Hence, the material, labour and expenses, which are indirect in nature,
----------------------
also constitute the element of expenses and therefore form a part of the cost of
the product. Thus, cost of production is also governed by these Indirect Material, ----------------------
Labour and Expenses. Over and above the direct and indirect elements of cost
are the overheads. These include expenses incurred by the business for packing ----------------------
and packaging, advertisement, sales promotion, etc. All these add up to the
----------------------
total cost of production. After arriving at the cost of production, the business
enterprise adds to it the percentage of profit it wishes to earn, to actually work ----------------------
out the Selling price.
----------------------
The business is a process that has to be kept continuously monitored.
An Accounting Information System ensures that the control on the costs and ----------------------
the resources in the form of money would be definitely utilised in the most
economical and efficient manner. ----------------------
In short, it is one such system, which is responsible for the accumulation ----------------------
and classification of the cost data of which Material, Labour and Expenses are
the three important elements. ----------------------
By cost we mean amount of money a business enterprise spends or incurs ----------------------

expenses on Material, Labour and Expenses to be able to produce or generate
the goods and services it wants. The amount of money directly attributable to ----------------------
the three elements could be subdivided into two categories called Direct and ----------------------
Indirect. The amount of money spent to buy the raw material and the amount
of money spent on the production process which converts the raw material into ----------------------
finished goods i.e. the amount of money spent for paying wages to employees
involved in production process directly will constitute the Direct Material, ----------------------
Direct Labour and Direct Expenses. The sum total of these three direct elements ----------------------
gives the business enterprise its Prime Cost.
A business house has to keep close control on every element of cost. ----------------------
This control helps in minimising the cost and maximising the profits. The ----------------------
chief aim of every business is to maximise the profits. To achieve this aim, the
business enterprise has to be careful about the cost elements. It must design ----------------------
the appropriate systems to avoid wastage in material, idle time of labour,
unnecessary unproductive expenses, and to maintain an efficient and satisfied ----------------------
manpower. ----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. ________, _______ and _______ are the elements of Cost.
----------------------
2. Such expenses, which are over and above the direct and indirect
---------------------- elements of cost, are called _______.
3. A comprehensive _______ exercise ensures the control on the costs
----------------------
so that the money is utilised in the most economical and efficient
---------------------- manner.
----------------------
1.11 COST SHEET ORIENTATION AND
----------------------
UNDERSTANDING OF PROBLEMS
----------------------
A specimen of a product-wise cost sheet will explain the facts better:
---------------------- Table 1.1: Product-wise Cost Sheet
---------------------- Sr. No. Item of Cost Total Cost per
---------------------- Cost Unit
I Direct Material
---------------------- Opening stock of raw material
---------------------- Add: Purchases of raw material
Carriage inward octroi
----------------------
Less: Closing stock of raw material
---------------------- II Direct Labour
---------------------- Skilled Labour
Semi skilled Labour
---------------------- Un-skilled Labour
---------------------- III Direct Expenses
Prime Cost
----------------------
Add Factory Overheads
---------------------- Add: Opening stock of WIP
---------------------- Less: Closing stock of WIP
Factory Cost
----------------------
Add Administrative Overheads
---------------------- Cost of production
Add Selling and distribution Overheads
----------------------
Cost of sales
---------------------- Add Profit
---------------------- Selling price
A few cost accounting techniques include: Notes
1. Standard Costing
----------------------
2. Marginal Costing
----------------------
3. Budgetary Control
Standard Costing ----------------------
Standard Costing is the preparation and use of standard costs, their ----------------------
comparison with actual costs and the analysis of variance to their causes and
points of incidence. Standard costs are usually associated with a company’s ----------------------
costs of direct material, direct labor, and manufacturing overhead. ----------------------
Standard cost is a predetermined cost, which is calculated from
management’s standards of efficient operation and the relevant necessary ----------------------
expenditure. ----------------------
Many manufacturers assign the expected or standard cost rather than
----------------------
assigning the actual costs of direct material, direct labor, and manufacturing
overhead to a product, this means that a manufacturer’s inventories and cost of ----------------------
goods sold will begin with amounts reflecting the standard costs, not the actual
costs, of a product. Manufacturers, of course, still have to pay the actual costs. ----------------------
This results in differences between the actual costs and the standard costs, and
----------------------
those differences are known as variances. A standard cost is used as a basis for
price fixation and cost control through variance analysis. Standard costing and ----------------------
the related variances is a valuable management tool.
----------------------
Marginal Costing
Marginal cost is the amount at any given volume of output by which the ----------------------
aggregate costs are changed if the volume of output is increased or decreased ----------------------
by one unit.
A unit may indicate a single article, a batch of articles, an order, a stage ----------------------
of production capacity, a process or a department, i.e. it relates to the change ----------------------
in output in a particular circumstance under consideration. In the short-term
period, the marginal cost is equal to the prime cost plus all variable overheads. ----------------------
Alternatively, we can say that marginal cost at each level of production ----------------------
includes any additional costs required to produce the next unit. If producing
additional vehicles requires, for example, building a new factory, the marginal ----------------------
cost of those extra vehicles includes the cost of the new factory.
----------------------
In real time scenario, the analysis is segregated into short and long-
run cases, and over the longest run, all costs are marginal. At each level of ----------------------
production and time period being considered, marginal costs include all costs
----------------------
which changes with the stages of production, and other costs are considered
fixed costs. A number of various other factors can affect marginal cost and ----------------------
its applicability to real world situations. Some of these may be considered
market failures. These may include information mismatch, negative or positive ----------------------
externalities of business, transaction costs, price discrimination and other
----------------------
related factors.

Notes Marginal costing is the ascertainment, by differentiating between fixed
and variable costs, of marginal costs, and of the effect on the profit of changes
---------------------- in the volume and type of output.
---------------------- Thus under marginal costing, costs are classified as fixed and variable,
and only variable costs are charged to products, while fixed costs are written
---------------------- off to the Marginal Profit and Loss Account during the period in which they are
incurred. Variable costs are expenses that change in proportion to the activity of
----------------------
a business. It is a technique of costing and is extensively used in all industries
---------------------- for profit planning, cost control and decision-making.
Budgetary Control
----------------------
Budgetary control is the process of developing a spending plan and
---------------------- periodically comparing actual expenditures against that plan to determine if
it or the spending patterns need adjustment to stay on track. This process is
----------------------
necessary to control spending and meet various financial goals.
---------------------- Budgetary control is the establishment of budgets relating to the
---------------------- responsibilities of business as per the requirements of the policy, and the
continuous comparison of the actual with the budgeted results, either by
---------------------- individual action in terms of policy or to provide a basis for its revision. A
budget is a financial and/or quantitative statement prepared and approved prior
---------------------- to a period of time, in terms of the policy to be pursued during that period for
---------------------- the purpose of attaining a given objective.
Budgetary control starts with involving defining the scope of the project
---------------------- or program and developing detailed cost estimates. The budget is used as a
---------------------- baseline, nd the work begins. Periodically, accountants compare the budget
with actual expenditures, and take note of any discrepancies. For example, in
---------------------- bridge construction, materials costs might rise beyond the inflation accounted
for in the original budget, creating a cost overrun.
----------------------
Alternatively, a company might be able to save money on part of a project
---------------------- because it costs lesser than originally expected. Therefore, all the variations
are noted and discussed. If they become extreme, budgetary control measures
---------------------- may come into play. It is designed to assist the management in the allocation of
---------------------- responsibility and authority, to aid in making estimates and plans for the future,
to assist in the analysis of the variations between the estimated and the actual
---------------------- results, and to develop the bases of the measurement or standards with which to
evaluate the efficiency of operations.
----------------------
---------------------- 1.12 COST ASSOCIATED WITH PERSONNEL FUNCTIONS
---------------------- Costs associated with personnel functions are of two types, maintenance
and recruitment costs. We will look at both one by one.
----------------------
Maintenance Costs
----------------------
Cost of maintenance is a universal measurement of maintenance
---------------------- performance. Unfortunately maintenance costs are often used to compare
maintenance performance between companies or between plants within the Notes
same company. The flipside is, there is no standard for measuring maintenance
costs. Each company, usually each plant within a company and often each ----------------------
department within a plant develop their own definition of “maintenance costs.”
----------------------
For this reason, maintenance cost comparisons should always be
accompanied by a clear definition of what is included and excluded for each ----------------------
plant included in the comparison.
----------------------
Some activities under maintenance cost may be; cleaning, inspections,
replacement of “production” components, Maintenance supervision, planning ----------------------
and administration, maintenance safety meetings, waiting time, etc
----------------------
Recruitment Costs
----------------------
It is based on compensation recruited by a recruiter or staffing function
which may be the primary factor used to determine external fees. This is based ----------------------
on the principle that in most cases, the higher the pay, the more costly it is to fill
the position. ----------------------
Recruitment cost reflects the correlation between compensation and ----------------------

candidate supply and demand. It also allows for an assessment of efficiency of
the recruited staff for a broad mix of positions. It is an ideal budgeting factor. ----------------------
Whenever we consider the cost of goods or services the elements are: ----------------------
a) Material Cost ----------------------
b) Labour Cost
----------------------
c) Overheads
----------------------
These costs are up to the point of producing a finished product. In addition
to these costs, administrative, selling and distribution costs are incurred to ----------------------
enable a product to reach the hands of the customers.
----------------------
However, out of the above costs, the ‘labour cost’ is the most significant
element for the businessman with special reference to its Personnel Management. ----------------------
The personnel department is responsible not only for salary and wage
administration but incurs costs right from manpower planning, recruitment, and ----------------------
training up to the exit interviews and in some cases where the job is pensionable, ----------------------
till the last breath of the employee.
----------------------
Thus, the nature of labour cost is very important for the Personnel
Department. Generally, labour cost includes all that expenditure incurred ----------------------
on workers, employees, supervisors, executives in connection with their
recruitments, development, maintenance etc. Gratuity and Retirement benefits ----------------------
also form part of the labour cost. However, the labour cost is basically divided
----------------------
into two classes, direct labour cost and indirect labour cost.
Direct Cost is the cost or expenditure on the remuneration of workers ----------------------
or employees responsible or engaged in the conversion of raw materials
----------------------
into a finished product. Thus, when you can conveniently identify any item
of expenditure in the nature of salary or wages, bonus, attendance incentive ----------------------

Notes etc. that is resulting in the alteration of construction (original shape, size etc.),
composition or condition of the raw material or product either intermediate
---------------------- or in process or finished is considered as the direct labour cost. For example,
direct costs include wages for the employees physically making a product, like
---------------------- workers on an assembly line.
---------------------- Any cost not having above or closed relation but incurred on labour
or employee is considered Indirect Labour Cost. For example, indirect costs
----------------------
are associated with support labor, such as employees that maintain factory
---------------------- equipment but don’t operate the machines themselves.
Direct costs and indirect cost have the same distinction as line and staff
----------------------
management have functionally.
---------------------- Let us take an example for the distinction. Consider Meera Furniture
manufactures wooden chairs and tables.
----------------------
Remuneration to workers Nature of Labour Cost
----------------------
(Wages/Salary, Bonus etc.)
---------------------- Carpenters engaged in cutting the wood ….Direct
Salary of designing staff ….Direct
----------------------
Wage of polishing workers ….Direct
---------------------- Wages of security men ….Indirect
Canteen workers’ wages ….Indirect
----------------------
Attendance keeping clerk’s wages ….Indirect
---------------------- The points of distinction between these two are as follows:
---------------------- Sr. Point of Direct Labour Cost Indirect Labour Cost
---------------------- No. Distinction
1. Nature of Resulting in direct change Resulting in indirectly
---------------------- Expenditure in the composition and rather as an aid for)
construction of the raw helping in changes
---------------------- material or product. mentioned under the
---------------------- direct labour cost
2. Example Wages of workers Wages of workers
---------------------- working on machines engaged in upkeep,
repairs and maintenance
----------------------
of the machines.
---------------------- 3. Forms the part of Prime cost (i.e. direct Overheads (expenditure
materials + direct labour over and above direct
---------------------- + direct expenses) expenses)
---------------------- 4. Variability Generally, direct labour These cost change
costs do not vary much in according to volume.
---------------------- proportion to the output Higher the volume, there
or volume of production is a decline in the cost as
----------------------
the proportion changes.
----------------------
Sr. Point of Direct Labour Cost Indirect Labour Cost Notes
No. Distinction
----------------------
5. Treatment in cost Directly changed i.e. These are either
account included in the cost of distributed and absorbed ----------------------
production of each unit. on the basis of suitable
proportion e.g. The cost ----------------------
of wages of Repairs and
----------------------
Maintenance department
is distributed on the basis ----------------------
of machine or machine
hours. ----------------------
6. Controllability Direct labour cost are As compared to direct ----------------------
extremely difficult to labour costs, to some
control, as these costs extent with proper ----------------------
have no alternatives but planing and following
are very fundamental certain systems like ----------------------
cost. repairs and maintenance ----------------------
programmes of total
preventive maintenance, ----------------------
avoiding overtime by
production planning ----------------------
and control (PPC) and ----------------------
sub-contracting the
work these costs can be ----------------------
controlled.
7. Identification Can be conveniently Cannot be conveniently ----------------------
identified with the identified with the ----------------------
product. product.
----------------------
Thus, the labour cost is that expenditure incurred by each organisation
whether it is a business or not and also irrespective of its objective whether ----------------------
making profits or not. It is a common feature of every industrial, agricultural,
professional and social activity performed by any organisation. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Differences between the actual costs and the standard costs are known
as _________. ----------------------
2. Direct labour costs are _________, which are extremely difficult to ----------------------
control.
3. _________ reflects the correlation between compensation and ----------------------
candidate supply and demand. ----------------------
----------------------

Notes
Activity 4
----------------------
1. Try making a brief analysis of few small, medium and large organisation
----------------------
to find out the essential components of an ideal compensation and
---------------------- reward system.
---------------------- 2. How compensation in terms of wages and salaries can be treated as

cost for a business? To what extent it is true? Justify your stand by
---------------------- studying the payment structure of human intensive VS fully automated
organisation.
----------------------
3. Explain at least four points of distinction between direct and indirect
---------------------- cost.
----------------------
1.13 CONCEPT OF COST TO THE COMPANY/ORGANISATION
----------------------
For any activity, the expenditure on employees and workers is inevitable.
---------------------- However, the factors which influence the labour cost are as follows:
---------------------- i) Level of skill
---------------------- ii) Fatigue and strain of the work
iii) Experience and job knowledge level
----------------------
iv) Mental and physical requirements.
----------------------
However, the availability of labour and the demand for the same is the
---------------------- major factor which determines the labour cost for a particular activity. Despite
these factors, the management needs to control it. The basic reasons behind
---------------------- controlling the costs are to maximise the profits on one hand and also to keep
---------------------- the employees satisfied.
The study of labour cost is significant as the management has manifold
----------------------
aspects and objectives. The main objectives are:
---------------------- 1. Ascertainment of labour cost is useful for pricing decision of the product
or service.
----------------------
2. On the basis of the ascertained cost, the estimation of future cost is
---------------------- possible after considering the likely variation in the level of labour costs.
---------------------- 3. While framing the incentive plans for remunerating the workers by
productivity bonus, attendance incentive, time saving sharing plans.
----------------------
4. The standard can be set and actual results can be compared with the
---------------------- standards. This is essential for controlling the labour costs.
---------------------- 5. Labour performance reports or the reports containing details regarding
hours of work, output and the cost for the work performed are useful for
---------------------- controlling the labour cost.
----------------------
6. Some companies are required to keep cost records under Section 223 Notes
(B) of the Companies Act, 1956 for the companies, which are engaged
in the manufacture, or processing of cement, cycles, refrigerators, etc. ----------------------
The Government may order the audit of the cost accounts for the other
companies also. ----------------------
7. The details are also necessary under the provisions of different State and ----------------------
Central Government labour legislations.
----------------------
Recording the time of workers during their engagement on different jobs,
tasks and activities, remuneration in the form of salary or wages, overtime, ----------------------
incentives bonus etc. is necessary. Ascertainment and analysis of such
----------------------
costs, comparison with the predetermined standards and controlling the
cost is the scope of the overall functions of the cost accounting. ----------------------
These functions need coordination among:
----------------------
●● Cost Accounting
Department
----------------------
●● Personnel
Department
●● Payroll
Department ----------------------
●● Engineering
and Work Study Department ----------------------
●● Time
Keeping Department ----------------------
In case of all small organisations, the Personnel Department performs the ----------------------
functions of:
●● Manpower Planning ----------------------
●● Recruitment
----------------------
●● Selection
----------------------
●● Placement
and Orientation
----------------------
●● Training
and Development
----------------------
●● Time
Keeping
●● Preparation
of Payroll ----------------------
●● Disbursement
of salary and wages ----------------------
However, for large organisations on account of large number of employees, ----------------------
separate departments may be established.
----------------------
Let us have a close look at few of the above departments:
The Personnel Department ----------------------
Personnel department plays a very important role in control of labour ----------------------
costs. It is primarily concerned with the recruitment of labours on the basis of
employee placement requisition and imparting training to them. And thereafter ----------------------
placing them to the job for which they are best suited. In order to achieve the ----------------------
efficient utilisation of manpower resources, this department is responsible to
execution of labour policies which have been laid down by top management. It ----------------------

Notes plays a very important role as it is primarily concerned with the proper selection
and training of workers and assigning them jobs for which they are best suited.
---------------------- This department is a service department and it renders only advisory functions.
---------------------- Time Recording Department
The recording of time put in by an employee is required for two purposes,
----------------------
viz. for time keeping and time booking. Time keeping is the recording of time
---------------------- for the purpose of attendance and wage calculations. Time booking is the
recording of the time for the purpose of cost analysis and the apportionment of
---------------------- labour costs over various jobs.
---------------------- Payroll Department
---------------------- The important functions of this department in controlling and accounting

for labour costs may be listed as follows:
---------------------- a) To maintain a record of job classification, department and wage rate for
---------------------- each employee.
b) To verify and to summarise the time of each worker as shown on the daily
---------------------- time cards.
---------------------- c) To compute the wages and to prepare the payroll for each department.
---------------------- d) To compute the payroll deductions.
---------------------- e) To maintain a payroll record for each employee.

f) To disburse salary and wage payments.
----------------------
Engineering Department
----------------------
This department helps in maintaining control over working conditions
---------------------- and the production methods for each job, department or process. It performs the
following functions:
----------------------
a) Preparation of plans and specifications for each job.
---------------------- b) Safe and efficient working conditions.
---------------------- c) Preparation of time and motion studies of labour.
---------------------- d) Making job analysis and setting piece rates for wages.
Cost Accounting Department
----------------------
This department is responsible for the accumulation and classification
---------------------- of all cost data of which labour is one of the elements. This department is
responsible for analysing the payroll in order to render routine and special
----------------------
labour cost reports revealing the amount of normal and abnormal idle time,
---------------------- direct and indirect labour, overtime and variances from budgeted labour costs.
These reports reveal to the management the effectiveness of labour policies and
---------------------- provide a base for necessary action to be taken for the proper control of labour
costs.
----------------------
Any cost related to the employee is of concern from the labour cost
---------------------- accounting point of view. Cost in terms of time spent on the above activities,
preparation and submission of various records and reports to internal and Notes
external authorities, all indirect expenses on inducting, maintaining, developing
at all levels of employees are covered by labour cost accounting and therefore ----------------------
it has a very wide scope.
----------------------
Employee turnover, the costs involved and the causes of employee
turnover, impact of employee turnover on cost, controlling employee turnover: ----------------------
Employee Turnover: Employee Turnover is a national problem of every ----------------------
country and leads to high costs and low productivity. The extent of employee
turnover varies according to industry, the proportion of males and females in ----------------------
the work force, structure of employment in the country, and physical conditions
----------------------
within a particular organisation. Although the cost of employee turnover is high
these days, very little effort has been made to collect, classify and compare the ----------------------
cost of employee turnover. A thorough understanding of the causes of employee
turnover and analysis and comparison of the cost of such a turnover may help in ----------------------
controlling the situation.
----------------------
“Turnover” means a change. We often observe either a friend or a relative
changing his job. When he changes the job, he leaves his original company, say ----------------------
‘X’, and joins a new company, say ‘Y’. In this case, this change has twofold
----------------------
effect. Company X’s strength of workers/ employees has been changed with
reduction by one number and for company Y, there is a change because of an ----------------------
additional one number.
----------------------
Labour Turnover may be defined as “the rate of changes in labour force,
i.e., the percentage of changes in the labour force of an organisation during ----------------------
a specific period. Higher rate of labour turnover indicates that labour is not
stable and there are frequent changes in the labour force in the organisation. ----------------------
It will affect the efficiency of the workers and overall profitability of the firm. ----------------------
The determinant result of labour turnover is expressed in terms of percentage.
Alternatively, it can be defined as the “change or rate of change in the working ----------------------
force of an organisation during a particular time period.”
----------------------
Nature of Employee Turnover
When we understand the characteristics of the concept we understand the ----------------------
nature of the concept. Employee Turnover has following characteristics: ----------------------
1. It is very common and universal. It is in existence in both, developed and
----------------------
underdeveloped, countries. It is also applicable to social organisations
like hospitals, trusts, etc. There is labour turnover in the public sector ----------------------
undertakings, government and semi government organisations, also.
----------------------
2. The rate of such turnover change depends upon:
a) Male and female ratio: Generally males are stable as they are not ----------------------
subject to pregnancy, dual roles at home and at the workplace and ----------------------
mobility on account of marriage as applicable to female employees.
Therefore, the chances of turnover in case of female employees are ----------------------
higher than for the male employees.
----------------------

Notes b) Structure of Employment: The structure denotes the levels in the
organisation.
----------------------
It has its linkage with the skill and abilities demanded by tasks for
---------------------- performing different functions. If the numbers of levels are more,
it is called a tall structure. In case of industries which are highly
---------------------- labour-oriented like, Bidi rolling/making, construction works,
transport activities, where tasks are performed manually and not by
----------------------
machines, the labour turnover is high.
---------------------- 3. It varies from industry to industry: The major reason for variation is that
different industries use a different technology for production. Automation
----------------------
and sophistication reduces the requirement of manual work. Therefore
---------------------- relatively highly sophisticated industries come across a lower level of
turnover.
----------------------
4. Employee turnover has its costs: Such a change calls for the replacement
---------------------- of workers and it has its own costs on sourcing the replacement, selection,
recruitment and placement.
----------------------
Costs involved in Labour Turnover
---------------------- Whenever there is a labour turnover in the organisation, the management
---------------------- has to remedy the situation by filling vacancies and if an employee is added to
the work force, suitable placement is necessary. These functions are looked after
---------------------- by the Personnel Department. The organisation has to incur certain expenses on
recruitment and these expenses are the costs of the labour turnover. These costs
---------------------- may be in terms of actual or notional costs.
---------------------- These costs are broadly classified into two categories:
---------------------- 1) Replacement costs
2) Preventive costs
----------------------
Replacement costs are those costs related to the process of replacement of
---------------------- an employee in the place of an employee who has left the organisation.
---------------------- Preventive costs are those costs which are incurred with an objective
to avoid replacement or for stabilising the employee in the organisation and
---------------------- maintaining his satisfaction regarding working conditions and remuneration.
---------------------- Replacement Costs
---------------------- I) Costs of Personnel Administration:
a) Cost of time spent by the personnel staff on the preparation of
----------------------
matter of advertisement for recruitment.
---------------------- b) Cost of time spent on scrutiny of applications, calling for interview,
conducting the interview and selecting the candidate for the
----------------------
replacement
---------------------- c) Increase in salary/wages and other items of pay package for the new
---------------------- employee as compared to an old employee is higher.
d) As the new employee is not familiar with the specific environment Notes
and the philosophy of the organisation or company and also not
familiar with required skills of his job, task method processes, role ----------------------
and operations, he needs different types of training for example,
induction training, on the job, safety training of the job, etc. These ----------------------
programs have their cost of contribution as well as the involvement ----------------------
of time of a new worker/employee becoming trained.
----------------------
e) Particularly for the workers who are engaged in working on the
machine, the spoilage and wastage of material is high. Similarly, the ----------------------
quality of output is low and the quantity is also on the lower side as
compared to production by stable employees. Sometimes, because ----------------------
of non-orientation to work, accidents take place. These factors
----------------------
also add to costs because of the time lag in the worker becoming
efficient. ----------------------
f) Interruption in production flow: When a key employee leaves, it
----------------------
affects the production flow badly.
g) Breakage of tools and equipments: The new worker, because of ----------------------
lack of experience, cannot handle tools and equipment properly.
----------------------
This leads to breakage and repairs of costly equipments.
Thus, replacement costs are sometimes direct and indirect and also ----------------------
tangible and intangible, but they are unavoidable. ----------------------
II) Preventive costs
----------------------
These costs are incurred in order to prevent the employees from leaving
the organisation. If the employees are satisfied as regards remuneration, ----------------------
working conditions, their security needs and development, it will result
in continuity and stability at the workplace. However, in order to keep ----------------------
them contended, the organisation needs to provide them with appropriate ----------------------
facilities. The significant elements of preventive costs are:
----------------------
i) Adequate Remuneration: It should be above the minimum level and
should provide a satisfactory standard of living to the employees. ----------------------
ii) Cost of Welfare facilities: In addition to statutory welfare, non-
----------------------
statutory welfare facilities are necessary for example, subsidised
food, allowances for laundry, car, transportation, children’s ----------------------
education, sports club, library, etc.
----------------------
iii) Incentive Schemes: For an able worker, the company should provide
an opportunity to earn more by institutionalising the incentive ----------------------
schemes.
----------------------
iv) Schemes for self-development: The continuous development of
an individual brings about organisational development. Facilities ----------------------
provided in this connection keep the employees satisfied.
----------------------
v) Pension schemes and retirement benefits: It provides a great sense
of security to employees. ----------------------

Notes vi) Other facilities which improve the overall working conditions are
knowledge level for example, training abroad and the honour of
---------------------- employees. They result in better relations between the management
and the employees.
----------------------
The costs related to the above factors are considered as Preventive Costs.
---------------------- Preventive costs are of a very general nature and therefore distributed
over different departments in proportion to the employees in that
----------------------
department. However, replacement costs are identifiable as the employee
---------------------- has to be replaced in a particular department and therefore it is the charge/
expenditure of that department.
----------------------
Causes of Labour Turnover
---------------------- There are various reasons, on account of which an employee leaves.
However, the normal reasons can be as under:
----------------------
1. Expansion of departmental functions and activities
----------------------
2. Increase in production facilities and a target of a higher output
---------------------- 3. Creation of new level of management in the organisational structure
---------------------- 4. Change in technology, process, methods and operations
---------------------- 5. Change in legal provisions
---------------------- 6. New activities and projects taken up by the organisation

7. Diversification into new product lines or services
----------------------
8. Mergers and Acquisitions
----------------------
9. New services required by the organisation
---------------------- 10. In-house programs of training
---------------------- 11. Replacements in the place of an old employee
---------------------- 12. Change in location/transfers

In case of an employee leaving the organisation, some causes are
---------------------- unavoidable. However, some are avoidable, and are within the scope of an
---------------------- organisation. They can be avoided by taking preventive actions.
Causes of employee turnover can be classified into two parts:
----------------------
a) Avoidable Causes
----------------------
1) Unsatisfactory pay package
---------------------- 2) Absence of job satisfaction
---------------------- 3) Monotony in the work
---------------------- 4) Unsafe or risky operations under the job

5) Long working hours
----------------------
6) Unsuitable working hours
----------------------
7) Unhealthy relationship with supervisors or subordinates Notes
8) Stretched relationship with subordinates
----------------------
9) Absence of group belongingness
----------------------
10) Unfair treatment from co-workers
11) Unfair treatment from management ----------------------
12) Unfair or faulty system of appraisal, promotion ----------------------

13) Lack of training facilities ----------------------
14) Harassment
----------------------
15) High pressure jobs
----------------------
16) Lack of recognition
17) Lack of scope for self development ----------------------
18) Favoritism and political practices ----------------------

19) Absence of Human Resource Development function ----------------------
20) Partiality
----------------------
21) Feeling of insecurity
----------------------
b) Unavoidable Causes
1) Better prospects elsewhere to an individual ----------------------
2) Death ----------------------
3) Retirement ----------------------
4) Marriage
----------------------
5) Shift from the place
----------------------
6) Long illness
7) Accidents ----------------------
8) National Service ----------------------

9) Transport problems ----------------------
10) Family problems
----------------------
11) Dismissal
----------------------
12) Promotion.
Generally, a good organisation prepares a report on the employee turnover ----------------------
and every month it is submitted to the policy making authorities. The report ----------------------
contains the causes and it provides the guidelines to the top management for
the actions to avoid the turnover resulting on account of the reasons which are ----------------------
avoidable.
----------------------
----------------------

Notes Effects of Employee Turnover
The costs involved in employee turnover are already discussed before.
----------------------
The other implications are also equally important. High employee turnover
---------------------- effects are:
1) Additional direct and indirect costs increase the cost of production and in
----------------------
turn there is a reduction in profits.
---------------------- 2) It slows down the overall productivity.
---------------------- 3) It affects the ability and confidence of the employees as they lose a group
member.
----------------------
The group has its own dynamism. The disturbed group or team members
---------------------- cannot perform efficiently.
---------------------- 4) It affects the interdependence of employees, which creates bottlenecks in

the smooth flow of activities. Thus, employee turnover has its impact on
---------------------- the overall co-ordination too.
---------------------- 5) It has its negative influence on the morale (ability to work together).
Low morale kills the initiative and innovativeness of the employees. This
---------------------- results in a lack of creativity and leads to misunderstanding and non-
cooperation.
----------------------
Measurement of Employee Turnover
----------------------
There are two parts of Employee Turnover. When the employee leaves the
---------------------- organisation, he gets separated from the workforce. Thus, an outgoing employee
on account of resignation, transfer or promotion results into separation from the
---------------------- present work force.
---------------------- The second part is the replacement of an employee by another employee.
Many times the separated employee may not get replaced. Therefore, while
---------------------- measuring labour turnover the formula is to be selected according to the choice
---------------------- of the interest of the management.
The employee turnover can be expressed by using any one method.
---------------------- By using the following formula, we get the rate of labour turnover and it is
---------------------- expressed as a percentage.
1. Separation Method/Rate
----------------------
Number of employees separated in a period
× 100
---------------------- Average number of employees in the period
---------------------- Where, Average Number = (Number of employees at the beginning +
Number of employees at the end)/2
----------------------
2) Replacement Method/Rate
---------------------- Number of employees replaced in a period
× 100
---------------------- Average number of employees in the period
---------------------- (Here only those who are replaced, that number is to be considered.
Suppose 100 employees are separated however only 50 are replaced, then Notes
only 50 numbers are to be considered.)
----------------------
3) Flux Method/Rate
This is a combined measure of both, separation and replacement. ----------------------
Number of employees separated + Number of employees repalced ----------------------
× 100
Average number of employees in the period
----------------------
Employee Turnover and Stability Index
----------------------
Employee Turnover rate computed by any of the above methods cannot
focus on the stability of the employee. It is just a percentage. However, if there ----------------------
are a 100 workers and the Employee Turnover rate is 3%, it will indicate to
us that out of 100 employees, 3 employees have left. However, if these three ----------------------
employees are with the company, say for the last 18 and above years, it will have
----------------------
a disastrous effect on the work than if these three workers had an employment
period of only for 2 to 3 years. The difference in impact in the two situations is ----------------------
the cause of concern about the stability.
----------------------
Similarly, if 1/5th of old employees are leaving every year (i.e. Employee
Turnover is 20%) a situation will arise, after five years, when not a single ----------------------
employee will be in the company.
----------------------
Therefore, Employee Stability is an important factor for the management
along with the Employee Turnover. Indices for stability are: ----------------------
1) Skill Dilution Index ----------------------
No. of persons over 4 years of service at present
SDI = × 100 ----------------------
Present Total Employees
2) Skill Wastage Index ----------------------
No. of persons over 4 years of service at present ----------------------
SWI = × 100
Total employed 4 years ago
----------------------
These are based on minimum 4 years of experience. The benefits of stable
workforce are: ----------------------
●● Experienced work force ----------------------
●● Increase in skills
----------------------
●● Training costs are recovered
----------------------
●● Familiarity with Philosophy, Policies, Methods of the organisation
●● Team formation - sense of belongingness ----------------------
These and few other characteristics of stable workforce contribute to the ----------------------
goals of the organisation.
----------------------
Employees’ cost to the company
----------------------
In modern context it means the following
●● Basic
wage/salary ----------------------

Notes ●● Dearness
allowance
●● House
rent allowance
----------------------
●● Medical reimbursement
----------------------
●● Conveyance
allowance
---------------------- ●● Provident
Fund benefits
---------------------- ●● Incentives

---------------------- ●● Leave
travel concession
●● Employers’ contribution to gratuity, superannuation funds, etc.
----------------------
●● Employers’ contribution
to other social security benefits
----------------------
---------------------- Fill in the blanks.
---------------------- 1. Labour turnover cost can be classified into two groups; they are
_______, and _______.
---------------------- 2. _______ slows down the overall productivity.
---------------------- 3. Incentive schemes can be a _______ measure for labour turnover.
----------------------
---------------------- Activity 5
---------------------- Describe at least three departments to which the costs are attached in your
organisation.
----------------------
----------------------
Summary
----------------------
●● oncept of compensation in business can be a payment made in exchange
C
---------------------- of effort/s, a service rendered or a task done.
---------------------- ●● n ideal compensation system depends on a number of factor which
A
are, Nature and size of business, demand and supply ratio, favourable
---------------------- government rules etc.
---------------------- ●● haracteristics of a good compensation system may be its well defined
C
uniform and fair nature, ability to minimise labour turnover, encouraging
---------------------- and growth oriented.
---------------------- ●● Advantages of a fair compensation system may be listed as flexible,
simple, easy to implement, transparent and which also supports parity.
----------------------
●● eed for designing a compensation policy which is to ensure that the
N
---------------------- Policy calls for deciding the criteria for promotions, fix the standard
expectations from each employee, and to also determine the norms to be
---------------------- followed for the Performance Appraisal or the Job Evaluation.
●● I mportance of a compensation system in a business organisation has also Notes
been elaborated upon.
----------------------
●● oncept of cost which is the basic amount of expenses a businessman is
C
likely to incur to be able to manufacture or process one unit of a proposed ----------------------
product
----------------------
●● ifferent elements of costs, which are Material, Labour and Expenses.
D
The control on these elements of cost shall help the businessman to keep a ----------------------
track of the expenses of business and also ensure measures of cost control.
----------------------
●● Different costs involved in a business and their impact on the business.
●● Labour Turnover and its causes and effect on the business. ----------------------
●● Methods of labour turnover and employee stability calculations. ----------------------
----------------------
Keywords
----------------------
●● ompensation: It means the return an employee expects from the business
C
process, since employee participates and puts his efforts to achieve the ----------------------
organisational goals.
----------------------
●● ost: It is the basic amount of expenses a businessman is likely to incur
C
to be able to manufacture or process one unit of the proposed product. ----------------------
●● irect Cost: It is the cost or expenditure on the remuneration of workers
D ----------------------
or employees responsible or engaged in the conversion of raw materials
into the finished product. ----------------------
●● I ndirect cost: Any cost not having the above or closed relation but ----------------------
incurred on labour or employee is considered as the Indirect Labour Cost.
----------------------
●● arginal cost: It is the amount at any given volume of output by which
M
the aggregate costs are changed if the volume of output is increased or ----------------------
decreased by one unit.
----------------------
●● tandard Costing: It is the preparation and use of standard costs, their
S
comparison with actual costs and the analysis of variance to their causes ----------------------
and points of incidence.
----------------------
Self-Assessment Questions ----------------------
1. Explain the concept of Compensation. What are the characteristics of a ----------------------

good compensation system? ----------------------
2. What is the role of compensation and rewards in a modern organisation?
What are the advantages of a fair compensation system? ----------------------
3. Explain the need for designing a compensation policy. What is the ----------------------
importance of a compensation system in business organisations?
----------------------
4. What is the concept of cost? What are the different elements of cost?
----------------------

Notes 5. Explain the importance of labour as an important element of cost.
Distinguish between direct and indirect labour.
----------------------
6. Explain in detail the various cost accounting techniques.
---------------------- 7. What is labour turnover? What are the costs involved in labour turnover?
---------------------- 8. Explain the various causes for labour turnover. What are the effects of
labour turnover? How is it measured?
----------------------
---------------------- Answers to Check your Progress

----------------------
1. False
----------------------
2. True
---------------------- 3. True
---------------------- 4. False

1. A worker with higher efficiency should be paid higher.
----------------------
2. A good compensation system should be able to minimise employee
---------------------- turnover.
---------------------- 3. Any compensation system should not violate any local or national trade
union’s agreement.
----------------------
---------------------- 1. Four major factors of production are Land, Labour, Capital and
Organisation.
----------------------
2. An ideal compensation system will have a positive impact on the efficiency
---------------------- shown by the employee.
---------------------- 3. A good compensation system will encourage the process of job evaluation.
----------------------
----------------------
1. A good compensation system brings ______ among employees.
---------------------- i. Healthy Competition
---------------------- 2. The principle of equal work equal wages, when brought into force, results
in
----------------------
iii. Transparency and parity
----------------------
Check your Progress 5 Notes
Fill in the blanks.
----------------------
1. Material, Labour and Expenses are the elements of Cost.
----------------------
2. Such expenses, which are over and above the direct and indirect elements
of cost, are called overheads. ----------------------
3. A comprehensive cost control exercise ensures the control on the costs so ----------------------
that the money is utilised in the most economical and efficient manner.
Check your Progress 6 ----------------------
Fill in the blanks. ----------------------

1. Differences between the actual costs and the standard costs are known as ----------------------
variances.
----------------------
2. Direct labour costs are fundamental costs, which are extremely difficult to
control. ----------------------
3. Recruitment cost reflects the correlation between compensation and
----------------------
candidate supply and demand.

1. Labour turnover cost can be classified into two groups; they are ----------------------
replacement costs and preventive costs.
----------------------
2. Employee turnover slows down the overall productivity.
3. Incentive schemes can be a preventive measure for labour turnover. ----------------------
----------------------
Suggested Reading
----------------------
1. Bhattacharya, Mousumi, Nilanjan Sengupta. Compensation Management.
----------------------
2. Myers, Donald W. Compensation Management.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Control Systems for Labour Costs
UNIT
2
Structure:
2.1 Introduction
2.2 Direct and Indirect Labour
2.3 Role of various Departments
2.4 The Personnel Department
2.5 Industrial Engineering Department
2.6 Types of Workers
2.7 Payroll Department
2.8 Wage Analysis
2.9 Cost Accounting Treatment of Wages Components
Summary
Key Words
Suggested Reading
Control Systems for Labour Costs 35

Notes
Objectives
----------------------
----------------------
• Describe the need and importance for the control of labour cost
----------------------
• Different types of costs involved
---------------------- • Explain various aspects for the control of labour costs
---------------------- • Analyse the roles of various departments in controlling labour cost
---------------------- • Categorise various types of workers

• Analyse wages in terms of business
----------------------
• Justify the cost accounting treatment of wage components
----------------------
---------------------- 2.1 INTRODUCTION
---------------------- Here, we will understand the concept of labour in view of its cost and
its control. Labour is an important element of cost of production representing
---------------------- human contribution to production. The role of labour in the process of production
cannot be underestimated on the background of machinery being used on a
----------------------
large scale. The efficiency of production depends upon proper utilisation of the
---------------------- labour force, which in turn needs proper accounting and control of labour cost.
Control of labour cost is a major problem before the management in which the
---------------------- cost accountant has an important role to play.
---------------------- Labour cost control is primarily concerned with the proper employment
and the efficient utilisation of the labour force. This needs the recruitment
---------------------- of efficient workers, proper recording of time devoted by them and regular
accounting of the wages paid to them.
----------------------
So, the sum of all wages paid to employees as well as the cost of employee
---------------------- benefits and payroll taxes paid by an employer constitutes the total cost of
---------------------- labour. The cost of labour is broken into direct and indirect costs. Direct costs
include wages for the employees who physically make a product, like workers
---------------------- on an assembly line. Indirect costs are associated with support labour, such
as employees that maintain factory equipment but don’t operate the machines
---------------------- themselves.
---------------------- For example, when manufacturers set the price of any goods, they take
the cost of labour into account. This is because they need to charge more than
---------------------- the good’s total cost of production. If demand for a good drops or if the price the
---------------------- consumers are willing to pay for the good falls, companies need to adjust their
cost of labour to still stay profitable. They can reduce the number of employees,
---------------------- cut back on production, require higher levels of productivity, reduce indirect
labour costs or reduce other factors in the cost of production.
----------------------
Labour cost covers one of the major portions of the total cost of a
---------------------- product or job. It may increase unnecessarily due to inefficiency of workers,
wastage of materials by workers, idle time, unusual overtime work and Notes
high labour turnover. Hence, the management should devise effective
techniques for controlling labour cost to ensure maximum outputs of ----------------------
better quality at low cost through proper utilisation of the labour force.
Basically, management is concerned with controlling labour cost. Labour cost ----------------------
control involves such systems, procedures, techniques and tools used by the ----------------------
management in order to keep the labour cost of the product or job as minimum
as possible. Labour cost control consists of a number of such regular activities ----------------------
which are carried on by various departments of the organisation in a coordinated
manner to ensure the availability of the best employees and their optimum ----------------------
utilisation. It is the system followed by the management to maximise quality ----------------------
output at a minimum cost. Labour cost control includes the process of developing
various forms, studying and recording the activities and performance of workers, ----------------------
calculating the correct amount of wages and making payment in time. It also
includes the process of analyzing and reporting labour cost to the management ----------------------
for planning and decision making. As the labour costs constitute a significant ----------------------
portion of the total cost of a product, proper recording of time and collection of
cost data are prerequisites of any system of labour cost control. Labour costs ----------------------
may be excessively high due to inefficiency of labour, wastage of material due
to improper supervision, idle time and unusual over-time work, inclusion of ----------------------
dummy names of workers in the payroll and other related factors. Inefficient ----------------------
use of labour not only increases the cost of production but also adversely affects
the quality of goods. The primary concern of the management, therefore, is, ----------------------
to utilise the labour cost as economically as possible so that not only is the
production cost minimised, but also the labour force is suitably rewarded for ----------------------
increased efficiency. The management is primarily interested in the evaluation ----------------------
and analysis of labour costs for the following purposes:
----------------------
Purpose or Objectives:
1. To use direct labour cost as a basis for increasing the efficiency of workers. ----------------------
2. To identify the direct labour cost with the product, job or process for ----------------------
ascertaining the cost of production as accurately as possible.
----------------------
3. To use direct labour cost as a basis for absorption of overheads, if desired.
4. To use direct labour as a basis for comparison with past labour cost and ----------------------
for substitution purposes. ----------------------
5. To determine the amount of indirect labour cost to be treated as overhead.
----------------------
In order to have a proper accounting and control of labour cost, it is
necessary to distinguish between direct and indirect labour. ----------------------
----------------------
2.2 DIRECT AND INDIRECT LABOUR
----------------------
Direct labour is that labour which can be conveniently identified or
attributed wholly to a particular job, product or process. It is the labour directly ----------------------
employed on production works. Thus, direct labour includes all labour expended
in converting raw material into finished goods or in altering the construction ----------------------

Notes composition or condition of the product. It varies directly in relation to the
volume of output.
----------------------
Indirect labour is one, which is of a general character and cannot be
---------------------- conveniently identified with a particular job, product or process. It represents
ancillary work done in connection with the product manufactured. It aids and
---------------------- facilitates production work indirectly.
---------------------- In other words, we can put it as, ‘Direct Labour as the type of labour
which is directly related with the manufacturing of product in factory,
---------------------- such as people directly working on machines for production of goods.’
Similarly, Indirect Labour is the type of labour which does not directly relate
---------------------- with the production of goods or without which the production can still be
carried on like ‘Supervisor’ in a factory who supervises the workers working
----------------------
on machines to produce any product.
---------------------- The distinction between direct and indirect labour is relative in each
particular firm or industry. Labour, which is direct in one unit, may be indirect in
----------------------
another. The simple criterion is that whether it can be identified with a particular
---------------------- job or not and how far it is practicable and expedient to do so. For example,
wages of an inspector put at a fixed point of production or process becomes
---------------------- direct and if he is put for inspection for different cost centres, it is indirect as
identification is costly and somewhat impracticable.
----------------------
Examples of Indirect Labour: 1) Shop labour that helps production in a
---------------------- general way, such as checker, crane operator, foreman, manager, etc. 2) Labour
employed on maintenance work 3) Labour employed in Service departments
---------------------- like Power House, Internal Transport Service, Gate and Security 4) Storekeeping
---------------------- workers and other such personnel.
Direct and Indirect labour in a Time-cum-job Card: Time-cum-job card
---------------------- contains information like a worker’s name, ticket number, attendance time, rate
---------------------- of pay and time spent on each job of productive order. Thus, if a worker’s time
is booked under specific job or productive order, it is direct labour otherwise
---------------------- it is indirect. Some workers may be treated as direct labour or indirect labour
depending upon the nature of job in which he is employed.
----------------------
Labour cost control is based on predetermined standards of efficiency and
---------------------- comparisons of actual costs with standard costs. A proper system of labour cost
control is therefore necessary for the management to devise a proper system
---------------------- of labour cost control. The management applies various techniques for the
effective control of labour cost.
----------------------
Labour Cost Control Techniques
----------------------
In order to achieve the effective utilisation of manpower resources, the
---------------------- management has to apply proper system of labour cost control. The labour
cost control may be determined on the basis of establishment of standard of
---------------------- efficiency and comparison of actuals with standards. The management applies
---------------------- various techniques for the effective control of labour costs, as under below:
1. Scientific Method of Production Planning: Production planning includes
---------------------- product engineering, process engineering, scheduling and routing. By
means of adequate time and motion studies for each operation, standard Notes
time should be determined and care should be taken to see that actual time
required conforms to the standard time. ----------------------
2. Use of Labour Budgets: With the help of data from production planning, ----------------------
detailed production schedules and labour budget is possible. An optimum
use of labour budget can be an effective cost control technique. ----------------------
3. Establishment of labour standards: Standards set for labour cost are ----------------------
compared with the actual ones, and the variances are computed and
prompt remedial measures are taken. With these calculations, total cost of ----------------------
a product is deduced and accordingly the control is observed.
----------------------
4. Effective system of job evaluation and job analysis: The efficiency
reports of different departments help in ascertaining the effectiveness of a ----------------------
job and thereby calculating the efficacy of an incentive system.
----------------------
5. Proper System of Labour performance reports: Efficiency and labour
utilisation reports help in instituting managerial and labour cost control. ----------------------
6. Labour cost accounting System: Wherever possible, automatic time- ----------------------

recorders and punched card systems of labour cost accounting should be
employed to reduce clerical costs and institute an effective control over ----------------------
the labour cost. ----------------------
In these days, labour being a major factor of production requires careful
thought. Labour cost may be excessive due to inefficiency of labour, idle time and ----------------------
unusual overtime work, increase of spoilage due to lack of proper supervision ----------------------
and inspection, high labour turnover and other related factors. Control of labour
cost is thus essential in every organisation on account of the following reasons: ----------------------
a. To use direct labour cost as a basis for control. ----------------------
b. To identify direct labour cost with products, jobs or processes.
----------------------
c. To use direct labour cost as a basis for overhead apportionment if desired.
----------------------
d. To determine indirect labour cost as an element of control of efficiency of
different cost centres or departments. ----------------------
Control of labour costs is thus the chief objective of management, which ----------------------
can be achieved by proper coordination of every member of the supervisory
force right from the top executive to the foreman. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Labour cost control used by the management keeps the labour cost of
the product or job as _______. ----------------------
2. _______ includes all labour expended in converting raw material into
----------------------
finished goods.
3. Labour cost control is based on predetermined standards of _______. ----------------------

Notes 2.3 ROLE OF VARIOUS DEPARTMENTS
---------------------- From the functional point of view, the control of labour cost is achieved
by the coordinated efforts of the personnel department; engineering and works
---------------------- study department, time-keeping department, payroll department and cost
accounting department.
----------------------
The objective of labour cost control is achieved through the concerted and
---------------------- coordinated efforts of various departments. The objectives of proper control on
---------------------- labour cost are effectively achieved through the functions of various departments
responsible for controlling labour cost in an organisation. The following are the
---------------------- important departments for control over labour costs:
---------------------- 1) Personnel department 2) Production Planning 3) Rate or Time and

Motion Study 4) Budgeting 5) Timekeeping 6) Engineering department 7) Cost
---------------------- accounting department 8) Payroll department.
---------------------- Let us see the functioning of these departments in detail.
---------------------- 2.4 THE PERSONNEL DEPARTMENT

---------------------- Personnel department plays a very important role in control of labour
---------------------- costs. It is primarily concerned with the recruitment of labour on the basis of
placement requisition of employee and also of imparting training to them. This
---------------------- later leads to placing them on the job for which they are best suited. Thus,
in order to achieve the efficient utilisation of manpower resources, Personnel
---------------------- department is also responsible for execution of labour policies which have been
---------------------- laid down by top management.
Therefore, we can say that this department is basically concerned with
----------------------
the tasks of recruitment, training, promotion and the placement of employees.
---------------------- It is responsible for providing an efficient labour force and lays down good
personnel policies to be followed by the entire organisation.
----------------------
Various personnel functions directly related to labour cost control are
---------------------- employment procedures, job description, job evaluation, merit rating and time
and motion study.
----------------------
Recruitment of the work force is done on the basis of procedures laid
---------------------- down by the personnel department. On the receipt of an employee placement
requisition (like material requisition), the personnel department initiates the
---------------------- necessary action for recruiting employees on the basis of tests, interviews,
physical and medical examinations, including induction training.
----------------------
Employee’s History Card
----------------------
The Personnel department maintains a complete record of each worker
---------------------- of the organisation. As soon as an employee joins the organisation, a personnel
file is maintained for him. This file is known as the Worker’s History Card or
----------------------
----------------------
Service History Card. A specimen of the Service History Card with necessary Notes
details is given below:
----------------------
Brilliant Learning Systems Limited
Employee’s Service Card ----------------------
Name: Department: ----------------------

Token No: Date of entry in service:
----------------------
Date of Birth: Grade and Pay:
----------------------
Education: Provident Fund A/c No.:
Address: Previous Employer details: ----------------------
Marital Status: Reason for discharge: ----------------------

Date of Retirement: Any other particulars: ----------------------
Specimen Signature: ----------------------
Changes in Pay and Service
----------------------
Date Trade Grade Rate of Pay Reason for change Remarks
----------------------
Leave Record
Date Entitlement Nature of leaves availed Remarks ----------------------
The Service History Card gives full details of the employee and it helps ----------------------
the organisation in many ways.
----------------------
Besides the permanent recruitment of workers, an organisation needs
workers for a short period, known as ‘Casual’ or ‘Temporary Workers’. In the ----------------------
interest of the organisation and effective labour cost control, it is advisable that:
----------------------
a. All recruitments are made through the personnel department only
----------------------
b. Frequent reviews of all placement for promotion, transfers be made
c. Labour utilisation reports should be introduced in each department, and ----------------------
d. Absenteeism and labour turnover should be kept at a minimum. ----------------------
Timekeeping and its methods ----------------------
The major function of this department consists of an accurate record of
each worker’s time in and out of the factory during regular working hours and ----------------------
overtime during irregular working periods, and of reporting the time of each ----------------------
employee for each department, operation and production order. This reporting
ensures punctuality and discipline and increases morale in the organisation. ----------------------
We can say that Timekeeping is actually recording of each worker’s time ----------------------
of coming in and going out of the factory during engagement of the factory.
Timekeeping is thus the basic activity in any factory. It is essential for the ----------------------
purpose of attendance and determination of wage payable to each worker.
----------------------
----------------------

Notes Objectives of Timekeeping
Following are the important objectives of timekeeping:
----------------------
a. Ensuring discipline in attendance for preparing attendance records to
---------------------- meet statutory requirements
---------------------- b. Preparation of payrolls
---------------------- c. Labour cost of an operation, product or services

d. Overhead distribution, if based on wages or labour hours
----------------------
e. Statistical analysis of labour records for determining productivity for
---------------------- effective utilisation of human resources.
---------------------- f. Minimisation of labour costs
g. Ascertaining ideal labour time and ideal machine time.
----------------------
Timekeeping embraces detailed recording of:
----------------------
a. Attendance time i.e. records of time spent in the factory
---------------------- b. Job time i.e. records of time spent on jobs or processes
---------------------- Gate timekeeping helps to maintain discipline, as punctuality is observed
and latecomers may be warned. Thus, it meets the statutory needs, provides
----------------------
data for the preparation of payroll and maintains discipline. But this attendance
---------------------- record fails to indicate the job on which the worker is engaged. Time booking
on jobs, on the other hand, helps to ascertain labour cost of each job, operation
---------------------- or services, indicates the efficiency attained by workers and provides the basis
for estimating the labour cost. Timekeeping thus serves both the purposes of
----------------------
ascertainment and control of labour costs.
---------------------- Timekeeping means ‘recording the time of any activity’. The components
of the activity are machine, man and the process.
----------------------
However, from the view point of the labour cost, the time taken for a
---------------------- particular job by a worker or for a task by a group of workers is an important
element of cost i.e. labour cost because the employer has to pay for it. Unless
----------------------
an employer understands the time for production activities he will not be in a
---------------------- position to prepare the production schedule, inflow of raw materials, making
production facilities available for production and also the labour and other
---------------------- costs. Therefore, time is often considered to be the raw material of profits.
---------------------- In large organisations a separate department called as a Timekeeping
Department performs this function with the objectives of providing the basic
---------------------- information for:
---------------------- i. Preparing statements of payment of remuneration to employees (Pay roll)
for normal time and overtime.
----------------------
ii. Preparation of records necessary under various labour laws.
----------------------
iii. Determination of cost of a service, operation or a product.
----------------------
iv. Indirect expenses (overheads) distribution in proportion to wages or Notes
labour hours.
----------------------
v. Deviations from estimated, budgeted or standard costs.
vi. Corrective actions necessary to control the deviations. ----------------------
vii. Measuring productivity by analysing the time records for machines, men ----------------------
and other facilities.
----------------------
Thus, timekeeping is recording in detail:
a. Attendance time of a man, (time in and time out of a worker or workers.) ----------------------
b. Recording the time spent on a job in particular. ----------------------

Methods of Timekeeping: The following are the two important methods of ----------------------
timekeeping:
----------------------
----------------------
Methods of
Timekeeping ----------------------
----------------------
----------------------
----------------------
Mechanical Method
Manual Method ----------------------
●● Time Recording Clock Dial
●● Attendance Register
Time Record ----------------------
●● Token or Disc
●● Key Recorder System ----------------------
Manual Method: ----------------------

The choice of the manual method adopted by the factory depends upon its ----------------------
size, number of workers employed; nature of the business and policy of a firm.
Under manual methods, there are two important methods which are in use: ----------------------
(I) Attendance Register Method and ----------------------
(II) Token or Disc Method.
----------------------
Attendance time recording methods
----------------------
These methods are need based. Nowadays, sophisticated machines are
available for the purpose. However, small organisations use old methods also ----------------------
as they are adequate to fulfil the needs of some organisations.
----------------------
The factors which influence the choice of system of attendance time recording
are: ----------------------
a) Nature of the business ----------------------
b) Methods of production
----------------------

Notes c) Number of employees
d) Number of piece workers
----------------------
e) The size of the organisation
----------------------
I) Attendance Register Method:
---------------------- Under this method, an Attendance Register is maintained by the Timekeeper
---------------------- in the time office. This register may be filled in by the Timekeeper when
the worker gets inside the factory and the time of departure, normal time
---------------------- and overtime. Workers may be required to sign at the time of arrival and
time of departure as well. This method is very simple and most suitable to
---------------------- small-scale industries. It is very difficult to operate when the number of
---------------------- workers is large.
Date Name Time of Time of Total Normal Overtime Remarks
---------------------- of the arrival departure Hours Hours Hours
---------------------- employee
Merits
----------------------
i. Very simple to operate
----------------------
ii. Economical
---------------------- iii. Easy to understand
---------------------- iv. Flexible
---------------------- v. Suitable for small organisations

Demerits
----------------------
i. The success depends on the honesty of the employees.
----------------------
ii. The register can be used for limited purposes.
---------------------- II) Token or Metal Disc Method
---------------------- In this method, each worker is given a metal disc or a token bearing his
identification number. All the tokens or discs are hung on a board serially
---------------------- at the entrance of the gate in the factory. As the worker enters the gate of
---------------------- the factory, he removes his disc from the board and drops it into a box.
This process is continued until the scheduled time expires. Latecomers
---------------------- may drop their tokens in a separate box or handover personally to the
timekeeper. In case of absentees the tokens are not removed from the
---------------------- board. Based on the above process, the Timekeeper records the attendance
---------------------- in the register known as Muster Roll for the purpose of pay rolls.
Let us understand this method with this example. The process under this
---------------------- system has a specific sequence or steps.
---------------------- 1. Every employee is given a number; for example, Mahesh is a
worker whose number is 009.
----------------------
2. There are discs, with numbers. (We often come across such metal
---------------------- discs in the bank for the withdrawal of money.)
3. Two boxes are kept. Notes
4. Suppose the factory time is 8.00 a.m. and the grace period for late
----------------------
coming is 10 minutes, then the first box will be kept near the board
or place where the discs are kept. (Generally at the entrance of ----------------------
the gatekeeper’s room). Every employee who comes before 8.00
a.m. or between 8.00 a.m. and 8.10 a.m. will collect the disc of the ----------------------
number allotted to him and put it in the box.
----------------------
5. If Mahesh comes before 8.10 a.m., he will collect disc number 009
and put it in the box while passing through the gate and then shall ----------------------
go to his work place.
----------------------
6. After 8.10 a.m. another box will be kept in place of the first box. If
Mahesh comes after 8.10 a.m. he will follow the same procedure ----------------------
and automatically it will be understood that he has come late. After
----------------------
the maximum late period, the second box will be removed.
7. The timekeeper/gatekeeper enters the time in time register. ----------------------
Merits ----------------------
i. Suitable where the workers are large in number. ----------------------
ii. Suitable where the workers are illiterate.
----------------------
iii. Easy to understand.
----------------------
iv. Easy to operate.
v. Inexpensive due to its simplicity. ----------------------
Demerits ----------------------
i. The success of the system depends upon the honesty of the workers. ----------------------
ii. The system is relatively inaccurate.
----------------------
iii. The system needs one person to take the discs out and arrange them.
----------------------
iv. It gives very limited information.
v. It becomes difficult to ascertain about overtime work, early leaving, ----------------------
ideal time etc. ----------------------
vi. There are chances of lack of accuracy regarding the exact time of
arrival of a worker which may result in many disputes. ----------------------
vii. Unless there is strict supervision, the timekeeper may include ----------------------
dummy or ghost workers in the Muster Rolls.
----------------------
Mechanical Method
----------------------
In order to achieve the accuracy and reliability of recording of time of
workers, the following different mechanical devices are used: ----------------------
I) Time Recording Clock ----------------------
This is a device where the worker has to record his time for In and Out
on a card or a paper kept in the machine. Under this system, each worker ----------------------

Notes is given a time card for a week or fortnight. These time or clock cards
are serially arranged in a tray at the entrance to the factory. When the
---------------------- worker enters the factory, he takes his allotted card from the tray and
puts it in the time recording clock that records the exact arrival time at
---------------------- the space provided on the card against the particular day. This process
---------------------- is repeated for recording time of departure for lunch, return from lunch,
leaving the factory after his day’s work. Late arrivals, early leavings and
---------------------- over time are printed in red so as to distinguish these from normal period
spent in the factory. This method is very popular for correct recording of
---------------------- attendance.
---------------------- There are variations in the system. Dial, keys, cards, etc. are used for
the purpose. The system is similar in operation to that found at a public
----------------------
telephone. Nowadays digital systems have replaced analogue systems.
---------------------- The systems of very sophisticated versions are available but basically
they are the modifications of this original system.
----------------------
Merits
---------------------- i) The system has a high accuracy.
---------------------- ii) It saves time.
---------------------- iii) There is very little chance for manipulation.

iv) Additional facilities are available with more sophisticated machines.
----------------------
Demerits
----------------------
i) Illiterate workers initially find it difficult to operate the system.
---------------------- ii) It has its cost for operations. It needs investment and electrical
---------------------- power to operate. Therefore, it may be uneconomical for very small
units.
---------------------- In order to be a sound system of timekeeping, it should have following
---------------------- characteristics:
●● It should be simple to understand.
----------------------
●● It should be easy to operate.
----------------------
●● It should be economical.
---------------------- ●● It should generate the information necessary for time booking,
preparation of a pay roll and providing basis for the Wage Analysis.
----------------------
●● Workers including piece workers and workers with sub-contractors
---------------------- should record the time. Time recording of employees should be
---------------------- without any exceptions, i.e., should be applicable to all.
●● There should not be any possibility for any employee to record the
---------------------- time for another employee.
---------------------- ●● It should have very high accuracy.
---------------------- ●● The devices should be adequate in number.
●● It should take the minimum time of employees for the purpose. Notes
●● I t should record all the timing i.e. in, out, lunch break, moving from
one department or from one job to another job. In other words, the ----------------------
system should contain the procedures for all kinds of internal and ----------------------
external movements of the employees.
II) Dial Time Records: This is a machine which is used for recording ----------------------
correct attendance time of arrival and departure of worker automatically. ----------------------
This recorder has number of holes all around the circumference. Each
hole represents worker’s number which corresponds to identification of ----------------------
allotted clock numbers. At the time of arrival and departure of a worker,
by operating the dial arm into a hole, the time gets recorded automatically ----------------------
on an attendance sheet placed inside. This machine is most suitable in ----------------------
small-scale industries.
III) Key Recorder System: In this machine there are a number of keys, each ----------------------
key denotes worker’s number. When at the time of arrival and departure, ----------------------
the worker inserts and operates his allotted key in the key hole the ticket
time and clock time are recorded on a sheet of paper. This method is ----------------------
economical and easy to operate.
----------------------
Time booking
It refers to recording the time of each worker for each department, ----------------------
operation, process or job during his working hours in the factory. It is
----------------------
useful for the purpose of cost analysis and effective cost control.
Objectives of Time Booking: ----------------------
1. To find out accurately the time spent by each employee directly or ----------------------
indirectly on a particular job.
----------------------
2. To provide the basis of information to the costing department, to
ascertain direct labour cost and indirect labour cost. ----------------------
3. To appraise the performance of the labour force.
----------------------
4. To determine the idle time for the process and other activities.
5. To evaluate labour productivity. ----------------------
6. To provide basis for evolving the proper salary and wage structure. ----------------------
Methods of Time Booking:
----------------------
In order to achieve the effective utilisation of manpower resources,
recording the correct time of workers and labour cost control is essential ----------------------
to adopt various methods of time booking. The following are the important
methods used for time booking: ----------------------
(1) Daily Time Sheet ----------------------

(2) Weekly Time Sheet ----------------------
(3) Job Cards or Job Tickets ----------------------
(a) Job Card For Each Worker (b) Job Card For Each Job
----------------------
(c) Combined Time and Job Card (d) Piece Work Card

Notes Suppose a unit produces the products A, B, C. Labour cost for each
product is necessary to fix its selling price. The following is the break-up
---------------------- of the other costs.
---------------------- Table 2.1: Cost Break-up
---------------------- Product A B C
Materials Rs. 500 Rs. 600 Rs.1000
----------------------
Labour ? ? ?
----------------------
Other Expenses Rs. 500 Rs. 600 Rs. 800
----------------------
Unless the labour cost is known, how can the selling price be fixed?
---------------------- Suppose workers X, Y, Z are working to manufacture products A, B,
C. The hours of work in a month of each worker are 35 days*8 hours. The
----------------------
remuneration of workers X, Y, Z is as follows:
---------------------- X Rs. 1600 1600/800 = Rs.2/- per hour Y Rs. 2400 2400/800 = Rs.3/- per hour
---------------------- Z Rs. 3200 3200/800 = Rs. 4/- per hour
Now the time recorded for such product is as follows:
----------------------
Table 2.2: Time Recorded
----------------------
Worker A B C Total
---------------------- X 200 200 400 800
Y 300 100 400 800
----------------------
Z 100 300 200 800
---------------------- TOTAL 600 800 1000 2400
As the production unit has kept the record of time spent on each job, it is possible
----------------------
to work out the labour cost as follows:
---------------------- For Product A
---------------------- Worker Hours Rate (Rs.) Rs.
X 200 2.00 400
---------------------- Y 300 3.00 900
---------------------- Z 100 4.00 400
Total 1700
---------------------- Now we can work out selling price of product A:
Materials Rs. 500
----------------------
Labour Cost Rs. 1700
----------------------
Other Expenses Rs. 500
----------------------
Total Cost Rs. 2500
---------------------- If the company wants 10% profit on cost, 10% of Rs. 2700 has to be
added to cost. Hence, (Rs. 2700+270 =) 2970 will be the selling price.
----------------------
From the above example, the importance of information of the time spent
---------------------- by each worker and supervisor on a particular job is evident. Therefore, costing
department needs this information with great deal of accuracy. Notes
Thus, time booking means recording the time of every employee who
----------------------
has spent the time on a particular job directly or indirectly. It is a common
experience that a worker or an employee handles a number of jobs, activities ----------------------
and tasks at a time. However, it is necessary to break up the total time spent into
different parts according to time spent by him on different jobs. ----------------------
Time booking is a technique and a process of recording and accounting ----------------------
different time blocks for different jobs of the employees.
----------------------
This is also similarly applicable in case of machines and equipments.
Conducive environment for discipline among workers to fill up the forms ----------------------
and create records is a prerequisite for effective and good time booking system. ----------------------
It is possible only when all the employees appreciate the significance of time
booking. ----------------------
Time Booking Methods ----------------------
Basically, the choice of the method largely depends upon the needs as
regards the requirement of information. The system should give the necessary ----------------------
and accurate information for furtherance of other dependent activities. Therefore, ----------------------
the documents are designed according to the needs of the organisation. However,
documents commonly used for the purpose are as follows: ----------------------
1. Daily Time Sheet ----------------------
This is one of the important methods which are used for a daily record
----------------------
of the work done by each worker. This record indicates that the nature of
work, actual time spent by the worker on each job or operation. The daily ----------------------
time sheet is allotted to each worker on which the record is made by the
worker himself or by the official in charge. This method is suitable only ----------------------
for small-scale industries.
----------------------
The sample shown on the next page is that of a daily time sheet. From the
records shown therein we can understand how the worker has spent time ----------------------
on Job No. 12, 17, 19 and 20 and on various other activities. It is also ----------------------
possible to show the cost break- up on the sheet. Thus, this is a worker-
wise sheet (i.e. according to time spent by each worker on a job). ----------------------
Merits ----------------------
i. Simple to understand.
----------------------
ii. Easy to operate.
----------------------
iii. Current state of work is immediately known from the card.
iv. Suitable for small organisations as it is not expensive. ----------------------
v. Activity wise it is suitable for repair and maintenance workers. ----------------------
Demerits ----------------------
1. The system has a low accuracy level.
----------------------

Notes 2. It involves paperwork, which is time consuming.
Table 2.3: Time Sheet
----------------------
XYZ Company Limited Form No. ________
---------------------- Time Keeping Departemnt
---------------------- Date: 1st January 1998 Employee Name: Mahesh
---------------------- Ticket No. : 007

Center: Maintenance Department: Assembly
----------------------
---------------------- Work Job No. Prdn. Time On/ Actual Idle Time Total time
Description Task No. Unit Off A.M. taken Hours
---------------------- Activities Hours
Machinery Job No. 17 10 11.00 1.00 2.00 1.00 3
---------------------- Product B
---------------------- Machinery Job No. 19 12 3.00 5.00 1.00 1.00 2
Product C
---------------------- Assembly D Job No. 20 14 5.00 6.00 0.80 0.50 1
Total 4.50 2.50 7
----------------------
Actual Hours x Rate per hours_____________ Cost Rs. ___________________
---------------------- Idle Hours x Rate per hours_______________ Cost Rs. ___________________
---------------------- Job Rs. Job Rs. Job Rs. Job Rs. Sign Super- Verified Ref. Remarks
No. No. No. No. visor’s By Costing
---------------------- Signature Dept.
---------------------- 2. Weekly Time Sheet
---------------------- This system may be executed as in the case of daily time sheet. Under
this method, instead of recording time on daily time sheets, a worker is
---------------------- given a weekly time sheet on which the record of the worker on each job
is maintained for a week. This method is useful for those concerns where
----------------------
the workers usually carry on a few jobs in a week.
---------------------- A worker maintains the records in connection with a job carried out during
a particular week. It is suitable for the type of work which generally takes
----------------------
a week to complete.
---------------------- Weekly Time Sheet
---------------------- Day
---------------------- Friday
Saturday
----------------------
Sunday (Other columns are as per Daily Time Sheet)
----------------------
Monday
---------------------- Tuesday
---------------------- Wednesday
Merits Notes
i. Less paperwork.
----------------------
ii. Pending work is known.
----------------------
iii. Useful for single activity taking a long time.
iv. Useful for carpenters’ or masons’ activities. ----------------------
Demerits ----------------------
Workers fill up the details at the end of the week for the work initiated on ----------------------
daily basis.
----------------------
3. Job Cards or Job Tickets
This method is adopted for recording of time booking for a worker’s ----------------------
time spent on a job. A job card is prepared for each job giving detailed
----------------------
particulars of the work to be carried out by the worker. Job cards are
classified into the following four types: ----------------------
(a) Job card for each worker: Under this system, job card is issued to ----------------------
each worker at the beginning of each day or week. The job card is
used to record the time of starting and finishing each job or work. ----------------------
It indicates the nature of work, time spent by the worker for each
job or operation, idle time, total hours, rates and remuneration of ----------------------
different jobs during a scheduled time. ----------------------
(b) Job card for each job: In this system, a separate card is prepared
and allotted to each job. The job card is used for each job and passes ----------------------
along with the job from worker to worker. As soon as the worker ----------------------
receives the job card he records the time of starting and finishing
the job or operation. This system is useful not only for correct ----------------------
calculation of wages for each job but it also shows the details of the
work to be done by the worker. ----------------------
(c) Combined time and job card: Under this system, job card is ----------------------
prepared on the basis of attendance time and actual time spent by
the worker. This system is useful to ascertain idle time, time taken ----------------------
and time booking on account of pay rolls.\ ----------------------
(d) Piece work card: This system is adopted where the piece wage
----------------------
payment is applicable. Accordingly, wage payment is made on the
basis of quantity of output produced by the worker. A piece work ----------------------
card is allotted to each worker on which the quantity of work to be
done by each worker is recorded. For determination of piece wage ----------------------
payment, the time spent by the worker is not taken into account.
----------------------
This method is suitable for small-scale industries only.
The basic distinction in Job Card and Time Sheets is that in Time Sheets, ----------------------
the time spent by the same worker on various jobs is recorded and in case
----------------------
of Job Cards (Job wise) the time spent by different workers on the same
job is recorded. The job card indirectly indicates the total time on the ----------------------

Notes particular job by various workers of different departments. In some job
cards, the time is recorded for each operation separately (cutting, drilling,
---------------------- turning, grinding, painting, assembly). It is important to note that there
are no hard and fast rules or specifications for this document (i.e. Job
---------------------- Card). It is entirely need based.
---------------------- Merits
---------------------- i. Facilitates recording information accurately.
ii. Separation for each job of time spent is not necessary which saves time.
----------------------
iii. Facilitates better production planning and control as the link and
---------------------- sequence of the operation is clear.
---------------------- iv. Facilitates effective costing of a product.
---------------------- v. Cost of labour for minute operations is also known in detail.
vi. Facilitates better cost control over labour costs.
----------------------
Demerits
----------------------
i. It involves more paperwork, which is time consuming.
---------------------- ii. It is difficult to collect the information from different departments.
---------------------- iii. Not suitable for a product or job which undergoes large number of
operations.
----------------------
iv. It is expensive for small units as it involves too many details and
---------------------- trained manpower may not be available.
---------------------- Table 2.4: Job Card
---------------------- Job Card

Grand Future Ltd.
---------------------- Work Order No: Job No.:
Job Description: Department:
---------------------- Date Day Emp. No. Oper. Time Time Total Std. Idle Actual Rate Rs.
code on off Hours Hours Time Time
---------------------- Std. Time Recorded by
Time Allowed Verified by
----------------------
Actual Time Passed by
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
Fill in the blanks.
----------------------
1. The objective of labour cost control is achieved through the concerted
and coordinated efforts of ____________. ----------------------
2. __________ is primarily concerned with the recruitment of labour on ----------------------
the basis of placement requisition of employee and also of imparting
training to them. ----------------------
3. _________ is essential for the purpose of attendance and determination ----------------------
of wage payable to each worker.
----------------------
4. Each worker is given a metal disc or a token bearing his identification
number in ___________. ----------------------
State True or False. ----------------------
1. Wage payment is made on the basis of quantity of output produced by
the worker in Piece work Card. ----------------------
2. Weekly Time Sheet method is adopted for recording of time booking ----------------------
for a worker’s time spent on a job.
----------------------
3. Time Booking appraises the performance of the labour force.
----------------------
Activity 1 ----------------------
----------------------
Describe any two time booking methods used by the personnel department
of your organisation. ----------------------
----------------------
2.5 INDUSTRIAL ENGINEERING DEPARTMENT
----------------------
Engineering department is primarily concerned with maintaining control
----------------------
over working conditions and production methods for each job, process,
operation or departments. This department consists of Engineers and is engaged ----------------------
in various activities, which are aimed at determining the standard procedure,
standard methods and the standard time for the task. ----------------------
It is performed by undertaking the following functions: ----------------------
(1) Preparation of plan and specification of each job ----------------------
(2) Maintaining required safety and efficient working conditions
----------------------
(3) Making time and motion studies
----------------------
(4) Conducting job analysis, job evaluation and merit rating.
Time requirement of a particular task depends on: ----------------------
a) Time for procedures, (Documentation) ----------------------

Notes b) Time for activities of human nature
c) Time for facilities like machines and equipments
----------------------
d) Time for other elements
----------------------
The sum total of these different activities and elements can help to
---------------------- standardise the time for a particular job. Material requirements, input in terms
of labour hours, machine hours, etc. can be estimated much more accurately
---------------------- after the work-study is conducted by engineering and work-study department
for the job under study.
----------------------
In order to maintain control over working conditions and production;
---------------------- methods carrying a detailed study of the following operations is necessary:
---------------------- (a) Method Study: It is one of the important components of work study.
The main aim of this study is to find a scheme of least wastage. Method
---------------------- Study is defined as “a systematic and scientific evaluation of existing and
---------------------- proposed plans and performance of any work system and the evaluation
of improvement through analytical process of critical examination.”
---------------------- In other words, it is the systematic procedure followed to analyse the job,
---------------------- work, task etc. with an objective to eliminate unwanted or unnecessary
work and the arrangement of essential work portion in the best way,
---------------------- which will facilitate the standardisation of the appropriate method of
work. Therefore, when the method study is complete it is determined that
---------------------- a particular method (i.e. set of procedure and rules) shall be followed,
---------------------- wherein it is not important as to who (the name of the person) is doing the
job. Whoever will do the job shall follow the method for performing the
---------------------- job, as it is the most suitable method for doing the job.
---------------------- (b) Motion Study: Frank Gilbreth is the real founder of Motion Study.
According to him motion study may be defined as the “science of
---------------------- eliminating wastefulness resulting from ill-directed and inefficient
motions.
----------------------
In this process, the work study is carried out first and the standard method
---------------------- is determined on the basis of the work study. This is followed by Motion
Study. Each operation has several motions. These motions have existence
----------------------
in the frame of operations which are a) Independent b) Dependent on the
---------------------- relation of the motion with other motions. Each such motion is called
as an element of the job or operation. After breaking a job into different
---------------------- elements or motions, each such motion is timed, i.e., the time actually
taken for each such motion is recorded. Both, the motions of a worker
----------------------
as well as motions of the respective, machines, tools and materials are
---------------------- recorded.
---------------------- The objective of motion study is to economise the motions, reduce

fatigue and improve the efficiency of workers and production facilities
---------------------- like machines, tools and instruments. Finally, the conclusion of the study
results into the standardisation of movements of a worker and production
---------------------- facilities.
The following are the important objectives of the motion study: Notes
(1) Effective utilisation of material, machine and labour.
----------------------
(2) Elimination of wastage of time and labour.
----------------------
(3) Maintaining higher standards of safety and health.
(4) Reducing unnecessary movements in order to minimise wastages. ----------------------
(5) Better design of work place layout for effective production process. ----------------------
(6) Ensure fair remuneration along with job satisfaction. ----------------------
(c) Time Study: Time study is also called work measurement. Time study
----------------------
may be defined as “the art of observing and recording the time required to
do each detailed element of an industrial operation.” ----------------------
After method and motion study, it is important to determine the time
----------------------
requirement for the same. For this purpose, standardisation of time
is necessary. This is the subject-matter of time study. Under this study ----------------------
“hypothetical time/hour” is calculated, which indicates the amount of
work which shall be completed within that one hour. For calculating the ----------------------
standard time required for a job, it is necessary to fix standard time of
----------------------
each operation and element. The sum total of such time will make the
standard time for that job. Once the standard time of the job is known, ----------------------
it helps the management in finding out requirements of labour quantity
correctly, wage rate fixation and the incentive rate fixation. ----------------------
Uses of Time Study ----------------------
(1) It assists in setting standard time for each operation. ----------------------
(2) It facilitates effective labour cost control.
----------------------
(3) It helps to ascertain ideal time and over time to men and machines.
----------------------
(4) It is useful to establish fair and suitable wage rates and incentives.
(5) It facilitates effective utilisation of resources. ----------------------
Procedures for Time Study ----------------------
1) Selection of a job: The work selected will depend upon the priority ----------------------
decided by the management where the standardisation is required.
2) Primary Work: Further, the job is broken into elements of ----------------------
operations and motions. ----------------------
Similarly, the working conditions are studied; machines, equipments,
----------------------
tools and the motions are studied. Each minute activity involved is
listed, with its sequence for the furtherance of the work on time ----------------------
study sheet.
----------------------
3) Making Observations: A stopwatch is used for the purpose to note
the time. The difference between the initial time (time of starting ----------------------
first activity of the job) and the time at the end of the job (time
for the last operation) is the time for that operation. However, ----------------------

Notes there is a variation in time because each individual worker may
possess different skills, which may reduce or increase the time.
---------------------- Thus, considering the time required by a normal worker, in normal
working conditions at normal speed, is significant. The worker’s
---------------------- skill (under time study) and efficiency is compared with such a
---------------------- normal worker’s efficiency and skill. Accordingly, the worker is
given a rating. For example one dollar ends at say, Rs.40. Here, the
---------------------- rating of one dollar is 40 times of a rupee.
---------------------- Finally, accurate and complete data is obtained for all the operations.
4) Time Computation: The type of time:
----------------------
a) Element Time: Actual time taken by the normal worker,
---------------------- under normal conditions of work when the work is carried
out under normal Speed.
----------------------
i) Time of Allowance: Actual operations are the part of the total
---------------------- work. i.e., when the worker and machine are both are engaged
---------------------- physically, individually or collectively. However, there are
instances where both are not physically working but it is
---------------------- necessary part of the job. For example, setting of a machine,
trial run of a machine, fatigue of a worker, worker needs to go
---------------------- to the toilet, a phone call to a worker from outside, call from
---------------------- a supervisor for instructions, collection of scrap and cleaning
the machine, oiling and maintenance online while performing
---------------------- the job etc.
---------------------- In other words, there are personal and non-personal time elements,
which are an integral part of the job.
---------------------- For such factors a certain quantum of time is added to the job (for
---------------------- example, 3 minutes for personal needs). This is worked out as a
certain percentage of the actual time taken for the job or by way of
---------------------- finding some suitable method for the addition of time. However,
it is not fixed and such a time requirement is subject to conditions
---------------------- of work (i.e. contingent upon the happening of the events). This is
---------------------- called Contingent Allowance.
1. In order to understand the time for an average or normal
----------------------
worker, the actual time for each element is normalised by
---------------------- using the formula,
Rating of a worker
---------------------- Normalised Time = * Actual Time
Normal Rating
----------------------
Generally, numbers of observations are made for the same
---------------------- operations. (Such timings as averaged for each element).
---------------------- 2. Allowances for various reasons predicted are added to the

normalised time.
---------------------- 3. Standard Time = Normalised Time + Time allowances
4. In case of the incentive scheme, an incentive time allowance Notes
is added to standard time, which is generally 66.66% of
standard time and it is called Time Allowed. ----------------------
Time Allowed = Standard Time + Incentive Time Allowance ----------------------
Example:
----------------------
Akash and Sagar are two operators whose work is studied by the
Engineering and Work Study Department. Akash is a skilled worker. An ----------------------
average worker is one who performs a job in 60 minutes. The same job is
----------------------
performed by Akash in half of the time. (i.e., his rating is 30/60). In case
of Sagar, he can perform the same work by taking longer time. He takes ----------------------
90 minutes for the same job. Therefore, his rating is 90/60.
----------------------
The study is a continuous activity, which is subject to continuous
improvement as no system has input and output ratio as one to one. ----------------------
(d) Job Analysis: Job Analysis is a formal and detailed study of jobs. Job ----------------------
analysis may be defined as “the process of determining by observation
and study the task, which comprise the job, the methods and equipment ----------------------
used and the skills and attitudes required for successful performance of
the job.” ----------------------
Advantages of Job Analysis ----------------------

Following are the important advantages of job analysis: ----------------------
(1) It is useful in classifying job and interrelationship among them.
----------------------
(2) If facilitates forecasting of manpower requirements.
----------------------
(3) It helps in effective utilisation of manpower resources.
(4) Effective employee development programme can be established. ----------------------
(5) Enables in determining performance standards of each process or job. ----------------------

(e) Job Evaluation: Job evaluation may be defined as “a process of ----------------------
analyzing and describing positions, grouping them and determining their
relative value by comparing the duties of different positions in terms of ----------------------
their different responsibilities and other requirements.” Job evaluation is
----------------------
determined on the basis of job description and job analysis. The primary
purpose of job evaluation is developing appropriate wage and salary ----------------------
structure with internal pay equity between jobs.
----------------------
(f) Merit Rating: Merit rating may be defined as “a systematic evaluation
of an employee’s performance on the job in terms of the requirement of ----------------------
the job.” Merit rating is a system of measuring both qualitatively and
quantitatively of an employee’s capacity in relation to his job. Following ----------------------
are the personal qualities of an employee, which are usually considered
----------------------
for determining merit and worth of labour:
(1) Academic qualification and knowledge ----------------------
(2) Skill and experience ----------------------

Notes (3) Attitude to the work.
(4) Quality of work done
----------------------
(5) Initiative intelligence
---------------------- (6) Accuracy
(7) Judgement
----------------------
(8) Leadership
---------------------- (9) Adaptability and Co-operation.
---------------------- (10) Leadership and self-confidence
(11) Reliability and Integrity.
----------------------
(12) Discipline
---------------------- Importance of Merit Rating: Following are some of the important
advantages of merit rating:
----------------------
(1) It assists in determining fair rates of wages for each worker on the
---------------------- basis of his/ her performance.
---------------------- (2) It helps to know the suitability of the worker for a particular job.
---------------------- (3) This method helps in removing grievances and it improves labour-
management relations.
----------------------
(4) Enables to ascertain an employee’s merit for grant of promotion or
---------------------- demotion or transfer or increment etc.
(5) If facilitates effective labour cost control.
----------------------
Engineering and Work Study Department can be seen in large-scale
---------------------- industries. In small- scale industries, institutionalising such departments is
many times not possible as it needs a large amount of expenditure as regards
----------------------
capital investment and the establishment of expenditure.
---------------------- Production Planning and Control (PPC) department is the name one finds
---------------------- as a replacement of the Engineering and Work Study Department because with
the recent rapid changes in technology the scope of functions has enhanced and
---------------------- increased to a large extent.
----------------------
----------------------
----------------------
1. Job evaluation is determined on the basis of job description and job
---------------------- analysis.
2. The objective of motion study is to reduce fatigue and improve the
----------------------
efficiency of workers and production facilities like machines, tools
---------------------- and instruments.
3. Time study does not assist in setting standard time for each operation.
----------------------
----------------------
Notes
Activity 2
----------------------
Describe the procedure of time study used in your organisation.
----------------------
----------------------
2.6 TYPES OF WORKERS
----------------------
1. Piece Workers
----------------------
i) Nature of work: Production of piece or completion of units of work.
----------------------
ii) Example:
a) Winding of small transformers ----------------------
b) Packing of goods ----------------------
c) ‘Bidi’ rolling ----------------------
d) Paper making
----------------------
e) Assembly of electronic parts
----------------------
iii) Type: Recurrent
iv) Payment: Per unit or piece basis on output ----------------------
v) Other benefits: Like P.F., Gratuity not in terms of employment ----------------------
vi) Class of workers: Semi skilled ----------------------
vii) Incentive plans: Partly applicable
----------------------
viii) Labour Cost: Direct
----------------------
ix) Time recording: Essential
x) Recruitment: By contracts ----------------------
xii) Control: On quality and quantity of output ----------------------
2. Casual Workers ----------------------
i) Nature of work: Complete the work or task of a specific nature
----------------------
ii) Example:
----------------------
a) Clean the factory
b) Loading and unloading ----------------------
c) Shifting of machines ----------------------

d) Cleaning the scrap yard ----------------------
e) Work in place of absentees
----------------------
iii) Type: Occasional
----------------------
iv) Payment: On the job basis for the total work
v) Other benefits: Like P.F., Gratuity, not in terms of employment ----------------------

Notes vi) Class of workers: Unskilled
vii) Incentive Plans: Not applicable
----------------------
viii) Labour Cost: Indirect (overheads)
----------------------
ix) Time recording: Not essential, as total work is given
---------------------- x) Recruitment: At the gate
---------------------- xi) Control: By supervision
---------------------- 3. Out Workers
i) Nature of work: Performance of work outside the factory
----------------------
ii) Example:
----------------------
a) Servicing of machines at client’s place.
---------------------- b) Erection work at the factory of the customer.
---------------------- c) Installation and Commissioning of the plant at the customer’s
place.
----------------------
d) Personal marketing.
----------------------
e) R&D at customer’s laboratories.
---------------------- iii) Type: Occasional but with regular intervals
---------------------- iv) Payment: Monthly basis
---------------------- v) Other benefits: Like P.F., Gratuity. Generally in terms of employment

vii) Class of workers: Highly skilled
----------------------
viii) Incentive plans: Fully applicable
----------------------
ix) Labour cost: Indirect, selling and administrative expenses
---------------------- (overheads)
---------------------- x) Time recording: Essential

xi) Recruitment: By regular procedure
----------------------
xii) Control: On the time spent outside
----------------------
From the foregoing points, from the time booking point of view, it is
---------------------- important to record, book and control the time of outworkers. In case of
outworkers working on sites, the time recording system is necessary at
---------------------- that place as the customer does not have any responsibility to count and
control the time of the vendor organisation.
----------------------
Time recording and time booking for piece workers is as important as the
---------------------- remuneration paid to them. The majority of time forms part of the direct
labour cost. Although casual workers are a pain on the total work basics,
----------------------
the time recording and booking significant when they work in place of
---------------------- absent workers, i.e. like ‘badali’ workers.
----------------------
Recording attendance time, time spent on each activity, time taken by each Notes
job operation or activity in any organisation is extremely important from
the viewpoint of the ascertainment of the labour cost (whether direct or ----------------------
indirect) charging the costs to the product or service and further controlling
the costs. For the former purposes, the timekeeping department provides ----------------------
the foundation work, which indicates the importance of the functions of ----------------------
the timekeeping department although it is not a line department but a
State Department. ----------------------
----------------------
2.7 PAYROLL DEPARTMENT
----------------------
This is one of the important departments which are responsible for
computation, preparation and payment of wages to all employees of the entire ----------------------
organisation. Wage Sheet or Pay Roll is prepared on the basis of the Piece Work
Card or Time Card or both. It is a statement which shows the detailed records of ----------------------
the employees’ remunerations such as gross wages, various reductions and net ----------------------
wages for particular period.
In order to ensure the proper determination and preparation of wage sheet, ----------------------
the pay roll department should be taken a special care. A systematic procedure ----------------------
for payment of wages should be adopted to prevent frauds and irregularities in
wage payments. Effective supervision and strict control are essential to ensure ----------------------
that the worker is not paid twice or no dummy name of workmen has been
entered in the pay roll. ----------------------
In large organisations, a separate payroll department exists. However, in ----------------------

small organisations it is the accounts or personnel department which looks after
----------------------
the functions of a payroll department.
Various functions entrusted with this department are: ----------------------
1. To prepare the pay sheet of each worker i.e., Calculation of Gross ----------------------
Earnings, Calculation of Deductions and Calculation of Net Earnings.
----------------------
2. While preparing the payroll, it is necessary to consider the time of work,
overtime investment, due allowances and their applicability according ----------------------
to slabs, to arrive at the accurate working of the gross and net amount
payable to a worker. ----------------------
3. Providing the permanent record of payment to all employees. ----------------------

4. Actual disbursement of wages. This is particularly important in case of ----------------------
illiterate workers.
----------------------
5. Keeping an internal check over the preparation and disbursement of the
salary and the wages to the employees. ----------------------
6. Calculation of job wise work rates, their classification and summarising the
----------------------
total gross remuneration paid to employees with the budgeted allocations.
7. Preparation of the MIS report for deviations from the budgeted expenditure. ----------------------
8. Statutory payments to the Government along with employer’s contributions ----------------------
or otherwise.
Notes Preparation of Payroll/Wage Sheet
The source documents for the preparation of such sheets are the Daily
----------------------
Time Sheet or Weekly Time Sheet or Attendance Register.
---------------------- A payroll may be defined as a statement wherein the Gross Earnings,
Total Deductions and Net amount payable as wage or salary is shown against
----------------------
the name or token number or code number of an employee for the period of
---------------------- generally a month in the case of salaried employees and a week in case of
workers.
----------------------
Computation of Earnings
---------------------- Net Earnings = Gross Earnings – Deductions
---------------------- A) The components of Gross Earnings are:
---------------------- Basic salary Dearness allowance

Other allowances, like House rent allowance, Medical allowance,
----------------------
Overtime. Ex gratia
---------------------- Bonus Incentives
---------------------- Other occasional income like Cash rewards Leave encashment, leave
travel allowances, etc.
----------------------
B) Components of Deductions
---------------------- Provident Fund Professional Tax Income Tax
---------------------- E.S.I. contribution of Employee Fines
---------------------- Charges for services provided by the organisation, for example: transport,
canteen, housing, furniture, gas, electricity, etc.
----------------------
Premium of Life Insurance Corporation Union membership contribution
---------------------- Housing loan instalments
---------------------- Credit society instalments other bank’s loan instalments

C) Net Earnings, which are popularly known as take home salary is worked
---------------------- out in the following way:
---------------------- Net Earnings = Gross Earnings – Gross Deduction
---------------------- In case of piece workers, the remuneration is the product of the number
of pieces or units completed and the rate for each piece. This is also called as
---------------------- payment by results.
---------------------- In case of time paid workers the remuneration is the product of time spent
in terms of hours and an hourly rate. For overtime work the rate is higher than
---------------------- the normal rate.
----------------------
----------------------
----------------------
Disbursement and internal checks Notes
It needs a considerable amount of effort to deliver payments physically
----------------------
and pay the workers. In companies like Telco Pune, having strength of 40,000
plus, the employer’s management of actual payments to the employees is a ----------------------
complex task.
----------------------
Nowadays, the most convenient way that is evolved is payment through a
bank. However, in a business where manual work assumes very high proportion ----------------------
and the payments are on weekly basis, an internal check is very important.
----------------------
Examples of such business are Construction work, Transportation, Film
making, Bidi rolling, Packing industry, Process food industry, Agro products, ----------------------
etc. This is because the majority of the workers are illiterate. Many times they
do not know how much they will be paid, how the amounts are calculated, etc. ----------------------
Most often, language is the major problem. English language is not understood
----------------------
by most of them. They use only the local language.
In such circumstances, the scope for fraud and cheating such workers is ----------------------
large. Therefore, an internal check is as important as the preparation of a pay ----------------------
roll. For an adequate and effective internal check on disbursement of wages, the
following factors are important. ----------------------
1. Time recording should be supervised properly. ----------------------
2. Normal time, overtime and other records should be certified by the
responsible authority who is not involved in timekeeping activities. ----------------------
3. In case of piece rated workers the accepted pieces or units should be ----------------------
certified by two individuals i.e. the foreman and the production in-charge.
----------------------
4. The details of time and output should be crosschecked from the entries
made in the documents used for the purpose. ----------------------
5. As far as possible the pre-sanction of overtime work should be made ----------------------
necessary with the justification thereof.
----------------------
6. Terms of remuneration and incentive schemes should be well defined.
7. It should be ensured that every worker understands the terms of and the ----------------------
method of payment. ----------------------
8. Calculation of wages and salary should be prepared by one person and
----------------------
it should at least be cross checked by another person (Preferably an
Accounts Executive). ----------------------
9. Cashier or the person responsible for the actual payment should not be
----------------------
involved in preparation of a payroll or wage sheet.
10. There should be a surprise check on calculations and payments. ----------------------
11. Identity cards or other means of identification should be used to ensure ----------------------
that the remuneration is paid to the worker who has actually worked. For
the workers who are not present at the time of payment, their undisbursed ----------------------
wages should be entered in a ‘wage register’ and accounted for. ----------------------

Notes 12. A day should be fixed for the payment of undisbursed wages.

----------------------
Fill in the blanks.
---------------------- 1. A ____________ is a statement wherein the Net amount payable as
wage or salary of an employee for the period of generally a month in
----------------------
the case of salaried employees and a week in case of workers.
---------------------- 2. _____________ should be supervised properly in payroll preparation.
----------------------
---------------------- 2.8 WAGE ANALYSIS

---------------------- Conducting salary analysis is an important element for establishing a
competitive salary structure within an organisation. It is a challenging task and
---------------------- gathering information can take time. This form template will assist in gathering
and reporting salary information by providing a clear and consistent format to
----------------------
help with the analysis. It can be used for the business and its competitors in
---------------------- order to compare and analyze differences in the various salary categories.
---------------------- For analysing wages, the documents useful for the purpose are:
1. Cards – clock, job and idle time
----------------------
2. Wage Sheet
----------------------
3. Payroll
---------------------- 4. Wage Analysis Book
---------------------- 5. Wage Abstracts
---------------------- 6. Accounting Registers – Journal and Ledger
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Table 2.5: Analysis of Wages Notes
Direct Wages Indirect Wages Cost Centres Job/Cost unit
----------------------
Wage analysis is required by the Costing Department as well as for Government
statistical information. ----------------------
A sample Wage/Salary Analysis template is given below. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 2.1: Sample Wage/Salary Analysis Template
----------------------
Activity 3 ----------------------
----------------------
Describe the various functions of the payroll department of your organisation.
----------------------
2.9 COST ACCOUNTING TREATMENT OF WAGE ----------------------
COMPONENTS
----------------------
Like material control, cost accountant has also genuine interest to control
over the labour cost, but he cannot control labour like material control. Both, ----------------------
decreasing the number of labourers and wages will increase the cost of labourers
----------------------
because less no. of worker with fewer wages will produce less output and its
cost will be more. ----------------------
Suppose you have to construct a building. In an effort to save the labour ----------------------
cost, if you appoint only two labourers, it will have a reverse effect because

Notes the no. of days to construct the building will increase and there will be a risk
of losing other stock like cement etc. as well. So, optimum use of workers is
---------------------- the way to control the cost of labour. There are many other factors which affect
labour cost control.
----------------------
The treatment of any expenditure means ascertaining of a particular
---------------------- expenditure as Direct Cost or Indirect Cost. The management has a great
concern about this distinction because direct costs are very difficult to control
----------------------
and indirect costs are controllable. Such indirect costs are generally the outcome
---------------------- of inefficiencies in different functional areas.
Therefore, the circumstances in which the costs occur determine the
----------------------
nature of the cost, whether direct or indirect.
---------------------- 1. Overtime: It means extra working time beyond normal working time. It
is paid at double the rate of the normal working hours.
----------------------
Table 2.6: Overtime Details
----------------------
No. Circumstances of Overtime Treated as Charged to
---------------------- 1) For completing the work Direct Cost Job
before Scheduled date and at
---------------------- the instructions of the buyer.
---------------------- 2) General pressure of work Indirect Cost Standing order
(overheads)
---------------------- 3) Inefficiency of other Indirect Responsible departments
departments
---------------------- 4) Management inefficiency Indirect Department having
---------------------- inefficient management.
5) Uncontrollable Reasons Indirect Costing P&LA/c.
---------------------- 2. Holidays and weekly off day’s workings: Same in case of overtime.
---------------------- 3. Night shift allowance: Same as overtime.
---------------------- 4. Wages of apprentice: Either direct expenses and charged to the job or
50% as direct and 50% as indirect labour cost.
----------------------
5. Idle time: Means the time for which the worker is paid but no production
---------------------- is received during that time.
Causes
----------------------
A) Production Causes
----------------------
1. Failure of electricity
---------------------- 2. Breakdown of machinery
---------------------- 3. Receiving of tools, materials
---------------------- 4. Receiving of instruction:
Is controllable by: i) Generator sets alternative energy sourcing (however,
----------------------
sometimes uncontrollable) ii) Preventive maintenance iii) Scheduling and
---------------------- proper material flow iv) Proper production planning and control.
B) Administrative Causes Notes
1. Underutilisation of the machinery due to the management policy
----------------------
2. Poor management
----------------------
3. Reactive approach to problems
C) Economic Causes ----------------------
1. Seasonal nature of demand ----------------------
2. Trade cycles ----------------------
3. Non-availability of working capital
----------------------
Idle time is unproductive but is a paid time. The employer is
sensitive about such factors as it unnecessarily increases the cost ----------------------
of production. The employer intends to minimise this time for men
----------------------
and machines and other production facilities by:
a. Recording Idle Time ----------------------
b. Analysing the reasons for that ----------------------
c. Preventing idle time by not allowing the analysed reasons to ----------------------
occur.
----------------------
Table 2.7: Idle Time Analysis
Circumstances of Idle Time Treated as Charged as ----------------------
Controllable and normal Indirect cost Overheads ----------------------
Uncontrollable but normal: Direct Cost Job Cost
Time lost in setting the machine ----------------------
Changing the job, tea breaks
----------------------
Uncontrollable and abnormal: Abnormal item of Costing P&LA/c ----------------------
----------------------
Strikes, lockouts, slowdown expenditure
fire, accidents etc. ----------------------
6. Idle Facilities: Underutilised plant and machinery. Under normal ----------------------
circumstances, if the production facility remains idle for example,
preventive maintenance, intermittent use for a particular sequence of ----------------------
operations, it is treated as Indirect Expenses or Overheads. ----------------------
In case of abnormal circumstances, it is debited to Costing Profit and Loss
Account. ----------------------
7. Fringe Benefits: Pension facilities, profit sharing bonus, insurance, ----------------------

special pay, etc. are the examples of benefits, which are over and above
----------------------
the normal wages. As a result these indirect benefits improve the morale
of workers, who tend to be stable and loyal. ----------------------
As far as possible these expenses are identified as job expenditure and
----------------------
treated as direct Costs. Otherwise they are treated as production overheads.

Notes 8. Holiday with pay: Festival holidays, national days, etc. are treated as
production overheads.
----------------------
9. Leave with pay: Leave under Factories Act: Medical leave, earned leave,
---------------------- travel leave, etc. are the examples when the employee is paid without any
work. As it is accepted that the employee has a right to enjoy the leaves it
---------------------- is treated as direct expenses so far as the leave is for the current year.
---------------------- Accumulated leave pay is treated as Indirect Expenses.
10. Attendance Bonus: Either direct or indirect expenses.
----------------------
11. E.S.I. Contribution: Direct expenses for production workers and indirect
---------------------- expenses for workers aiding the production.
---------------------- The principles followed for the treatment of any costs are:
---------------------- 1. As far as possible the costs should be attempted to be identified with the
job.
----------------------
2. If controllable and normal, they are treated as indirect expenses/overheads.
---------------------- If uncontrollable and abnormal, they are directly charged to Profit and
Loss Account.
----------------------
----------------------
---------------------- State True or False.

1. The employer is sensitive about idle time as it unnecessarily increases
----------------------
the cost of production.
---------------------- 2. Labour cost can be controlled by optimum use of workers.
---------------------- 3. Direct costs are very difficult to control and indirect costs are
controllable.
----------------------
---------------------- Summary
----------------------
●● he total cost of labour and various techniques used by the management
T
---------------------- for the effective control of labour costs are scientific method of production
planning, use of labour budgets, establishment of labour standards etc.
----------------------
●● abour cost control is based on predetermined standards of efficiency and
L
---------------------- comparisons of actual costs with standard costs.
---------------------- ●● ersonnel department is also responsible for execution of labour policies

P
which have been laid down by top management in order to achieve the
---------------------- efficient utilisation of manpower resources,
---------------------- ●● e can say that Timekeeping is actually recording of each worker’s

W
time of coming in and going out of the factory during engagement of the
---------------------- factory. It can be done by Manual or Mechanical method.
----------------------
●● ime booking refers recording the time of each worker for each department,
T Notes
operation, process or job during engagement of the factory. It is useful for
the purpose of cost analysis and effective cost control. ----------------------
●● ngineering department is primarily concerned with maintaining control
E ----------------------
over working conditions and production methods for each job, process,
operation aimed at determining the standard procedure, standard methods ----------------------
and the standard time for the task.
----------------------
●● ayroll Department is one of the important departments which is
P
responsible for computation, preparation and payment of wages to all ----------------------
employees of the entire organisation.
----------------------
●● scertaining a particular expenditure as Direct Cost or Indirect Cost and
A
the management’s concern about this distinction because direct costs are ----------------------
very difficult to control.
----------------------
Keywords ----------------------
●● irect labour: It is that labour which can be conveniently identified or

D ----------------------
attributed wholly to a particular job, product or process. It includes all ----------------------
labour expended in converting raw material into finished goods or in
altering the construction composition or condition of the product. It varies ----------------------
directly in relation to the volume of output.
----------------------
●● I ndirect labour: It is one, which is of a general character and cannot
be conveniently identified with a particular job, product or process. It ----------------------
represents the ancillary work done in connection with the product
----------------------
manufactured.
●● vertime: It is an extra working time beyond normal working time and
O ----------------------
is paid at double the rate of the normal working hours.
----------------------
●● I dle time: It is the time for which the worker is paid but no production is
received during that time. ----------------------
----------------------
----------------------
1. What is the need and importance of control on labour costs?
----------------------
2. What are the different important departments associated with the cost
control aspect of a business organisation? ----------------------
3. Explain the need for and the major parts of time and motion study. ----------------------
4. Which are the different time keeping and time recording methods? ----------------------
5. Explain the cost accounting treatment with special reference to the
components of wages. ----------------------
----------------------
----------------------

Notes Answers to Check your Progress

1. Labour cost control used by the management keeps the labour cost of the
---------------------- product or job as minimum.
---------------------- 2. Direct labour includes all labour expended in converting raw material
into finished goods.
----------------------
3. Labour cost control is based on predetermined standards of efficiency.
----------------------
---------------------- 1. The objective of labour cost control is achieved through the concerted and
coordinated efforts of various departments.
----------------------
2. Personnel department is primarily concerned with the recruitment of
---------------------- labour on the basis of placement requisition of employee and also of
imparting training to them.
----------------------
3. Timekeeping is essential for the purpose of attendance and determination
---------------------- of wage payable to each worker.
---------------------- 4. Each worker is given a metal disc or a token bearing his identification
number in Token Method.
----------------------
---------------------- 1. True
---------------------- 2. False
---------------------- 3. True
----------------------
----------------------
1. True
---------------------- 2. True
---------------------- 3. False
Fill in the blanks.
----------------------
1. A payroll is a statement wherein the Net amount payable as wage or salary
---------------------- of an employee for the period of generally a month in the case of salaried
employees and a week in case of workers.
----------------------
2. Time recording should be supervised properly in payroll preparation.
----------------------
----------------------
----------------------
1. True
----------------------
2. True
3. True ----------------------
----------------------
Suggested Reading
----------------------
1. Bhatia, S.K. New Compensation Management in Changing Environment:
----------------------
Managerial Remuneration and Wage & Salary Administration: a
Professional Manual. Deep and Deep Publications. ----------------------
2. Bhattacharya, Dipak Kumar. Compensation Management. OUP India.
----------------------
3. Bhattacharya, Mausomi. Compensation Management. Excel Books India.
----------------------
4. Goel, Diwakar. Performance Appraisal and Compensation Management:
A Modern Approach. PHI Learning Pvt. Ltd. ----------------------
5. Henderson, Richard I., Sandra Vasa-Sideris, Barbara Bernal Thomas. ----------------------
Compensation Management in a Knowledge-Based World: Exercise
Book. Prentice Hall. ----------------------
6. Upadhyay, S.S. Compensation Management: Rewarding Performance. ----------------------
Global India Publications.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Compensation Systems: Merits and Demerits
UNIT
3
Structure:
3.1 Introduction
3.2 Compensation / Reward Management Process
3.3 Components of Remuneration
3.4 Reward System
3.6 Aspects of Reward Management
3.7 Various Compensation Systems and their Merits and Demerits
Summary
Key Words
Suggested Reading
Compensation Systems: Merits and Demerits 73

Notes
Objectives
----------------------
----------------------
• Explain the compensation and reward management process
----------------------
• Evaluate the components of remuneration
---------------------- • Analyse the reward system and the advantages of fair compensation
---------------------- • Different aspects of reward management
---------------------- • Explain various compensation systems and their merits and demerits
---------------------- 3.1 INTRODUCTION

---------------------- The term “compensation” is heard in the context of getting paid for the
---------------------- work that we do. This work in question can be as a part of full time engagement
or part-time in nature. The remarkable point here is the “reward” that we get for
---------------------- expending our energy not to mention the time for which we are compensated.
---------------------- Employee remuneration has different connotations for different people.
For an employee, it means status and standard of living; for the employer it adds
---------------------- to the cost; and to the HRM the administration of remuneration is an important
activity. From the employers’ point of view, the money that is being paid to
----------------------
the employees in return for the work that they do is compensation and that
---------------------- should be planned for in an elaborate and systematic manner. If the employer
and the employee are not in a broad agreement to this system, the net result is
---------------------- dissatisfaction from the employee’s point of view and friction in the relationship
of employer and employee.
----------------------
Going by the understanding, it can be said that compensation is the
---------------------- “glue” that binds the employee and the employer together. In the business
sector, this is further expressed in the form of a contract or a mutually binding
----------------------
legal document that expresses out exactly how much should be paid to the
---------------------- employee for the components of the compensation package. A good decision of
appropriate compensation makes all the difference between a satisfied employee
---------------------- and a disgruntled employee.
---------------------- Employee compensation is an important as well as a complicated issue
for every manager of the organisation. Therefore, it is important to have a well-
---------------------- designed compensation system.
----------------------
3.2 COMPENSATION/REWARD MANAGEMENT PROCESS
----------------------
In this section, we will try to understand the compensation and benefits
---------------------- processes. This procedure belongs to the most important HR Processes, which
are critical for the organisation and modern HR organisation. The compensation
----------------------
and benefits process revolves around managing the personnel expenses budget,
---------------------- setting the performance standards, setting the transparent compensation
policies and introducing the competitive benefits for employees. Therefore, Notes
an organisation with effective compensation and benefits initiatives leads
its personnel costs, manages the performance of employees and rewards the ----------------------
extraordinary performance.
----------------------
A compensation framework that supports a long-term strategic vision for
compensation and implements new initiatives will provide the needed direction. ----------------------
Changes will involve moving towards solving special salary problems using
----------------------
innovative concepts. The way we deal with compensation is undergoing major
change towards a more flexible and timely corporate compensation system. The ----------------------
new system will have increased delegation to managers and will be driven by
the business needs of the government and ministries. It will be faster, more ----------------------
efficient and eliminate duplication and it will focus on a long-term approach to
----------------------
It will move from being a highly centralised approach whereby the senior ----------------------
managers will have increased authority to make decisions, integrate compensation
----------------------
with other areas of human resource management and emphasise transparency,
monitoring, reporting and accountability. The vision for compensation will ----------------------
assist the public service in attracting and retaining key employees.
----------------------
Managers will have more accountability for compensation of their
employees and will be profiled with the required tools, systems and support. ----------------------
Senior managers will also have the authority to approve the classification levels
of pre-identified jobs within their organisation. ----------------------
Compensation management, which is also named as wage and salary ----------------------
administration, remuneration management, or reward management, is designed
for implementing total compensation package. The traditional concept of wage ----------------------
and salary administration emphasised on only determination of wage and salary ----------------------
structures in organisational settings. However, over the passage of time, many
more forms of compensation as discussed earlier, entered the business field ----------------------
which necessitated to take wage and salary administration in comprehensive
way with a suitable change in its nomenclature. ----------------------
The framework of a compensation policy, employee motivation and ----------------------

performance management depends on good systems that offer both, financial
and non-financial rewards. This performance management article applies to ----------------------
all organisations. Constant changes and high expectations are taking their toll ----------------------
in some organisations, as well as in industry and the government in general.
Sometimes this is shown in the employee turnover. Sometimes it is hidden ----------------------
because of job insecurity. Many employees make a New Year’s resolution to
seek other employment. Many are also seeking more balance in their life. ----------------------
Rewards and compensation must be scrutinised. Employee motivation ----------------------

and performance are critical. Non-monetary rewards can be as important as
----------------------
monetary rewards.
In some organisations, a multitude of different salary and pay arrangements ----------------------
exists. It is time to bring these different systems into a new framework.
----------------------

Notes Employees at all levels need to have confidence in the salary administration
system. Employees want the rewards to be shared fairly and equitably. If they
---------------------- are not, the resultant dissatisfaction can cause severe morale and performance
problems.
----------------------
In order to achieve the objectives of compensation management, it should
---------------------- proceed as a process. This process has various sequential steps as shown:
---------------------- Organisation’s Strategy

----------------------
Compensation policy
---------------------- 
Job analysis and evaluation
----------------------

---------------------- Analysis of contingent factors
---------------------- 
Design and implementation of compensation plan
---------------------- 
---------------------- Evaluation and Review
---------------------- Organisation’s overall strategy though not a step of compensation

management, is the starting point in the total human resource management
---------------------- process including compensation management. Companies operating in
different types of market/product having varying level of maturity adopt
----------------------
different strategies and matching compensation strategy and blend of different
---------------------- compensation methods. Thus, it can be seen that organisations follow different
strategies in different market situations and align their compensation strategy
---------------------- and contents with these strategies. In a growing market, an organisation can
expand its business through internal expansion or takeover and merger of other
----------------------
organisations in the same line of business or a combination of both. In such a
---------------------- growing market, the inputs, particularly human resources, do not grow in the
same proportion as the business expands. Therefore, in order to make the growth
---------------------- strategy successful, the organisation has to pay high cash to attract talents. For
example, information technology is a fast growing business presently and we
----------------------
find maximum merger and higher managerial compensation in this industry. In
---------------------- mature market, the organisation does not grow through additional investment
but stabilises and the growth comes through making the present investment more
---------------------- effective, known as learning curve growth. In such a situation, average cash
and moderate incentives may work. The benefits which have been standardised
----------------------
have to be maintained.
---------------------- Compensation policy is derived from organisational strategy and its
---------------------- policy on overall human resource management. In order to make compensation
management to work effectively, the organisation should clearly mention the
---------------------- policies which must include the basis for determining base compensation,
incentives and benefits and various types of perquisites to various levels of
---------------------- employees. The policy should be linked with the organisational philosophy on
human resources and strategy. Besides, many external factors which impinge Notes
on the policy must also be taken care of.
----------------------
Job Analysis and Evaluation- Job analysis provides details about a
job and job specification with the former dealing with various characteristics ----------------------
and responsibilities involved in a job and the latter dealing with qualities and
skills required in job performer. Job Evaluation is also based on Job Analysis. ----------------------
It determines the relative worth of various jobs in the organisation. The relative
----------------------
worth of various jobs determines the compensation package attached with each
job. ----------------------
Analysis of Contingent Factors: Compensation plan is always
----------------------
formulated in the light of various factors, both external and internal, which
affect the operation. Various external factors are conditions of human resource ----------------------
market, cost of living, level of economic development, social factors, pressure of
trade unions and various labour laws dealing with compensation management. ----------------------
Various internal factors are organisation’s ability to pay and employees’ related
----------------------
factors such as work performance, seniority, skills, etc. These factors may
be analysed through wage/salary survey. The impact of these factors will be ----------------------
discussed later.
----------------------
Design and Implementation of Compensation Plan: After going through
the above steps, the organisation may be able to design its compensation plan ----------------------
incorporating base compensation with provision of wage/salary increase over
the period of time, various incentive plans, benefits and perquisites. Sometimes, ----------------------
these are determined by external party, for example, pay commissions for
----------------------
Government employees as well as for public sector enterprises. After designing
the compensation plan, it is implemented. Implementation of compensation ----------------------
plan requires its communication to employees and putting this into practice.
----------------------
Evaluation and Review: A compensation plan is not a rigid and fixed
one but is dynamic since it is affected by a variety of factors which are dynamic. ----------------------
A good compensation management system should ensure probability for
evaluating and reviewing the compensation plan. After the plan is implemented, ----------------------
it will generate results either in terms of intervening variables like employee ----------------------
satisfaction and morale or in terms of end-result variable like increase of
productivity. However, this latter variable is more important. The evaluation of ----------------------
compensation plan must be positive. If it does not work as expected, a review
of the plan becomes necessary. ----------------------
A good rewards and remuneration system ensures that each person ----------------------
receives appropriate financial and non-financial recognition to account for the
personal contribution they are making and the overall value of their position to ----------------------
the organisation. ----------------------
This includes creating and maintaining an organisational structure and
culture that facilitates employee and organisational performance. ----------------------
The best performance appraisal system in the world will not work if it is ----------------------
linked to rewards and remuneration system that the employees do not trust or
----------------------
support.

Notes A motivated employee will achieve a great deal. A de-motivated
employee will be slow, prone to error and not likely to achieve his best.
---------------------- Motivation influences performance. It also suggests that the ‘lack of’, ‘promise
of’, or ‘receipt of’ either financial or non-financial rewards may also influence
---------------------- motivation. A feedback loop between motivation and performance exists, with
---------------------- each one potentially influencing the other.

----------------------
Fill in the blanks.
---------------------- 1. From the employers’ point of view, the money that is being paid to the
employees in return for the work that they do is ___________.
----------------------
2. __________ should be linked with the organisational philosophy on
---------------------- human resources and strategy.
---------------------- 3. The evaluation of compensation plan must be __________.
----------------------
3.3 COMPONENTS OF REMUNERATION
----------------------
Remuneration is a component of both, financial and non-financial
----------------------
rewards; financially, in terms of cash and benefits received; non-financially in
---------------------- terms of recognition, status and esteem; for example- the status of full private
use of a motor vehicle. Job evaluation is a process to determine the contribution
---------------------- of a position to an organisation. It needs to be seen by both, the employee and
organisation as fair and equitable.
----------------------
Good salary administration requires that the employees receive financial
---------------------- reorganisation for the contribution that they make, and that positions of equal
value should be entitled to equal compensation. If the organisation handles
----------------------
this incorrectly, or manipulates it in some way, the impact on the employee is
---------------------- significant. Past pay systems often paid little attention to incentives. It is only
in the recent years that some systems have provided for differentials based on
---------------------- performance. The concept of fair incentives should be on the agenda.
---------------------- An average employee in an organisation is entitled to several benefits.
Atypical remuneration of an employee comprises of wages and salary,
---------------------- incentives, fringe benefits, perquisites, and non-monetary benefits. They are as
follows:
----------------------
1. Wages and salary: Wages represent the hourly rates of pay, and salary
---------------------- refers to the monthly rate of pay, irrespective of the number of hours
---------------------- put in by an employee. Wages and salary are subject to annual revisions,
which differ from employee to employee and depend upon the nature of
---------------------- job, seniority and merit.
---------------------- 2. Incentives: Incentives are paid in addition to wages and salaries. Incentive
is the payment for work of an acceptable quality produced over and above
---------------------- a specified quantity or standard. Incentive compensation is performance-
linked remuneration paid with a view to inspire employees to work Notes
hard and do better. Both individual incentives and group incentives are
used. Bonus, profit-sharing, commission on sales are some examples ----------------------
of incentive compensation. Incentives depend upon productivity, sales,
profit or cost reduction efforts. There are individual incentives as well as ----------------------
group incentive schemes. Incentives are the extra financial motivation. ----------------------
3. Fringe Benefits: This includes such employee benefits as provident
----------------------
fund, ESIS, leave with pay, paid holidays, pension schemes, leave travel
concession, house rent allowance, gratuity, health and group insurance, ----------------------
medical care, hospitalisation, accident relief, canteen, recreation, uniform
and the like. Several types of benefits are paid particularly to senior ----------------------
managers. Provident funds, pensions, gratuity, encashment of earned
----------------------
leave, company house, company car, leave travel concession (LTC),
medical aid, interest free loan, holiday homes, entertainment, stock ----------------------
options, etc. are examples of such benefits.
----------------------
4. Perquisites: These are normally provided to managerial personnel either
to facilitate their job performance or to retain them in the organisation. ----------------------
Such perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc. ----------------------
5. Non-monetary Benefits: These include challenging job responsibilities, ----------------------
growth prospects, recognition of merits, competent supervision,
comfortable working conditions, and job sharing and flexible time. ----------------------
Various Components of Employee Remuneration ----------------------
Table 3.1: Components of Employee Remuneration ----------------------
Remuneration
----------------------
Financial Non-financial
----------------------
Hourly Incentives Fringe Perquisites Job Context
and ----------------------
• Individual Benefits • Company • Challenging
Monthly Plans • P. F. Car Job ----------------------
Rated • Group • Gratuity • Club • Responsibilities
----------------------
• Wages Plans Membership
• Medical • Recognition
• Salaries Care • Paid ----------------------
• Growth
Holidays
• Accident prospects ----------------------
Relief • Furnished
• Supervision ----------------------
House
• Health • Working
and Group • Stock ----------------------
conditions
Insurance Option etc.
etc. • Job sharing ----------------------
etc.
Direct Indirect ----------------------
----------------------

Notes 6. Employee Rewards: The only way the employees will fulfil your dream
is to share their dream. Reward system is the mechanism that facilitates
---------------------- the same. However, reward systems are much more than bonus plans and
stock options. While they often include both of these incentives, they can
---------------------- also include rewards and other recognition, promotions, reassignment,
---------------------- non-monetary bonuses (for example, vacations), or a simple thank you.
7. Performance Related Pay: Rewards can act as the ‘catalyst’ for improved
----------------------
performance and better productivity. But reward, as such, is not enough
---------------------- and in any case it is not a substitute for good management. Rather, it is a
part of management. Certain basic criteria are essential for rewards to be
---------------------- effective. These include:
---------------------- ●● Reward should be quick
●● Reward should be significant
----------------------
●● he goals and rewards must be known, understandable, and
T
---------------------- attainable
---------------------- ●● Reward must be distinctly and directly related to performance
---------------------- ●● Reward should be irrevocable

●● Reward should be compatible with the job measurement
----------------------
If the reward plan seems to be unfair and unrealistic, for example,
---------------------- promotion on the basis of seniority or favouritism, it may definitely have a
negative effect as a motivator. For rewards to be effective they have to be
----------------------
generous and significant, hence they must be structured to attain a proper
---------------------- balance of motivating people to a purpose and at optimum efforts.
Rewards are generally reckoned to improve productivity by somewhere
----------------------
of the order of 20% to 30%. This is nearly twice as much as that attained by
---------------------- goal setting or the job redesigned. But each incentive or reward system is likely
to have value under certain conditions only. Hence to be effective, the rewards
---------------------- must be ‘tailored’ and changed to suit the specific conditions. There is no magic
formula for all situations and at all times.
----------------------
Productivity is usually but erroneously associated with the shop floor
---------------------- only. But total productivity which ultimately determines the profitability of
---------------------- entire organisation; is the sum total of the productivity at various levels right
up to the CEO. If the workers are not given the right materials at the right place
---------------------- and at the right time, their productivity suffers due to no fault of theirs. The
manager, therefore, plays a vital role in the productivity of the workers and the
---------------------- team.
---------------------- One can even go so far as to say that productivity is the only reason for the
existence of the managers. Individually, the manager may be considered non-
---------------------- productive, in that he or she does not contribute directly to the production, but is
---------------------- responsible for integrating the work of his or her team into a total effect. Thus,
a manager can increase productivity indirectly by aiding to produce more, and
---------------------- here too, financial motivation plays a major role.
Notes
----------------------
----------------------
1. Good salary administration requires that the employees receive
financial reorganisation for their own contribution. ----------------------
2. Incentive compensation is not a performance-linked remuneration ----------------------
which is paid with a view to inspire employees to work hard and do
better. ----------------------
3. Reward system is the mechanism that makes the employees fulfill ----------------------
their dream by sharing employer’s dream.
----------------------
Activity 1 ----------------------
----------------------
Describe any four components of remuneration, which you feel are more
important than the rest. ----------------------
----------------------
3.4 REWARD SYSTEM
----------------------
The financial rewards are basically of three types:
----------------------
1. Profit sharing
----------------------
2. Job evaluation
3. Merit rating ----------------------
1. 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. Profit sharing could be on a ----------------------
macro basis or on a micro basis. The former relates to the entire company
----------------------
as a whole and the latter to a particular section or a group dealing with a
particular activity and/or product. On a macro level, it would be difficult ----------------------
to identify and reward an outstanding performance. This is possible on a
micro level by treating the particular activity as a cost and profit centre by ----------------------
itself. This is easier said than done, since overheads and other common
----------------------
services have to be charged and this cannot be done with complete
objectivity. The cost allocation in such cases is somewhat arbitrary and ----------------------
the profit will therefore not be a true reflection of the performance of that
particular group or activity. ----------------------
Most common characteristics of Profit Sharing may be enlisted as: ----------------------
●● I t is calculated on an agreement defined between the employer and ----------------------
the employees.
----------------------

Notes ●● I t is a payment made after ascertaining the net profits of the business.
It is not therefore, a charge on profits.
----------------------
●● he amount paid to the employees is over and above their normal
T
---------------------- pay.
●● he amount to the paid is determined based on some agreed
T
----------------------
formulas.
---------------------- ●● he payments based on seniority and wage level of individual
T
workers.
----------------------
2. Job evaluation
----------------------
Job evaluation is the process of methodically establishing a structure of
---------------------- jobs within an organisation based on a systematic consideration of job
content and requirements. The purpose of the job structure or hierarchy
---------------------- is to provide a basis for the pay structure. The job structure, as seen in
---------------------- foregoing paragraphs is only one of the determinants of the wage structure.
But it is an important one that is often used.
---------------------- Job evaluation is concerned with jobs, not people. A job is a grouping of
---------------------- work tasks. It is an arbitrary concept requiring careful definition in the
organisation.
----------------------
Job evaluation determines the relative position of the job in the organisation
---------------------- hierarchy. It is assumed that as long as job content remains unchanged,
it may be performed by individuals of varying ability and proficiency. In
---------------------- case of job evaluation, the various component factors have to be isolated
and evaluated for the purposes of inter-job comparison. Each factor is
----------------------
assigned a rating on the basis of a scale agreed before hand by the union
---------------------- and the management joint committee. The total rating for each job then
forms the basis of a wage structure. However, there must be a base level,
---------------------- representing, in effect, the ‘minimum wage’, depending on the nature of
work and the geographical area. In some cases and in some countries the
----------------------
law stipulates these.
---------------------- A typical, though somewhat broad, list of job factors is as follows:
---------------------- ●● Working environment
---------------------- ●● Physical characteristics

●● Mental characteristics
----------------------
●● Extent of responsibility
----------------------
●● Training and experience
---------------------- In case of managers, these factors are:
---------------------- ●● Responsibility
---------------------- ●● Expertise
●● Human relations
----------------------
3. Merit rating Notes
Merit rating has been used as an indicator of performance. Each employee
----------------------
is rated typically, as excellent, good, average or poor, in respect of the
following abilities: ----------------------
●● Communication
----------------------
●● Human relations, including leadership and motivation
●● Intelligence ----------------------
●● Judgment ----------------------
●● Knowledge
----------------------
The rating, unfortunately, tends to be carried out purely, mechanically,
and it carries a heavy bias of the rater who may be too lenient, may not be ----------------------
objective and may also have favourites or otherwise in the group which is
rated. ----------------------
Types of Rewards ----------------------

●● xtrinsic rewards: positively valued work outcomes given by some
E ----------------------
persons or source in the work setting
----------------------
●● I ntrinsic rewards: positively valued work outcomes received directly
from the task performance ----------------------
Pay as an Extrinsic Reward
----------------------
Positive aspects of Pay
----------------------
●● Helps firms attract and retain capable workers
----------------------
●● Helps satisfy and motivate workers
Negative aspects of Pay ----------------------
●● issatisfaction with pay can lead to strikes, grievances, absenteeism,
D ----------------------
turnover, and poor physical and mental health of workers
----------------------
Pay as a source of motivation
●● High job performance must be viewed as the path for achieving high pay ----------------------
●● Merit pay is a method for connecting performance and pay ----------------------

●● Merit pay makes pay contingent on job performance ----------------------
To be effective, merit pay should-
----------------------
●● Use realistic and accurate performance measures
----------------------
●● Create a strong linkage between high performance and high pay
●● Discriminate between high and low performance in the amount of pay ----------------------
●● Not be confused with the cost of living adjustments ----------------------

Creative Pay Practices ----------------------
●● erit pay plans do not recognise employee interdependence, and are thus
M
----------------------
inconsistent with the demands of HPOs

Notes ●● Pay practices should be consistent with
1. The demands of HPOs
----------------------
2. The HR and overall organisational strategies
----------------------
Types of Creative Pay Practices
---------------------- 1. Skill based pay
---------------------- 2. Gain sharing plans
---------------------- 3. Profit sharing plans
4. Employee stock ownership plans (ESOPs)
----------------------
5. Lump-sum pay increases
----------------------
6. Flexible benefit plans
---------------------- 1. Skill Based Pay:
---------------------- ●● Rewards people for acquiring and developing job relevant skills
---------------------- ●● Advantages - employee cross training, fewer supervisors needed
●● isadvantages - higher pay and training cost, establishing
D
----------------------
appropriate monetary values for skills
---------------------- 2. Gain sharing Plans
---------------------- ●● orkers share in enhanced earnings, resulting from productivity
W
gains.
----------------------
●● dvantages: Increased worker motivation, greater sense of personal
A
---------------------- responsibility, encourages participation and teamwork
---------------------- 3. Profit Sharing Plans
●● ewards employees based on the performance of the entire
R
----------------------
organisation
---------------------- ●● Not connected to productivity gains
---------------------- ●● Often funds employee retirement plans
---------------------- ●● Considered to be a benefit rather than an incentive

4. Employee Stock Ownership Plans (ESOPs)
----------------------
●● Based on total performance of the organisation.
----------------------
●● SOP options - stock may be given to employees, employees may
E
---------------------- purchase at a below market price
●● dvantage - non-taxable to an organisation until redeemed by
A
----------------------
employees
---------------------- ●● Disadvantage - risk of stock investments
----------------------
----------------------
5. Lump Sum Pay Increases Notes
●● I ndividuals elect to receive a pay increase in one or more lump-sum
----------------------
distributions that increase the base salary
●● Lump-sum payments - which differ from lump-sum increases - are ----------------------
one-time bonus payments that do not increase the base salary
----------------------
6. Flexible Benefits Plans
----------------------
●● Fringe benefits are indirect incentives
●● lans accommodate individual differences to capitalise on the
P ----------------------
motivational value of benefits ----------------------
●● Plans allow workers to select benefits according to their needs
----------------------
You get what you reward
----------------------
The greatest management principle is that the things that get rewarded
get done. “You get more of the behaviour you reward, you do not get what you ----------------------
hope for, wish for or beg for, and you get what you reward.”
----------------------
1. Segment the workforce according to key company functions and high
performers: ----------------------
●● Customise reward plans to target business drivers ----------------------
●● ocus on individual performance and those worker ideas or actions
F
that impact the bottom line ----------------------
●● trike the balance between absolute contribution and relative

S ----------------------
performance
----------------------
2. Look at the Management of Performance and Rewards holistically:
----------------------
●● The reward models should be a part of an overall company system
●● Understand the cost and value of every program ----------------------
●● Strike a balance between fixed and variable rewards ----------------------
3. Training and communication about reward program across the company ----------------------
are critical
----------------------
●● mployees should understand every aspect of the reward system,
E
everything from its design to implementation ----------------------
●● anagers should be given extensive information on how to manage
M
----------------------
the reward system
When your employees do hit the target and meet a stretched standard ----------------------
which you set for them, reward them immediately. By doing this, you help
----------------------
employees, directly connect reward with behaviour and the higher performance
which they have attained. “Fail to reward the right behaviour and you will most ----------------------
likely get the wrong results.”
----------------------
----------------------

Notes 3.5 ADVANTAGES OF A FAIR COMPENSATION SYSTEM
---------------------- A fair compensation system is a must for every business organisation. It
has the following advantages:
----------------------
1. If an ideal compensation system is designed, it will have positive impact
---------------------- on the efficiency and results produced by workmen.
---------------------- 2. Such system will encourage the normal worker to perform better and
achieve the standards fixed.
----------------------
3. This system will encourage the process of job evaluation. It will also help
---------------------- in setting up an ideal job evaluation, which will have transparency and
fixing the standards would be more realistic and achievable.
----------------------
4. Such a system would be well defined and uniform. It will be apply to all
---------------------- the levels of the organisation as a general system.
5. The system would be simple and flexible so that every worker/recipient
----------------------
would be able to compute his own compensation receivable.
---------------------- 6. Such system would be easy to implement, so that it would not penalise
---------------------- the workers for the reasons beyond their control and would not result in
exploitation of workers.
---------------------- 7. It will raise the morale, efficiency and cooperation among the workers. It
---------------------- being just and fair would provide satisfaction to the workers.
8. Such system would help management in complying with the various
---------------------- labour acts.
---------------------- 9. Such system would also bring about amicable settlement of disputes
between the workmen union and management.
----------------------
10. The system would embody itself the principle of equal work equal wages.
---------------------- Encouragement for those who perform better and opportunities for those
who wish to excel
----------------------
---------------------- 3.6 ASPECTS OF REWARD MANAGEMENT

---------------------- There are two major kinds of wage and salary payment plans:
---------------------- Those under which remuneration does not vary with output or the quality
of output, but depends on the time unit consumed in performing work. These
---------------------- are known as time wage plans. The time unit may be the day, week, fortnight or
month. Time plans are non-incentive in the sense that earnings during a given
----------------------
time period do not vary with the productivity of an employee during that period.
---------------------- The second kind is concerned with the output or some other measure
of productivity during a given period of time. To earn more, an employee is
----------------------
required to put in more labour and produce more. This kind is known as the
---------------------- piece or output wage plan. It is a direct financial incentive plan, thus, the ‘time’
and the ‘output’ wage plan are the two basic systems. Some of the common
---------------------- systems of Reward are,
1. Time Rate: This is the oldest and the most common method of fixing Notes
wages. Under this system, workers are paid according to the work done
during a certain period of time, at a specific rate per hour, per day, per ----------------------
week, per fortnight or per month or any other fixed period of time. A
worker is paid wage for the time worked irrespective of his output during ----------------------
that time. The essential point is that the production of a worker is not ----------------------
taken into consideration in fixing the wages, but is paid at the settled rate
as soon as the time contracted for is spent. ----------------------
It is quite easy to understand and calculate the amount of wages to be ----------------------
paid. Thus, even an illiterate worker can understand it. Both employers
and workers know well in advance the amount of wages payable and they ----------------------
can adjust their budgets accordingly.
----------------------
Since there is no direct linkage between performance and wages;
employees tend to take an easy approach. Also, this system does not ----------------------
differentiate between efficient and inefficient workers: gradually,
----------------------
inefficiency percolates to efficient workers too.
2. Piece Rate Plan: Workers paid on the piece rate plan receive a certain ----------------------
amount for each item produced. Gross earnings equal the rate per item
----------------------
multiplied by the number of items produced during the pay roll period.
There is a direct relationship between output and wages which works as ----------------------
a motivating factor to workers to produce more. It differentiates efficient
and inefficient workers and provides incentives to inefficient workers to ----------------------
become efficient. This is fair and equitable so far as utilisation of human
----------------------
resources is concerned.
3. Combination Plan: Many businesses pay sales people both a salary and ----------------------
a commission. Such combination plan provides some regular income and ----------------------
offers an incentive for superior sales.
4. Wages and Salaries: Although we use the terms wages and salaries ----------------------
interchangeably, in payroll accounting, the two terms have a different ----------------------
definition. Wages refer to the earnings of an employee whose pay is
calculated on an hourly basis. Salary refers to the earnings of an employee ----------------------
whose pay is calculated on a monthly basis.
----------------------
5. Commissions: Sales commission and plans vary greatly from company
to company, but are generally based on the amount of sales made during ----------------------
a payroll period. Commission income is considered the same as wages or
salaries for withholding and reporting purposes. Commissions are usually ----------------------
computed on a certain percentage. Some commissioned employees may ----------------------
not be exempt from the minimum wage requirement. Employer must
determine the regular, hourly rate for each non-exempt sales person ----------------------
during the week and make sure this rate is at least equal to the current
minimum wage. ----------------------
6. Draws: Draws are often given to sales people who work only for ----------------------
a commission. A draw is an advance given to a sales person that will
----------------------

Notes be collected when future sales transactions are closed. Draws will be
subtracted from a sales person’s commission after any applicable taxes
---------------------- and deductions have been withheld. The draw is subjected to all the pay
roll withholding taxes.
----------------------
7. Bonuses: Businesses offer bonuses in many different ways. Some bonuses
---------------------- are based on profitable operations of the business and are paid at the year-
end. A common type of bonus may be offered to sales people for selling
----------------------
a specific item. Another type of bonus plan, one that may be part of an
---------------------- employment agreement, pays managers if the yearly sales or profits reach
a certain level.
----------------------
8. Capital Sharing Payments: Profit sharing plan, like a bonus plan, can
---------------------- be structured in a number of ways. An employer may elect to pay cash to
employees, give them stock in business, or set up a different compensation
---------------------- fund for retirement.
---------------------- 9. Other Taxable Forms of Compensation: Sometimes other payments
to employees are required that are equivalent to wages. These include
---------------------- non-cash fringe benefits, reimbursed expenses, sick pay, supplemental
employment, etc.
----------------------
10. Balance or Debt Method: This method is a combination of time and
---------------------- piece rates.
---------------------- The worker is guaranteed an hourly or a daily rate with an alternative
piece rate combination. If the earning of a worker calculated at the piece rate
---------------------- exceeds the amount, which he would have earned if paid on time basis, he
---------------------- gets credit for the balance, i.e. the excess piece rate earnings over the time rate
earnings. If these piece rate earnings are equal to his time rate earnings, the
---------------------- question of excess payment does not arise. Where the piece rate earning is less
than the time rate earnings, he is paid on the basis of the time rate, but the excess
---------------------- which he is paid is carried forward as debt against him to be recovered from any
---------------------- future balance of piece work earnings or over time work earning. This system
presupposes the fixation of time and piece rate on a scientific basis. There is
---------------------- a direct relationship between output and wages which works as a motivating
factor to workers to produce more. It differentiates efficient and inefficient
---------------------- workers and provides incentives to inefficient workers to become efficient. This
---------------------- is fair and equitable so far as utilisation of human resources is concerned.
---------------------- 3.7 VARIOUS COMPENSATION SYSTEMS AND THEIR

---------------------- MERITS AND DEMERITS
---------------------- There are basically two compensation systems viz., Basis Time Rate and
Piece Rate. These two systems are devised to make payment to workers of
---------------------- different skills and efficiency levels. It is meant for making payment, which
should adequately compensate the worker for his efforts.
----------------------
----------------------
Compensation Systems Notes
----------------------
----------------------
Time rate Piece rate Bonus Profit sharing Monetary incentive
----------------------
We will concentrate only on the Time Rate and Piece Rate systems in this chapter.
The Bonus, Profit Sharing and Indirect Monetary Incentives are discussed under ----------------------
the subsequent topic called Incentives/Bonus schemes, etc.
----------------------
1) Time rate systems:
----------------------
Time rates
----------------------
----------------------
Ordinary level High level wage Graduated time rate ----------------------

A) At ordinary levels ----------------------
1. Basis of time: (hourly, daily, weekly or monthly) and overtime for
----------------------
extra hours.
2. Formula: Rate per hour X Hours worked = Earnings (RPH X HW = ----------------------
E)
----------------------
3. Suitability: where
----------------------
a) Quality of output is of great importance for example, jewellery,
tool making, fashion designing, etc. ----------------------
b) Quantitative measurement of work is not possible for example, ----------------------
security service, store service, repairs and maintenance.
----------------------
c) Conveyor belt is in operation, the speed of the production will
depend upon the time ----------------------
d) The production unit is small
----------------------
e) There is a close supervision
----------------------
f) Trainees are working
In the above circumstances the time rate system is applied. ----------------------
Merits ----------------------
a) Simple to understand ----------------------
b) Operating simplicity
----------------------
c) High quality of jobs
----------------------
Demerits
a) No distinction between efficient and inefficient workers as regards ----------------------
output ----------------------

Notes b) Increases the cost of production in case of low productivity
B) High wage level/High time rate
----------------------
1. Payment: Hourly rate is substantially higher than ordinary rate, but
---------------------- overtime is not paid.
---------------------- 2. Formula: as in (A).
---------------------- 3. Suitability: Where degree of skill is very high. The intention is to

remunerate the efficient worker at higher rate i.e. to provide incentive
---------------------- to such workers similarly; it is believed that the productivity will
increase with high rates.
----------------------
4. Merits:
---------------------- i) Incentive to workers to improve performance
---------------------- ii) Productivity increase
---------------------- iii) And other benefits of (A)
---------------------- 5. Demerits:
i) Fixed cost increases
----------------------
ii) A careful study is necessary before introduction
----------------------
iii) Labour cost per unit increases
---------------------- iv) Burden of inefficiency of worker is on the employer
---------------------- v) Involves risk, if the productivity does not increase
---------------------- vi) Advantages to workers for higher performance

C) Graduated time rates
----------------------
Payment: The basis is fixed and the dearness allowance is linked with the basic
---------------------- pay and also cost of living index. The cost of living is variable and that is
considered for calculating the total remuneration.
----------------------
Example: Basic Salary is Rs. 2,000/- and for a level Cost of Living Index D.A.
---------------------- is payable @ 100% then, for the basic of Rs. 2,000+100% of Rs. 2,000 as cost
of living is added, thus total remuneration is Rs. 4,000/-. It after 6 months, cost
----------------------
of living index changes to 150%. Then basic salary + 150% of basic salary
---------------------- i.e. Rs. 3,000/- will make it Rs. 5,000/-.
---------------------- Suitability: Each employee is in a different economic situation. Accordingly,
the need for money also changes with the size of the family. Similarly, price
---------------------- level changes affect the cost of living. Therefore, if wages are linked with the
---------------------- cost of living, it renders real wages to the employee. The employer should be in
a position to revise the selling price.
---------------------- Merits:
---------------------- a) Economic factors are considered.
---------------------- b) Graduated increase, does not burden the employer.
c) The employee is free from the fear of price level changes and inflation. Notes
d) Provides security to an employee against fluctuating economic
----------------------
circumstances. A stable work force performs better.
Demerits: ----------------------
a) Determining cost of living index is extremely difficult. ----------------------
b) Sometimes competition restrains increase in selling price. ----------------------
c) The customers do not like frequent changes in selling price.
----------------------
d) Burden on producer as the costs increase.
----------------------
e) It is difficult to prepare a cost budget and take a pricing decision.
f) It affects the profits and makes them very thin. ----------------------
2) Piece rate/payment by results system: ----------------------
System of Piece Rate (Payment by Result)
----------------------
----------------------
Straight Piece Rate Piece and Time Rate Combination Differential Piece Rate
----------------------
Taylor System Merrick System Gantt Task System ----------------------
a) Straight Piece Rate ----------------------

Payment: Flat rate is applicable per unit, which is pre-determined. ----------------------
The time spent is not considered. Sometimes, standard time is considered to
ascertain standard production and output which is then converted into standard ----------------------
hours. It should not be mistaken as time rate payment as actual time taken is not
----------------------
considered for payment but a particular output is measured in terms of standard
hours required for the output produced as the rate is applicable on the basis of ----------------------
the standard hour rate.
----------------------
Formula:
i) Where per piece/unit rate is fixed ----------------------
(PPR) PPR x O = Earnings O = Output ----------------------
Ex.: A worker produces 50 units a week of 6 days and piece rate is Rs. ----------------------
2/- per piece. Then his earning is, PPR x O = E
Rs. 2/- x 50 units = Rs. 100/- ----------------------
ii) In case rate for standard is given ----------------------

For example: Mahesh produces 40 units in a week of 6 days of consisting ----------------------
6 hours work per day. Standard time for producing one piece is 30 minutes.
Rate for Standard Hour is Rs.10/-. Calculate Earning of Mahesh for the week. ----------------------
a) Here actual hours are 6 days x 6 hours i.e. 36. These hours have no ----------------------
relevance for the calculation of earnings.
----------------------

Notes b) Production of 40 units is needs to be converted to Standard Hours required
to produce 40 units.
----------------------
c) For one unit/piece it takes 30 minutes. Therefore, in one standard hour
---------------------- (60/30 = 2) ² units are produced.
If 2 pieces need one standard hour, how many standard hours will be
----------------------
needed to produce 40 pieces?
---------------------- 40 pieces/2 pieces x 1 Standard Hour = 20 Standard Hours
---------------------- Earnings = Standard hours required to produce x Rate/Std. Hr. = 20 x 10
= Rs.200/-
----------------------
Thus, Mahesh is earning Rs.200/- for the week. Suitability: where,
---------------------- i) The work can be measured in terms of pieces or units.
---------------------- ii) The intention is to motivate efficient workers to give more output.
---------------------- iii) The speed of production depends upon the efforts by workers and not
only on time as in case of automated machines.
----------------------
iv) The nature of production involves sub activities like fixing parts, assembly,
---------------------- polishing, packing, etc. the system is very suitable.
---------------------- v) Quality may not become a very critical issue.

Merits
----------------------
i) The system is fair for efficient works. They derive job satisfaction and
---------------------- freedom to work hard
---------------------- ii) Increases output
iii) Productivity is improved
----------------------
iv) Per unit cost falls as fixed costs are loaded on larger volume of units
----------------------
v) It improves the speed of production
---------------------- vi) The system is simple to understand
---------------------- vii) Convenient to operate
---------------------- viii) Close linkage between performance and reward creates better industrial
relations
----------------------
Demerits
---------------------- i) Inefficient workers are de-motivated which results in having average
---------------------- production level to be same. Effective for efficient workers only.
ii) Trainees, apprentice workers may get demoralised.
----------------------
iii) It affects the quality of the production as the worker stresses on quantity
---------------------- or output. Being quantity-oriented, cost of re-work and rejections may
increase.
----------------------
iv) It calls for proper use of equipments and machines, which increases
---------------------- related costs of repairs.
v) It depreciates physical production facilities at a higher rate. Notes
vi) Inefficiency taking place on account of other reasons or faults of other
----------------------
departments or persons directly affect the earnings of efficient workers.
vii) Scientific work-study is needed before fixing the Standard Hour Rate. ----------------------
Disputes may occur between the union and management on this point.
----------------------
viii) It creates impersonal relationship and advantages from working as a
group are lost. ----------------------
ix) The system does not provide weightage to loyalty to the organisation and ----------------------
therefore the labour turnover increases which calls for related costs.
----------------------
x) Efficient workers may not train other inefficient workers.
xi) Absenteeism increases in case of inefficient workers if they get frustrated. ----------------------
xii) It saves direct costs but increases indirect costs. ----------------------

xiii) It is suitable for the activities, which can be performed independently, and ----------------------
not teamwork.
----------------------
b) Piece Rate and Time Rate Combination
Payment: It is a dual rate system, designed to perfect inefficient workers. ----------------------
Every worker is ensured the minimum payment. If the payment calculated on ----------------------
the basis of piece rate is guaranteed and if the number of pieces falls below the
minimum wages guaranteed, he is paid by Time Rate. ----------------------
For example: Umesh is working under the above scheme. He has worked ----------------------
in a week of 6 days, consisting of 48 hours. His hourly rate is Rs.2/- per hour.
His piece rate is Rs.2/- per piece. His output for the week is 40 units. Calculate ----------------------
his earnings.
----------------------
i) Here, his earning is calculated first by the piece rate system.
----------------------
ii) Earnings under Piece Rate System is 40 pieces x Rs.2/- per piece = Rs.80/-
iii) Also, wages by the time rate is calculated for 48 hours x Rs.2/- per hour ----------------------
= Rs.96/-
----------------------
iv) In this example, Umesh’s piece rate earning of Rs.80/- falls below the
Time rate earning Rs.96/-. ----------------------
v) Therefore, his minimum guaranteed payment is made i.e. Rs.96/- provided ----------------------
under the scheme.
----------------------
Suitability: The system is very suitable where there is heterogeneity and
absence of uniformity as regards skill, speed of work, etc. because it protects ----------------------
the slow, trainee workers. It eliminates the drawback of pure, straight piece rate
system. ----------------------
Merits ----------------------
i. It protects learners and slow workers from de-motivation and permits ----------------------
them to aspire for better performance
----------------------

Notes ii. The secured feelings of a worker increase production
iii. Dual rate system helps to minimise the cost of production
----------------------
iv. It combines advantages of both, Time and Piece Rate Systems.
----------------------
Demerits
---------------------- i. As minimum wage is guaranteed, the workers may feel over secured and
---------------------- do not try hard to increase production
ii. Employer is burdened with high fixed cost if productivity is not increased.
----------------------
iii. Labour cost increases if piece rate earnings constantly fall below minimum
---------------------- guaranteed payments
---------------------- iv. The chance of effectiveness of the scheme is gloomy on account of over
security.
----------------------
c) Differential Piece Rate
---------------------- Payment: In case of piece rate system, minimum wages were assured.
---------------------- However, under this system, instead of combining time-rate and piece-rate, there
are dual rates for different efficiency levels. The purpose behind keeping a high
---------------------- piece rate for higher efficiency is as the level of production increases, the cost
per unit falls. The saving in cost can be conveniently passed on to the worker
---------------------- for his efficiency in terms of a high piece rate to reward him satisfactorily. The
---------------------- objective behind the system is to push the worker to earn more and more and as
a result, the output is also enhanced.
---------------------- Formula, for example: The output expected is 1000 units from two
---------------------- workers John and Anthony. 100% efficiency is fixed as 500 units. There are
two rates applicable unto 80% efficiency it is Rs.2/- per piece and above 80% it
---------------------- is Rs.2.50 per piece. If John produces 300 pieces, his efficiency 300/500 x 100
= 60% then per piece rate will be applicable is Rs.2/- (Low piece rate) and if
---------------------- Anthony produces 450 units, his efficiency is 450/500 x 100 = 90% (which is
---------------------- above 80% efficiency level). Then, per piece rate applicable will be Rs.2.50/-
(high piece rate). Thus, John’s earning is 300 units x Rs.2/- = Rs.600/- and
---------------------- Anthony’s earnings will be 450 units x Rs.2.50/- = Rs.1125
---------------------- Suitability: Where,

i) Fixed costs are higher in proportion to variable costs i.e. Fixed costs are
----------------------
heavy.
---------------------- ii) Standard time can be accurately measured.
---------------------- iii) It is possible to count the production accurately in respect of each
individual worker.
----------------------
iv) There is continuity in the work so that he can take advantage of the system.
---------------------- v) The nature of production work is stereotype.
---------------------- vi) There are standardised methods of production and processes of production.
----------------------
Merits: a) It eliminates the drawback of Time Wage System b) Useful for Notes
learners and trainees also.
----------------------
Demerits: One unit above efficiency level makes considerable impact on
total earning. ----------------------
E.g. At 80% efficiency level i.e. 400 units rate applicable is Rs.2/-.
----------------------
Earnings is 2 x 400 = Rs.800/-.
At above 80% efficiency level if the worker produces 402 units and high ----------------------
piece rate becomes applicable i.e. Rs.2.50, earning will be 402 x 2.50/- = Rs.
----------------------
1005/-
Thus, only 2 units above 400 number will make the difference of Rs. ----------------------
1005/- Rs.800/- = Rs.205/- which is substantial. ----------------------
Therefore, careful study is necessary before fixing efficiency levels and
the differential piece rate. ----------------------
a) Taylor Differential Piece Rate System ----------------------

F. W. Taylor, who is known as the Father of Scientific Management, ----------------------
developed the differential piece rate plan. Under the plan, two piece rates are
laid down – ----------------------
(i) A lower rate for those workers who are not able to attain the standard ----------------------
output within the standard time; and
----------------------
(ii) A higher rate for those who are in a position to produce the standard
output within or less than the standard time. ----------------------
Under the plan, minimum daily wage is not guaranteed. F. W.Taylor, who ----------------------
is known as the Father of Scientific Management, developed the differential
piece rate plan. Under the plan, two piece rates are laid down: ----------------------
(i) A lower rate for those workers who are not able to attain the standard ----------------------
output within the standard time; and
----------------------
(ii) A higher rate for those who are in a position to produce the standard
output within or less than the standard time. ----------------------
Payment: Two wage rates are applicable- Output below standard - low piece
----------------------
rate and output above standard - high piece rate.
Formula: Standard or Efficiency level is set. Two differential rates are applicable ----------------------
as above.
----------------------
Suitability: Where production is on a large scale.
----------------------
Under the plan, minimum daily wage is not guaranteed. Taylor’s differential
piece rate plan has the following components: ----------------------
(i) Standard output ----------------------
(ii) Standard time
----------------------
(iii) A lower piece rate and
----------------------
(iv) A higher piece rate

Notes Merits
The following are the merits of Taylor’s differential piece rate plan:
----------------------
l. It is easy to understand and simple to operate.
----------------------
2. It enables efficient workers to earn more.
---------------------- 3. Workers not reaching the standard are paid at a lower rate. Such people,
---------------------- thus, are punished for their inefficiency. This protects the interests of the
organisation.
---------------------- Demerits
---------------------- The limitations of Taylor’s plan are given below:
---------------------- l. It does not guarantee minimum wage. This creates a sense of insecurity
for the workers. .
----------------------
2. There may be ill-feelings among workers in view of the differential piece
---------------------- rates.
3. The quality of the output is ignored.
----------------------
For example: Mohan and Rajesh produced 600 and 900 units respectively.
---------------------- High piece rate is 120% and low piece rate is 80% of the normal piece rate.
---------------------- Normal piece rate is Rs.10/- per unit. The standard is set at 1000 units. Calculate
the earnings for Mohan and Rajesh if low rate is applicable below 70% of
---------------------- standard and high piece rate above 70% of standard.
---------------------- Solution: High piece rate is 120% of Normal Piece Rate i.e. 120% of Rs.10/-,
i.e. Rs.12/- and low piece rate is 80% of normal rate i.e. Rs.8/-.
----------------------
Standard is 700 units. Mohan produced 600 units i.e. 60% of 1000 units.
---------------------- Therefore, low piece rate shall be applicable (which is 80% of Normal Piece
Rate i.e. 80% of Rs.10/-).
----------------------
Mohan’s Earnings: 600 units x Rs.8/- = Rs. 4,800/- Rajesh’s Earnings: 900 units
---------------------- x Rs.12/- = Rs. 10, 800/-
(Here, the variation is in rates and applicability is upto standard, which are 700
----------------------
units).
---------------------- b) Merrick’s Differential Piece Rate System
---------------------- Under this plan too a standard task is set for the workers. But unlike Taylor’s
plan that provides for two differential rates, Merrick’s plan contemplates three
---------------------- rates as shown below:
---------------------- (i) Workers producing less than 83% of the standard output are paid at a
basic rate.
----------------------
(ii) Workers producing between 83 % and 100% of the standard output will
---------------------- be paid 110% of the basic piece rate.
---------------------- (iii) Those producing more than the standard output will be paid at 120% of
the basic piece rate.
----------------------
Payment: Modified Taylor System. One more level is added. Notes
Output percentage Standard Payment Rate
----------------------
Up to 83% of standard Normal Piece Rate
----------------------
Between 83% and 100% 110% of Normal Rate
Above 100% of Standard 120% of Normal Rate ----------------------
Suitability: The workers have the potential to produce at a higher level in the ----------------------
future. Generally, workers in the trainees and learners class show a gradual
progress in their output. ----------------------
Merits ----------------------
The merits of the plan may be stated as follows: ----------------------
1. It is an improvement over Taylor’s plan.
----------------------
2. It has greater flexibility.
----------------------
3. It offers greater scope for efficient workers to earn more.
Demerits ----------------------
The following are, probably, the drawbacks of the plan: ----------------------

1. It is a complicated plan. ----------------------
2. Even a worker achieving 83% target is branded as a poor performer.
----------------------
Formula: Suppose, standard is fixed as 1000 units and Rs.10/- is the ordinary
piece rate. Then, the above rates of remuneration shall be as follows: ----------------------
Output percentage Payment Rate per unit ----------------------

Up to 83% Ordinary Rate Rs.10/- Between 83% ----------------------
and 100% 110% of Normal Rs.11/-
----------------------
Above 100% 120% of Normal Rs.12/-
c) Gantt Task Plan ----------------------
This plan guarantees minimum daily wage. Its special feature is that it ----------------------
combines time rate, piece rate and bonus. A worker who is unable to produce
the standard output receives only the time wage. He becomes eligible for bonus ----------------------
only when he attains or exceeds the standard output within the standard time. ----------------------
The rate of bonus varies from 20% to 50% of his wages.
Payment: This is the combination of time rate as well as piece rate. The worker ----------------------
is assured of earning for the time he spends on the job. The combination is on ----------------------
the following slabs.
Sr. No. Output Payment ----------------------
1. Below standard Time Rate ----------------------
2. At standard Time Rate + 20% of Time Rate
(120% of Time Rate) ----------------------
3. Above standard High piece rate for entire production or
output (120%) ----------------------

Notes Suitability: Where a) Cost of running a machine for one hour (operating
costs) is relatively higher than the hourly wage rate. This is mainly because the
---------------------- cost of machine, in terms of depreciation the power required to run a machine,
repairs and maintenance, is very high. b) The quality of production, environment
---------------------- has more weightage than the skill involved in production of an individual
---------------------- worker. c) The production without any intervals or interruption (smooth) is an
essential condition for the production
----------------------
Merits
---------------------- The plus points of Gantt’s task plan are:
---------------------- 1) It has, as mentioned above, time wage, piece rate and bonus. It is, therefore,
a three-in-one scheme.
----------------------
2) It guarantees daily minimum wage.
---------------------- 3) It provides enough opportunities for efficient workers to earn more.
---------------------- 4) It minimises the supervision work
---------------------- 5) It accommodates skilled and unskilled workers
6) This can be conveniently made applicable to supervisory status including
----------------------
the foreman
---------------------- 7) Security and inducement are provided at the same time.
---------------------- Demerits
---------------------- The weaknesses of the plan are:

1) Fixing the time rate is a difficult task
----------------------
2) It is only suitable where operating costs of machines are very high
----------------------
3) Union may attempt to fix time rate at maximum possible level of standard
---------------------- 4) It needs expensive work study process
---------------------- 5) It needs a very efficient production planning and control department.
---------------------- 6) It is not easy to understand.
Formula: The formula of computation is same as above. The following
----------------------
example is to explain the plan. (Instead of standard output, the term high task is
---------------------- used)
For example: In a factory, output observed is as under:
----------------------
Amar 300 units
----------------------
Akbar 500 units
---------------------- Anthony 400 units
---------------------- (High task) Standard is set at 400 units. The workers work for 48 hours in a
week. Rate per hour is Rs.4/- per hour and high piece rate is 50 paise per unit.
----------------------
Calculate earning of workers.
----------------------
Solution: Notes
In order to find out which rate should be applied to the worker, the level of
----------------------
production in comparison to standard output (high task) is to be found out.
Worker Standard Actual Output Remarks ----------------------
Amar 400 units 300 units below standard ----------------------
Akbar 400 units 500 units above standard
Anthony 400 units 400 units at standard ----------------------
Now, accordingly, rates are applicable. ----------------------

Amar: Time rate 48 hours x Rs.4/- hour = Rs.192/- ----------------------
Anthony: Time rate (120%) 48 hours x 4.80/- per hour =Rs.230.40/-
----------------------
Akbar: 500 pieces x Rs.0.50/- (high piece rate) = Rs.250/-
----------------------
Differences between Piece Rate System and Time Rate System
The following table shows the differences between Piece Rate System and Time ----------------------
Rate System. ----------------------
Table 3.2: Differences between Piece Rate System and Time Rate System
----------------------
No. Particular Time Rate System Piece Rate System
1. Definition When the payment When the employee is paid ----------------------
of wages is made to on the basis of output/units
----------------------
employees irrespective of produced/completed and
the production, the system the predetermined rate for ----------------------
is called Time Rate the same irrespective of
System piece rate system. time spent for the work is ----------------------
called Piece rate System.
----------------------
2. Significant factor Attendance time Production/Output
3. Additional payment Overtime higher rate Additional output at ----------------------
component higher piece rate.
4. Formula Hours worked x rate per Units produced x Piece ----------------------
Hour - Earnings (HW x rate – Earning (UP x PR
----------------------
RPH – E) – E)
5. Pre-requisire The work is of the nature, The work should be ----------------------
which cannot be measured, measurable in quantitative
in quantitative terms e.g. terms. e.g. winding of ----------------------
Preparing engineering transformer, packing
drawing of a job. articles in plastic bags. ----------------------
Supervision of the work. ----------------------
6. Suitability to Performance also depends Where precisely the output
industries on quality. can be measured where ----------------------
Where jobs involves art the job is of stereotype ----------------------
and skill, like ornament nature (Assembly of parts
making, fashion designing, etc.) ----------------------
architectural drawings,
----------------------
furniture making

Notes No. Particular Time Rate System Piece Rate System
7. Work nature to be performed with Generally manually, with
---------------------- machines and equipment, intervals
without intervals
----------------------
8. Workers:
---------------------- a) Literary level High low
b) Skill highly skilled semi skilled
---------------------- c) Creativity high normal
d) Tenure normal normal
---------------------- e) Job satisfaction high low
---------------------- f) Responsibility permanent contract basis
high normal
---------------------- high normal
9. Incentive paid by higher time rated high rate for additional
---------------------- output
10. Benefits of all these very low
----------------------
11. Cost high cost, fixed cost low cost, variable cost
---------------------- 12. Advantage Consistency, loyalty, speedy work with
integration adjustments
----------------------
----------------------

1. _____________ is a combination of time and piece rates.
----------------------
2. _____________ differentiates efficient and inefficient workers and
---------------------- provides incentives to inefficient workers to become efficient.
---------------------- 3. In ____________, the employees are paid in addition to the regular
wage, a particular share of the net profits of the business as incentive.
----------------------
---------------------- Summary
----------------------
●● ompensation is the “glue” that binds the employee and the employer
C
---------------------- together. It is an important as well as a complicated issue for every
manager of the organisation.
----------------------
●● n organisation with effective compensation and benefits initiatives leads
A
---------------------- its personnel costs, manages the performance of employees and rewards
the extraordinary performance.
----------------------
●● ompensation management, which is also named as wage and salary
C
---------------------- administration, remuneration management, or reward management, is
designed for implementing total compensation package.
----------------------
●● ood salary administration requires that the employees receive financial
G
---------------------- reorganisation for the contribution that they make and that positions of
equal value should be entitled to equal compensation.
----------------------

●● rofit sharing is the most popular method rewarding the employees. Under
P Notes
it, the employees are paid in addition to the regular wage, a particular
share of the net profits of the business as incentive. ----------------------
●● J ob evaluation is the process of methodically establishing a structure of ----------------------
jobs within an organisation based on a systematic consideration of job
content and requirements. The purpose of the job structure or hierarchy is ----------------------
to provide a basis for the pay structure.
----------------------
●● erit rating has been used as an indicator of performance. Each employee
M
is rated typically, as excellent, good, average or poor. ----------------------
●● fair compensation system should be ideal, encouraging, uniform etc,
A ----------------------
in nature. Different systems of wages calculations are based on different
parameters. ----------------------
----------------------
Keywords
----------------------
●● ages and Salary: Wages represent the hourly rates of pay, and salary
W
refers to the monthly rate of pay, irrespective of the number of hours put ----------------------
in by an employee. ----------------------
●● I ncentives: Incentive is the payment for work of an acceptable quality
----------------------
produced over and above a specified quantity or standard.
●● ringe Benefits: It includes such employee benefits as provident fund,
F ----------------------
ESIS, leave with pay, paid holidays, pension schemes, leave travel
----------------------
concession, house rent allowance, gratuity, health and group insurance,
medical care, hospitalisation, accident relief, canteen, recreation, uniform ----------------------
and the like.
----------------------
●● erquisites: Generally, these are given to executives and include company
P
car, club membership, furnished house, stock option plans and the like. ----------------------
●● on-monetary Benefits: These include challenging job responsibilities,
N ----------------------
growth prospects, and recognition of merits, competent supervision,
comfortable working conditions, and job sharing and flexible time. ----------------------
----------------------
----------------------
1. Which are the different compensation systems?
----------------------
2. Distinguish between the time rate and piece rate systems.
3. What are the advantages of a fair compensation scheme? ----------------------
4. Describe the merits and demerits of various compensation systems. ----------------------
5. Write short notes:
----------------------
a) Differential piece rate
----------------------
b) Graduated time rate
c) Taylor differential piece rate system ----------------------

Notes Answers to Check your Progress
1. From the employers’ point of view, the money that is being paid to the
----------------------
employees in return for the work that they do is compensation.
---------------------- 2. Compensation policy should be linked with the organisational philosophy
---------------------- on human resources and strategy.
3. The evaluation of compensation plan must be positive.
----------------------
----------------------
---------------------- 1. True
---------------------- 2. False
---------------------- 3. True
----------------------
Fill in the blanks.
----------------------
1. Balanced method is a combination of time and piece rates.
---------------------- 2. Piece rate plan differentiates efficient and inefficient workers and provides
incentives to inefficient workers to become efficient.
----------------------
3. In profit sharing, the employees are paid in addition to the regular wage,
---------------------- a particular share of the net profits of the business as incentive.
----------------------
Suggested Reading
----------------------
----------------------
---------------------- Professional Manual. Deep and Deep Publications.
2. Bhattacharya, Dipak Kumar . Compensation Management. OUP India.
----------------------
----------------------
---------------------- A Modern Approach. PHI Learning Pvt. Ltd.
---------------------- 5. Henderson, Richard I., Sandra Vasa-Sideris, Barbara Bernal Thomas.
---------------------- Book. Prentice Hall.
---------------------- 6. Upadhyay, S.S. Compensation Management: Rewarding Performance.
----------------------
----------------------

Wage and Salary Administration
UNIT
4
Structure:
4.1 Introduction
4.2 Nature and Purpose of Wage and Salary Administration
4.3 Wage Surveys
4.4 Administration of Wages and Salaries
4.5 Principle of Wage and Salary Administration
4.6 Components of Wages
4.7 Theory of Wages
4.8 Wage Differentials
4.9 Importance of Wage Differentials
4.10 Wage Differentials in India
4.11 Executive Compensation Plans
Summary
Key Words
Suggested Reading
Wage and Salary Administration 103

Notes
Objectives
----------------------
----------------------
• Explain the nature and purpose of wage and salary administration
----------------------
• Undertake wage surveys
---------------------- • Understand the wage and salary administration
---------------------- • Gain knowledge about different principles of wage and salary
administration
----------------------
• Analyse different components of wages
---------------------- • Explain the wage theory
---------------------- • Justify the importance of wage differentials
----------------------
---------------------- 4.1 INTRODUCTION
---------------------- Wage and Salary Administration refers to the establishment and
implementation of sound policies and practices of employee compensation. It
----------------------
includes such areas as job evaluation, surveys of wages and salaries, analysis
---------------------- or relevant organisational problems, development and maintenance of wage
structure, establishing rules of administering wages, wage payments, incentives,
---------------------- profit sharing, wage changes and adjustment, supplementary payments, control
of compensation costs and other related items.
----------------------
Some of the common Terms and their Definitions are,
----------------------
Wage: A ‘wage’ (or pay) is the remuneration paid, for the service of labour
---------------------- in production, periodically to an employee/worker. “Wages” usually refer to
the hourly or daily rate paid to such groups as production and maintenance
---------------------- employees (“blue-collar workers”).
---------------------- Salary: On the other hand, ‘Salary’ normally refers to the weekly or
monthly rates paid to clerical, administrative and professional employees
---------------------- (“white collar workers”).
---------------------- The Wage Levels: represent the money an average worker makes in a
geographic area or in his organisation. It is only an average. Specific markets or
---------------------- firms and individual wages can vary widely from the average.
---------------------- Wage Structure: The term ‘wage structure’ is used to describe wage/salary
relationships within a particular grouping. The grouping can be according to
----------------------
occupation, or organisation such as wage structure for craftsman (carpenters,
---------------------- mechanics, bricklayers, etc.)
----------------------
----------------------

4.2 NATURE AND PURPOSE OF WAGE AND Notes
SALARY ADMINISTRATION
----------------------
Wage and salary are the most important component of compensation and
----------------------
these are essential irrespective of the type of organisation. Wage is referred to
as remuneration to workers particularly, hourly-rated payment. Salary refers to ----------------------
remuneration paid to white-collar employees including managerial personnel.
Wages and salary are paid on the basis of fixed period of time and normally not ----------------------
associated with productivity of an employee at a particular time.
----------------------
The basic purpose of a wage and salary administration is to establish
and maintain an equitable wage and salary structure. Its secondary objective ----------------------
is the establishment and maintenance of an equitable labour cost structure, i.e.
----------------------
an optimal balancing of conflicting personnel interests so that the satisfaction
of employees and employers is maximised and conflicts are minimised. The ----------------------
wage and salary administration is concerned with the financial aspects of needs,
motivation and rewards. Managers, therefore, analyse and interpret the needs of ----------------------
their employees so that the reward can be individually designed to satisfy these
----------------------
needs of their employees. It has been rightly said “people do what they do to
satisfy some need. Before they do anything, they look for a reward or pay-off.” ----------------------
The basic objective of wage and salary administration can be briefly
----------------------
termed as meeting the needs of both employees and the organisation. Since both
these needs emerge from different sources, often, there is a conflict between ----------------------
the two. This conflict can be understood by agency theory which explains
relationship between employees and employers. ----------------------
The theory suggests that employers and employees are two main ----------------------
stakeholders in a business unit, the former assuming the role of principals and
the latter assuming the role of agents. The wages paid to employees is agency ----------------------
consideration. Each party to agency tries to fix this consideration in its own ----------------------
favour. The employers want to pay as little as possible to keep their costs low.
Employees want to get as high as possible. The wage and salary administration ----------------------
tries to strike a balance between these two with following specific objectives:
----------------------
Advantages
a) For employees: ----------------------
i) Employees are paid according to requirements of their jobs, i.e. ----------------------

highly skilled jobs are paid more compensation than low skilled
----------------------
jobs. This eliminates inequalities.
ii) The chances of favouritism (which creep in when wage rates are ----------------------
assigned) are greatly minimised.
----------------------
iii) Jobs sequences and lines of promotion are established wherever
they are applicable. ----------------------
iv) Employees’ morale and motivation are increased because a wage ----------------------
programme can be explained and is based upon facts.
----------------------

Notes b) To employers:
i) They can systematically plan for and control their labour costs
----------------------
ii) In dealing with a trade union, they can explain the basis of their
---------------------- wage programme because it is based upon a systematic analysis of
job and wage facts.
----------------------
iii) A wage and salary administration reduces the likelihood of friction
---------------------- and grievances over wage inequities.
---------------------- iv) It enhances an employee’s morale and motivation because adequate
and fairly administered wages are basic to his wants and needs
----------------------
v) It attracts qualified employees by ensuring an adequate payment for
---------------------- all the jobs.
---------------------- Purpose
Wage and salary programmes have four major purposes:
----------------------
a) To recruit persons for a firm/organisation
----------------------
b) To control payroll costs
---------------------- c) To satisfy people, to reduce the incidence of employee turnover,
---------------------- grievances, and frictions over pay and
d) To motivate people to perform better
----------------------
The Wage Determination Process
----------------------
Usually, as would be clear from the following diagram, the steps involved
---------------------- in determining wage rates are: performing job analysis, wage surveys, analysis
of relevant organisational problems forming the wage structure, framing rules
---------------------- of wage administration, explaining those to employees, assigning grades and a
price to each job and paying the guaranteed wage.
----------------------
The process of Job Analysis
----------------------
This results in job descriptions, which lead to job specification. A job
---------------------- analysis describes the duties, responsibilities, working conditions and inter-
relationships between the job as it is and the other jobs with which it is
---------------------- associated. It attempts to record and analyse details concerning the training,
---------------------- skills, required efforts, qualifications, abilities, experience and responsibilities
expected of an employee. After determining the job specifications, the actual
---------------------- process of grading, rating or evaluating of the job occurs. A job is rated in order
to determine its value relative to all the other jobs in the organisation, which
---------------------- are subject to evaluation. The next step is that of providing the job with a price.
---------------------- This involves converting the relative values or translating the jobs into rate
ranges.
----------------------
----------------------
----------------------

Job Analysis Notes
Wages Legislation
----------------------
Job Description & Job Wages Surveys & Wages
Analysis
----------------------
Specification Evaluation Structure
----------------------
Rules of Admn.
----------------------
Performance
Standards Differential Employee
Appraisal ----------------------
----------------------
Wages Payments
----------------------
Fig. 4.1: Steps involved in Wage Determination
----------------------

1. A __________ describes the duties, responsibilities, working ----------------------
conditions and inter-relationships between the jobs.
----------------------
2. The basic purpose of a wage and salary administration is to establish
and maintain an __________ wage and salary structure. ----------------------
3. ___________ and _________ are two main stakeholders in a business ----------------------
unit.
----------------------
4.3 WAGE SURVEYS ----------------------
Once the relative worth of jobs has been determined by job evaluation, ----------------------
the actual amounts to be paid must be determined. This is done by making wage ----------------------
or salary surveys in the area concerned. Such surveys seek to answer questions
like what are other firms paying, what are they doing by way of social insurance, ----------------------
what is the level of pay offered by other firms for similar occupations, etc. by
gathering information about ‘benchmark jobs’, which are usually known as ----------------------
good indicators. ----------------------
There are various ways to make such a survey. Most firms either use the
results of “packaged surveys” available from the research bodies, employers’ ----------------------
associations, Government Labour Bureaus, etc., or they participate in wage ----------------------
surveys and receive copies of results, or else they conduct their own. These
surveys may be carried out by mailed questionnaire, telephone, or personal ----------------------
interviews with other managers and personnel agencies.
----------------------
A wage survey to be useful must satisfy these aspects:
----------------------
a) Frequency - affected by rapidity of changes, current and contemplated.
Generally, it is once every year. ----------------------

Notes b) Scope (number of firms) - influenced by the geographic area from which
people are drawn, the number of units competing for this labour, accuracy
---------------------- requirements, and willingness of organisations to share information
---------------------- c) Accuracy: the diversity in job titles and specific job duties is staggering.
The greater the accuracy and detail needed, the greater the requirements
---------------------- for careful description and specification and the surveyor’s reliance on
person to person interviewing rather than on a mailed questionnaire.
----------------------
Such wage surveys provide many kinds of useful information about
---------------------- differences in wage levels for particular kinds of occupations. This can have a
great influence on an organisation’s compensation policy.
----------------------
Analysis of Relevant Organisational Problems
----------------------
In addition to the results of job analysis and wage surveys, several
---------------------- other variables have to be given due consideration in establishing the wage
structure. For example, whether there exists well-established and well-accepted
---------------------- relationships among certain jobs, which can upset job evaluation, whether the
---------------------- organisation would recruit new employees after a revised wage structure, are
the prevailing rates in industry or community inconsistent with the results of
---------------------- job evaluation? What will be the result of paying lower or higher compensation
and what should be the relationship between the wage structure and the fringe
---------------------- benefit structure. Belcher has listed 108 variables, which can affect the levels of
---------------------- compensation and the wage structure.
Preparation of Wage Structure
----------------------
The next step is to determine the wage structure. For this, several decisions
---------------------- need to be taken, such as (a) whether the organisation wishes, or is able, to pay
the amounts above, below or equal to the averages in the community or industry
---------------------- (b) whether wage ranges should provide for merit increases or whether there
---------------------- should be single rates (c) the number and width of the ‘pay grades’ and the
extent of overlap (d) which jobs are to be placed in each of the pay grades (e)
---------------------- the actual money value to be assigned to various pay grades (f) differentials
between pay plans and (g) what to do with salaries that are out of line once these
---------------------- decisions have been made.
---------------------- There are, though, no hard and fast rules for making such decisions,
and procedure commonly used is the two-dimensional graph on which job
----------------------
evaluation points for key jobs are plotted against the actual amounts paid or
---------------------- against the desired levels. Plotting the remaining jobs then reveals which jobs
seem to be improperly paid with respect to the key jobs and to each other.
----------------------
----------------------
----------------------
----------------------
----------------------

Plotting Jobs on a Curve Notes
----------------------
Wages Line ----------------------
Wages Rates
----------------------
----------------------
----------------------
Some Points fall well ----------------------

off Wages Line
----------------------
Points ----------------------
In the above figure, wage rates are shown on the vertical axis while
----------------------
pay grades (in points) along the horizontal axis. This ‘wage curve’ shows the
relationship between a) the ‘value’ of the job and b) the ‘average wage rates’ of ----------------------
these grades (or jobs).
----------------------
The following steps are involved in drawing a wage curve:
1. Finding out the average pay for each pay grade, for each pay grade may ----------------------
have several jobs and chances are that each of these jobs is currently ----------------------
being paid a different rate.
2. Plotting the wage rate for each grade. ----------------------
3. Drawing “wage lines” through the points plotted. These lines may be ----------------------
straight or curved.
----------------------
If the pay grade comprises a single job cluster, a straight line is usually
employed. ----------------------
4. Pricing jobs. Wages along the “wage line” are target wages or salary rates ----------------------
for the jobs in each pay grade. It is possible that some of the plotted points
may fall off the line. This will mean that the average for that grade is too ----------------------
high (or too low), given the pay rates for other grades. If the plot falls
----------------------
below the line, raises for jobs in this pay grade may be required. Such a
raise may be given either immediately or in one or two steps. If the plot ----------------------
falls above the wage, that indicates that the rates are high and the over
paid employees are often called “red circle,” “flagged”, “overrates”. ----------------------
This will necessitate either a) to freeze the rate paid until the general ----------------------
salary increases bring the other jobs into line with it, or b) to transfer or promote
the employee to a job where he can legitimately be paid his current rate, or c) to ----------------------
cut to the maximum in the pay grade. ----------------------
It is standard practice to establish ‘pay grades’ or equal width or ‘point
spread’ i.e. each grade might include all those jobs falling between 50 to 100 ----------------------
points, 150 to 200 points, and so forth. Since each grade is the same width, it ----------------------
is necessary to determine how many grades there should be. In an industry,

Notes the number varies from as few as five to as high as thirty. Two points need
consideration when deciding the number of grades. First, the size of the
---------------------- organisation, i.e. if there are 1000 jobs to be graded, more ‘pay grades’ will
be needed, than where the jobs are few, say 100. Second point is about the
---------------------- broadness of the grades. For instance, in the case of hourly jobs, the maximum
---------------------- of individual pay grades may vary from 10 to 20% above the minimum, while
in case of salaried employees the maximum of pay grades may vary from 15 to
---------------------- 75% above the minimum.
---------------------- Some authorities feel that there should be only one comprehensive ‘pay
grade’ for each organisation. But it is probably more realistic to have several
---------------------- pay grades/ranges. Several wage structures are developed - one for each type of
job or “job cluster”. Dunlop describes the cluster concept as follows:
----------------------
“A job cluster is defined as a stable group of job classifications or work
---------------------- assignments within a firm which are linked together by a) technology b) the
administrative organisation of the production process, including policies of
----------------------
transfer, lay off and promotion, or c) social custom that they have common
---------------------- wage-making characteristics.”
This indicates the need for having several pay ranges for each organisation.
----------------------
Such a range usually has several advantages: a) the management can take a more
---------------------- flexible stance with respect to the labour market b) It makes it easier to attract
experienced employees from other organisations c) It helps to ensure that there
---------------------- is an overlap between the pay rates and those prevailing in the labour market. d)
It also allows the management to provide for performance differences between
----------------------
employees. While determining pay ranges, the following consideration should
---------------------- be attended to:
---------------------- 1. It is important to keep in mind that there is an adequate differential

between supervisors and subordinates - whether they are paid under the
---------------------- same pay plan or under different ones.
---------------------- 2. When the pay-range of one group is changed, equal attention must be
given to the pay-level of the other.
---------------------- 3. Due to the continuous rise in wage and salary levels, a rise resulting
---------------------- from a variety of environmental pressures, considerable attention must
be given to handling upward changes in wage structure. Some firms give
---------------------- general percentage or “across the board” pay increases based on merit or
length of service. The sound thing is to make general adjustments in wage
---------------------- structure according to the price index number.
---------------------- 4. The existing pay structure should be regularly reviewed and revised. This
will make job evaluation programme more acceptable to employees.
----------------------
5. Regional differences in wages should invariably be maintained. Forces
---------------------- that favour regional differences are: low mobility, lower skill jobs, major
cost of living differences between areas, added sources of income, or
----------------------
characteristics (rural versus urban or industrial), seasonal occupations as
---------------------- in agriculture versus stable occupations.

However, several forces work to level these differences. The forces Notes
that favour uniformity in wages are: high mobility between regions and/or
employees, access to timely and reliable information, wide spread unionisation ----------------------
efforts (often along industry/occupational lines).
----------------------
‘Rate ranges’ can be developed in various ways. The usually adopted
approach is to use the “wage curve”. A maximum and minimum rate for each ----------------------
grade, such as 15% above and below wage line, may be arbitrarily decided. The
----------------------
maximum and minimum lines may then be drawn on the curve; the ‘range’ may
be allowed to become wider for the higher pay grades. This reflects the greater ----------------------
demands (and performance variability) inherent in jobs in these grades. Most
organisations structure their rate ranges to overlap a bit. Thus, a person who ----------------------
has been on the job longer and is more experienced may earn more than a fresh
----------------------
employee in the next higher pay grade.
Wage Administration Rules ----------------------
The development of rules of wage administration has to be done after the ----------------------
rate ranges have been determined. Rules have to be developed to determine to
what degree the advancement will be based, length of service rather than merit, ----------------------
with what frequency pay increases will be awarded, how controls over wage
----------------------
and salary costs can be maintained, what rules will govern promotion from one
pay grade to another, etc. ----------------------
At the next stage, the employees are to be informed of the details of wage ----------------------
and salary programme. Although most hourly paid workers are informed through
the wage contract about the details of the wage programme, a substantially ----------------------
smaller number of salaried employees have such information about their jobs. It
is considered advisable, in the interest of the concern and the employees that the ----------------------
information about average salaries and ranges in the salaries of group should ----------------------
be made known to the employees concerned, for secrecy in this matter may
create dissatisfaction, and it may also vitiate the potential motivating effects of ----------------------
disclosure.
----------------------
Finally, the employee is appraised and the wage fixed for the grade he is
found fit for. ----------------------
Factors influencing Wage, Salary Structure and Administration ----------------------
A sound wage policy is to adopt a job evaluation programme in order
----------------------
to establish fair differentials in wages based upon differences in job contents.
Besides the basic factors provided by a job description and job evaluation, those ----------------------
that are usually taken into consideration for wage and salary administration are:
----------------------
●● Organisation’s ability to pay
●● Supply and demand for labour ----------------------
●● The prevailing market rate ----------------------
●● The cost of living ----------------------
●● Living wage
----------------------

Notes ●● Productivity
●● Trade Union’s bargaining power
----------------------
●● Job requirements
----------------------
●● Managerial attitudes and
---------------------- ●● Psychological and sociological factors
---------------------- 1. Organisation’s Ability to Pay: Wage increases should be given by those
organisations, which can afford them. Companies that have good sales
---------------------- and therefore, high profits, tend to pay higher wages than those which
---------------------- are running at a loss or earning low profits because of the high cost of
production or low sales. In the short run, due to economic influence, the
---------------------- ability to pay is practically nil. All employers, irrespective of their profits
or losses, must pay not less than their competitors and need pay not more
---------------------- if they wish to attract and retain the workers. In the long run, the ability
---------------------- to pay is very important. During times of prosperity, employers pay high
wages to carry on profitable operations and because of their increased
---------------------- ability to pay. But during a period of depression, wages are cut because
funds are not available. Marginal firms and non-profit organisations (like
---------------------- hospitals and educational institutions) pay relatively low wages because
---------------------- of low or no profits.
2. Supply and Demand of Labour: The labour market conditions or supply
---------------------- and demand forces operate at the national, regional and local levels, and
---------------------- determine the organisational wage structure and level.
If the demand and the supply of certain skills are low, the result is a rise
----------------------
in the price to be paid for these skills. When prolonged and acute, these
---------------------- labour market pressures probably force most organisations to “reclassify
hard-to-fill jobs at a higher level” than that suggested by the job evaluation.
---------------------- The other alternative is to pay higher wages if the labour supply is scarce,
and lower wages when it is excessive. Similarly, if there is great demand
----------------------
for labour expertise, wages rise, but if the demand for manpower skill is
---------------------- minimal, the wages will be relatively low. Mescon says: “The supply and
demand compensation criterion is very closely related to the prevailing
---------------------- pay, comparable wage and on-going wage concepts since, in essence, all
of these remuneration standards are determined by immediate market
----------------------
forces and factors.”
---------------------- 3. Prevailing Market Rate: This is also known as the ‘comparable wage’
or ‘going wage rate’, and is most widely used criterion. An organisation’s
----------------------
compensation policies generally tend to conform to the wage-rates
---------------------- payable by the industry and the community.
---------------------- This is done for several reasons. First, competition demands that
competitors adhere to the same relative wage level. Secondly, various
---------------------- government laws and judicial decisions make the adoption of uniform
wage rates a necessary proposition. Thirdly, trade unions encourage
---------------------- this practice so that their members can have equal pay for equal work

and geographical differences may be eliminated. Fourth, functionally Notes
related firms in the same industry require essentially the same quality of
employees, with the same skills and experience. Finally, if the same or ----------------------
about the same general rates of wages are not paid to the employees as
are paid by the organisation’s competitors, it will not be able to attract and ----------------------
maintain a sufficient quantity and quality of manpower. ----------------------
Belcher and Atchison observe: “Some companies pay on the high side
----------------------
of the market rate in order to obtain goodwill or to ensure an adequate
supply of labour, while other organisations pay lower wages because ----------------------
economically they have to, or because by lowering hiring requirements
they can keep the jobs adequately manned. ----------------------
4. The Cost of Living: ‘The cost of living’ pay criterion is usually regarded ----------------------
as an automatic minimum equity pay criterion. This criterion calls for
pay adjustments based on increases or decreases in an acceptable cost ----------------------
of living index. In recognition of the influence of the cost of living,
----------------------
“escalator clauses” are written into labour contracts. When the cost of
living increases, workers and trade unions demand adjusted wages to ----------------------
offset the erosion of real wages. However, when living costs are stable or
decline, the management does not resort to this argument as a reason for ----------------------
wage reductions.
----------------------
5. The Living Wage: This criterion means that the wages paid should be
adequate to enable an employee to maintain himself and his family at ----------------------
a reasonable level of existence. However, employers do not generally
----------------------
favour using the concept of a living wage as a guide to wage determination
because they prefer to base the wages of an employee on his contribution ----------------------
rather on his need. Also, they feel that the level of living prescribed in
a worker’s budget is an open argument since it is based on subjective ----------------------
opinion.
----------------------
6. Productivity: It is another criterion, and is measured in terms of output
per man- hour. It is not due to labour efforts alone. Technological ----------------------
improvements, better organisation and management, the development ----------------------
of better methods of production by labour and management, greater
ingenuity and skill by labour are all responsible for the increase of ----------------------
productivity. Actually, productivity measures the contribution of all
the resource factors namely men, machines, methods, materials and ----------------------
management. No productivity index can be devised which will measure ----------------------
only the productivity of a specific factor of production .Another problem
is that productivity can be measured at several levels - job, plant, industry ----------------------
or national, economic level. Thus, although theoretically it is a sound
compensation criterion, operationally many problems and complications ----------------------
arise because of definitional measurement and conceptual issues. ----------------------
7. Trade Union’s Bargaining Power: Trade unions do affect rate of wages.
Generally, the stronger and more powerful the trade union, the higher the ----------------------
wages. A trade union’s bargaining power is often measured in terms of its ----------------------

Notes membership, its financial strength and the nature of its leadership. A strike
or a threat of a strike is the most powerful weapon used by it. Sometimes,
---------------------- trade unions force wages up faster than increase in productivity would
allow and become responsible for unemployment or higher prices and
---------------------- inflation. However, for those remaining on the payroll, a real gain is often
---------------------- achieved as a consequence of a trade union’s stronger bargaining power.
8. Job Requirements: Generally, the more difficult a job, the higher are the
----------------------
wages.
---------------------- Measures of job difficulty are frequently used when the relative value of
one job to another in an organisation is to be ascertained. Jobs are graded
----------------------
according to the relative skill, effort, responsibility and job conditions
---------------------- required.
9. Managerial Attitudes: These have a decisive influence on the wage
----------------------
structure and wage level since judgment is exercised in many areas of
---------------------- wage and salary administration- including whether the firm should pay
below average, or above average rates, what job factors should be used
---------------------- to reflect job worth, the weight to be given for performance or length of
service, and so forth, both the structure and level of wages are bound to
----------------------
be affected accordingly. These matters require the approval of the top
---------------------- executives. Lester observes “Top management’s desire to maintain or
enhance the company’s prestige has been major factor in the wage policy
---------------------- of a number of firms. Desires to improve or maintain morale, to attract
high-calibre employees, to reduce turnover, and to provide a high living
----------------------
standard for employees as far as possible; also appear to be factors in the
---------------------- management’s wage-policy decisions.”
---------------------- 10. Psychological and Social Factors: These determine in a significant

measure how hard a person will work for the compensation received
---------------------- or what pressures he will exert to get his compensation increased.
Psychologically, persons perceive the level of wages as a measure of
---------------------- success in life, people may feel secure, have an inferiority complex, seem
---------------------- inadequate or feel the reverse of all these. They may or may not take pride
in their work, or in the wages they get. Therefore, the management in
---------------------- establishing wage rates should not overlook these things. Sociologically
and ethically, people feel that “equal work should carry equal wages,”
---------------------- that “wages should commensurate with their efforts”, that “they are not
---------------------- exploited, and “that no distinction is made on the basis of caste, colour,
sex or religion.” To satisfy the conditions of equity, fairness and justice, a
---------------------- management should take these factors into consideration.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. The relative worth of jobs has been determined by job evaluation, and
the actual amounts to be paid are decided with a wage survey. ----------------------
2. If the demand for certain skills and the supply is low, the result is a ----------------------
decrease in the price to be paid for these skills.
----------------------
3. Employers do not generally favour using the concept of a living wage
as a guide to wage determination. ----------------------
4. The stronger and more powerful the trade union, the lower are the
----------------------
wages.
----------------------
4.4 ADMINISTRATION OF WAGES AND SALARIES ----------------------
Wage and salary administration should be controlled by some proper ----------------------

agency. This responsibility may be entrusted to the personnel department or the
----------------------
general company administration, or to some job executive. Since the problem
of wages and salary is very delicate and complicated, it is usually entrusted ----------------------
to a Committee comprised of high-ranking executives representing major line
organisations. The major functions of such Committee are as follows: ----------------------
a) Approval and/or recommendation to management on job evaluation ----------------------
methods and findings;
----------------------
b) Review and recommendation of basic wage and salary structure;
c) Help in formulation of wage policies; ----------------------
d) Coordination and review of relative departmental rates to ensure ----------------------

conformity; and
----------------------
e) Review of budget estimates for wage and salary adjustments and increases.
----------------------
This Committee should be supported by the advice of the technical staff.
Such staff committees may be for job evaluation, job description, merit rating, ----------------------
wage and salary surveys in an industry, and for a review of present wage rates,
procedure and policies. ----------------------
Alternatively, the Personnel Manager in consultation with senior ----------------------
members of other departments and discussions first prepares the over-all plan.
It is then submitted for final approval of the top executive. Once he has given ----------------------
his approval, for the wage and salary structure and the rules for administration, ----------------------
its implementation becomes a joint effort of all heads of the departments.
The various managers, who in turn submit their recommendations to higher ----------------------
authority and the latter, in turn, to the personnel department, carry out the
actual appraisal of the performance of subordinates. The personnel department ----------------------
ordinarily reviews recommendations to ensure compliance with established ----------------------

Notes rules of administration. In unusual cases of serious disagreement, the President
makes the final decision.
----------------------
----------------------
4.5 PRINCIPLE OF WAGE AND SALARYADMINISTRATION
---------------------- The generally accepted principles governing the fixation of wages and
salary are as follows:
---------------------- 1. The basic principle of wage and salary fixation is that it should be based on
---------------------- the relative contributions of different jobs and not on the basis of who the job
holders are. If this principle is adopted, the first requirement is to identify the
---------------------- likely contributions of different jobs.
---------------------- 2. There should be a definite plan to ensure that differences in pay for
jobs are based upon variations in job requirements such as skill, effort,
---------------------- responsibility of job or working conditions, and mental and physical
requirements.
----------------------
3. The general level of wages and salaries should be reasonably in line with
---------------------- that prevailing in the labour market. The labour market criterion is most
commonly used.
----------------------
4. The plan should follow a wage rate as prevalent. It should carefully
---------------------- distinguish between jobs and employees. A job carries a certain wage
rate, and a person is assigned to fill it at that rate. Exceptions sometimes
----------------------
occur in very high-level jobs in which the job-holder may make the job
---------------------- large or small, depending upon his ability and contributions.
5. “Most important principle is “Equal pay for equal work”, i.e. if two jobs
----------------------
have equal difficulty requirements, the pay should be the same, regardless
---------------------- of who fills them.
6. An equitable practice should be adopted for the recognition of individual
----------------------
differences in ability and contribution. For some units, this may take the
---------------------- form of rate ranges, with in-grade increases/raise; in others, it may be
a wage incentive plan; in still others, it may take the form of closely
---------------------- integrated sequences of job promotion.
---------------------- 7. There should be a clearly established procedure for hearing and attending
wage complaints. This may be integrated with the regular grievance
---------------------- procedure, if it exists.
---------------------- 8. The employee and the trade union, if there is one, should be informed
about the procedure used to establish wage rates. Every employee should
---------------------- be informed of his own position, and of the wage and salary structure.
---------------------- 9. The wage should be sufficient to ensure for the worker and his family
a reasonable standard of living. Workers should receive a guaranteed
---------------------- minimum wage to protect them against conditions beyond their control.
---------------------- 10. The wage and salary structure should be flexible so that the changing
conditions can be easily met.
----------------------

11. Prompt and correct payments of the dues of the employees must be Notes
ensured and arrears of payment should not accumulate.
----------------------
12. For revision of wages, a Wage Committee should always be preferred to
the individual judgment, however unbiased, or a manager. ----------------------
13. The wage and salary payments must fulfil a wide variety of human needs,
----------------------
including the need for self-actualisation. It has been recognised that
“money is the only form of incentive which is wholly negotiable appearing ----------------------
to the widest possible range of seekers. Monetary payments often act as
motivators and satisfiers interdependently of other job factors.” ----------------------
----------------------
----------------------
----------------------
1. If two jobs have equal difficulty requirements, the pay should be the
i. Different ----------------------
ii. Lower ----------------------

iii. Same ----------------------
2. Workers should receive a guaranteed _______wage to protect them
----------------------
against conditions beyond their control
i. Maximum ----------------------
ii. Minimum ----------------------
iii. Below average ----------------------
3. For revision of wages, a Wage Committee should always be
----------------------
i. Unbiased
----------------------
ii. Tough
iii. Unfair ----------------------
----------------------
4.6 COMPONENTS OF WAGES ----------------------
Wages in the widest sense mean any economic compensation paid by ----------------------
the employer under some contract to his workers for the services rendered by
them. Wages, therefore, include family allowance, relief pay, financial support ----------------------
and other benefits. But, in the narrower sense, wages are the price paid for the
services of labour in the process of production and include only the performance ----------------------
wages or wages proper. Major components of wages can be listed down as ----------------------
below:
----------------------
1. Wage and Salary: Wage and salary are the most important components
of compensation and these are essential irrespective of the type of ----------------------
organisation. Wage is referred to as remuneration to workers particularly,
hourly-rated payment. Salary refers to the remuneration paid to white- ----------------------

Notes collar employees including managerial personnel. Wages and salary are
paid on the basis of fixed period of time and normally not associated with
---------------------- productivity of an employee at a particular time.
---------------------- 2. Incentives: Incentives are the additional payment to employees
besides the payment of wages and salaries. Often these are linked with
---------------------- productivity, either in terms of higher production or cost saving or both.
These incentives may be given on individual basis or group basis.
----------------------
3. Fringe Benefits: Fringe benefits include such benefits which are provided
---------------------- to the employees either having long-term impact like provident fund,
gratuity, pension; or occurrence of certain events like medical benefits,
----------------------
accident relief, health and life insurance; or facilitation in performance of
---------------------- job like uniforms, canteens, recreation, etc.
4. Perquisites: These are normally provided to managerial personnel either
----------------------
to facilitate their job performance or to retain them in the organisation.
---------------------- Such perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc.
----------------------
In India, different Acts include different items under wages, though all
---------------------- the Acts include basic wage and dearness allowance under the term wages. For
example, under the Workmen’s Compensation Act, 1923, Section 2(m), “wages
---------------------- for leave period, holiday pay, overtime pay, bonus, attendance bonus, and good
---------------------- conduct bonus” form a part of wages.
Under the Payment of Wages Act, 1936, Section 2(vi), “any award of
---------------------- settlement and production bonus if paid; constitutes wages.” But under Payment
---------------------- of Wages Act, 1948, “retrenchment compensation, payment in lieu of notice
and gratuity payable on discharge constitute wages.”
---------------------- The following type of remuneration, if paid, does not amount to wages
---------------------- under any of the Acts:
1. Bonus or other payments under a profit-sharing scheme, which does not
----------------------
form a part of the contract of employment.
---------------------- 2. Value of any house accommodation, supply of light, water, medical
attendance, travelling allowance, or payment in lieu thereof or any other
----------------------
concession.
---------------------- 3. Any sum paid to defray special expenses entailed by the nature of the
---------------------- employment of a workman.
4. Any contribution to pension, provident fund, or a scheme of social security
---------------------- and social insurance benefits.
---------------------- 5. Any other amenity or service excluded from the computation of wages by
a general or special order of an appropriate governmental authority.
----------------------
A wage level is an average of the rates paid for the jobs of an organisation,
---------------------- an establishment, a labour market, an industry, a region or a nation. A wage
structure is a hierarchy of jobs to which wage rates have been attached.
----------------------

4.7 THEORY OF WAGES Notes
Different methods of wage payment are prevalent in different industries ----------------------
and in various countries. There may be payment by time or payment by results,
including payment at piece rates. ----------------------
Wages are fixed mainly as a result of individual bargaining, collective ----------------------
bargaining or by public or state regulation. How the wages are determined
has been the subject of several theories of wages. The main elements in these ----------------------
theories may be summed up as follows: ----------------------
Subsistence Theory
----------------------
This theory, also known as ‘Iron Law of Wages,’ was propounded by
David Ricardo (1772-1823). This theory (1817) states that the “The labourers ----------------------
are paid to enable them to subsist and perpetuate the race without increase or
----------------------
diminution.” The theory was based on the assumption that if the workers were
paid more than the subsistence wage, their numbers would increase as they ----------------------
would procreate more, and this would bring down the rate of wages. If the
wages fall below the subsistence level, the number of workers would decrease- ----------------------
as many would die of hunger, malnutrition, disease, cold, etc. and many would
----------------------
not marry, and when that happened the wage rates would go up.
Wage Fund Theory ----------------------
This theory was developed by Adam Smith (1723-1790). His basic ----------------------
assumption was that wages are paid out of a pre-determined fund of wealth,
which lie surplus with wealthy persons - as a result of savings. This fund could ----------------------
be utilised for employing labourers for work. If the fund was large, wages would
----------------------
be high, if it was small, wages would be reduced to the subsistence level. The
demand for labour and the wages that could be paid to them were determined ----------------------
by the size of the fund.
----------------------
The Surplus Value Theory of Wages
In the surplus-value theory as propounded by Karl Marx, the value ----------------------
produced by the worker in excess of what is paid in wages is called surplus ----------------------
value. The surplus value, exacted from the worker, constitutes the capitalist’s
profit. The wage-fund theory is that wages are advanced out of a fixed fund of ----------------------
capital, from which an excess withdrawal, either through legislation or through
union pressure, will ultimately reduce the amount available for other workers. ----------------------
Any increase in wages would also have to be taken out of profits, and their ----------------------
reduction would cause a decline in savings, which provide the capital from
which the wage fund is derived. ----------------------
The price of any product is determined by the labour time needed for ----------------------
producing it. The labourer was not paid in proportion to the time spent on work,
but much less and the surplus went to the owner, to be utilised for paying other ----------------------
expenses.
----------------------
----------------------

Notes Residual Claimant Theory
Francis A Walker (1840-1897) propounded this theory. According to
----------------------
him, there were four factors of production/business activity, viz., land, labour,
---------------------- capital and entrepreneurship. Wages represent the amount of value created in
the production, which remains after payment has been made for all these factors
---------------------- of production. In other words, labour is the residual claimant.
---------------------- Marginal Productivity Theory
This theory was developed by Phillips Henry Wicksteed (England)
----------------------
and Jon Bates Clark (USA). The marginal-productivity theory maintains that
---------------------- employers will only pay a wage that is, at most, equal to the amount of extra
value added to the total product by one additional worker. The bargaining
---------------------- theory modifies the marginal-productivity theory by taking into consideration
other factors (e.g., laws and social and political changes) that might affect the
----------------------
determination of wage levels and by acknowledging certain basic assumptions
---------------------- (equal bargaining power of employer and employee, free competition between
the two, and mobility of labour) that characterise the marginal-productivity
---------------------- theory.
---------------------- In other words, it assumes that wages depend upon the demand for and the
supply of labour. Consequently, workers are paid what they are economically
---------------------- worth for. The result is that the employer has a larger share in profit as he does
---------------------- not have to pay to the non-marginal worker. As long as each additional worker
contributes more to the total value than the cost in wages, it helps the employer
---------------------- to continue hiring and where this becomes uneconomical, the employer may
resort to superior technology.
----------------------
The Bargaining Theory of Wages
---------------------- John Davidson propounded this theory. Under this theory, wages are
---------------------- determined by the relative bargaining power of workers or trade unions and of
employers. When a trade union is involved, basic wages, fringe benefits, job
---------------------- differentials and individual differences tend to be determined by the relative
strength of the organisation and the trade union.
----------------------
Behavioural Theories
----------------------
Many behavioural scientists - notably industrial psychologists and
---------------------- sociologists like Marsh and Simon, Robert Dubin Eliot Jacques have presented
their views on wages and salaries, on the basis of research studies and action
---------------------- programmes conducted by them. Briefly such theories are:
---------------------- 1. The Employee’s Acceptance of a Wage level: This type of thinking takes
into consideration the factors, which may induce an employee to stay
---------------------- with a company. The size and prestige of the company, the power of the
union, the wages and benefits that the employee receives in proportion to
----------------------
the contribution made by him have their impact.
---------------------- 2. The Internal Wage Structure: Social norms, traditions, customs prevalent
---------------------- in the organisation and psychological pressures on the management, the

prestige attached to certain jobs in terms of social status, the need to Notes
maintain internal consistency in wages at the higher levels, the ratio of
the maximum and minimum wage differentials, and the norms of span ----------------------
of control, and demand for specialised labour all affect the internal wage
structure of an organisation. ----------------------
3. Wage and Salaries and Motivators: Money is often looked upon as a ----------------------
means of fulfilling the most basic needs of man. Food, clothing, shelter,
----------------------
transportation, insurance, pension plans, education and other physical
maintenance and security factors are made available through the purchasing ----------------------
power provided by monetary income-wages and salaries. Merit increases,
bonuses based on performance, and other forms of monetary recognition ----------------------
for achievement are genuine motivators. However, basic pay and the cost
----------------------
of living increases, and other wage increases unrelated to an individual’s
own productivity typically may fall into maintenance category. ----------------------
Minimum, Fair and Living Wage
----------------------
Some new terms have gained currency in India after Independence. These
are: ----------------------
a) Statutory Minimum Wage is the wage determined according to the ----------------------
procedure prescribed by the relevant provisions of the Minimum Wages
Act, 1948. Once the rates of such wages are fixed, it is the obligation of ----------------------
the employer to pay them, regardless of his ability to pay. Such wages are ----------------------
required to be fixed in certain employments where “sweated” labour is
prevalent, or where there is a great chance of exploitation of labour. ----------------------
b) Bare or Basic Minimum Wage is the wage which is to be fixed in ----------------------
accordance with the awards and judicial pronouncements of Industrial
Tribunals, National Tribunals and Labour Courts. They are obligatory on ----------------------
the employers.
----------------------
Minimum wage, Fair wage and Living wage are terms used by The Report
of the Committee of Fair Wages, set up by the Government in 1948 to determine ----------------------
the principles on which fair wages should be based and to suggest how these
principles should be applied. According to this Committee, the minimum wage ----------------------
should represent the lower limit of a fair wage. The next higher level is the fair ----------------------
wage, and the highest level of the fair wage is the living wage.
----------------------
●● inimum wage: “The concept of minimum wages considers the factor
M
of the prevailing cost of essential commodities whenever such minimum ----------------------
wage is to be fixed. The idea of fixing such wages in the light of cost of
living at a particular juncture of time and neutralising the rising prices of ----------------------
essential commodities by linking up scales of minimum wages with the
----------------------
cost of living index cannot, therefore be said to be alien to the concept of
minimum wage. Furthermore, in the light of rise of prices in recent years, ----------------------
if the wage scales are to be realistic it may become necessary to fix them
so as to neutralise at least partly the price rise in essential commodities”. ----------------------
In other words, a minimum wage should provide for the sustenance of ----------------------

Notes worker’s family, for his efficiency, for the education of his family, for
their medical care and for some amenities.
----------------------
The question of determining the minimum wage is a very difficult task
---------------------- for more than one reason. Conditions vary from place to place, industry
to industry and from worker to worker. The standard of living cannot be
---------------------- determined accurately. What then should be the quantum of the minimum
wage? What is the size of the family it should support? Who should decide
----------------------
these questions? These issues are very difficult to decide on. Moreover,
---------------------- since the cost of living varies with the price level, it follows that this
index should be periodically reviewed and modified.
----------------------
However, the principles of determining minimum wages were evolved by
---------------------- the Government and have been incorporated in the Minimum Wages Act,
1948, the important principle being that minimum wages should provide
---------------------- not only for the bare sustenance of life but also for the preservation of the
efficiency of the workers by way of education, medical care and other
----------------------
amenities.
---------------------- ●● iving Wage: This was recommended by the Committee as a fair wage
L
and as an ultimate goal in a wage policy. It defined a Living Wage as “One
----------------------
which should enable the earner to provide for himself and his family not
---------------------- only the bare essentials of food, clothing and shelter but a measure of
frugal comfort, including education for his children, protection against ill-
---------------------- health, requirements of essential social needs and a measure of insurance
against the more important misfortunes, including old age.” In other
----------------------
words, a living wage was to provide for a standard of living that would
---------------------- ensure good health for the worker, and his family as well as a measure
of decency, comfort, education for his children, and protection against
---------------------- misfortunes. This obviously implied a high level of living.
---------------------- Such a wage was so determined by keeping in view the national income
and the capacity of an industry to pay. The Committee was of the opinion
---------------------- that although the provision of a living wage should be the ultimate goal;
---------------------- the present level of national income did not permit the payment of a
living wage on the basis of the standards prevalent in the more advanced
---------------------- countries.
---------------------- The goal of a living wage was to be achieved in three stages. In the first
stage, the wage to be paid to the entire working class was to be established
---------------------- and stabilised. In the second stage, fair wages were to be established in
community-cum-industry. In the third stage, the working class was to be
---------------------- paid the living wage. The living wage may be somewhere between the
---------------------- lowest level of the minimum wage and the highest limit of the living
wage, depending upon the bargaining power of labour, the capacity of
---------------------- industry to pay, the level of the national income, the general effect of the
wage rise on neighbouring industries, productivity of labour, the place of
---------------------- industry in the economy of the country, and the prevailing rates of wages
---------------------- in the same or similar occupations in neighbouring localities.

●● air Wage: According to the Committee on Fair Wages, “It is the wage
F Notes
which is above the minimum wage but below the living wage.” The lower
limit of the fair wage is obviously the minimum wage: the upper limit set ----------------------
by the “capacity of the industry to pay”.
----------------------
There is difference between minimum wages and fair wages. In case of fair
wage, besides the principle of industry-cum-region, the company’s capacity ----------------------
to bear the financial burden must receive due consideration. Between these
two limits, the actual wages should depend on considerations of such ----------------------
factors as ----------------------
a) the productivity of labour b) the prevailing rates of wages in the
same or neighbouring localities and c) the place of industry in the ----------------------
economy of the country. ----------------------
●● he Need-based Minimum Wage: The Indian Labour Conference, at
T
----------------------
its 15th session held in July 1957, suggested that the minimum wage
fixation should be need-based and should meet the minimum needs ----------------------
of an industrial worker. For the calculation of the minimum wage, the
Conference accepted the following norms and recommended that they ----------------------
should guide all wage-fixing authorities, including the Minimum Wage
----------------------
Committee, Wage-Boards, and adjudicators:
1) The standard working class family should be taken to consist of 3 ----------------------
consumption units for the earner; the earnings of women, children
----------------------
and adolescents should be disregarded
2) The minimum food requirements should be calculated on the basis ----------------------
of the net intake of 2700 calories, as recommended by Dr. Akroyd, ----------------------
for an average Indian adult of moderate activity.
3) The clothing requirements should be estimated at a per capita ----------------------
consumption of 18 yards per annum, which would mean, for an ----------------------
average worker’s family of four, a total of 72 yards.
4) In respect of housing, the norms should be the minimum rent ----------------------
charged by the Government in any area of houses provided under ----------------------
the Subsidised Housing Scheme for low-income groups.
----------------------
5) Fuel, lighting and other miscellaneous items of expenditure should
constitute 20 per cent of the total minimum wage. ----------------------
Ever since the I.L.C. made its recommendations on the need-based
----------------------
minimum wage, attempts were made by several government and private
agencies and trade union organisations to work out its monetary equivalent. ----------------------
These estimates have varied considerably.
----------------------
Elements or Ingredients of a Good Wage Plan
Before we discuss these two plans, it would be fruitful to know the ----------------------
ingredients of a good wage plan. These are: ----------------------
1. Easy Understanding: It should be easily understandable i.e. all the
employees should easily understand what they are to get for their work. ----------------------

Notes They should be instructed as to how the wage plan works.
2. Easy Computation: It should be capable of easy computation i.e. it should
----------------------
be sufficiently simple to permit quick calculation. Mathematical tables
---------------------- may be supplied, by reference to which calculations can be quickly made.
3. Motivating: It should be capable of effectively motivating the employees
----------------------
i.e. it should provide an incentive for work. If both, the quality and
---------------------- quantity of work are to be stressed at the same time, a plan should be
selected that will not unduly influence the worker to work too fast or to
---------------------- become careless about quality.
---------------------- 4. Beneficial: It should provide for remuneration to employees as soon as
possible after the effort has been made. Daily or weekly payment of wage
---------------------- would be preferable to induce employees to work.
---------------------- 5. Stable: It should be relatively stable rather than frequently varying so that
employees are assured of a stable amount of money.
----------------------
---------------------- 1. Subsistence theory is known as “Iron Law of Wages”.
2. Wage fund theory is propounded by F.A. Walker.
----------------------
3. Wage survey is a part of wage determination process.
----------------------
---------------------- 4.8 WAGE DIFFERENTIALS

---------------------- Wages differ in different employments or occupations, industries and
---------------------- localities, and also between persons in the same employment or grade. One
therefore comes across such terms as occupational wage differentials, inter-
---------------------- industry, inter-firm, inter area or geographical differentials and personal
differentials.
----------------------
Wage differentials mean differences or disparities in wages.
----------------------
First, the differentials that can be attributed to imperfections in the
---------------------- employment markets, such as the limited knowledge of workers with regard
to alternative job opportunities available elsewhere, obstacles to geographical,
---------------------- occupational or inter-firm mobility of workers, or time lags in the adjustment
of resource distribution and changes in the scope and structure of economic
----------------------
activities. Examples of such wage differentials are inter-industry, inter-firm and
---------------------- geographical or inter-area wage differentials.
Second is the wage differentials, which originate in social values and
----------------------
prejudices and which are deeper and more persistent than economic factors.
---------------------- Wage differentials by sex, age, status or ethnic origin belong to this category.
Third, occupational wage differentials, which would exist even if
----------------------

employment markets were perfect and social prejudices were absent. Notes
In other words, wage differentials may be:
----------------------
a) Occupational differentials or differentials based on skill
----------------------
b) Inter-firm differentials
c) Inter-area or regional differentials ----------------------
d) Inter-industry differentials and ----------------------

e) Differentials based on sex ----------------------
a) Occupational Differentials: The reasons for occupational wage
----------------------
differentials can be varying requirements of skill, knowledge, demand
supply situation, degree of responsibilities etc. In countries adopting ----------------------
a course of planned economic development, skill differentials play an
important role in manpower and employment programmes, for they ----------------------
considerably help in bringing about an adequate supply of labour with
----------------------
skills corresponding to the requirements of product plans. The basic
functions of such differentials are: ----------------------
i) To induce workers to undertake “more demanding,” “more
----------------------
agreeable or dangerous” jobs, or those involving “a great chance of
unemployment, or a wide uncertainty of earnings”. ----------------------
ii) To provide an incentive to young persons to incur the costs of ----------------------
training and education and encourage workers to develop skills in
anticipation of higher earnings in the future. ----------------------
iii) To perform a social function by way of determining the social status ----------------------
of workers.
Inter-occupational differentials may comprise skilled, unskilled and ----------------------
manual differentials, non-manual and manual (white and blue-collar); ----------------------
and general skill differentials. Occupational wage differentials generally
follow the changes in the relative supplies of labour to various occupations. ----------------------
a) Inter-firm Differentials: Inter-firm differentials reflect the relative wage ----------------------
levels of workers in different plants in the same area and occupation.
Differences in technological advancement, managerial efficiency, financial ----------------------
capability, age and size of them, relative advantages and disadvantages of
----------------------
supply of raw materials, power and availability of transport facilities- those
are also accounted for considerable disparities in inter-firm wage rates. ----------------------
Lack of co-ordination among adjudication authorities is responsible for
such anomalies as well. The main causes of inter-firm wage differentials ----------------------
are as follows:
----------------------
i) Differences in the quality of labour employed by different firms
----------------------
ii) Imperfections in the labour market
iii) Differences in the efficiency of equipment, supervision and other ----------------------
non-labour factors. ----------------------

Notes b) Inter-area or Regional Differentials: Such differentials arise when
workers in the same industry and the same occupational group, but living
---------------------- in different geographical areas, are paid different wages. Regional wage
differentials may be conceived in two senses. In the first sense, they are
---------------------- merely a part of inter-industry differentials in a particular region. “The
---------------------- industry mix varies from one area to another, and for this reason alone,
the general average of wages would be expected to vary.” In the second
---------------------- sense, they may represent real geographical differentials, resulting in the
payment of different rates for the same type of work. In both the cases,
---------------------- regional differentials affect the supply of manpower for various plants in
---------------------- different regions.
Such differentials are the result of living and working conditions, such
----------------------
as unsatisfactory or irksome climate, isolation, sub-standard housing,
---------------------- disparities in the cost of living and the availability of manpower. In some
cases, regional differentials are also used to encourage planned mobility
---------------------- of labour.
---------------------- c) Inter-industry differentials: These differentials arise when workers
in the same occupation and the same area but in different industries are
---------------------- paid different wages. Inter-industry differentials reflect skill differentials.
The industries paying higher wages have mostly been industries with
----------------------
a large number of skilled workers, while those paying less have been
---------------------- industries with a large proportion of unskilled and semi-skilled workers.
Other factors influencing inter-industry differentials are the extent of
---------------------- unionisation, the structure of product markets, the ability to pay, labour-
capital ratio and the stage of development of an industry.
----------------------
d) Personal Wage Differentials: These arise because of differences in the
---------------------- personal characteristics (age or sex) of workers who work in the same
plant and the same occupation. “Equal pay for equal work” has been
----------------------
recommended by the I.L.O. Convention (No.100), as also by Industrial
---------------------- courts, Labour Tribunals, the Minimum Wages Committee and the Fair
Wages Committee. But in practice; this principle has not been fully
---------------------- implemented because in occupations which involve strenuous muscular
work, women workers, if employed, are paid less than men workers, lack
----------------------
of organisation among women employees, less mobility among them,
---------------------- lower subsistence and weak constitution are other reasons which bring
them lower wages than what their male counterparts receive.
----------------------
---------------------- 4.9 IMPORTANCE OF WAGE DIFFERENTIALS
---------------------- Wage differentials have a great economic and social significance, for
they are directly related to the allocation of economic resources of a country,
---------------------- including manpower, growth of the national income and the pace of economic
development. Social welfare activity depends, in a large measure, on such wage
----------------------
differentials as it will:
---------------------- a) Cause labour to be allocated among different occupations, industries and

geographical areas in the economy in such a manner as to maximise the Notes
national product.
----------------------
b) Enable full employment of the resources of the economy to be attained.
c) Facilitate the most desirable rate of economic progress. ----------------------
Wage differentials reflect differences in the physical and mental abilities ----------------------
of workers, differences in productivity in the efficiency of management and in
consumer preferences, and act as signposts for labour mobility. By providing ----------------------
an important incentive for labour mobility, they bring about a re-allocation of
----------------------
the labour force under changing circumstances. Under competitive conditions,
wages are determined by conditions of demand (which reflect the productivity ----------------------
of workers) and conditions of supply (which reflect the attractiveness of jobs).
The level of wages would depend upon the relative scarcity of supply in ----------------------
relation to demand. Scarcity differentials (which may be due to specific skills
----------------------
and mental abilities) produce wage differentials, and as long as the former are
inevitable, the latter, too, would be so. In other words, wage differentials reflect ----------------------
the different degrees of scarcity, the different categories of labour, and since
different categories cannot be reduced to the same degree of scarcity in the ----------------------
market, wage differentials are inevitable.
----------------------
Wage differentials arise because of following factors:
----------------------
a) Differences in the efficiency of the labour, which may be due to inborn
quality, education, and conditions under which work may be done. ----------------------
b) The existence of non-competing group due to difficulties in the way of the ----------------------
mobility of labour from low paid to high paid employments.
----------------------
c) Differences in the agreeableness or social esteem of employment.
d) Differences in the nature of employment and occupations. ----------------------
The nature and the extent of wage differentials are conditioned by a ----------------------
set of factors such as the conditions prevailing in the market, the extent of
unionisation and the relative bargaining power of the employers and workers, ----------------------
the rate of growth in productivity, the extent of authoritarian regulations and ----------------------
the centralisation of decision-making, customs and traditions, the general
economic, industrial and social conditions in a country, and a host of other ----------------------
subjective and objective factors operating at various levels. The prevailing
rates of wages, the capacity of an industry to pay, the needs of an industry in ----------------------
a developing economy, and the requirements of social justice also directly or ----------------------
indirectly affect wage differentials.
----------------------
4.10 WAGE DIFFERENTIALS IN INDIA
----------------------
Due to the paucity of relevant data on wage differentials, it is not possible
----------------------
to analyse them in India; yet the main features of the Indian wage structure
may be stated thus, “As a characteristic of the unorganised labour market, ----------------------
personal differentials because of job selling, individual bargaining and wage
discrimination have tended to persist in India, especially in the unorganised ----------------------

Notes sector of the economy, and even in the organised and unorganised section in
industry.”
----------------------
The tendency appears to be towards the elimination of wage differentials
---------------------- because of government interference through the fixation of the minimum wages
and, of late, through the appointment of Wage Boards and pressures from trade
---------------------- unions. Wage differentials by sex are quite common. Both, economic and social
reasons account for this phenomenon. Despite the fact that the Constitution of
----------------------
India enjoins upon the State to direct its policy towards securing “equal pay for
---------------------- equal work” for men and women, awards of some industrial Tribunals provide
for “different wages for men and women workers, not on the grounds that the
---------------------- work done is unequal but on the grounds that the wages of women workers
support a smaller family, that the cost of employing women workmen is higher.”
----------------------
As regards inter-firm and inter-industry differentials in India, the former
---------------------- were quite important and frequent in the past, particularly in the jute mill
industry. Of late, however, there has been a tendency towards the elimination
----------------------
of inter-firm differentials. The forces which tend to eliminate inter-personal
---------------------- differentials in the country operate in this case as well.

----------------------
Fill in the blanks.
---------------------- 1. ___________ means differences or disparities in wages.
---------------------- 2. ___________ reflect the relative wage levels of workers in different
plants in the same area and occupation.
----------------------
3. __________ enjoins upon the State to direct its policy towards
---------------------- securing “equal pay for equal work” for men and women.
----------------------
4.11 EXECUTIVE COMPENSATION PLANS
----------------------
For the purpose of executive compensation, an executive is a person who is a
----------------------
member of the highest decision-making group in an organisation. Chief executive
---------------------- officer (CEO), full-time directors and other senior managers fall in this category.
Executive compensation includes base salary, bonus, long-term incentives, and
---------------------- perquisites (perks) payable to executive. Executive compensation has become a
hot topic in compensation management, both at global level as well as in India. It
---------------------- has become a hot topic globally because it differs from compensation plan of other
employees.
----------------------
We can say that, for the higher management, salaries are influenced by the
---------------------- size of a company, by the specific industry, and in part by the contribution of the
---------------------- incumbent to the process of decision- making. The bigger the firm, the greater
is the compensation paid to the executives. The industries that are more highly
---------------------- constrained by governmental regulations (banks, life insurance, air transport,
railroads, public utilities) pay relatively less than those that are more free to
---------------------- carry on their business (private firms).

Straight salaries, bonuses, stock purchase plans and profit sharing are Notes
used to compensate major executives. Of these, the straight salary is the most
common method. The salary is determined by mutual agreement between the ----------------------
individual and the employer. The sales effected, the cost of production, reduction
in expenses and the profits made are also taken into account. ----------------------
The difference is in the following ways: ----------------------

1. Executives are in a position to fix their own compensation package within ----------------------
the guidelines framed by an organisation or guidelines framed by the
government (in India, these guidelines exist). ----------------------
2. Executive frequently operates under bonus and stock option plans that ----------------------
can dramatically increase their total compensation. Because of this
phenomenon, the gap between executive and non-executive remuneration ----------------------
is widening at an alarming rate, from 80 per cent in 1980s to 400 per cent
----------------------
in 1990s. According to a report from Time Magazine, top five executives
account for about 75 per cent of stock options while 15 per cent options ----------------------
are accounted by another top five per cent. These figures compel people
wonder whether the CEOs are busy managing the company or the share ----------------------
prices.
----------------------
3. Executives are offered perquisites that are not available to other category
of managerial personnel. Such perquisites may include free housing, ----------------------
company’s vehicles for personal use, free insurance, liberal expense ----------------------
accounts, post-retirement consulting contracts, and so on.
4. In many cases, executives have the benefit of golden parachute. It is ----------------------
designed by the executives as a means of protecting themselves if a ----------------------
merger or hostile takeover occurs. Such a parachute typically provides
either severance compensation to the departing executive or a guaranteed ----------------------
position in the newly created entity.
----------------------
Because of economic liberalisation and consequent entry of multinationals
in India, many companies are designing their executive compensation plans on ----------------------
the pattern of global plans. With the result, the number of companies whose
CEOs draw more than one crore rupees a year is increasing at a fast pace. ----------------------
Bonuses are also an aid to executives at a certain percentage of the profits. ----------------------
The bonuses may average from 30 per cent of the basic salary. These bonuses
----------------------
operate most effectively in increasing motivation when the following conditions
exist: ----------------------
i) The amount paid is closely related to the level of individual performance;
----------------------
ii) The amount paid after taxes, represents a clearly noticeable rise above the
base salary level. ----------------------
iii) The amount paid is closely related to the level of company performance. ----------------------
iv) The amount paid is tied into the base salary in such a way that the combined ----------------------
earnings are equitable both in relation to internal and external standards.
----------------------

Notes v) The amount paid is reduced drastically whenever an individual experiences
a real and continuing decrease in performance effectiveness.
----------------------
vi) The amount paid is based on an easily understandable system of
---------------------- allocation, and the individual is provided with complete information on
the relationship between bonus and performance.
----------------------
Moreover, executives are compensated for the various expenses incurred
---------------------- by them, for taxation takes away a major portion of their salary. Such payments
are in the form of
----------------------
a) Medical care
---------------------- b) Counsel and accountants to assist in legal, tax and financial problems
---------------------- c) Facilities for entertaining customers and for dining out
---------------------- d) Company recreational area (Swimming pool and gymnasium)
e) Cost of the education and training of executives, scholarships for their
----------------------
children, and allowances for business magazines and books
---------------------- f) Free well-furnished accommodation, conveyance and servants
---------------------- All these go under the head of perquisites. However, the following
generalisations are provided on managerial pay:
----------------------
i) Satisfaction with pay is a function of comparison with another’s pay, with
---------------------- downward comparisons having the great impact.
---------------------- ii) A manager’s satisfaction with his income and its motivational effect
appears to be directly related to the anticipated pay raises.
----------------------
iii) Those managers who expect large increases in the future apparently are
---------------------- less satisfied with their existing level of income, those expecting little or
no increase are more satisfied.
----------------------
iv) The choice of merit, as opposed to seniority, as the basis for determining
---------------------- the salary rates tends to increase with education and position. The
actual determinants of pay differentials seem to be job level supervisory
---------------------- experience and professional experience.
---------------------- v) Managerial incentive compensation has tended to become rigid rather
than flexible. If the various compensation media are to be used to motivate
---------------------- managers, there must be a return to a greater flexibility and less rigidity.
---------------------- vi) Satisfaction with pay increases with increased managerial level, and
increased salary but decreases with post-graduate training.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. Executive Compensation differs from compensation plan of other
employees. ----------------------
2. Executive compensation is not related to the level of company ----------------------
performance.
----------------------
3. Executives are offered perquisites that are not available to other
category of managerial personnel. ----------------------
----------------------
Activity 1
----------------------
1. Describe any four important points of the compensation system ----------------------
applicable to your organisation. What improvements would you
like to have in the existing system? Convey your concerns through ----------------------
suggestion schemes / drop box.
----------------------
2. Try to figure out the difference between living wages and fair wages.
How payment of fair wages improves employee’s morale? Talk to ----------------------
employees of both manufacturing and service industry for better ----------------------
understanding.
3. Wage differs from industry to industry, occupation to occupation. ----------------------
Try to study the payment structure in industries carrying out similar ----------------------
operations in the same localityand analyse as to what extent the wage
or salary rate could differ. List down the points of distinction. ----------------------
----------------------
Summary
----------------------
●● he basic purpose of a wage and salary administration is to establish and
T ----------------------
maintain an equitable wage and salary structure. The wage and salary
administration tries to strike a balance between employers and employees. ----------------------
●● nce the relative worth of jobs has been determined by job evaluation,
O ----------------------
the actual amounts to be paid must be determined and this is done by
making wage or salary surveys. ----------------------
●● age and salary administration should be controlled by some proper
W ----------------------
agency. This responsibility may be entrusted to the personnel department.
----------------------
●● ifferent components of wages include family allowance, relief pay,
D
financial support and other benefits. There are different theories of wages ----------------------
such as Subsistence theory, Wage fund theory, Surplus theory of wages
etc. ----------------------
----------------------

Notes ●● ages differ in different employments or occupations, industries and
W
localities and also between persons in the same employment or grade.
---------------------- Executive Compensation has become a hot topic globally because it
differs from compensation plan of other employees.
----------------------
---------------------- Keywords
---------------------- ●● air Wage: It is the wage which is above the minimum wage but below
F
the living wage.
----------------------
●● J ob cluster: It is a stable group of job classifications or work assignments
---------------------- within a firm which are linked together by a) technology b) the
administrative organisation of the production process, including policies
----------------------
of transfer, lay off and promotion, or c) social custom that they have
---------------------- common wage-making characteristics.
---------------------- ●● iving Wage: It is the one which should enable the earner to provide
L
for himself and his family not only the bare essentials of food, clothing
---------------------- and shelter but a measure of frugal comfort, including education for his
children, protection against ill-health, requirements of essential social
---------------------- needs and a measure of insurance against the more important misfortunes,
---------------------- including old age.
●● inimum Wage: It is the wage which must provide not only for the bare
M
---------------------- sustenance of life, but also for the preservation of the efficiency of the
---------------------- worker.
●● alary: ‘Salary’ normally refers to the weekly or monthly rates paid
S
----------------------
to clerical, administrative and professional employees (“white collar
---------------------- workers”).
●● The wage levels: It represents the money an average worker makes in a
----------------------
geographic area or in his organisation.
---------------------- ●● age: A ‘wage’ (or pay) is the remuneration periodically paid for the
W
service of labour in production to an employee/worker. “Wages” usually
----------------------
refer to the hourly or daily rate paid to such groups as production and
---------------------- maintenance employees (“blue-collar workers”).
---------------------- ●● age Structure: The term ‘wage structure’ is used to describe wage/
W
salary relationships within a particular grouping. The grouping can be
---------------------- according to occupation, or organisation such as wage structure for
craftsman (carpenters, mechanics, bricklayers etc.).
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. What is the nature and purpose of wage and salary administration?
---------------------- 2. Explain the process of wage determination.
---------------------- 3. What is the need for wage surveys?

4. What are the factors influencing wage and salary administration? 5. Notes
Explain various theories of wages.
----------------------
6. Write a note on elements or ingredients of a good wage plan.
7. What are the reasons or factors affecting wage differentials? ----------------------
8. Write short notes. ----------------------
a. Executive Compensation Plans ----------------------
b. Importance of wage differentials
----------------------
c. Minimum, fair and living wage
----------------------
Answers to Check your Progress ----------------------
Fill in the blanks.
----------------------
1. A Job analysis describes the duties, responsibilities, working conditions
and inter-relationships between the jobs. ----------------------
2. The basic purpose of a wage and salary administration is to establish and ----------------------
maintain an equitable wage and salary structure.
----------------------
3. Employers and employees are two main stakeholders in a business unit.

1. True ----------------------
2. False
----------------------
3. True
----------------------
4. False
Multiple Choice Single Response. ----------------------

1. If two jobs have equal difficulty requirements, the pay should be the ----------------------
iii. Same
----------------------
2. Workers should receive a guaranteed _______wage to protect them
against conditions beyond their control ----------------------
ii. Minimum ----------------------
3. For revision of wages, a Wage Committee should always be ----------------------
i. Unbiased
----------------------
----------------------
----------------------

Notes Check your Progress 4
----------------------
1. True
----------------------
2. False
---------------------- 3. True

1. Wage differentials means differences or disparities in wages.
----------------------
2. Inter-firm differentials reflect the relative wage levels of workers in
---------------------- different plants in the same area and occupation.
---------------------- 3. Constitution of India enjoins upon the State to direct its policy towards
securing equal pay for equal work” for men and women.
----------------------
---------------------- 1. True
---------------------- 2. False
3. True
----------------------
---------------------- Suggested Reading

----------------------
---------------------- Managerial Remuneration and Wage & Salary Administration: a
Professional Manual. Deep and Deep Publications.
----------------------
---------------------- 3. Bhattacharya, Mausomi. Compensation Management. Excel Books India.
---------------------- 4. Goel, Diwakar. Performance Appraisal and Compensation Management:
A Modern Approach. PHI Learning Pvt. Ltd.
----------------------
5. Henderson, Richard I., Sandra Vasa-Sideris, Barbara Bernal Thomas.
---------------------- Compensation Management in a Knowledge-Based World: Exercise
Book. Prentice Hall.
----------------------
6. Upadhyay, S.S. Compensation Management: Rewarding Performance.
---------------------- Global India Publications.
----------------------
----------------------
----------------------
----------------------

Legal Framework for Wage and Salary Administration
UNIT
5
Structure:
5.1 Introduction
5.2 Methods of Wage Fixation in India
5.3 Norms for Fixation of Wages in an Industry
5.4 Retirement Benefits related Enactments
5.5 Wage Boards
5.6 Collective Bargaining
Summary
Key Words
Suggested Reading
Legal Framework for Wage and Salary Administration 135

Notes
Objectives
----------------------
----------------------
• Explain different methods of wage fixation in India
----------------------
• Reproduce various norms of wage fixation
---------------------- • Analyse the contribution of wage boards
---------------------- • Explain the importance of collective bargaining in wage fixation
---------------------- • Explain the retirement related enactments
----------------------
---------------------- 5.1 INTRODUCTION

---------------------- “Compensation which includes direct cash payments, indirect payments
in the form of employee benefits and incentives to motivate employees, to strive
---------------------- for higher levels of productivity is a crucial component of the employment
---------------------- relationship. Compensation is affected by forces as diverse as labour market
factors, collective bargaining, government legislations and top management
---------------------- philosophy regarding pay and benefits.”
---------------------- Wages have at least two connotations from the standpoint of employers
and employees in organisational settings. First, the employers perceive wages
---------------------- as a cost of their business efforts and are keen to reduce labour cost per unit of
output. Explicitly, wages form the largest cost factor for the enterprise. Although
---------------------- the employers are inclined to save this cost, they have also come to realise that
---------------------- it would not be possible for them to attract and maintain an effective work
force without compensating it adequately. Second, employees consider wages
---------------------- as a means for satisfying their needs in terms of an expected standard. They
desire to receive at least as much remuneration as other individuals equipped
---------------------- with similar skills get for doing similar work. Notwithstanding this simple
---------------------- logical reasoning, the financial compensation of human resources is a highly
perplexing problem involving several emotional components.
----------------------
5.2 METHODS OF WAGE FIXATION IN INDIA
----------------------
In the course of the last decade, the culture of wage fixing has absorbed the
----------------------
notion that productivity improvement is the only sound basis for increased pay.
---------------------- The underlying concept which permeates the pay fixing system has thus become
one in which pay increase cannot be contemplated without offsetting increase in
---------------------- productivity and increased productivity is a sufficient justification for increased
pay. In most cases the link between pay and productivity is encapsulated in
---------------------- the terms of enterprise agreements whereby specific changes in work practices
---------------------- are required to secure specific increases in pay. In other cases, productivity
measurement models are being put in place with automatic links between increases
---------------------- in measured productivity and pay. While there is merit in using pay increases to

secure changes in work practices which enhance productivity, there is also a danger Notes
that productivity increase will be viewed as necessary and sufficient conditions for
increase in pay. ----------------------
The four methods of wage fixation in India are legislation, wage boards ----------------------
and pay commissions, job evaluation and collective bargaining. While job
evaluation has been discussed earlier, let us see legislations, wage boards and ----------------------
pay commissions and collective bargaining in detail.
----------------------
Legislation
----------------------
The major wage laws include the Payment of Wages Act, 1936 and pay
its subsequent amendments, the Minimum Wages Act, 1948 and the Equal ----------------------
Remuneration Act, 1976.
----------------------
The Payment of Wages Act, 1936
Employers can neither withhold the wages earned by workers nor can ----------------------
they make any unauthorised deductions. Payments must be made prior to the
----------------------
expiry of a specified day only after those acts of omission, which have been
approved by the appropriate government; the fines cannot exceed an amount ----------------------
equal to three paise in a rupee of the wage payable. If the payment of wages is
delayed or wrongful deductions are made, the workers or their trade unions can ----------------------
file a claim.
----------------------
Responsibility for payment of wages - Every employer shall be responsible
for the payment of all wages required to be paid to persons employed by him ----------------------
under this Act. ----------------------
Provided that, in the case of persons employed (otherwise than by a
contractor), ----------------------
(a) in factories, if a person has been named as the manager of the factory under ----------------------
[clause (f) of sub-section(1)of section 7 of the Factories Act, 1948 (63 of
1948)] ----------------------
(b) in industrial or other establishment, if there is a person responsible to ----------------------

the employer for the supervision and control of the industrial or other
establishments ----------------------
(c) Every person responsible for the payment of wages under section 3 shall ----------------------
fix periods (in this Act referred to as wage-periods in respect of which
such wages shall be payable.) ----------------------
(d) No wage-period shall exceed one month ----------------------

The Act has at least two limitations. ----------------------
----------------------
----------------------
----------------------
----------------------

Notes The Minimum Wages Act, 1948
The Minimum Wages Act, 1948 relates to the employment situations
----------------------
embodied in Parts I and II of the Schedule of the Act. The appropriate
---------------------- governments are empowered to include other employment situations in the
schedule and fix or revise the minimum wage rates. It is obligatory on the part of
---------------------- the employer to pay the minimum rates of wages fixed in terms of the procedures
prescribed by law, irrespective of his capacity to pay. The Act provides for
----------------------
fixing minimum wages in certain employment situations where sweated labour
---------------------- prevails or where there exists the possibility of exploitation of labour. However,
minimum wages are not to be fixed in an industry, which employs less than
---------------------- 1000 employees in the entire state, although this condition has been relaxed in
a subsequent amendment of the Act. Thus, the Act empowers the Central and
----------------------
State governments to fix minimum rates of wages in woollen, carpet-making or
---------------------- shawl-weaving establishments, rice, flour or dal mills, tobacco or bidi-making
industry, plantations, oil mills, road construction or building operations, stone
---------------------- breaking or stone crushing, lac manufacturers, mica works, public motor
transport, tanneries and leather manufacturers and agriculture.
----------------------
The Act provides for the fixation of a minimum time rate, a minimum
---------------------- piece rate, a guaranteed time-rate, and an overtime rate suitable for the various
occupations and classes of workers. A minimum wage rate incorporates a basic
----------------------
rate of wage and a cost of living allowance or a basic rate with or without the
---------------------- cost of a living allowance, and the cash value of the concessions regarding
supplies of essential commodities at nominal rates.
----------------------
The Act further prescribes for the payment of wages in cash, although
---------------------- the appropriate government is empowered to pay it wholly or partly in kind.
The Act further provides for the appointment of committees, subcommittees,
---------------------- advisory committees, advisory subcommittees, advisory boards and central
advisory board for assisting the appropriate government in fixing and revising
----------------------
the wages. The Act also provides for the revision of minimum rates fixed
---------------------- at suitable intervals, not exceeding five years. Accordingly, different state
governments and union territory authorities make wage revisions. The facts
---------------------- taken into account for the initial fixation of wages as well as for the subsequent
revisions under the Act include minimum wage rates fixed by other states in
----------------------
similar industries, prevailing wage rates in adjacent areas/industries, increases
---------------------- in the cost of living since the last fixation, etc.
---------------------- The Act, however, does not provide any guidance to the wage fixation
authorities with respect to the content of minimum wages, size of family unit
---------------------- for which minimum wage rates have to be fixed, weightage to be assigned to
different factors such as the cost of living, needs of workers, etc. Therefore,
---------------------- it is left to the individual committee or the government to determine their
---------------------- own standards and arrive at conclusions. Historically, the first to lay down the
guidelines for the fixation of minimum wages was the fifteenth session of the
---------------------- Indian
----------------------

Labour Conference held in July 1957. It passed a resolution stressing that Notes
the minimum wage should be need-based to meet the minimum requirements
of the workers. The resolution embodies several norms for the fixation of such ----------------------
wages in an industry.
----------------------

1. The four methods of wage fixation in India are legislation, ----------------------
____________, job evaluation and ____________.
----------------------
2. Except __________, the Payment of Wages Act, 1936, extends to the
whole of India and applies to persons employed in any factory as ----------------------
defined in the Factories Act, 1948
----------------------
3. In ____________________, it is obligatory on the part of the employer
to pay the minimum rates of wages fixed in terms of the procedures ----------------------
prescribed by law, irrespective of his capacity to pay.
----------------------
5.3 NORMS FOR FIXATION OF WAGES IN AN INDUSTRY ----------------------
----------------------
1. While computing the minimum wage, the standard working class family
should be considered as consisting of four consumption units and the ----------------------
earnings of women, children and adolescents should be excluded.
----------------------
2. The minimum food requirements should be determined on the grounds of
a net intake of 2700 calories as laid down by Akroyd for a normal adult in ----------------------
India.
----------------------
3. Clothing needs should be established on the basis of a per capita
consumption of 16.62 meters per year. ----------------------
4. As regards housing, the minimum wage should be determined from the ----------------------
standpoint of the rent corresponding to the minimum area specified under
the Government Industrial Housing Scheme. ----------------------
5. Miscellaneous expenditures on items such as fuel, lighting etc. should ----------------------
form 20 per cent of the total minimum wage. The resolution further
prescribes that the authorities involved in the issue should justify any ----------------------
deviations from these norms.
----------------------
This was followed by the one-man committee headed by K.I. Vidyasagar
who, in his report dated December 19, 1966, suggested a number of norms, ----------------------
which must be taken into account while fixing/revising the minimum wage.
Likewise, the National Commission on Labour (1969) provided a number of ----------------------
recommendations with regard to the statutory minimum wage. A committee of ----------------------
secretaries belonging to six states with the additional secretary of Ministry of
Labour as chairman was formed in 1981. The committees made a number of ----------------------
recommendations with respect to the criteria for the fixation of minimum wages
and evolved a formula for variable dearness allowance to be attached thereto. ----------------------

Notes Although the Minimum Wage Act originally included 13 industries or
employments, the minimum rates of wages have been fixed in 197 employments
---------------------- till June 30, 1985. During July 1985 to June 1996, minimum wages were revised
in 426 employments.
----------------------
Viewpoint of National Labour Law Association on Minimum Wages Act 1948
----------------------
In the opinion of the National Labour Law Association, while significant
---------------------- progress has been made in extending the coverage of the Act, the effort has
neither been systematic nor uniform. There is also no means to verify or to
---------------------- ensure that all the employments for which minimum wages need to be fixed
are actually included in the schedule, and minimum wages have been fixed in
----------------------
respect of all of them.
---------------------- The concept of minimum wages takes in the factor of the prevailing cost
of essential commodities whenever such minimum wage is to be fixed. The idea
----------------------
of fixing such wages in the light of cost of living at a particular juncture of time
---------------------- and neutralising the rising prices of essential commodities by linking up scales
of minimum wages with the cost of living index cannot, therefore be said to be
---------------------- alien to the concept of minimum wage. Furthermore in the light of spiralling
of prices in recent years, if the wage scales are to be realistic it may become
----------------------
necessary to fix them so as to neutralise at least partly the price rise in essential
---------------------- commodities.
---------------------- Fixation of minimum wages is a kind of a ‘safety net’ to protect workers

from exploitation by the payment of unduly low wages. This protection should
---------------------- be available to every worker who needs it. There is no justification to deny
this protection to those employed in employments which are not included in
---------------------- the schedule to the Act unless there is a proper arrangement for the regulation
---------------------- of their wages by collective agreement or otherwise. It is, therefore, proposed
to make a law applicable to all employees, with the provision that where
---------------------- the minimum wage fixed or revised under this code is less than the wage
fixed through collective bargaining, arbitration, adjudication, wage board or
---------------------- otherwise the employee shall be entitled to the payment of wages at the higher
---------------------- rate applicable to them.
A minimum wage must provide not merely for the bare subsistence of
---------------------- life but for the preservation of the efficiency of the worker, and, so it must also
---------------------- provide for some measure of education, medical requirements and amenities.
The concept of minimum wage does not mean a wage that enables the worker
---------------------- to cover his bare physical need and keep himself just above starvation.
---------------------- Finally, there is a limitation in the Act, as it does not define the term
minimum wages. While several states consider that the concept of minimum
---------------------- wage as currently applied to sweated industries needs no change, trade unions
have urged that to avoid differences in interpretation by wage fixing authorities,
---------------------- ‘minimum wage’ should be spelt out in precise terms. Accordingly, the minimum
---------------------- wages vary from region to region and even within the same region from time
to time depending upon particular situations. It has been recommended by the
---------------------- National Labour Law Association that the minimum wage be defined as “a

wage, which is fixed with reference to the basic needs of an employee so as Notes
to provide him and his family consisting of his spouse and two children an
adequate means of livelihood and a decent standard of living.” ----------------------
The Equal Remuneration Act, 1976 ----------------------
The Equal Remuneration Act, 1976 provides for payment of equal
----------------------
remuneration to men and women workers for the same work or work of
similar nature. It prevents discrimination on the ground of sex against women ----------------------
in the matter of employment and matters connected therewith except where
the employment of women in such work is prohibited or restricted under any ----------------------
law for the time being in force. The Act has been enforced in several spheres
----------------------
such as plantations, local authorities, Central and State Governments, banks,
educational institutions, mines, hospitals, hotels and restaurants, manufacture ----------------------
of textile products, wholesale and retail trade, construction, agriculture and
air transport industry. In June 1978, it was extended to community, social and ----------------------
personal services.
----------------------
The National Labour Law Association has proposed to widen the scope of
the Equal Remuneration Act and to provide that no employer shall pay to any ----------------------
employee employed by him in an establishment or employment remuneration
----------------------
at rates less favourable than those at which remuneration is paid by him to
any other employee in the same establishment or employment for performing ----------------------
the same work or work of similar nature instead of limiting it to members of
the outside sex only. Thus, it should cover employees appointed on casual or ----------------------
temporary basis or in a project.
----------------------
Conclusion
----------------------
Conclusively, as recommended by the National Labour Law Association,
there is a need for simplification, rationalisation of the laws relating to the ----------------------
wages. There is a need for a central law to regulate the fixation and revision
of wages above the minimum on an all India basis. There is a proposal by the ----------------------
Association to make a provision in the law for the establishment of a Wage ----------------------
Guarantee Fund to ensure the payment of wages and other statutory dues of
the employees in the event of the failure of the employers concerned to pay the ----------------------
same due to closure or insolvency. On further consideration, it has been decided
to incorporate such provisions in social security legislations. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. The concept of minimum wage means a wage that enables the worker
---------------------- to cover his bare physical need and keep himself just above starvation.
---------------------- 2. Fixation of minimum wages is a kind of a ‘safety net’ to protect
workers from exploitation by the payment of unduly low wages.
----------------------
3. While computing the minimum wage, the standard working class
---------------------- family should be considered as consisting of four consumption units
and the earnings of women, children and adolescents should be
---------------------- included.
----------------------
----------------------
5.4 RETIREMENT BENEFITS RELATED ENACTMENTS
---------------------- Employees’ Provident Fund Act, 1952

The Act was passed with a view to make some provision for the future of
---------------------- the industrial employees after their retirement or for their dependents in case
---------------------- of his early death and inculcating the habit of saving among the employees.
The object of the Act is to provide substantial security and timely monetary
---------------------- assistance to industrial employees and their families when they are in distress or
are unable to meet family and social obligations and to protect them in old age,
---------------------- disablement, early death of the bread winner and in some other contingencies.
---------------------- The Act provides for a scheme for the institution of Provident Fund for
specified classes of employees. Accordingly, the Employees’ Provident Funds
----------------------
Scheme was framed under Section 5 of the Act, which came into force on 1st
---------------------- November 1952. On a review of the working of the scheme over the years,
it was found that the provident fund was no doubt an effective old age and
---------------------- survivorship benefit, but in the event of the premature death of an employee,
the accumulations in the fund were not adequate enough to render long-term
----------------------
financial protection to his family. The lacuna led to the introduction of the
---------------------- Employees’ Deposit being linked to the Insurance Scheme with effect from 1st
March 1971. The Act was amended in 1976 with a view to provide insurance
---------------------- cover to the members of provident fund in covered establishments without the
payment of any premium by these members. Furthermore, the Act was amended
----------------------
in 1995 providing for an employee pension scheme in lieu of the existing
---------------------- employees’ pension scheme of 1971. Thus, three schemes have been framed
under the Employees’ Provident Funds and the Miscellaneous Provisions Act,
---------------------- 1952.
---------------------- Main Features of the Act
The Act is applicable to factories and other establishments engaged in
----------------------
specified industries, classes of establishments, which have completed three years
---------------------- of their existence and employing 20 or more persons. The Act, however, does

not apply to co-operative societies employing less than 50 persons and working Notes
without the aid of power. However, the Central Government is empowered
to apply the provisions of this act to any establishment by giving a notice of ----------------------
two months by a notification in official gazette. An establishment, which is not
otherwise coverable under the Act, can be covered voluntarily with the mutual ----------------------
consent of the employer and the majority of the employees. Employees drawing ----------------------
a pay not exceeding Rs. 21000 per month are eligible for membership of the
fund. Every employee employed in or in connection with the work of a factory ----------------------
or establishment shall be entitled and required to become a member of the fund
from the date of joining the factory or establishment. ----------------------
The normal rate of contribution to the provident fund by the employees ----------------------
and the employers as prescribed in the Act is 12 per cent of the pay of the
----------------------
employees. The term ‘wages’ includes basic wage, dearness allowance;
including cash value of food concession and retaining allowance, if any. The ----------------------
Act however, provides that the Central Government may, after making such
enquiries, as it deems necessary, enhance the statutory rate of contributions to ----------------------
12 per cent of wages in any industry or class of establishments.
----------------------
Contribution
----------------------
The rate of contribution under the Employees’ Pension Scheme 1995 is
8.33% of pay of the employee. The contribution shall be payable from and out ----------------------
of the contribution payable by the employer under Section 6 of the Act. In cases
where the pay of the member exceeds Rs. 21000/- per month, contributions ----------------------
payable to the pension fund by the employer shall be limited to a pay of
----------------------
Rs. 21000/- only. Any additional contribution to the provident fund beyond the
pay of Rs. 21000/- would continue to be credited to the Provident Fund account ----------------------
of the member. In cases where the rate of Provident Fund contribution is 12%,
the balance of contribution i.e. 1.67% (12%-8.33%=3.67%) is to be credited in ----------------------
the Provident Fund account of the member.
----------------------
Contributions are to be rounded off to the nearest of rupee; 0.50 paise or
more to be counted as the next higher rupee and fraction of a rupee less than 50 ----------------------
paise shall be ignored. ----------------------
The contribution to the pension fund shall have to be remitted within
15 days of the close of every month along with a challan for Account No.1, ----------------------
2,10, 21 and 22 as the case may be for Provident Fund, Pension Scheme, and ----------------------
Employees’ Deposit Linked Scheme, Inspection charges for PF, EDLI and
Pension Scheme. ----------------------
Employees’ State Insurance Act, 1948 ----------------------
The Employees’ State Insurance Act, 1948, is a pioneering measure in the
----------------------
field of social insurance in our country. This act came into force from 19th April
1948. The Scheme under the Act aims at providing for certain cash benefits to ----------------------
employees in the case of sickness, maternity, employment injury and medical
facilities in kind, and to make provisions for certain other matters in relations ----------------------
thereto.
----------------------

Notes The term ‘employee’ has wide connotations and would include within its
scope functions of a clerical, manual, technical and supervisory nature.
----------------------
The Act does not make any distinction between casual or temporary
---------------------- employees or between technical or non-technical employees, employees
employed directly by the principal employer and those employed by or through
---------------------- contractor. However, the definition of “employee” does not include any member
of the Indian naval, military or air force.
----------------------
Contribution
----------------------
The contribution will have to be payable for every wage period. The
---------------------- employees’ contribution has to be calculated individually for each employee
at the rate of 1.75% of the wages paid/ payable for every wage period. But in
---------------------- the case of the employer’s contribution, the same may be calculated at the rate
of 4.75% of the total wages paid to all the employees covered under the ESI
----------------------
scheme in each wage period, rounded to the next higher multiple of five paise.
---------------------- The total value of the combined employer’s share as well as the employee’s
---------------------- share has to be deposited in State Bank of India or in any other authorised bank
branch through a challan in quadruplicate as per pro-forma on or before the
---------------------- 21st of the month following the calendar month in which the wages fall due.
An employer who fails to pay contribution within the periods specified shall be
---------------------- liable to pay for the default or delay in payment of contribution, and also may be
---------------------- liable for damages for late payment. It will be in the interest of the employer if the
payment of contributions is made within the time limits laid down under the law
---------------------- so as to avail the permissible deductions under Section 43 of the Income Tax Act.
---------------------- Return of contributions (in place of contribution card) in Form No. 6

providing details of the employer and employees’ share of contributions in
---------------------- respect of the insured persons is to be submitted. This return serves as the basic
record for determining the title to benefit and calculating its rates. The returns
---------------------- are to be submitted by the employers at the end of each contribution period (of
---------------------- six months).
Contribution Period Corresponding Benefit Period
----------------------
1st April to 30th September 1st January to 30th June
----------------------
1st October to 31st March 1st July to 31st December the year following
---------------------- In case of a person who becomes an employee within the meaning of
---------------------- the Act for the first time, the first contribution period will commence from the
date he enters into insurable employment for the first time in the contribution
---------------------- period current on that day and his corresponding benefit period will commence
on the expiry of nine months from the date of such employment. For example,
---------------------- if a person joins insurable employment for the first time, say on 5th January,
---------------------- his first contribution period will be from 5th January to 31st March and his
corresponding first benefit period will be 5th October to 31st December.
----------------------
----------------------

5.5 WAGE BOARDS Notes
The First Five Year Plan recommended the setting of tripartite wage boards ----------------------
for fixing wages. The first wage boards were set up in 1957 for the cotton textile
industry, and gradually tripartite wage boards became the principal machinery ----------------------
for wage fixation in the organised sector in India.
----------------------
A wage board is a non-statutory body consisting of the representatives of
employers and employees headed by an independent chairman. 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.
----------------------
Therefore, 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 Organisations. These boards are ----------------------
chaired by government nominated members representing the public. The chairman
----------------------
nominated by the government is usually a serving or retired Judge. 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 procedure ----------------------
A duly constituted wage board first issues a detailed questionnaire
----------------------
to collect from the concerned parties. The board assesses the views of the
parties and makes its recommendations regarding wage structure. The wage ----------------------
structure recommended by the board is in operation for five years. However, the
management is not statutorily bound to implement the recommendations. ----------------------
Evaluation of wage boards ----------------------
The functioning of the wage boards has been a subject of much criticism ----------------------
and dissatisfaction both among employers and workers. Even the implementation
of recommendation has not been quite up to the mark. Anyway, a heavy price ----------------------
has been extracted by Trade Unions from employers and the Government for
industrial peace through wage boards and at the expense of consumer interest. ----------------------
(a) Estimates of ‘Need Based Minimum Wage’ differ widely. ----------------------

(b) Application of ‘Capacity of Pay’ criterion has been vague and arbitrary. ----------------------
(c) System of payment of results or ‘Piece - Rates’ has not been introduced
----------------------
widely.
(d) Delays and abnormally long time is taken by Wage Boards to complete ----------------------
their deliberations. ----------------------
(e) There is lack of coordination among the Wage Boards. Individually,
industry federations have grown. ----------------------
----------------------

Notes Recommendations to strengthen Wage Board functioning (National Commission
on Labour 1969)
----------------------
(a) Chairman need not be an independent person but must be appointed by
---------------------- consensus of both parties.
(b) Time stipulation for completing the recommendation and for being in
----------------------
effect.
---------------------- (c) Statutory implementation of their unanimous recommendations.
---------------------- (d) An Open Body in Labour Ministry to monitor, coordination and for staff
support.
----------------------
(e) A manual of procedures and guidelines.
---------------------- (f) For the industries covered by wage boards, permanent machinery should
---------------------- be created for follow-up action.

----------------------
Fill in the blanks.
---------------------- 1. The ____________ Act, 1948, is a pioneering measure in the field of
social insurance in our country.
----------------------
2. A ___________ is a non-statutory body consisting of the representatives
---------------------- of employers and employees headed by an independent chairman.
---------------------- 3. Wage boards is tripartite, representing the interests of __________,
__________ and __________.
----------------------
----------------------
5.6 COLLECTIVE BARGAINING
----------------------
Almost all contract negotiations pivot upon, and most grievances and
---------------------- arbitration procedures thus ultimately deal with four major areas:
---------------------- (1) Wages and issues that can be directly related to wages;
(2) Employee benefits or economic “fringe” supplements to the basic wage rate;
----------------------
(3) “Institutional” issues that deal with the rights and duties of employers and
---------------------- unions; and
---------------------- (4) “Administrative” clauses that treat such subjects as work rules and job
tenure.
----------------------
Probably no issues under collective bargaining continue to give rise
---------------------- to more difficult problems than do wages and wage-related subjects. When
negotiations reach a stalemate, they frequently do so because management and
---------------------- union representatives are not able to find a formula to resolve wage disputes.
Wage controversies are, for that matter, by far the leading overt cause of strikes.
----------------------
Over the past decade, for example, they have accounted for over 40 percent of
---------------------- all such work stoppages.

This record highlights the vital character of wage negotiations in collective Notes
bargaining and also suggests that in the area of wages much can be done to
decrease management-labour conflict substantially. In any area of human ----------------------
relations, ignorance breeds suspicion, distrust, and conflict; this principle of
human behaviour is fully applicable to wage negotiations under collective ----------------------
bargaining. To the extent that understanding is substituted for ignorance, there ----------------------
will be a greater opportunity for peaceful settlement of wage controversies,
even if the conflict of interest in such matters never disappears. ----------------------
It is not difficult to understand why wages do play such an important and ----------------------
controversial role in labour relations. For workers, wages are normally the only
source of income, and the standard of living of the employee and his family is ----------------------
determined almost exclusively by this source. For workers’ families, the weekly
----------------------
pay check establishes the character and quality of their dwelling, food clothing,
education, recreation, and all other items that are included in the concept of ----------------------
standard of living.
----------------------
In fact, as is the case perhaps with no other area of collective bargaining
to that extent, wage problems test the skill, understanding, and attitudes of ----------------------
negotiators. In spite of the Government’s tender-minded approach towards
wage problems, collective bargaining as a method of wage fixation has ----------------------
emerged and been adopted in almost all major industries. The agreement
----------------------
through negotiations covers subjects like the recognition of mutual rights and
responsibilities, systems of wage payments and structure and personnel issues ----------------------
such as discipline, recruitment, promotion and transfers. This phrase originated
from writings of Sydney and Beatrice Webb and refers to the joint regulation of ----------------------
terms and conditions of employment during which both, the management and
----------------------
the union participate and where the end result is a WAGE AGREEMENT.
As a process, it involves both, economic and political factors. Equilibrium ----------------------
between the two sides which in turn depends upon representative nature of the
----------------------
bargainers, the economic condition of the organisational and external support.
Actually, its outcome depends crucially on the attitude of both parties and their ----------------------
past and present relationships. If mutual understanding exists, it can result in
mutual gains for both through increased productivity and problem solving. ----------------------
Maturity in this process can lead to a worthwhile union participation in the
----------------------
management process itself.
----------------------
----------------------
1. Collective bargaining can be done to decrease management-labour
conflict substantially. ----------------------
2. Wages and wage-related subjects give rise to very difficult problems ----------------------
under collective bargaining.
----------------------
3. In Collective Bargaining, when employee is suspicious of decisions,
there will be better chances for peaceful settlement of wage controversies. ----------------------

Notes
Activity 1
----------------------
1. Post independence, Govt of India fix norms for payment of wages
----------------------
in industries and occupations based on the minimum requirements of
---------------------- food, clothing and shelter by an individual family unit. To what extent
it is true in present times. Observe such minimum requirements of a
---------------------- family unit in small town, city and metro region.
---------------------- 2. Government has passed equal remuneration act, 1976 which prevents
discrimination on the ground of sex against woman in the matter of
---------------------- employment and other matters connected therewith. List down few
---------------------- occupations where it is still not practically employed.
3. Employee’s state insurance act provides certain fixed benefits to
---------------------- workmen. What other benefits can be included to the existing one?
---------------------- Prepare a write-up to justify your opinion.
----------------------
Summary
----------------------
●● he four ways of fixing wages in India are legislation, wage boards and
T
---------------------- pay commissions, and collective bargaining.
---------------------- ●● he major wage laws include the Payment of Wages Act, 1936, The
T
Minimum Wages Act, 1948 and The Equal Remuneration Act, 1976.
----------------------
●● he Minimum Wages Act provides for the fixation of a minimum time
T
---------------------- rate, a minimum piece rate, a guaranteed time-rate, and an overtime rate
suitable for the various occupations and classes of workers.
----------------------
●● The Equal Remuneration Act, 1976 provides for payment of equal
---------------------- remuneration to men and women workers for the same work or work of
similar nature.
----------------------
●● he wage board is a non-statutory body consisting of the representatives
T
---------------------- of employers and employees headed by an independent chairman.
---------------------- ●● ollective bargaining in wage negotiations and also suggests that in the
C
area of wages much can be done to decrease management-labour conflict
---------------------- substantially by using this method of wage fixation.
----------------------
Keywords
----------------------
●● Collective bargaining: The agreement reached through negotiations
----------------------
between management and workers covering subjects like recognition
---------------------- of mutual rights and responsibilities, systems of wage payments and
structure and personnel issues such as discipline, recruitment, promotion
---------------------- and transfers is called collective bargaining.
----------------------

●● age board: It is a non-statutory body consisting of the representatives
W Notes
of employers and employees headed by an independent chairman. The
government appoints an equal number of representatives of employers ----------------------
and employees. The chairman nominated by the government is usually a
serving or retired Judge. ----------------------
----------------------
----------------------
1. What are the norms for the fixation of wages in an industry? ----------------------
2. Explain the relevance of the Payment of Wages Act, 1938 and the
Minimum Wages Act, 1948 to the wage and salary administration. ----------------------
3. What are the retirement benefits related enactments in India? Explain ----------------------
each of them in detail.
----------------------

1. The four methods of wage fixation in India are legislation, wage boards, ----------------------
job evaluation and collective bargaining.
2. Except Sikkim, the Payment of Wages Act, 1936 extends to the whole ----------------------
of India and applies to persons employed in any factory as defined in the ----------------------
Factories Act, 1948.
3. In Minimum Wages Act, 1948, it is obligatory on the part of the employer ----------------------
to pay the minimum rates of wages fixed in terms of the procedures ----------------------
prescribed by law, irrespective of his capacity to pay.
----------------------
1. False ----------------------
2. True ----------------------
3. False
----------------------
----------------------
Fill in the blanks.
1. The Employees’ State Insurance Act, 1948, is a pioneering measure in the ----------------------
field of social insurance in our country.
----------------------
2. A wage board is a non-statutory body consisting of the representatives of
employers and employees headed by an independent chairman. ----------------------
3. Wage board is a tripartite, representing the interests of labour, management ----------------------
and public.
----------------------

----------------------
1. True
----------------------
2. True
---------------------- 3. False
----------------------
Suggested Reading
----------------------
----------------------
----------------------
----------------------
---------------------- A Modern Approach. PHI Learning Pvt. Ltd.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Compensation Structures
UNIT
6
Structure:
6.1 Introduction
6.2 History and Past Practices
6.3 Elements of Management Compensation
6.4 Types of Compensation Systems
6.6 Salary/Compensation Surveys
6.7 Job Evaluation, Internal and External Equity
6.8 Objectives of Job Evaluation
Summary
Key Words
Suggested Reading
Compensation Structures 151

Notes
Objectives
----------------------
----------------------
• Explain the old practices in compensation management
----------------------
• List out the elements of management compensation
---------------------- • Describe various types of compensation systems
---------------------- • Analyse the role of compensation and rewards in modern organisation
---------------------- • Elaborate on the meaning of salary surveys

• Enumerate the objectives of job evaluation
----------------------
---------------------- 6.1 INTRODUCTION

---------------------- One of the most vital factors for the motivation, retention and the morale
---------------------- amongst the employees is the compensation system, policies and review
philosophies of any organisation. While the bargainable employees generally
---------------------- have their unions to negotiate or review terms with the Management - which are
governed by the long term settlements - the terms of the Managerial employees
---------------------- are mostly seen to be at the mercy or the goodwill of the organisation, reviews
---------------------- of which may or may not be regular or timely, or often do not seem to meet the
expectations or logic of such employees.
---------------------- The objectives of this introduction is to look at the history and past
---------------------- practices of the progress of the compensation system followed generally in
the prominent commercial organisations in India, and attempt to evolve some
---------------------- criteria best suited to the present competitive scenario.
----------------------
6.2 HISTORY AND PAST PRACTICES
----------------------
The history and past practices of the progress of the managerial
---------------------- compensation system followed generally in prominent multi-national
commercial organisations in India attempt to evolve some criteria best suited to
---------------------- the present competitive scenario.
---------------------- The evolution of the compensation system for the larger organisations
came mostly from the pre-independence British companies or from the Indian
---------------------- Government system - that too was initiated by the British, and was generally
---------------------- paternalistic and protective. The system provided a 20-30 year grade scale of
the Basic salary for each level of employees - generally linked to age, with other
---------------------- fixed allowances - for each grade. It was felt that with increasing age and family
size, their needs increased, which required consideration in compensation.
---------------------- Annual increments were provided with increasing steps as one progressed
---------------------- through the salary scale, even though the increases were often ad-hoc.
Festivals, pujas or annual bonuses were paid to meet the social needs -
----------------------

usually once a year, and were often linked to the profits of the company. To meet Notes
the inflationary trends, a Dearness Allowance system was introduced during the
World War II days in the early forties, but this was generally not applicable ----------------------
to the management staff – the basic salary remained the main component of
compensation for them. Benefits frequently included provision of housing - ----------------------
often furnished partially or fully - or an allowance in lieu, annual leave travel ----------------------
expenses - generally quantum linked to the family size and fares to home
town or nearest hill station, use of Company Transport or cars (from limited ----------------------
use to expensive, with or without driver – grade related), medical coverage or
assistance, and retirement benefits. To encourage managers in social and sporting ----------------------
activities, either company clubs existed or financial assistance was given to join ----------------------
the local clubs - depending upon the level. Overall compensation increased
with grade, age and service, with only very limited linkage to performance, and ----------------------
which was often ad-hoc and at the discretion or pleasure of the boss.
----------------------
The company was usually quite actively concerned and involved with
the mangers’ family life and style of living, and strongly believed that the ----------------------
company’s image demanded this conforming discipline from them.
----------------------
Most multinational companies operating in India had a fair number of
experienced staff – even as late as in the sixties – having vastly different terms ----------------------
and conditions of service as compared to the local staff at the same level. This
----------------------
continued partially out of necessity to attract them to overseas postings, and
also due to past colonial and historical reasons. Excellent furnished housing ----------------------
was provided to them and many other personal or social needs for them and
their family members were mostly taken care of by the company, including ----------------------
overseas education for their children, home leave and travel expenses,
----------------------
etc. as well as to protect the benefits available at the home country to their
compatriots. Class distinctions existed even amongst the expatriates - they were ----------------------
generally separated as ‘blue blood’ at top positions, and ‘commoners’ at middle
management positions. The local Indian covenanted cadre managers identified ----------------------
for senior positions were higher than the expatriate middle managers in rank,
----------------------
but their gross terms were generally lower. The junior management local staff
was a class apart, and their terms were substantially lower, but were in line with ----------------------
the above philosophy, and therefore, while the cash component may have been
low, the benefits of furnished housing, leave travel expenses, use of company ----------------------
vehicles etc. enabled the overall living standards during the service period at a
----------------------
good level. With the limited opportunities, retention of management staff was
not an issue in all those days. Revisions in overall terms were usually done ----------------------
after 3 to 5 years. The management salaries were considered to be a highly
confidential topic, and the top brass seriously frowned upon any discussion ----------------------
on this subject. The management style did not inspire openness, and the lower
----------------------
levels were expected to follow orders rather than suggest any major changes.
Participative style was generally not practiced or encouraged. Employee ----------------------
and managerial costs were a small part of the total expenses, and these large
corporations having little competition in near monopoly conditions, easily ----------------------
made profits.
----------------------

Notes In 1923, The Workmen’s Compensation Act, was introduced which
provided for payment of compensation to workmen and their dependants in
---------------------- case of injury and accident (including certain occupational disease) arising out
of and in the course of employment and resulting in disablement or death. The
---------------------- Act applies to railway servants and persons employed in any such capacity as is
---------------------- specified in Schedule II of the Act. The schedule II includes persons employed
in factories, mines, plantations, mechanically propelled vehicles, construction
---------------------- works and certain other hazardous occupations.
---------------------- The amount of compensation to be paid depends on the nature of the
injury and the average monthly wages and age of workmen. The minimum and
---------------------- maximum rates of compensation payable for death (in such cases it is paid to
the dependents of workmen) and for disability had been fixed and is subject to
----------------------
revision from time to time.
---------------------- From the sixties onwards, the salaries of bargainable workers increased
phenomenally due to the successes of the Unions in negotiations - at times
----------------------
by pressure tactics. At the same time, the Government statutorily limited the
---------------------- Directors maximum Basic Salary at a very low level in line with the socialistic
philosophy. This resulted in the need for creating other indirect compensation
---------------------- mainly through perquisites for the management staff due to the salary
compression. These perquisites and benefits given to the management staff
----------------------
gradually started being valued by the authorities, and had to be included for
---------------------- tax purposes, thereby further compressing the “in-hand post tax” compensation
range drastically - with the junior or middle managers being affected most
---------------------- adversely. The marginal tax rates had also risen to very high levels, and so was
the inflationary trend, requiring much larger increase to meet the employees’
----------------------
expectations. The earlier ‘taboo’ regarding management salaries being a close
---------------------- subject for discussion was also fading out and the top management started
recognising disparities that needed urgent attention. It started dawning on most
---------------------- progressive organisations that the compensation governance needed clear cut
philosophy and policy, instead of the ad-hoc solutions of the past, and that the
----------------------
motivation and retention of capable managers was gaining importance as very
---------------------- crucial in the growing scenario in India. Some of the personnel directors of
heads of major companies informally discussed these issues at regular intervals,
---------------------- and shared data and policies, what later became the Remuneration Clubs, to
address this important subject.
----------------------
Many companies had chosen to use somewhat ‘shady’ reimbursements or
---------------------- perquisite routes, in order to contain the overall costs in the assumption of being
non-taxable, and therefore, meeting the compensation needs more easily, rather
----------------------
than the larger cost of taxable increases for the same net gain. The Basic Salary
---------------------- as the main component of overall compensation had also consequently become
lower - with reduced indirect component costs that affected the retiral benefits
---------------------- substantially, often ignored by the company.
---------------------- The above stated traditional system started being challenged during the
last decade by the “Money for the job”, “Total cost to the Company”, “Flexible
---------------------- package” and “Variable performance pay or Bonus” concepts followed by some

of the new large well known organisations, with annual increase in salaries Notes
with the traditional ‘grey hair’ philosophy. These companies, with much easier
hire and fire practices, shook the protective long-term security of employment, ----------------------
with second raters and non-performers not being acceptable or retained. This
resulted in a much larger compensation package being suddenly available to ----------------------
young and confident managers without having to wait for years. This so called ----------------------
‘American’ compensation strategy conflicted with the traditional methodology,
causing unexpected upheavals. ----------------------
The Government had in the meanwhile realised the futility of very ----------------------
high rates of taxation, which encouraged tax evasion, and had also relaxed
the compensation limits for the company directors in the meanwhile as well. ----------------------
This provided an opportunity for companies to realign their compensation
----------------------
philosophy to suit the organisational needs during the reviews. Many companies
started moving away from the perquisite oriented style. They recognised the ----------------------
need for greater freedom to their managers to choose their own standard or
style of living, with remuneration based on the market compensation trends. ----------------------
With liberalisation, came greater competition and new opportunities for jobs,
----------------------
and therefore, both, organisational excellence and retention of key managers
became paramount. The need for an effective impartial performance appraisal ----------------------
and reward system therefore became essential.
----------------------
The Y2K era opened the floodgates for the Indian IT industry and personnel
for lucrative overseas jobs and easier to and fro movement, which created a ----------------------
new paradigm for managing the aspirations of IT professionals - so was very
different to the traditional managers. Job security and long term employment ----------------------
needs came down for these people, and the international compensation based on
----------------------
declining exchange rates created newer benchmarks. The retiral benefits were
discarded as a major need by many of the young professionals. The distinction ----------------------
between manager and an entrepreneur faded in small start up companies, as did
compensation and profits through value addition for such people. Stock options ----------------------
suddenly became a part of the remuneration package despite tax implications,
----------------------
and international compensation systems influenced the Indian scenario
substantially, which did not remain unique to the IT industry only. For such ----------------------
‘Knowledge workers’ in the organisations, changes in compensation strategies
were needed that extended to most others as well. ----------------------
----------------------
6.3 ELEMENTS OF MANAGEMENT COMPENSATION
----------------------
Management Compensation now plays a very significant part along with
the working style and environment, empowerment, etc. in the organisation’s ----------------------
success strategy. While individual organisations may have differences in their
----------------------
methodologies based on factors best suited to their perceived needs, some
general directions are evident. Every organisation has a compensation plan ----------------------
which is written or unwritten, formal or informal. For some organisations, the
purpose of that plan may be merely to meet compliance requirements. For other ----------------------
organisations, the main objective of the compensation plan may be to attract
----------------------

Notes qualified employees, to retain those employees, and to motivate employees
to have their efforts aligned towards achieving the goals of the organisation.
---------------------- Regardless of the goal, size and complexity of a compensation plan, there are
several easily identified elements to any compensation plan.
----------------------
1. Salary, Basic Salary or Consolidated Salary continues to remain as
---------------------- the major component of compensation, though Salary Scales are often
discarded these days, or used only as guides. Individual Salary is generally
----------------------
decided initially using the Scale, but thereafter performance, contribution
---------------------- to targets or results generated determine the revisions periodically, which
may vary widely from individual to individual. ‘Salary broad banding’ is
---------------------- therefore, getting recognition and acceptance.
---------------------- 2. Incentives: Incentives are the additional payment to employees besides the
payment of wages and salaries. Often these are linked with productivity,
---------------------- either in terms of higher production or cost saving or both. These incentives
may be given on individual basis or group basis.
----------------------
3. Grade-wise flat Allowances are being considered generally, except
---------------------- where tax exemption benefits are still available, when they continue
as separate components. Allowances may be linked to the Salary as a
----------------------
percentage or by slabs, but preference is for flat amounts, which do not
---------------------- increase automatically, and therefore, increase could be discretionary, and
therefore controllable.
----------------------
4. Reimbursements of expenses incurred on company work has become
---------------------- limited, and in line to conform to the tax laws. Being actuals in most
cases, they are not considered as a part of the compensation, unless it is
---------------------- provided towards personal benefits.
---------------------- 5. Annual payments: Bonus or Commission, and Leave Travel are common
features of annual payment. Some tax reliefs are applicable as per the
---------------------- current Income Tax Rules.
---------------------- 6. Fringe Benefits: Fringe benefits include such benefits which are provided
to the employees either having long-term impact like provident fund,
---------------------- gratuity, pension; or occurrence of certain events like medical benefits,
---------------------- accident relief, health and life insurance; or facilitation in performance
of job like uniforms, canteens, recreation, etc. Therefore, generally, it
---------------------- comprises mostly unfurnished company owned or leased accommodation,
use of company or leased vehicles, medical coverage, retiral benefits
---------------------- covering Provident Fund, Pension or Superannuation and Gratuity, post-
---------------------- retiral medical assistance, easy loan schemes at low or zero interest rates
for house building, cars or vehicles, furniture or utility items, etc. renting
---------------------- employee owned housing, club entrance fee reimbursement, etc. Minor
benefits could be provision of security, driver or gardening assistance,
---------------------- sale of products or assets at a concessional rate, relocation and transfer
---------------------- expenses including admission etc. fees for children, credit card fees,
phones, etc.
----------------------

7. Employee stock option schemes - Employee stock option schemes Notes
which have been popular in the IT industry- are not extensively used yet,
not being tax advantageous to other industries, nor seen as being very ----------------------
attractive with lesser growth trends for their share values, especially in
the well-established older companies. ----------------------
8. Most companies, as against earlier visible costs, use the “Total cost to ----------------------
the Company” concept as basis. Cost of most benefits are averaged or
----------------------
computed on an actual basis, and included in the above. Greater openness
is practised, and some permit individual flexibility within the system of ----------------------
the overall cost, but with greater compliance to tax laws, this ‘basket
concept’ is on the wane. ----------------------
9. As mentioned earlier, Retiral benefits are important to many, whilst the ----------------------
younger generation and specially IT professionals do not consider it as an
advantage, unless the benefit value is available to them on moving to a ----------------------
new job. This is a complex issue, and may require attention. Some are in
----------------------
recognition of the past contribution of pensioners, and to partly offset the
inflation post retirement practices periodic improvement in pensions, or a ----------------------
guaranteed grade minimum pension.
----------------------
10. Against the past practice of a Performance based increase applicable to
all, with only marginal additional to the good performer, the differential ----------------------
in performance is now being recognised through very substantial and
varying increase during the review to the good performer, and often a ----------------------
Salary freeze is being used for poor performers! This strategy manages
----------------------
the rewards often within the same total cost.
11. Performance Bonus: While the salary increase in the past resulted ----------------------
in benefits continuing during the rest of the service period, now large ----------------------
amounts are given once, so that workers who are highly efficient are able
to earn more by way of performance bonus, higher commission and so ----------------------
on. In this way, Performance Bonus that does not increase future liability
is being given more and more recognition for the results generated. ----------------------
Emphasis on Variable Performance Pay or Bonus as a reward is getting to ----------------------
be an important and growing component of the compensation system. It
requires transparent, balanced and fair systems and benchmarks, and also ----------------------
agreed targets by the managers in advance during planning and review
discussions. ----------------------
12. From the earlier grade oriented compensation system within reasonable ----------------------
boundaries, compensation often has to be somewhat tailor made for
specialist or key contributors to retain them in the very volatile job ----------------------
market. This has many repercussions, and therefore policies for such ----------------------
compensation need to be carefully built into the system in an open manner
to avoid loss of credibility. ----------------------
13. Compensation review periods have become annual generally and ----------------------
sometimes often more, as compared to every three to five years earlier, in
the fast changing market situation. The quantum of increases has jumped of ----------------------

Notes late and successful organisations need to not only keep pace, but also have
to be seen and reputed to be amongst the best to attract talent. The employee
---------------------- cost increase has to be set off through productivity and greater contribution
from the resources. This requires constant market data on compensation
---------------------- practices, and a very pragmatic analysis for determining the strategy.
---------------------- 14. Retention strategies employed are generally the attractive interest free
or at low rates for loans, on which the market rate of interest may apply
----------------------
on early exit, renting employee owned property to set off repayment of
---------------------- loans, qualifying periods or attractive service benefits added to the retiral
benefits or post retirement benefits etc., besides the terms, compensation
---------------------- and any special deals. Managers and teams having the commitment require
empowerment, a lean and supportive structure, a healthy organisational
----------------------
climate - which are all great retention motivators, and also end up as
---------------------- ‘pullers’ from the external environment.
To summarise, the need to regularly carry out detailed compensation
----------------------
reviews both within or without, and with full support and commitment from the
---------------------- top is essential. The specific needs of the organisation should be identified and
addressed during such reviews. Openness and transparency are important to the
---------------------- managers in the very sensitive and personal issue of management remuneration,
and therefore policies and practices should match. The remuneration and the
----------------------
systems have to be, and should be seen to be, fair and just, non- bureaucratic
---------------------- and dynamic, and which are dealt with human feelings and the necessary speed,
still do remain competitively attractive.
----------------------
Following example tells you how it works:
---------------------- You set a specific goal for your salesperson this year, which is generating
---------------------- say Rs.1, 00,000 in sales annually. You tell him that if for each year his sales
touch Rs.1, 10,000, he will get a bonus of Rs. 2500 – but the bonus is only
---------------------- payable after he has stayed with the firm for seven years. If the salesperson hits
his quota each year during that time, the company will pay out Rs.17500 bonus
---------------------- in seven years. If he leaves before that, the company would keep the money.
---------------------- Businesses with uneven workloads often run the risk of overstaffing,
getting through crunch periods by carrying too many full-time employees. One
---------------------- solution is “peak-time pay”, essentially a premium wage for regular part-time
---------------------- employees who work during periods when the full-time staff is overburdened.
Companies can usually afford the higher wage because they do not have to
---------------------- provide part-timers with benefits and the money helps attract better-qualified,
more dependable workers.
----------------------
Small, growing companies usually cannot pay their people as much as the
---------------------- large outfits down the street. While employers know that insurance and the cost
of other benefits are eating them alive, their employees rarely understand the
---------------------- true expense of keeping them on the payroll.
---------------------- Employees know exactly what it costs to keep them on board. It is not that
we tell a new employee that he/she will be making Rs. 25000 a year, instead we
----------------------
must tell him/her that his/her total benefit package is Rs. 36750 and we must

explain that in addition to the Rs. 25000, we pay Rs.495 a month for his/her Notes
insurance, Rs. 25 for parking, and so on down the line.
----------------------
It is convincible enough that such disclosure makes it easier to control
the cost aspect. In giving him/her a raise, we might tell the employee that his/ ----------------------
her total compensation package is being hiked by 11% including a 4% raise in
compensation and a 7% increase in benefits. That will help in impressing upon ----------------------
the employee some of the benefits.
----------------------
Competing on compensation can be complicated. For, intent on outpaying
rivals, one could be running the risk of sacrificing internal equity within one’s ----------------------
company. Surely, one would like to focus on beating the market - and one’s
----------------------
competitor - at each managerial level with a higher and more innovative pay-
package. But the question is whether a company should re-engineer its pay ----------------------
scales to ensure that when compared on compensation standards from top to
bottom, the company is indeed the better employer? ----------------------
Many pitfalls threaten the paymaster today. Pack the pay-package with ----------------------
hard cash, and the taxman’s swoop will leave the recipients poorer. Provide a
bounty of benefits, and employees will complain about too low a take-home ----------------------
amount, even if the perks are plenty. Raise the CEO’s compensation high
----------------------
enough to reflect his responsibility, and the yawning gap between different
levels could upset other managers. That is why it is essential for the strategic ----------------------
salary designer to not just look narrowly outwards for benchmarks, but to also
diligently compare every pay packet of the organisation with one another, and ----------------------
with its corresponding compensation level in other companies.
----------------------

1. The act which provided for payment of compensation to workmen ----------------------
and their dependants in case of injury and accident is
i. The Workmen’s Compensation Act ----------------------
ii. Minimum Wages Act ----------------------
iii. Equal Remuneration Act
----------------------
2. _____________ are such benefits given to the employees that either
have long-term impact like provident fund, gratuity, pension; or ----------------------
occurrence of certain events like medical benefits, accident relief etc.
----------------------
i. Incentives
ii. Fringe benefits ----------------------
iii. ESOP ----------------------
3. ___________ are the additional payment to employees besides the
payment of wages and salaries that is linked with productivity. ----------------------
i. Wages ----------------------
ii. Incentives
iii. Retiral Benefits ----------------------

Notes
Activity 1
----------------------
Using a survey, find out at least five elements of management compensation
----------------------
generally used in an industry.
----------------------
---------------------- 6.4 TYPES OF COMPENSATION SYSTEMS

---------------------- There are two types of compensation:
---------------------- They are Direct Compensation, and Indirect Compensation.
---------------------- Compensationcomprises of monetary and other benefits provided to

an employee in return for his or her time and skill. An ideal compensation
---------------------- management field provides management with the optimum mix of the different
remuneration types, with the goal of retaining and motivating good employees.
----------------------
Direct compensation: As the name indicates, it is typically made up of salary
---------------------- payments and health benefits. It is the prime responsibility of compensation
management staff to prepare salary range and pay scales for different positions
---------------------- within the company. The evaluation of the employee and employer portions
---------------------- of benefit costs is an important part of a payment package as are the other
components.
----------------------
Although some jobs are unique within a specific firm,effective
---------------------- compensation plans should routinely be compared with other firms in the same
industry or against published benchmarks as the vast majority of positions can
---------------------- be compared to similar jobs in other firms or industries, a comparision can be
easily drawn. Employees have the assurance of getting paid fairly when direct
----------------------
compensation is in line with industry standards. This way, the process helps the
---------------------- employer in avoiding the costly loss of trained staff to a competitor.
Indirect compensation: Personal motivations of each person on their work is
----------------------
the focus of Indirect compensation. Though salary is important, employees are
---------------------- most productive in jobs where they share the company’s values and priorities.
Such unique benefits can include concepts like free skill development courses,
---------------------- subsidised child care, the chance for getting promoted or transfer within the
company,recognition among peers, the ability to effect change in the workplace,
----------------------
and service to others.
---------------------- A good designed package has a combination of direct and indirect
compensation. Timely revision of the total compensation program and continual
----------------------
modifications is necessary to meet the changing needs of employees. Many
---------------------- firms invest time and resources to ensure that all employees are aware of all of
the types of benefits that are available. This encourages employees to provide
---------------------- valuable feedback on the types of programs that are most important to them.
----------------------
----------------------

6.5 ROLE OF COMPENSATION AND REWARDS IN Notes
MODERN ORGANISATIONS
----------------------
A compensation framework that supports a long-term strategic vision for
compensation and implements new initiatives will provide the needed direction ----------------------
and the changes involving moving towards solving special salary problems ----------------------
using innovative concepts. The way we work out compensation is undergoing
a major change towards a more flexible and timely corporate compensation ----------------------
system. The new system will have increased delegation to managers and will
be driven by the business needs of government and ministries. It will be faster, ----------------------
more efficient and eliminate duplication and focus on a long-term approach to ----------------------
----------------------
It will move from being a highly centralised approach whereby senior
managers will have increased authority to make decisions, integrate compensation ----------------------
with other areas of human resource management and emphasise transparency,
monitoring, reporting and accountability. The vision for compensation will ----------------------
assist the public service in attracting and retaining key employees.
----------------------
Managers will have more accountability for the compensation of their
employees and will be profiled with the required tools, systems and support. ----------------------
Senior managers will also have the authority to approve the classification levels
----------------------
of pre-identified jobs within their organisation.
Framework of a compensation policy, employee motivation and ----------------------
performance management depend on good systems that offer both financial ----------------------
and non-financial rewards. This performance management article applies to all
organisations. Constant changes and high expectations are taking their toll in ----------------------
some organisations as well as in the industry and the government generally.
Sometimes, this is shown in employee turnover. Sometimes it is hidden because ----------------------
of job insecurity. Many employees make a New Year’s resolution to seek another ----------------------
job. Many are also seeking more balance in their life.
Rewards and compensation must be scrutinised. Employee motivation ----------------------
and performance are critical. Non-monetary rewards can be as important as ----------------------
monetary rewards.
In some organisations, a multitude of different salary and pay arrangements ----------------------
exist. It is time to bring these different systems into a new framework. ----------------------
Employees at all levels need to have confidence in the salary administration
system. Employees want the rewards to be shared fairly and equitably. If they ----------------------
are not, dissatisfaction can cause severe morale and performance problems.
----------------------
If they haven’t done so already, leading organisations will need to
establish an improved salary administration structure. It is possible to develop ----------------------
a simple structure that overcomes the difficulties of the past, yet is simple
----------------------
enough for everyone in the organisation to understand. This structure can be
tied to a completely new performance management approach, including better ----------------------
performance appraisal mechanisms.
----------------------

Notes Some industry’s remuneration systems have been dominated by the
industrial relations system. Enterprise bargaining and local area agreements,
---------------------- individual performance based contracts and the effects of compensation on
organisational structures have had a big impact.
----------------------
A good rewards and remuneration system ensures that each person
---------------------- receives appropriate financial and non-financial recognition to account for the
personal contribution they are making and the overall value of their position to
----------------------
the organisation.
---------------------- This includes:
---------------------- ●● Creating and maintaining an organisational structure and culture that
facilitates employee and organisational performance
----------------------
●● Recognising and rewarding individual and team performance, financially
---------------------- or otherwise, in relation to the overall contribution implementing
compensation systems that fairly treat and recognise all employees
---------------------- regardless of their level within the organisation. This is the equity issue. It
---------------------- involves matching remuneration with the contribution made, particularly
where job requirements can change rapidly.
---------------------- ●● The best performance appraisal system in the world will not work if it is
---------------------- linked to a rewards and remuneration system that employees do not trust
or support.
---------------------- A motivated employee will achieve a great deal. A de-motivated
---------------------- employee will be slow, prone to error and not likely to achieve his best.
Motivation influences performance. It also suggests that the ‘lack of’, ‘promise
---------------------- of’, or ‘receipt of’ either financial or non-financial rewards may also influence
motivation. A feedback loop between motivation and performance exists, with
---------------------- each potentially impacting the other.
---------------------- Remuneration is a component of both financial and non-financial rewards;
financially, in terms of cash and benefits received; non-financially, in terms of
----------------------
recognition, status and esteem, for example, the status of the full private use
---------------------- of a motor vehicle. Job evaluation is a process to determine the contribution
of a position to an organisation. It needs to be seen by both the employee and
---------------------- organisation as fair and equitable.
---------------------- Good salary administration requires that employees receive financial
reorganisation for the contribution that they make, and that positions of equal
---------------------- value should be entitled to equal compensation. If the organisation handles
this incorrectly, or manipulates it in some way, the impact on the employee is
----------------------
significant. Past pay systems often paid little attention to incentives. It is only
---------------------- in the recent years that some systems have provided for differentials based on
performance. The concept of fair incentives should be on the agenda.
----------------------
The only way the employees will fulfil your dream is to share their
---------------------- dream. Reward systems are the mechanism that makes this happen. However,
reward systems are much more than bonus plans and stock options. While they
---------------------- often include both of these incentives, they can also include rewards and other

recognition, promotions, reassignment, non- monetary bonuses (for example, Notes
vacations), or a simple thank you.
----------------------
----------------------
1. ________ is typically made up of salary payments and health benefits
----------------------
2. Timely revision of ________ and continual modifications is necessary
to meet the changing needs of employees. ----------------------
3. Compensation policy, employee motivation and performance ----------------------
management depend on good systems that offer both ________ and
________. ----------------------
----------------------
Activity 2 ----------------------
----------------------
As an HR manager of an organisation, prepare the compensation structure
for your executives. ----------------------
----------------------
6.6 SALARY/COMPENSATION SURVEYS
----------------------
Further, points in question are as to how can the data for such comparisons
----------------------
be collected? How can one get a peep at the payroll of its competitors? In such
situations, the Salary Survey becomes immensely important. It has the following ----------------------
twin objectives:
----------------------
1. To identify the elements of the dimension of managerial compensation in
the region, neighbouring industries and economy as a whole. ----------------------
2. To present the complete pay-packages - covering not just salary and
----------------------
perquisites, but also non-monetary benefits, ranging from housing
facilities and furnishing allowances to overseas travel facilities and ----------------------
equity participation schemes - earned by managers, rather than only the
monetary components, which are often misleadingly low. ----------------------
The surveys should normally systematically cover the compensation ----------------------
earned by five different levels of corporate managers. All but one of them; are
further divided into two grades. ----------------------
The various designations of various levels and its grades: ----------------------
●● EO: The typical designation varies between chairman and managing
C
director, often combining the two. ----------------------
●● enior Managers: Level I, comprising, typically, directors, presidents,

S ----------------------
executive vice- presidents, senior vice-presidents, executive vice-
----------------------
presidents, vice-presidents and assistant vice-presidents. Level II,
comprising senior general managers, general managers, and deputy ----------------------
general managers
Notes ●● iddle Managers: Level I comprising, typically, deputy general
M
managers, senior managers and managers. Level II, comprising senior
---------------------- managers, deputy managers, and assistant managers
---------------------- ●● J unior Managers: Level I comprising typically, deputy managers,
and assistant managers. Level II, comprising senior executives, senior
---------------------- engineers, senior officers, executives, engineers, and officers.
---------------------- ●● anagement Trainees: Level I, comprising trainees after confirmation.
M
Level II comprising fresh MBAs
----------------------
If the necessary investigation methodologies or various response system
---------------------- databases are utilised to get some kind of findings, it might bring about each
of these trend setting salary sweeps, revealing, in the process, a definitive
---------------------- presentation of corporate compensation strategy in its totality.
---------------------- An optimum pay for people is good for business. When underpaid,
employees will eventually look for a better offer. In case of overpayment, the
---------------------- payroll budget and profitability will suffer. This is the reason why companies
---------------------- use market data to research the value of their jobs. Such compensation surveys
that are in-depth and specific to the companies’ business and regions are used
---------------------- for determining the prevailing rate for a job. The companies “benchmark” the
jobs against their competitors with the help of surveys. A good compensation
---------------------- survey uses data gathering and analysis for determining the value of payment
---------------------- for a specific job in a specific industry. Various organisations conduct salary
surveys which widely include businesses, compensation consulting firms,
---------------------- industry associations, educational institutions, and governments.
---------------------- Compensation Surveys are conducted periodically- be it semi-annual,

annual, or biennial basis. Very careful planning and execution is required for
---------------------- the process of collecting data. This then leads to a salary survey to provide
useful inputs. All this requires money to be invested, utilisation of manpower,
---------------------- and time. Some companies conduct surveys with the help of their own staff and
---------------------- compensation experts. However, in most of the cases, companies undergo a
contract with a third party to collect the data and do the number- crunching. The
---------------------- third-party approach provides a level of independence that most participants
want.
----------------------
Some of the major components for a Compensation survey are;
----------------------
Job descriptions: For a useful survey result, it is important to find surveys
---------------------- which compare companies of a similar stature. Also, it’s very important that
the jobs being surveyed are comparable to the job being benchmarked for a
---------------------- successful survey. When consulting a compensation survey, the job descriptions
should be matched rather than the job titles. For example, an associate could
----------------------
be at an entry-level position in one consulting firm, or it could be the title for
---------------------- someone with an MBA at another. All the companies are structured differently,
and therefore, different companies use different names for the same jobs, so job
---------------------- descriptions are the best way to match positions.
----------------------

Compensation data: Several factors should be considered while analyzing the Notes
compensation components of a salary survey. Since companies have different
pay structures, the compensation data thus collected and the actual pay can ----------------------
be in ranges. Salary/Compensation surveys can provide employers much more
information about the marketplace and also an insight into how to determine ----------------------
competitive pay without overpaying or underpaying employees. A good ----------------------
Compensation Surveys should ask for the minimum, the midpoint, and the
maximum for the surveyed positions, in addition to the actual base salary paid. ----------------------
----------------------
----------------------
----------------------
1. Compensation surveys that are in-depth and specific to the companies’
business and regions are used for determining the prevailing rate for a ----------------------
job.
----------------------
2. Compensation Surveys are conducted at random periods.
3. For a successful survey, it’s very important that the jobs being ----------------------
surveyed are not comparable to the job being benchmarked. ----------------------
----------------------
6.7 JOB EVALUATION, INTERNALAND EXTERNAL EQUITY
----------------------
Once a right candidate is placed on a right job, the person needs to be
duly compensated for the job he/she performs. In the pursuit of equal payment, ----------------------
there should be established a consistent and systematic relationship among base ----------------------
compensation rates for all the jobs within the organisations. The process of
such establishment is termed ‘job evaluation’. Different jobs in an organisation ----------------------
need to be valued to ascertain their relative worth so that jobs are compensated
accordingly and an equitable wage and salary structure is designed in the ----------------------
organisation. This is necessary for sustaining cordial relations within and ----------------------
between employees and employer. Hence, there is a need for appreciation of
intricacies of the job evaluation in the modern organisations. ----------------------
Job evaluation is the output provided by job analysis. Job analysis ----------------------
describes the duties of a job, authority relationship, skills required; conditions
of work and additional relevant information. Job evaluation on the other hand, ----------------------
uses information in job analysis to evaluate each job, valuing its components
and ascertaining the relative job worth. 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. Rather it follows the job analysis process, which provides the basic ----------------------
data to be evaluated.
----------------------
In other words, it involves a formal and systematic comparison of jobs
in order to determine the worth of one job relative to another, so that a wage ----------------------
or salary hierarchy results. It is a process by which jobs in an organisation are
appraised. ----------------------

Notes In simple worlds, job evaluation is the rating of jobs in an organisation. 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 organisation.
Some renounced definitions of job evaluation are described below.
----------------------
Scott, Clothier and Priegel defines job evaluation as “the operation of
---------------------- evaluating a particular job in relation to other jobs either within or outside the
organisation”.
----------------------
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
organisation and among similar organisations”.
----------------------
Edwin B.Flippo defines job evaluation as “a systematic and orderly
---------------------- process of determining the worth of a job in relation to other jobs”.
---------------------- According to the International Labour Organisation (ILO), “job
evaluation is an attempt to determine and compare the demands which the normal
---------------------- performance of a particular job makes on normal workers, without taking into
---------------------- account the individual abilities or performance of the workers concerned”.
When jobs are evaluated, the relative worth of a given collection of duties
---------------------- and responsibilities to the organisation is assessed. This process is adopted to help
---------------------- a management to maintain high levels of employee productivity and employee
satisfaction. If job values are not properly studied, it is very likely that jobs
---------------------- would not be properly priced, i.e. high valued jobs may receive less pay than
low-valued jobs. When employees realise this, they become dissatisfied. They
---------------------- may leave the organisation, reduce their efforts or perhaps adopt other modes of
---------------------- behaviour detrimental to the organisation. Therefore, in modern society, a great
deal of attention is paid to the value of the job. The payment for a particular job
---------------------- is greatly influenced by the value of judgment about the worth of a job. In other
words, a person is paid for what he brings to a job- his education, training and
---------------------- experience, provided; these are related to the requirements of the job to which
---------------------- he is assigned.
There are those under which the remuneration does not vary with the
---------------------- output or the quality of output, but depends on the time unit consumed in
---------------------- performing work. These are known as time wage plans. The time unit may be a
day, a week, a fortnight or a month. Time plans are non-incentive in the sense
---------------------- that earnings during a given time period do not vary with the productivity of an
employee during that period.
----------------------
The second kind is concerned with the output or some other measure
---------------------- of productivity during a given period of time. To earn more, an employee is
required to put in more labour and produce more. This kind is known as the
----------------------
piece or output wage plan. It is a direct financial incentive plan, thus, the ‘time’
---------------------- and the ‘output’ wage plan are the two basic systems. All the other plans are
simply variations of these two.
----------------------
----------------------

Procedure for job evaluation: Notes
1. Analyse and prepare a job description
----------------------
2. Select and prepare a job evaluation plan
----------------------
3. Classify jobs
4. Install the programme ----------------------
5. Maintain the programme ----------------------
There are four basic and traditional systems of job evaluation viz. a) the ----------------------
ranking system b) the grading or job classification system c) the point system
and d) the factor comparison system. The first two systems are popularly known ----------------------
as the non-analytical or non-quantitative or summary systems and the last two
are analytical or quantitative systems. ----------------------
The main difference between these systems: ----------------------

1) Consideration of the ‘job as a whole’ versus consideration of ‘compensable ----------------------
factors’ and
----------------------
2) Judging and comparing jobs with each other rather than assigning
numerical scores or a rating scale. ----------------------
Internal equity: This study can determine whether there is pay equity between ----------------------
like-positions and whether all roles in the organisation are based upon the
same compensation guidelines. Internal equity exists when employees in an ----------------------
organisation believe that they are being compensated in a fair manner according
to the relative value of their jobs within an organisation. Alternatively, it can ----------------------
be stated that it should be as per a person’s perception of his responsibilities, ----------------------
rewards and work conditions which is seen as fair or equitable when compared
to those of other employees in similar positions in the same organisation. ----------------------
Factors such as skill level, the effort and the responsibility of the role, as well
as working conditions are considered. ----------------------
External equity: It exists in an organisation when its pay rates are at least equal ----------------------
to the average rates in the organisation’s market or sector. When employees
in an organisation believe that they are being rewarded fairly as compared ----------------------
to those who perform similar jobs in other organisations, there exist external ----------------------
equity. This assures the employees ensure that the employers are able to pay
what is necessary to find, keep and motivate an adequate number of qualified ----------------------
employees. Creating a compensation structure that starts with competitive base
pay is critical. ----------------------
Generally, employees consider much more than base pay in determining ----------------------
external equity. They compare their roles to their pay and pay in other
----------------------
organisations. It is important to ensure that the key responsibilities and goals of
the roles being compared are similar; as is the sector the organisation is aligned ----------------------
with.
----------------------
----------------------

Notes 6.8 OBJECTIVES OF JOB EVALUATION
---------------------- The main objective of job evaluation is to ensure equitable remuneration
for relative worth of a job. As per the ILO Report, the aim of the majority of
---------------------- systems of job evaluation is to establish, on agreed logical basis, the relative
values of different jobs in a given plant or machinery, i.e., it aims at determining
----------------------
the relative worth of a job. The principle upon which all job evaluation schemes
---------------------- are based is that of describing and assessing the value of all jobs in the firms in
terms of a number of factors, the relative importance of which varies from job
---------------------- to job.
---------------------- The objectives of job evaluation, to put in a more systematic manner are to:
---------------------- 1. Establish a standard procedure for determining the relative worth of each
job in an organisation;
----------------------
2. Ensure equitable wage for a job and reasonable wage differentials between
---------------------- different jobs in a hierarchical organisation;
3. Determine the rate of pay for each job which is fair and equitable in
----------------------
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 organisation, employees’ selection,
---------------------- placement, training and other similar purposes;
8. Provide a benchmark for making career planning for the employees in the
----------------------
organisation and;
---------------------- 9. Ensure that like wages are paid to all qualified employees for like work.
---------------------- In fact, the primary purpose of job evaluation is to set wages and salary
on the basis of the relative work or jobs in the organisation. It provides ground
---------------------- for the following:
---------------------- a) Equity and objectivity of salary administration i.e. paying the people
whose work is alike the same wages, and establishing appropriate wage
---------------------- differentials between jobs calling for different skills and responsibilities
---------------------- b) Effective wage and salary control
---------------------- c) Union-management negotiations on wages and
d) Comparison of wage and salary rates with those of the other employees
----------------------
Apart from the above, it helps in:
---------------------- i. Providing standardisation of, and improvement in working
conditions
----------------------
----------------------

ii. Clarifying the functions, authority and responsibilities of employees Notes
iii. Establishing references for the settlement of grievances arising out
----------------------
of individual rates and for negotiations with a trade union on an
internal wage structure and differentials. ----------------------
----------------------
Fill in the blanks.
1. _______________ is/are necessary for sustaining cordial relations ----------------------
within and between employees and employer
----------------------
2. Job Evaluation is used for establishing a standard procedure for
determining the ______________ of each job in an organisation; ----------------------
3. __________ provides a benchmark for making career planning for ----------------------

the employees in the organisation.
----------------------
----------------------
Summary
----------------------
●● he evolution of the compensation system for the larger organisations
T
came mostly from the pre-independence British companies. ----------------------
●● ne of the earliest laws of compensation is Workmen’s Compensation
O ----------------------
Act.
----------------------
●● Two different types of compensation are Direct and Indirect Compensation.
Direct Compensation comprises of salary payments and health benefits. ----------------------
Indirect Compensation comprises unique benefits such as free skill
development courses, subsidised child care, recognition among peers, the ----------------------
ability to effect change in the workplace etc.
----------------------
●● ome prominent roles of compensation and rewards are mainly creating
S
and maintaining an organisational structure and culture that facilitates ----------------------
employee and organisational performance, also recognising and rewarding
----------------------
individual and team performance and many more.
●● ompensation Surveys, which are in-depth and specific to the companies’
C ----------------------
business and regions, are used for determining the prevailing rate for a ----------------------
job.
●● Job evaluation is a systematic and orderly process of determining the ----------------------
worth of a job in relation to other jobs. ----------------------
Keywords ----------------------
----------------------
●● J ob evaluation: It is the output provided by job analysis to evaluate each
job, valuing its components and ascertaining the relative job worth. ----------------------
----------------------

Notes ●● J ob analysis: It describes the duties of a job, authority relationship, skills
required, conditions of work, and additional relevant information.
----------------------
●● emuneration: It is a component of both financial and non-financial
R
---------------------- rewards; financially, in terms of cash and benefits received; non-financially
in terms of recognition, status and esteem.
----------------------

---------------------- 1. What do you mean by a compensation structure?
---------------------- 2. What are the components of a modern compensation structure?

3. Explain the importance of salary survey. What are the objectives of such
----------------------
a survey?
----------------------
----------------------
----------------------
----------------------
1. The act which provided for payment of compensation to workmen and
---------------------- their dependants in case of __________injury and accident is;
i. The Workmen’s Compensation Act
----------------------
2. _____________ are such benefits given to the employees that either have
---------------------- long-term impact like provident fund, gratuity, pension; or occurrence
---------------------- of certain events like medical benefits, accident relief etc.
ii. Fringe benefits
----------------------
3. ___________ are the additional payment to employees besides the
---------------------- payment of wages and salaries that is linked with productivity.
---------------------- ii. Incentives

Fill in the blanks.
----------------------
1. Direct Compensation is typically made up of salary payments and health
---------------------- benefits
---------------------- 2. Timely revision of total compensation program and continual modifications
is necessary to meet the changing needs of employees.
----------------------
3. Compensation policy, employee motivation and performance management
---------------------- depend on good systems that offer both financial and non-financial
rewards.
----------------------
----------------------
----------------------

----------------------
1. True
----------------------
2. False
3. False ----------------------

1. Job Evaluation is necessary for sustaining cordial relations within and ----------------------
between employees and employer.
----------------------
2. Job Evaluation is used for establishing a standard procedure for
determining the relative worth of each job in an organisation. ----------------------
3. Job Evaluation provides a benchmark for making career planning for the
----------------------
employees in the organisation.
----------------------
Suggested Reading ----------------------
1. Bhatia, S.K. New Compensation Management in Changing Environment: ----------------------
Professional Manual. Deep and Deep Publications. ----------------------
2. Bhattacharya, Dipak Kumar . Compensation Management. OUP India. ----------------------
----------------------
A Modern Approach. PHI Learning Pvt. Ltd. ----------------------
5. Henderson, Richard I., Sandra Vasa-Sideris, Barbara Bernal Thomas. ----------------------
Book. Prentice Hall. ----------------------
6. Upadhyay, S.S. Compensation Management: Rewarding Performance. ----------------------

----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Compensation Surveys
UNIT
7
Structure:
7.1 Introduction
7.2 Wages and Salary Administration in Hospitality Industry – A Survey
7.3 Duration of Pay Revision
7.4 Labour Turn-out
7.5 Compensation Survey - IT/Telecom Industries
7.6 Methodology
7.7 Perception of Current Compensation and Benefit Policies
7.8 Emerging Trends in Compensation and Benefits
7.9 Benchmarking with the Best in Compensation and Benefits Policies
7.10 Sector-wise Scenarios
7.11 Aspects of Wage Surveys
7.12 Wage Administration Rules
7.13 Compensation and Benefits in Perspective
7.14 Compensation and Benefits: A Tool to attract Talent
7.15 Compensation and Benefits as a Tool to drive Performance and build
Workforce Capability
7.16 Role of Compensation and Benefits in arresting Attrition
7.17 Compensation Structures Today
Summary
Key Words
Suggested Reading
Compensation Surveys 173

Notes
Objectives
----------------------
----------------------
• Analyse the sector wise scenarios of different industries
----------------------
• Explain the perceptions of current compensation and benefits
---------------------- policies
• Benchmark best compensation and benefits policies
----------------------
• Analyse issues related to compensation in manufacturing/
---------------------- engineering industries
---------------------- • Evaluate the essentials of a standard pay packet for manufacturing
industries
----------------------
• Justify the compensation structures today
----------------------
7.1 INTRODUCTION
----------------------
The hospitality industry includes hotels, hospitals, travel and tourism
---------------------- agencies/corporations, airline services, cargo/courier service agencies and
---------------------- such organisations which require a specific kind of manpower. The jobbers
in such industries are often paid handsome compensation depending upon the
---------------------- position and job profile handled by him/her. The Industry expects the persons
with typical personality traits who especially are warm hearted and who love to
---------------------- attend to many people with warmth and an exceptionally courteous manner.
---------------------- The typical organisational chart for such a hospitality industry looks like
follows:
----------------------
M.D./CEO/Chairman
----------------------
Manager Manager Manager Manager Manager Manager
---------------------- (F & B) (Front (Admin) (HR) (Logistics) (Finance)
Office)
----------------------
Supervisor Officer Officer Officer Officer Officer
---------------------- Staff
---------------------- Issues related to Compensation in Service/Hospitality Industry
---------------------- This depends upon the following points:

1. Types of staff/workmen employed, their skill sets and their expectations
---------------------- as against salaries/wages offered in neighbouring units.
---------------------- 2. Size of the organisation, its organisational structure and the volume of
transactions.
----------------------
3. The customer base, customers’ expectations and the seasonal influx due
---------------------- to factors like vacations, monsoon, festivals, holidays, changing habits of
tourists, etc.
----------------------

4. Employee turnover in the service industry. Notes
5. Availability of the required manpower.
----------------------
6. Government policies in relation to such industries.
----------------------
7. Local/State tax structure and other regulatory rules affecting the industry.
8. The up-gradation of the knowledge base of the employees, training and ----------------------
development activities as well as availability of the Vocational Training ----------------------
Institutes imparting required knowledge to the new/budding or aspiring
persons wanting to get employed in such industries. ----------------------
9. Difficulties in marketing the service i.e. Service Marketing: It is difficult ----------------------
to convince the customer about the need for such a service.
----------------------
7.2 WAGES AND SALARYADMINISTRATION IN
----------------------
HOSPITALITY INDUSTRY – A SURVEY
----------------------
Jobs in the hospitality sector in general and in hotels in particular, are
predominately low-skilled and low-paying. The average wages for maids ----------------------
and housekeeping cleaners, who counts for roughly one-third of all hotel
----------------------
employees, was lesser in the traveller accommodation industry in 2013, as
compared to the average wage for maids and housekeeping cleaners from all ----------------------
across the industries. Also, unlike in the fast food industry, where each outlet is
comparatively small and many tasks are mechanised, hotels are typically large ----------------------
and jobs are less routinised. As a result, even workers at the lowest range of the
----------------------
employment chain within hotels, such as housekeepers, have ample opportunity
to shirk and otherwise behave opportunistically to make the most of it. ----------------------
Some of the major concerns for food-service managers remains human
----------------------
resources, a whole set of issues which covers many facets. In addition to human
resources and government issues, the employees identified key points in the ----------------------
categories of food safety, marketing, the economy, competitive dynamics,
accounting, and operations. However, none of those was as salient as human ----------------------
resources. Various issues relating to human resources included benefits,
----------------------
compensation, employee attitudes, immigration, interpersonal conflict, loyalty
and satisfaction, recruiting, and retention. The administration of wages and ----------------------
salary is the most important task in personnel administration. Mere determination
of the wage structure is not enough; it must be properly implemented and ----------------------
administered. This calls for keeping a track of various changes on which wages
----------------------
depend and comparing them with the established standards. Wage survey,
wage plans and job evaluation are the three important methods used for this ----------------------
purpose. These methods have to be applied with prudence. Wage and salary are
also subject to a variety of legislation and in this context, compliance with the ----------------------
existing legislative measures is very important.
----------------------
The aim of a wage and salary policy is to recognise the value of each
job, provide stability in earning, allow individuals to reach their full earning ----------------------
potential and to ensure that all staff shares in the organisation’s prosperity.
----------------------
Therefore, an attempt was made to find out from the personnel manager/general

Notes manager/managing director/owner of 40 hotels of a sample state from India, the
factors determining wage and salary structure, duration of wage revision and the
---------------------- percent of labour turnout due to non-satisfaction with wage and salary structure.
Wage levels in an organisation are determined by factors like the organisation’s
---------------------- ability to pay, supply and demand of labour, job requirement, cost of living
---------------------- index, prevailing wage rate, trade union bargaining power, psychological and
social factors. Suitable levels have to be set after the consideration of all these
---------------------- factors. Therefore, an attempt was made to assess the main consideration for
determining the wage and salary structure in the selected hotel units.
----------------------
The analysis signifies that the selected hotel units like to use more than
---------------------- one of the identified bases for determining wages and salary structure but the
most common factors are the prevailing wage rate and the organisation’s ability
----------------------
to pay, that is, 80 per cent and 72 per cent respectively by all categories of
---------------------- hotels. Their representatives say that competition demands adherence to the
same relative wage level, and trade unions encourage this practice so that their
---------------------- members can have equal pay for equal work and geographical difference can
be eliminated. But during research, it was found that in certain cities, prevailing
----------------------
wage rates are very low whereas the organisational ability to pay is more. This
---------------------- has led to frustration in employees and labour turnover in these hotels has been
the maximum. Supply and demand of labour, job requirements, and cost of
---------------------- living index are the next important factors in determining the wage and salary
structure. Whereas trade union bargaining power and psychological and social
----------------------
factors are involved only in five-stars and are only 16 per cent.
---------------------- Hotels must realise that satisfied human resource is a valuable asset for
the organisation. An organisation pay must be competitive and equitable. This
----------------------
will not only ensure the cooperation of their managerial and non managerial
---------------------- personnel but also reduce the percentage of labour turn-out besides maintaining
industrial peace. If an organisation fails to do so, it attracts criticism from social
---------------------- reformers and trade unions. Therefore, the business organisation must develop
a balanced package of wage and salary administration in a most appropriate and
----------------------
effective manner.
----------------------
----------------------
Fill in the blanks.
----------------------
1. Jobs in the hospitality sector in general and hotels in particular are
---------------------- predominately ____________ and _____________.
---------------------- 2. Mere determination of the wage structure is not enough; it must be
properly ____________ and _______________.
----------------------
3. A competitive and equitable pay structure ensures _____________
---------------------- and lowered percentage of labour turn-out.
----------------------
----------------------

7.3 DURATION OF PAY REVISION Notes
By keeping in view the natural expectation of employees to gain higher ----------------------
wages and salaries as their experience curve takes an upward trend yearly,
and to avoid frustration in employees on not getting a timely pay hike, several ----------------------
organisations have decided the duration of wage and salary revision. More than
----------------------
60 per cent of the selected hotel units are following a yearly increment policy.
But less than 20 per cent of the three, two-star, heritage and unapproved hotels ----------------------
follow a two-yearly/three yearly increment policy. It was also found that 20 per
cent and 30 per cent of the two-star and unapproved hotels respectively do not ----------------------
have a fixed duration of increments.
----------------------
7.4 LABOUR TURN-OUT ----------------------
It is seen that most financially sound organisations take into consideration ----------------------
the prevailing wage rate factor while fixing the wage and salary structure of their
----------------------
employees. This may engineer a sense of frustration in employees leading to
heavy labour turnout. In this regard, an attempt was made to find out the percent ----------------------
of labour turnout due to non-satisfaction with the wage and salary structure.
----------------------
It was revealed that a percentage of labour turn-out due to non-satisfaction
of wage and salary structure is 10-15 per cent in 50 per cent of five-star hotels ----------------------
(including chain hotels) surveyed because they give more weightage to prevailing
market rates rather than giving much importance to the organisation’s ability to ----------------------
pay. In more than 50 per cent of the two, three-star, four-star and heritage, this
----------------------
percentage is between 0-5 per cent and in unapproved hotels the percentage of
labour turnout is very low due to loyalty towards the owner, social causes and ----------------------
illiteracy of the employees.
----------------------
7.5 COMPENSATION SURVEY- IT/TELECOM INDUSTRIES ----------------------
The IT (Information Technology) sector comprising of software and ----------------------
hardware sectors has been a booming sector in many countries. IT sector has
been around since the late 1980’s, but it is still considered a young and dynamic ----------------------
sector to work in. It provides place for innovation, entrepreneurship and growth.
----------------------
Because of this, fresh graduates flock to the IT sector after graduation to take up
roles that are challenging and stimulating. ----------------------
Indian IT sector is recruiting more and more technical and professional
----------------------
people and therefore industry is witnessing a high growth rate. As observed, the
growth rate of recruitment in the sector has been approx 14.5%. The organisations ----------------------
focus on higher competitive packages because of immense recruitments and
high attrition rate. The average increase in the salary during 2006 was reported ----------------------
as 16%.
----------------------
The compensation package for an employee is based on various factors
such as his/her educational level, relevant experience in the industry, job’s ----------------------
position in the hierarchy, skills and attributes and job related technicality. The ----------------------

Notes IT sector designs its compensation packages in ways so as to attract the best
talent available. This can be termed innovative and path breaking as the basic
---------------------- compensation components and perks and benefits are combined in novel and
unique ways.
----------------------
----------------------
---------------------- 10 yrs & Above
---------------------- 7-10 yrs

---------------------- 5-7 yrs
----------------------
2-5 yrs
----------------------
0-2 yrs
---------------------- 0 5 10 15
----------------------
----------------------
----------------------
---------------------- Fig. 7.1: Average Salary Offered in IT Sector Based on Experience

Nearly half the workforce with 2-5 years of experience gets between Rs.
----------------------
4 and Rs 6 lakh annually. In fact, if you ignore the fringe numbers, most IT
---------------------- employees with 2-5 years’ experience fall in the Rs. 2-6 lakh income bracket.
Between 5-10 years, the pay packet largely ranges from Rs. 6 to Rs. 9 lakh.
---------------------- After that, salary figures stop making sense, varying all the way from Rs. 10 to
Rs. 90 lakh per annum for those with over 10 years of experience.
----------------------
IT companies rely on non-standard components that are the characteristic
---------------------- of the old economy or the traditional sectors which is quite a hallmark of the
---------------------- compensation packages in the IT sector. In comparison, the so-called “new
economy” companies make it a point to include additional components like
---------------------- variable pay, performance linked incentives over and above the base pay that
they give out to their employees. With the aura surrounding the IT sector, many
---------------------- employees have come to take for granted the high pay along with the attractive
---------------------- perks and benefits that these companies give.
Major attractive aspects of the IT Compensation
----------------------
ESOP’s
----------------------
ESOP’s or Employee Stock Options plans for the employees were first of
---------------------- all introduced in IT Industry. It was used as a means of ensuring that employees
take more responsibility and ownership for their work by making them a
---------------------- shareholder in the growth of the company. ESOPs was introduced to employees
so that they feel a sense of ownership with the company in which they are
----------------------
working. This ultimately resulted in their performance levels which went up

due to increased motivation and satisfaction. Such a practice tends to inculcate Notes
in the employees. Given the fact that most IT stocks zoom ahead in value after
the IPO or the Initial Public Offering is announced and retains their valuations ----------------------
well into the company’s existence, IT companies that offer ESOP’s are much
sought after by many employees. ----------------------
Other Perks and Benefits ----------------------

Various other benefits like transportation, medical allowance and ----------------------
allowances for furnishing one’s house are provided in IT Industries. IT
companies ensure that their employees are taken care of well by putting an ----------------------
emphasis on all round welfare of the employees. Many companies in the IT
----------------------
sector are quite liberal in insuring their employees and their families under
group medical insurance which provides adequate cover to the employees and ----------------------
their families. These medical cover stands good in case of illness and surgeries
as well as accidents and other unanticipated contingencies. Furthermore, some ----------------------
IT companies go a step further and provide for recreational allowances that
----------------------
ensure their employees’ vacation expenses are also taken care of.
Given the innovative ways in which IT companies provide for their ----------------------
employees, it is not surprising that this sector ranks among the most preferred
----------------------
employers and the companies that make up this sector is the destination of
choice for many graduates fresh out of college. ----------------------
Similarly Telecom Sector is also a promising sector. ----------------------
Indian telecommunication sector is also witnessing a growth rate of more
than 25% in the present scenario. With the advent of new upgraded technologies ----------------------
such as 3G, the Telecom sector has seen exponential growth rate which is ----------------------
more than 100%. Public players and private players are competing with each
other and are developing themselves to provide better quality and advanced ----------------------
technologies for consumers. Top players in the segment such as Bharti Airtel,
Reliance Communications, Tata ----------------------
Teleservices, Idea Cellular, Hutchison, Essar, Nokia, Siemens, LG, ----------------------

Motorola, etc are investing in new projects to accommodate the 3G technology.
----------------------
More and more recruitments are taking place in the sector because the
business expansion and globalisation of Indian organisations has made it ----------------------
a viable option. The sector has also provided jobs in marketing, installation
----------------------
and construction segments. Immense competition has led the organisations
hire more and more skilled labour, be it for upgrading their technologies or ----------------------
marketing their products. For this, organisations are offering best possible
competitive packages to attract and retain talented human resource. In the global ----------------------
competitive environment, experienced people have an upper hand in selecting
----------------------
an organisation. Organisations need to offer most competitive packages and
heavy perks to attract and retain the talented work force. People working in ----------------------
telecommunication sector are often asked to work at stretch and under pressure.
Also, the level of experience determines one’s level of compensation package ----------------------
and position in the industry. All this traits make this a good paying as well as
----------------------
competitive sector.

Notes In fact, a lot of companies, ranging from relatively small software
exporters to large Multinational Companies’ vendors, actually cut salaries from
---------------------- anywhere between 10 and 20% across the board. It wasn’t just the high-paying
start-ups that first cut down the salaries and then staff strength.
----------------------
Employee Break-up by Salary and Experience Salary (Rs Lakh p.a.)
----------------------
Employee’s % 10 plus years experience level
---------------------- Employee’s in the Industry by Experience
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
To be forthright, these numbers are shaky. The 10 years-plus experience
----------------------
level includes the top management, and this skews the findings. Among the top 5
---------------------- software companies, for instance, top management salaries can range anywhere
between Rs. 2 crores and Rs. 5 crores per annum for marketing heads working
---------------------- out of the US, drawing dollar salaries. So though the average here looks like Rs.
32 lakh per annum (Rs. 42 lakh for the top 5), the real numbers for employees
----------------------
with more than 10 years of experience who don’t fall into the top 1-2% of the
---------------------- top management category is likely to be lower. With that fiat, the numbers show
that about 24% of IT professionals with more than 10 years in the business draw
---------------------- between Rs10.1 to Rs 20 lakh per annum. Another large chunk of 26.3% draws
between Rs. 25.1 lakh and Rs. 30 lakh per annum.
----------------------
It’s still an Industry average: Young companies from the HR survey
---------------------- industry–the Survey’s Top 10 or 5 are the ‘common’. Good 30% of IT companies
---------------------- that figure in both the professionals Survey’s Top 20 and the HR survey in the
country today are new entrants, with under 2 years of experience.
---------------------- However, about 37% have been around for a while, with about 2-5 years
---------------------- in the business and some of them will be on the threshold of moving up from
the executive to manager level. Not surprisingly, it’s still not too heavy at the
---------------------- top, with only 10.6% of the industry consisting of professionals with over 10
years of experience. Year 2001-2002 will be remembered for a long time in
---------------------- the history of the Indian IT industry as the ‘Year of Lay-offs;’ and as the year
---------------------- wherein we discovered numerous euphemisms for that word- right sizing,
smart sizing, reorganisation. There’s no concrete data available on the number
---------------------- of people actually laid off, but numerous companies pared their staff strength
from anywhere between 2% and 5%. At the very least, most put a stop to hiring.
----------------------
----------------------

Company Rank by Perks and Benefits Notes
This measures employee perception of the company’s performance on
----------------------
various perks and benefits. Three companies that emerged as the dark horses of
this HR survey, also turns out, and have the best perks–Adobe, SAP Cadence. ----------------------
Adobe is among the few companies that provide hospitalisation cover to
a majority of its employees, while most Cadence employees said they were ----------------------
eligible for annual foreign trips. All employees of SAP and Infosys said the
----------------------
company provided them with home loans, while 88% of SAP employees also
got an annual book allowance. Infosys comes with a close fourth, which–given ----------------------
its sheer size–is quite commendable. i-Flex, interestingly, also turned in a good
performance on perks. Despite being ranked as the third-best IT employer, ----------------------
Wipro is rated only 13th on perks and benefits to its employees.
----------------------
Without exception, all companies focused on cost cutting. This ranged
all the way from reduced travel and telephone expenses to a clampdown on ----------------------
office stationary and, in one case, even tissues in the restrooms. Some perks,
----------------------
especially those whose withdrawal could cause a fair amount of unrest still
stayed untouched. About 62% of employees surveyed; said they were still ----------------------
eligible for lunch allowance, while 36% said they were still getting overtime
benefits (the last applying mostly to software professionals). Companies that ----------------------
could afford benching put their employees on sundry training programs. So,
----------------------
that was one benefit–if one could call it that; in the circumstances–that was not
hit quite as badly. ----------------------
Insurance and Reimbursements
----------------------
Insurance and reimbursement of medical bills were suddenly perks that
were part of the salary package, so they remained untouched too. Not very ----------------------
surprisingly, the smaller companies–Adobe, SAP and Cadence–did the best on ----------------------
employee ratings on perks. Infosys did commendably at number 4, considering
its size. i-Flex and Digital were the other two companies that didn’t rank too ----------------------
high on the Best Employer rankings (see DQ Top 20, 2002 Volume 4), but did
well on perks. ----------------------
What are the Perks? ----------------------
Employee benefits, which in most of the cases are given in addition to ----------------------
salary and standard employee benefits are called as perks. The word, perk or
perks, is a short form of the word perquisite which means incentives, bonuses, ----------------------
extras etc. In the terms of business, the term perks comes up to mean benefits or
extras over and above the normal comprehensive benefits package. ----------------------
Perquisite also means nonstandard benefits that are not usual or exclusive ----------------------
which means, only a limited number of employees are eligible. We get to
----------------------
hear employees in the business world use the word perks in reference to any
nonstandard benefit, though this is not the usual reference. ----------------------
Across the organisations, perks are often viewed as an incentive or a form
----------------------
of gratitude that is offered to executive level employees or employees with
seniority or longevity – a practice to put that sets of employee aside from the ----------------------

Notes average employee. A perk may be a privilege, reward or option. Not surprisingly,
the most common and widespread perks across the industry are life and medical
---------------------- insurance and reimbursement of medical bills—now more or less part of the
standard salary package.
----------------------
The following are examples of perks of both the monetary type and perks
---------------------- that are available as a privilege.
---------------------- ●● Company supplied cars
●● Free lunches
----------------------
●● ompany logoed shirts, hats, and other merchandise supplied at low cost
C
---------------------- or no-cost
---------------------- ●● Professional association membership
---------------------- ●● Conference attendance
●● First chance for lateral moves or promotions
----------------------
●● Job openings posted and filled internally before externally
----------------------
●● Flexible schedules, etc.
---------------------- Interestingly, lunch is still hanging in there, with 62% saying they were
---------------------- eligible for a lunch allowance. Training is still big, though this figure is not
indicative of the actual hours of training. Close to 45% employees said that
---------------------- leave encashment was not permitted, though loans for a car or house were still
available to over 40% of the employees. A good 36% said that they were eligible
---------------------- for overtime benefits and about 10.7% said that annual foreign trips were part
---------------------- of their benefits. For a few–mostly senior management–the more uncommon
allowances, viz utilities, helper, etc, seemed unchanged.
---------------------- Increments were felt during the last survey itself, well over a year ago.
---------------------- Things got a little worse this year. Nearly 55% of IT employees got an increment
of 15% or less (compared to 39% last year). As a result, fewer got increments
---------------------- in the 16-30% band (down from 54.2% to 37.2%). However, the proportion
of employees in the 31-40% increment range went up quite sharply–jumping
---------------------- from 1.8% to 5.2%. Essentially, there was a movement toward two increment
---------------------- ranges–less than 15% and 31-40%. Overall, average salary increments in the
industry went down from 18% (with a standard deviation of 8, that’s a band of
---------------------- 10-26%) to 15% (standard deviation of 10, meaning a band of 5-25%).
---------------------- Despite this and perhaps in a perverse way because of it–salary no longer
remained the chief motivator for IT employees. It remained important–it always
---------------------- will–but job content, security and company image are looked on as a greater
value.
----------------------
In the long run, the industry may look back at this as a blessing. While
---------------------- chasing the money was certainly a valid reason for jumping jobs, it wasn’t
always the wisest one. Last year, more than any, showed us that.
----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. _____________ comes up to mean benefits or extras over and above
the normal comprehensive benefits package. ----------------------
2. _________________ is used as a means of ensuring that employees ----------------------
take more responsibility and ownership for their work by making
them a shareholder in the growth of the company. ----------------------
3. The business expansion and globalisation of Indian organisations has ----------------------
made _____________ a viable career option.
----------------------
----------------------
7.6 METHODOLOGY
----------------------
This HR and Salary survey was conducted by a popular magazine
and was carried out in seven cities across the country–Mumbai, New Delhi, ----------------------
Chennai, Kolkata, Hyderabad, Bangalore and Pune. The first part of the survey
was The Best Employers’ Rankings. The survey was conducted in two phases– ----------------------
in the first phase, questionnaires were sent out to 198 companies, of which 48
----------------------
companies participated. From these, 23 companies were short listed on the basis
of various parameters for the second round–the employee survey. The salary ----------------------
survey uses data from both phases. For the salary figures, data has been used
from 33 companies that cover the entire spectrum–from software to hardware ----------------------
and services across the country. Data on perks and demographics was taken
----------------------
from responses from 774 IT employees surveyed in Round II. Salary figures are
“Cost to Company” figures, as given by HR heads of these IT companies. ----------------------
7.7 PERCEPTION OF CURRENT COMPENSATION AND ----------------------

BENEFIT POLICIES ----------------------
Is compensation commensurate with the efforts involved? ----------------------

This is a very tricky situational question, where both the parties involved ----------------------
i.e.; employer and the employee can have different views. There are many
cases where employers may think that the amount paid for the job done is ----------------------
commensurate with individual efforts of the employees. Whereas, when asked
the same questions to an employee, we will be utterly surprised by the responses ----------------------
we can get at a given point of time. There may be whole combinations of ----------------------
thinking involved which can be fairly paid to moderately unfair payment or to
extremely dissatisfied lot of employees who may think that their efforts are not ----------------------
monetarily acknowledged by their employers.
----------------------
A prominent business magazine surveyed organisations for different
parameters. Their results for salary payment were entirely different. Probably ----------------------
given the bias in the sampling where majority of the respondents worked for
----------------------
organisations which featured amongst the top 20% pay masters in their industry

Notes sector, three fourth of the respondents felt that they were fairly compensated for
their efforts.
----------------------
Employees asserted that a satisfactory system to reward good performance
---------------------- existed in their organisation. Comparatively this perception was more prominent
in the Telecom, BPO/ITES and IT industry and less so in the Pharmaceutical
---------------------- and Manufacturing industry.
---------------------- Efforts like compensation surveys etc are widely used these days to
maintain parity in payment among employees.
----------------------
Is compensation competitive?
---------------------- Based on the same survey again being from the top 20% paymasters,
---------------------- majority of the respondents agreed that their salaries were competitive when
compared to colleagues at the same level in different companies. Across sectors,
---------------------- this opinion was more pronounced in Manufacturing and Telecom and more
pronounced in junior management than other levels.
----------------------
A competitive package is the necessity of today’s business environment
---------------------- in order to maintain work-force and cut down on labour turnover.
---------------------- Is the compensation package flexible?
There is scope for innovations around structuring of the pay package as
----------------------
less than a fifth of the employees strongly feel that their pay package offers
---------------------- them enough flexibility to do what they want with their money.
Comparatively higher number of employees in IT, manufacturing and
----------------------
telecom strongly assert that their pay package offers adequate flexibility.
---------------------- Flexibility in pay-package gives the employees adequate opportunity to
channelise their money as per their wish. This becomes a very important feature
---------------------- of the compensation structure. Employees feel in-charge of their money and
they don’t feel burdened by unwanted HR policies.
----------------------
As pointers to innovate around, the employees were asked about their
---------------------- specific grouses with regards to their compensation package- the key grievance
---------------------- seemed to be that although the pay package took care of medical needs of self,
spouse and children, it did not adequately address medical needs of dependent
---------------------- parents. This was especially true in the BPO/ITES and Manufacturing sector.
---------------------- When referring to flexibility in the compensation package employees

were also perhaps referring to salary structure- given a choice between a higher
---------------------- aggregate pay package which translates into a lower take-home post taxes to a
lower aggregate package which is more tax friendly, most employees preferred
---------------------- the latter.
---------------------- Does the package effectively address post retirement needs?
---------------------- Retiral benefits include deferred income such as plan pension, gratuity,
provident fund, old age pension, old age counselling, medical benefits for retired
---------------------- employees, travelling concession to retired employees. There is a concern
that the current levels of savings and investment may not make it possible to
----------------------
maintain the same standard of living post retirement and provide for medical

emergencies like accidents/severe illness post retirement. This concern was Notes
voiced across sectors, particularly the BPO/ITES sector.
----------------------
Is the compensation structure innovative in the context of changing the
socioeconomic scenario? ----------------------
Yes, but only slightly. Over 50% of the employees felt that their company’s
----------------------
compensation policies are innovative in terms of addressing changing needs
of employees in view of today’s social and economic changes (increase in ----------------------
the number of female employees, movement towards nuclear families, etc).
Employees in Manufacturing were particularly unhappy on this count. ----------------------
However, there was good news on the gender equity front - 87% of ----------------------
respondents asserted that there is no discrimination in how men and women
are paid in their organisation. The scenario is healthiest in the IT and Telecom ----------------------
sectors.
----------------------
Opinion of promotion policies
----------------------
Policymakers indicated that a promotion from junior management to
middle management level entailed a raise of 22% and from middle management ----------------------
to senior management commanded a hike of 31%. Employees seemed satisfied
with this- 78% of employees endorsed that promotions were accompanied by a ----------------------
commensurate hike in pay. ----------------------
Employees also approve that HR leaders are doing a reasonably good job
of bringing in transparency into promotion practices (60% of employees polled ----------------------
are of this opinion). Manufacturing fares the worst on this count, financial ----------------------
services significantly better. Manufacturing also scores significantly lower on
‘system to determine salary hikes is fair and objective’. ----------------------
Perception of benefits ----------------------
The most common benefits across industries seem to be
----------------------
●● Performance based rewards (96%)
----------------------
●● Health Benefits (96%)
●● Car Scheme (93%) ----------------------
●● Medical Benefits for spouse and children (93%) ----------------------

●● Cell phones and laptops (89%) ----------------------
●● Medical Benefits for dependent parents (75%)
----------------------
●● Employee referral scheme (79%)
----------------------
●● Housing Support (75%)
The comparatively less common ones are ----------------------
●● Credit card (64%) ----------------------

●● Flexible Benefit Plan ----------------------
●● ESOPs (54%) ----------------------

Notes ●● Foreign Trips/Vacations (43%)
●● Sponsored Family outings (39%) The uncommon ones are
----------------------
●● Crèche (29%)
----------------------
●● Post retirement medical benefits (39%)
---------------------- ●● Paternity leave (21%)
---------------------- ●● Adoption leave (7%)
---------------------- While ESOPs, Car scheme and Credit card are offered to middle and
senior management in most companies, other benefits including Foreign Trips,
---------------------- Housing Support and employee referral are more universal in scope.
---------------------- From an employee perspective, Medical Benefits (87%) Housing Support
(67%) and Retirals (57%) are the three most essential benefits. HR managers’
---------------------- opinions seem to reflect the employees’ viewpoint when it comes to housing and
medical schemes being important, but they do not consider retirals as employees
----------------------
do- they feel that to the employees, Car scheme, ESOPs and Flexible benefit
---------------------- plan are as or more important than retirals. Is the dissonance real? Despite the
conflict, it is evident that while decision makers are focusing on higher order
---------------------- needs- the social security needs of employees are still calling for attention.
---------------------- Today, employees are living longer, living alone and need Social security.
Gender roles are getting redefined. Both spouses need to share responsibility.
---------------------- The message is clear - corporate India needs to be better aware of the changing
needs of its employees. Among the gripes heard from Employees - that the HR
----------------------
policies are not responsive to the changing socioeconomic scene of Corporate
---------------------- India. This is evident from the fact that paternity leave has still not come into
vogue. Corporate India has a long way to go to display more sensitivity towards
---------------------- the new trend of nuclear families where fathers need to take time off to support
their wives during pregnancy. Crèche facilities need to be made available
----------------------
keeping in view the increasing incidences of working mothers of children.
---------------------- Considering that people today are living longer and in the age of nuclear
---------------------- families, post- retirement medical benefits become extremely important. However,
this scenario will change in the next two years as most of these benefits could
---------------------- come into effect across organisations - most companies who are not offering these
benefits currently are considering offering them in the next 2 years.
----------------------
---------------------- 1. A competitive package in today’s business environment helps to

maintain work-force and increases labour-turnover.
----------------------
2. Efforts like compensation surveys etc. are widely used these days to
---------------------- maintain parity in payment among employees.
3. Flexibility in pay-package gives the employees adequate opportunity
----------------------
to channelise their money as per their wish.
7.8 EMERGING TRENDS IN COMPENSATION AND Notes
BENEFITS
----------------------
1] Towards performance based pay
----------------------
One of the major objectives of compensation program is to motivate
employees to perform their best. There are a number of programs which were ----------------------
launched to invite employee cooperation and increased effort on the job, so
----------------------
as to make product or services better and more competitive. These programs
go under a number of names, such as variable pay, merit pay, alternative pay, ----------------------
incentive systems and pay-for-performance.
----------------------
Qualitative research had indicated that performance based pay was
increasingly becoming popular with HR managers and employees. Most ----------------------
managers find the idea of relating pay to performance a highly attractive trend.
This persuades almost all organisations to indicate that they have pay for ----------------------
performance at least in the form of a merit pay system. Pay for performance
----------------------
is not easy to implement, and also not always desirable and it is evident by a
number of surveys. ----------------------
The quantitative phase validated this - 81% of the respondents asserted ----------------------
that this was indeed a noticeable trend. Close to a third of HR managers though
expressed concern that ‘pay for performance’ was not going down well with ----------------------
employees - these managers can now relax as a whopping 82% employees are
saying that the trend in fact is a welcome one. ----------------------
Why? Perhaps because employees understand the monetary benefits ----------------------
and perhaps because employees’ working for organisations where pay for
performance exists; are significantly more likely to feel that: ----------------------
●● y company is competitive in terms of salary offered to employees at my

M ----------------------
level.
----------------------
●● romotions are accompanied by a commensurate increase in salary Thus,
P
causing them to view their compensation package more positively. ----------------------
Most of the organisations admit that pay for performance is important. In ----------------------
those organisations where surveys were carried out, claim that they do connect
pay with performance in setting pay rates for employees. Both management and ----------------------
employees concur to relating pay to performance is do-able and desirable.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes So do employees across sectors welcome this trend?
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
---------------------- Fig. 7.2: Perception of performance based pay across sectors
---------------------- From the above graph, it is evident that the trend is welcomed by
employees across sectors, especially in the Pharmaceutical industry.
----------------------
Is Variable pay here to stay?
---------------------- The following table answers the query. As can be seen, the percentage of
---------------------- variable pay increases across levels.
Table 7.1: Percentage of Variable Pay
----------------------
Level All Manufacturing IT BPO/ Pharma Telecom Financial
---------------------- Industry ITES
Number of 19 3 3 3 3 3 4
---------------------- responses
---------------------- Entry Level 18 11 12 38 13 23 20
Junior 19 11 14 41 13 22 23
---------------------- Management
Middle 21 13 21 42 15 27 25
---------------------- Management
Senior 26 20 31 44 19 30 26
---------------------- Management
---------------------- Performance based pay is increasingly becoming popular even among
the support functions. The variable component of the pay depends on both, the
---------------------- individual/team and organisational performance and increases across levels of
the management hierarchy. It is also interesting to note that 50% of weightage
----------------------
is assigned to non-financial parameters of performance and “leadership
---------------------- competencies” for incumbents in Senior Management role. There is greater
acceptance among employees regarding variable pay and the total variable payout
---------------------- as a percentage of the total wage bill has been increasing over the last 3 years
----------------------

The BPO sector has the greatest orientation towards performance in its Notes
pay structure. If there are any doubts left, 100% of the organisations studied
have a Variable Pay Plan in their salary structure. ----------------------
So, how much do organisations shell out to reward performance? ----------------------
The following table indicates the total variable payout as a percentage of
----------------------
the wage bill over the past 12 months for various sectors.
Is this the revised split? ----------------------
All Manufacturing IT BPO/ Pharma Telecom Financial ----------------------
Industry ITES
No. of responses 26 4 5 3 5 4 5 ----------------------
18 14 13 13 13 19 27
----------------------
No surprises here, the financial sector takes the cake in rewarding
performance. According to an HR head of banking major, “A big part of ----------------------
Compensation Package of most associates is at risk and unlike many other
----------------------
sectors, where the variable component is added only to swell the CTC figure;
we consistently reward good performance with monetary incentives.” ----------------------
How common is pay for performance?
----------------------
Majority (69%) of the employees polled also said that they had a
performance based component in their compensation package. The percentage ----------------------
was significantly higher in BPO/ITES and Telecom sectors where 77% and ----------------------
83% respectively said that they had a Performance Based component in their
pay structure and significantly lower in the financial sector where only 58% said ----------------------
that a part of their pay was at risk. (This is at variance with the opinion of HR
Leaders of the Financial Sector as a majority say that Performance Orientation ----------------------
is strongly built into the Compensation Structure). Incidence increased with ----------------------
increase in management level. A significantly higher proportion of experienced
professionals had a performance based component in their compensation ----------------------
package as compared to freshers.
----------------------
All companies surveyed had a Performance Pay Plan in their salary
structure. Despite its obvious appeal, each and every aspects of pay for ----------------------
performance are not wanted.
----------------------
First of all, when there is a focus on performance,, it often conflicts with
the compensation goal of equity. In an organisation, where there is a pay-for- ----------------------
performance system, employees in the same work group doing the same work
----------------------
may be earning greatly different pay rates. A bad feeling of inequity can be
evident in this situation, more so when the program is not well designed and ----------------------
communicated. It also happens when people do not consider performance as a
proper variable by which there’s a set pay. ----------------------
Secondly, pay-for-performance may not be desirable as the program ----------------------
implicitly or explicitly puts people in competition with each other. Cooperation
in working unit is required for the work to be accomplished is cooperation. ----------------------
----------------------

Notes Performance based Rewards
Rewards are used as a tool for recognition, motivation and sometimes
----------------------
even for attracting and retaining employees. Rewards are fast gaining popularity
---------------------- and the trend is towards providing one time reward/recognition rather than
compensation renegotiation.
----------------------
Many things are rewarded - timely/early project completion, excellent
---------------------- project execution, customer satisfaction etc. Rewards can be in the form of
Certificates/Mementos/Cash/ Paid holidays/foreign trips/expensive dinners.
----------------------
However, unlike what employers would like to believe, rewards are not
---------------------- entirely appreciated even by rewarded employees-” What’s the point of sending
me on a foreign trip and making me pay the tax on it?” or “ I was told I would
---------------------- receive Rs. 1,00,000 for my performance, I received only Rs. 70,000, the rest
was cut as tax. The company should have borne the tax on this or at least
----------------------
clarified that the award is only Rs. 70,000”
---------------------- 2] ESOP’s on a comeback trail
---------------------- 63% of the employers polled said that they currently offer ESOP’s and of
those who do not indicated that they were considering offering ESOP’s in the
---------------------- next 1 or 2 years.
---------------------- ESOPs are again flavour of the season among HR leaders in the new
economy sectors of the industry. The exceptional performance of stock markets
---------------------- is a factor behind this. Some lessons have however been learnt from the past
---------------------- and employers are more discriminating while offering ESOPs. Besides, ESOPs
will have a higher lock-in period.
----------------------
After the slump in stock markets post 2001, employers and employees
---------------------- had both lost interest in ESOPs. HR leaders however feel that ESOPs are a
potent retention tool and also boost performance by giving employees a stake
---------------------- in the organisation’s fortunes. HR leaders contend that ESOPs are here to stay.
---------------------- Some organisations offer ESOPs to their best performing employees
irrespective of grade, level or function. Other organisations restrict ESOPs to
---------------------- middle and higher management.
---------------------- What is the response of employees?
---------------------- Cautious optimism- 60% felt ESOPs were an attractive mode of

compensation.
---------------------- The sentiment was reflected across sectors. Senior management was more
---------------------- positive than middle management, junior management was more positive than
entry level employees. Perhaps at higher levels of management ESOP’s look
---------------------- more favourable.
---------------------- However, given a choice between ESOPs worth 20% of their annual take
home or a spot payment of the same amount, more employees (54%) preferred
---------------------- the latter option. This was especially true of the BPO/ITES sector. Employees
obviously prefer the solid reassurance of cash in their bank accounts to the lure
----------------------
of notional lucre.

3] Are retirals in or out? Notes
There is a reasonable amount of contradiction concerning ‘Retirals’.
----------------------
Policymakers are of the opinion that retirals are a component of the compensation
package only because the law mandates it. However, 75% of employees perceive ----------------------
retirals as mandatory savings, which are effective in addressing post retirement
financial needs. Despite this faith, employee opinion is divided- many (54%) ----------------------
feel that as the market yields more benefits than retirals like pension, the retirals
----------------------
component should be brought down to 15-16% from the current 20% of basic
pay. They are clear that a higher take home is preferable in lieu of retirals like PF. ----------------------
However, a growing number of employees demand post-retirement health benefits.
----------------------
4] Impact of FBT
Benefits given to employees in addition to their salary or wage are called ----------------------
‘fringe benefits’. Thus, fringe benefits are those monetary and non monetary benefits
----------------------
given to the employees during and post employment period which are connected
with employment but not to the employees contribution to the organisation. ----------------------
The fringe benefits covers bonus, social security measures, retirement ----------------------
benefits like provident fund, gratuity, pension workmen’s compensation, housing
medical, canteen, Co-operative credit, consumer stores educational facilities, ----------------------
recreational facilities financial advice and so on. There seems to be a lot of
confusion around FBT and its impact. Although over half the respondents (56% - ----------------------
HR managers and 60% - employees) felt that FBT would impact benefits currently ----------------------
offered to employees, they were unclear about which benefits would be impacted.
Employees felt a host of benefits including performance based rewards, ----------------------
foreign trips, housing assistance, health benefits, car schemes, accessories like ----------------------
cell phone and laptops, ESOPs, sponsored family outings, etc. would be affected
while HR managers were clear that impact would be largely on Sponsored family ----------------------
outings, foreign trips, car schemes and perhaps housing support. (Refer to Chart
7). The non-clarity in the employees mind is also reflected from the fact that ----------------------
40% of the respondents said that they didn’t know if FBT had impacted their ----------------------
net take home this year. There is clearly a need among compensation managers
to educate internal customers about the FBT regime and its impact. ----------------------
----------------------
7.9 BENCHMARKING WITH THE BEST IN
COMPENSATION AND BENEFITS POLICIES ----------------------
Not all policymakers have global benchmarks for designing compensation ----------------------
policies; majority (88%) claimed to have Indian benchmarks. Of the Indian
----------------------
companies Ranbaxy was in the top spot while for global benchmarks it was IBM
in the first position. 69% of the companies studied; claimed to have instituted ----------------------
an innovative compensation scheme in the past year. [Innovative did not mean
new, it simply meant a scheme that did not exist in the company till date]. For ----------------------
example, Pay for position, ESOP’s at par value, deferred payment, etc. So are
----------------------
employees satisfied with this level of innovation or do they want more?
----------------------

Notes It appears that across sectors, employees in Manufacturing, especially
in line functions, are least satisfied with the level of innovation in their
---------------------- compensation package.
---------------------- Across sectors, employees were asked to name the organisations they felt
had the best compensation and benefits policies, and the top five organisations
---------------------- across sectors were as follows:
---------------------- Sr. No. Sector Organisations perceived to have the best
Compensation and Benefits policies
----------------------
1. Manufacturing Infosys, Tata, Wipro, Reliance, T.C.S
---------------------- 2. IT Infosys, IBM, Microsoft, Wipro, Accenture
3. BPO/ITES Infosys, HP, H.C.L, T.C.S, IBM
----------------------
4. Pharmaceutical Infosys, Ranbaxy, Pfizer, ICICI, Tata
---------------------- 5. Telecom Infosys, Wipro, Reliance, Nokia, Airtel
6. Financial Sector HSBC, Infosys, Citi Bank, ABN Amro, ICICI
----------------------
As can be seen, employees across all sectors, other than financial, strongly
---------------------- feel that Infosys has the best compensation and benefits policies. The Tata group
of companies and Wipro, HSBC, IBM, ICICI, Citibank are the more common
----------------------
organisations that employees quote.
---------------------- When reasons for rating an organisation as having the best compensation
---------------------- and benefits policies are looked into, the key reason cited was ‘Good pay
package’. Employees seem to equate ‘high salary’ with ‘best package’ implying
---------------------- that their foremost concern is the gross value of the package and not its structure,
tax friendliness, benefits, etc
----------------------
Other reasons for high ratings were:
----------------------
Sr. No. Company Name Reasons the organisation is perceived to
---------------------- have the best compensation and benefits
policies
---------------------- 1. Infosys ESOPs, Insurance policies for employees,
---------------------- Leave facilities, Opportunities to prove
talent for a higher package
---------------------- 2. Tata Group of Insurance policies for employees, Leave
companies facilities, Inexpensive food, ESOP’s,
----------------------
Accident Insurance, Food coupons
---------------------- 3. Wipro ESOP’s, Opportunities to prove talent for
a higher package, Openness to permitting
---------------------- employees to take families during official
foreign trips.
----------------------
4. HSBC Net cash component, Good facilities, Good
---------------------- loan facilities, Advance
5. Citibank Good Incentives, Good facilities, Opportunities
----------------------
to prove talent for a higher package
---------------------- 6. ICICI Good facilities, Advances, Good Incentives

Notes
----------------------
----------------------
1. Employees in the same work group doing the same work may be
earning same pay rates with performance by pay based compensation ----------------------
system.
----------------------
2. Fringe benefits are given to the employees during and post
employment period which are connected with employment but not to ----------------------
the employees contribution to the organisation.
----------------------
3. Performance based Rewards cannot be in the form of Certificates/
Mementos/Cash/ Paid holidays/foreign trips/expensive dinners. ----------------------
----------------------
Activity 1 ----------------------
With the help of a survey, explain some of the emerging trends in ----------------------
compensation and benefits.
----------------------
----------------------
7.10 SECTORWISE SCENARIOS
----------------------
Manufacturing Sector
Although the manufacturing sector is booming in India, the pressure on ----------------------
the demand side of skilled manpower is perhaps the greatest. Cross-sectoral ----------------------
mobility of employees is perhaps the biggest reason for this.
While the salaries at the entry and junior levels of management are ----------------------
competitive, the manufacturing sector finds itself hard to match salary levels of ----------------------
the new economy sector in the middle and senior levels of management.
----------------------
The manufacturing sector has a challenge of retaining talent at the
upper echelons of the management. Perhaps the biggest reason for this is that ----------------------
this sector finds its hands tied up when it comes to making counter-offers to
separating employees. ----------------------
Pay grades are defined very rigidly in this sector and there is very little ----------------------
room for negotiation. Besides, the rise in salary levels across levels is not as high.
----------------------
The Manufacturing sector largely reflects the same trends in the area of
Compensation and Benefits as in the New Economy sectors for the reason that ----------------------
today, many HR leaders in the manufacturing sector feel that they are competing
for manpower with these sectors. ----------------------
Where the manufacturing sector needs a re-look and perhaps an overhaul ----------------------
is in the areas of HR outside of Compensation and Benefits as this sector can
obviously not compete with the New-Age sectors in this area. This realisation ----------------------
has set in among HR leaders. ----------------------

Notes There is clearly a need to bring in a ‘breath of fresh air’ in compensation
structuring in the manufacturing industry less employees here perceive fairness
---------------------- and transparency in salary hikes, promotion practices, etc. More employees are
unhappy with the level of innovation in their compensation package as also with
---------------------- the ability of the package to address the medical needs of dependent parents.
---------------------- Although employees agree that their salaries are competitive and their pay
package flexible, most employees in this sector are dissatisfied with existing
----------------------
reward-for-performance systems.
---------------------- Following aspects were observed while determining pay ranges:
---------------------- 1. It is important to keep in mind that there is an adequate differential
between supervisors and subordinates-whether they are paid under the
---------------------- same pay plan or under different ones.
---------------------- 2. When the pay-range of one group is changed, equal attention must be
given to the pay level of the other.
----------------------
3. Because of the continuous rise is wage and salary level, a rise resulting
---------------------- from a variety of environmental pressures, considerable attention must be
given to handling upward changes in wages structure. Some firms give
---------------------- general percentage or “across the board” pay increase based on merit or
---------------------- length of service. The sound thing is to make general adjustments in wage
structure according to the price index number.
---------------------- 4. The existing pay structure should be regularly reviewed and revised. This
---------------------- will make job evaluation programme more acceptable to employees.
5. Regional differences in wages should invariably be maintained and also
----------------------
forces that favour regional differences between areas, added sources of
---------------------- income, or characteristics (rural versus urban or industrial), seasonal
occupations as in agriculture versus stable occupations.
----------------------
However, it was observed that, several forces work to level these
---------------------- differences. The forces that favour uniformity in wages are: high mobility
between regions and /or employees, access to timely, reliable information, wide
---------------------- spread unionisation efforts (often along industry/occupational lines.)
---------------------- Pharmaceutical Sector
---------------------- Pharma employees emphasise on career growth opportunities followed by

compensation when ranking the factors that attracted them to an organisation.
---------------------- Comparatively, these employees (particularly entry level) attribute significantly
less importance to Brand Equity. This is in variance with the opinion of HR
---------------------- managers who give Brand equity of the organisation second billing. While the
---------------------- importance of Employer Value Proposition cannot be gainsaid, money clearly
matters more. HR Managers will do well to take note.
---------------------- Policymakers should note that employees in this sector are especially
---------------------- dissatisfied with existing reward-for-performance systems and are particularly
welcoming of the trend towards performance-based pay.
----------------------

The attrition rate in this sector is at 16%, manageable according to most Notes
HR leaders considering the dynamic nature of the Industry. As can be guessed,
55% of employees cited career growth as a reason for considering other offers. ----------------------
In contrast, only 21% named Compensation as a reason for looking around.
----------------------
Financial Sector
----------------------
Financial sector employees lay more emphasis on career growth
opportunities followed by compensation rather than brand equity when ranking ----------------------
factors that attract them to an organisation. They, more than others, give a
‘thumbs up’ to HR managers on bringing transparency into promotion practices. ----------------------
This sector is beset with an attrition rate of nearly 18%. Understandably, ----------------------
Marketing and Sales and Finance functions have bled the most over the last 12
months. ----------------------
BPO/ITES and IT Sector ----------------------
Compensation seems to be the predominant concern of these employees ----------------------
- they prefer cash to ESOPs, they are more concerned than others about the
ability of their pay package to address post retirement needs. A significantly ----------------------
higher number of BPO/ITES employees said that they would consider a job
switch even for less than 20% hike in pay. ----------------------
At the same time, BPO/ITES employees also put a premium on job ----------------------
content - this is perhaps why majority of the employees in this sector said they
would prefer to move to the IT industry rather than to another organisation ----------------------
operating in the BPO/ITES space. ----------------------
Performance - based pay seems to be more predominant amongst
----------------------
employees in Telecom, BPO/ITES and IT. Policymakers would be reassured to
know that more employees in these sectors feel satisfactorily rewarded for good ----------------------
performance.
----------------------
Interestingly, IT sector employees do not rate job content highly - they
place more emphasis on work-life balance. These employees are also probably ----------------------
the priciest when it comes to job hopping - significantly higher number of
employees here said they would jump only for a salary hike of more than 40%. ----------------------
Telecom Sector ----------------------
More employees in Telecom feel that their salaries were competitive and ----------------------
a comparatively higher number strongly assert that their pay package offers
adequate flexibility. Most Telecom employees feel that the company suitably ----------------------
rewards their efforts.
----------------------
Policymakers would be interested to know that employees in this sector
seem to put more of a premium on Brand equity of the organisation (as a factor ----------------------
in attracting talent) and a higher emphasis on career growth opportunities (as a
factor in arresting attrition). ----------------------
The contrast between Employee opinion and that of HR Managers is in ----------------------

fact, most stark in this sector. While Career Growth (56%) and the brand name
----------------------
of the organisation (28%) scores over compensation as far as attracting talent

Notes to an organisation goes, HR Managers give undue weightage to compensation
at 50%. They seem to totally disregard the brand name of the organisation as a
---------------------- factor with none of the HR Managers polled naming it as a factor.
----------------------
7.11 ASPECTS OF WAGE SURVEYS
----------------------
A wage survey dealt with the following aspects:
---------------------- a) Frequency: affected by rapidity of changes, current and contemplated.
---------------------- Once per year is common.
b) Scope (number of firms): influenced by the geographic area from which
----------------------
people are drawn, the number of units competing for this labour, accuracy
---------------------- requirements, and willingness of organisations to share information.
c) Accuracy: The diversity in job titles and specific job duties was
----------------------
staggering. The greater the accuracy and detail was needed, the greater
---------------------- was the requirement for careful description and specification and
surveyor’s reliance on person to person interviewing rather than a mailed
---------------------- questionnaire.
---------------------- Such wage surveys provided many kinds of useful information about
differences in wage levels for particular kinds of occupations. This could have
---------------------- a great influence on an organisation’s compensation policy.
---------------------- Analysis of Relevant Organisational Problems
---------------------- In addition to the results of job analysis and wage surveys, several other
variables had to be given due consideration in establishing a wage structure. For
---------------------- example, whether there existed well-established and well-accepted relationships
among certain jobs, which could upset job evaluation, whether the organisation
---------------------- would recruit new employees after a revised wage structure, were the prevailing
---------------------- rates in industry or community inconsistent with the results of job evaluation?
What would be the result of paying lower or higher compensation and what
---------------------- should be the relationship between the wage structure and the fringe benefit
structure? They had listed 108 variables, which can affect levels of compensation
---------------------- and the wage structure.
---------------------- Preparation of Wage Structure
---------------------- The next step was to determine the wage structure. For this, several
decisions needed to be taken, such as:
----------------------
a) Whether the organisation wished, or was able, to pay the amounts above,
---------------------- below or equal to the averages in the community or industry
---------------------- b) Whether wage ranges should provide for merit increases or whether there
should be single rates
---------------------- c) The number and width of the ‘pay grades’ and the extent of overlap
---------------------- d) Which jobs were to be placed in each of the pay grades?
---------------------- e) The actual money value that was assigned to various pay grades

f) Differentials between pay plans and Notes
g) What to do with salaries that were out of line once these decisions had
----------------------
been made.
The above had necessitated either ----------------------
a) To freeze the rate paid until general salary rise brings the other jobs into ----------------------
line with it, or
----------------------
b) To transfer or promote the employee to a job where he can legitimately be
paid his current rate, or ----------------------
c) To cut to the maximum in the pay grade. ----------------------
Broad Groups
----------------------
It was described that: “ Broad groups may be illustrated within
manufacturing as a) managerial - executive, administrative, professional, ----------------------
and supervisory b) clerical and c) factory, within each broad group, narrower
groups are obvious. Within the factory group are maintenance, inspection, ----------------------
transportation and production. Within production are certain smaller groups, ----------------------
varying with the nature of the industry.”
This indicated the need for having several pay ranges for each organisation. ----------------------
Such a range usually had several advantages: ----------------------
a) The management could take a more flexible stance with respect to the
labour market ----------------------
b) It made it easier to attract experienced employees from other organisations ----------------------

c) It helped to ensure that there was an overlap between the pay rates and ----------------------
those prevailing in the labour market.
----------------------
d) It also allowed the management to provide for performance differences
between employees. ----------------------
Following aspects were observed while determining pay ranges:
----------------------
1. It is important to keep in mind that there is an adequate differential
between supervisors and subordinates - whether they are paid under the ----------------------
same pay plan or under different ones.
----------------------
2. When the pay-range of one group is changed, equal attention must be
given to the pay-level of the other. ----------------------
3. Due to the continuous rise in wage and salary levels, a rise resulting from ----------------------
a variety of environmental pressures, considerable attention must be given
to handling upward changes in wage structure. Some firms give general ----------------------
percentage or “across the board” pay increase based on merit or length of ----------------------
service. The sound thing is to make general adjustments in wage structure
according to the price index number. ----------------------
4. The existing pay structure should be regularly reviewed and revised. This ----------------------
will make the job evaluation programme more acceptable to employees.
----------------------

Notes 5. Regional differences in wages should invariably be maintained. Forces
that favour regional differences are: low mobility, lower skill jobs, major
---------------------- cost of living differences between areas, added sources of income, or
characteristics (rural versus urban or industrial), seasonal occupations as
---------------------- in agriculture versus stable occupations.
---------------------- However, it was observed that several forces work to level these
differences. The forces that favour uniformity in wages are: high mobility
---------------------- between regions and/or employees, access to timely, reliable information, wide
---------------------- spread unionisation efforts (often along industry/ occupational lines).
Most organisations structured their rate ranges to overlap a bit. Thus, a
----------------------
person who had been on the job longer and was more experienced, might earn
---------------------- more than a fresh employee in the next higher pay grade.

----------------------
---------------------- 1. Broad Groups made it easier to attract experienced employees from
---------------------- other organisations.
2. When the pay-range of one group is changed, no attention is required
---------------------- to be given to the pay-level of the other.
---------------------- 3. Pay range ensured that there was an overlap between the pay rates
and those prevailing in the labour market.
----------------------
----------------------
7.12 WAGE ADMINISTRATION RULES
----------------------
The following administration rules were found to have been followed by
---------------------- many manufacturing industrial establishments:
---------------------- 1. The development of rules of wage administration had to be done after the
rate ranges had been determined. Rules have to be developed to determine
---------------------- to what degree would advancement be based on length of, service rather
---------------------- than merit, with what frequency pay increases would be awarded, how
controls over wage and salary costs could be maintained, what rules
---------------------- would govern promotion from one pay grade to another, etc.
---------------------- 2. At the next stage, the employees were to be informed of the details
of wage and salary programme. Although most hourly paid workers
---------------------- were informed through the wage contract about the details of wage
programme, a substantially smaller number of salaried employees had no
----------------------
such information about their salaries. It was considered advisable, in the
---------------------- interest of the concern of the employees that the information about average
salaries and ranges in the salaries of group should be made known to the
---------------------- employees concerned. Secrecy in this matter might create dissatisfaction,
and it might also vitiate the potential motivating effects of disclosure.
----------------------

3. Finally, the employee was appraised and the wage fixed for the grade Notes
he is found fit. The following factors were influencing wage and salary
structure and administration: ----------------------
●● he wage policies of different organisations varied somewhat. Marginal
T ----------------------
units paid the minimum necessary to attract the required number and kind
of labour. Often, these units paid only the minimum wage rates required ----------------------
by labour legislation, and recruit marginal labour. At the other extreme,
----------------------
some units paid well above the going rates in the labour market. They
did so to attract and retain the highest calibre of the labour force. Some ----------------------
managers believed in the economy of higher wages. They felt that, by
paying high wages, they would attract better workers who would produce ----------------------
more than the average worker in the industry. This greater production per
----------------------
employee meant greater output per man-hour. Hence, labour costs might
turn out to be lower than those existing in firms using marginal labour. ----------------------
Some units paid high wages because of a combination of a favourable
product market demand, higher ability to pay and the bargaining power of ----------------------
a trade union. But a large number of them sought to be competitive in their
----------------------
wage programme i.e. they aimed at paying somewhere near the going rate
in the labour market for the various classes of labour they employ. Most ----------------------
units gave greater weight to two wage criteria, viz. job requirements and
the prevailing rates of wages in the labour market. Other factors, such as ----------------------
changes in the cost of living, the supply and demand of labour, and the
----------------------
ability to pay were accorded a secondary importance.
●● sound wage policy was to adopt a job evaluation programme in order to
A ----------------------
establish fair differentials in wages based upon differences in job contents.
----------------------
The basic factors provided by a job description and job evaluation are as
follows. ----------------------
Factors that were usually taken into consideration for wage and salary
----------------------
administration are:
1. The Organisation’s ability to pay ----------------------
2. Supply and demand for labour ----------------------

3. The prevailing market rate ----------------------
4. The cost of living
----------------------
5. Living wage
----------------------
6. Productivity
7. Trade union’s bargaining power ----------------------
8. Job requirements ----------------------

9. Managerial attitudes ----------------------
10. Psychological and sociological factors
----------------------
----------------------

Notes 1. The Organisation’s ability to pay: Wage increases were given by
those organisations, which could afford them. Companies that had good
---------------------- sales and therefore, high profits tended to pay higher wages than those
which running at a loss or earning low profits because of the high cost
---------------------- of production or low sales. In the short run, the economic influence on
---------------------- the ability to pay was practically nil. All employers, irrespective of their
profits or losses, had opted to pay not less than their competitors and
---------------------- needed pay not more if they wished to attract and keep workers. In the
long run, the ability to pay is very important. During times of prosperity,
---------------------- employers paid high wages to carry on profitable operations and because
---------------------- of their increased ability to pay. But during a period of depression, wages
were cut because funds were not available. Marginal firms and non-profit
---------------------- organisations (like hospitals and educational institutions) paid relatively
low wages because of low or no profits.
----------------------
2. Supply and Demand of labour: The labour market conditions or supply
---------------------- and demand forces operated at the national, regional and local levels, and
determine organisational wage structure and level.
----------------------
If the demand for certain skills and the supply were low, the result was
---------------------- a rise in the price to be paid for these skills. When prolonged and acute,
these labour market pressures probably forced most organisations to
----------------------
“reclassify hard-to-fill jobs at a higher level” than that suggested by the
---------------------- job evaluation. The other alternative was to pay higher wages if the labour
supply was scarce, and lower wages when it was excessive. Similarly, if
---------------------- there was great demand for labour expertise, wages rise, but if the demand
for manpower skill were minimal, the wages would be relatively low.
----------------------
It was observed: “The supply and demand compensation criterion was
---------------------- very closely related to the prevailing pay, comparable wage and on-going
wage concepts since, in essence, all of these remuneration standards were
----------------------
determined by immediate market forces and factors.”
---------------------- 3. Prevailing market rate: This is also known as the ‘comparable wage’
---------------------- or ‘going wage rate’, and was the most widely used criterion. An
organisation’s compensation policies generally tended to conform to
---------------------- the wage-rates payable by the industry and the community. This was
done for several reasons. First, competition demands that competitors
---------------------- adhered to the same relative wage level. Second, various government
---------------------- laws and judicial decisions made the adoption of uniform wage rates an
attractive proposition. Third, trade unions encouraged this practice so that
---------------------- their members could have equal pay for equal work and geographical
differences may have been eliminated. Fourth, functionally related firms
---------------------- in the same industry required essentially the same quality of employees,
---------------------- with the same skills and experience. Finally, if the same or about the same
general rates of wages were not paid to the employees as were paid by the
---------------------- organisation’s competitors, it would not be able to attract and maintain a
sufficient quantity of and quality of manpower. It was observed: “Some
---------------------- companies paid on the high side of the market in order to obtain goodwill

or to ensure an adequate supply of labour, while other organisations paid Notes
lower wages because economically they had to, or because by lowering
hiring requirements they could keep the jobs adequately manned.” ----------------------
4. The cost of living: The cost of living pay criterion is usually regarded ----------------------
as an automatic minimum equity pay criterion. This criterion called for
pay adjustments based on increases or decreases in an acceptable cost ----------------------
of living index. In recognition of the influence of the cost of living,
----------------------
“escalator clauses” were written into labour contracts. When the cost of
living increases, workers and trade unions demanded adjusted wages to ----------------------
offset the erosion of real wages. However, when living costs were stable
or in decline, the management did not resort to this argument as a reason ----------------------
for wage reductions.
----------------------
5. The living wage: This criterion means that the wages paid should be
adequate to enable an employee to maintain himself and his family at a ----------------------
reasonable level of existence. However, employers did not generally favour
----------------------
using the concept of a living wage as a guide to wage determination because
they preferred to base the wages of an employee on his contribution rather ----------------------
on his need. Also they felt that the level of living prescribed in a worker’s
budget was an open argument since it was based on a subjective opinion. ----------------------
6. Productivity: It is another criterion, and was measured in terms of output ----------------------
per man- hour. It was not due to labour efforts alone. Technological
improvements, better organisation and management, the development ----------------------
of better methods of production by labour and management, greater
----------------------
ingenuity and skill by labour were all responsible for the increase of
productivity. Actually, productivity measured the contribution of all the ----------------------
resource factors - men, machines, methods, materials and management.
No productivity index could be devised which would measure only the ----------------------
productivity of a specific factor of production. Another problem was that
----------------------
productivity could be measured at several levels - job, plant, industry
or national, economic level. Thus, although theoretically it is a sound ----------------------
compensation criterion, operationally many problems and complications
arose because of definitional measurement and conceptual issues. ----------------------
7. Trade union’s bargaining power: Trade unions do affect rate of wages. ----------------------
Generally, the stronger and more powerful is the trade union, the higher are
the wages. A trade union’s bargaining power was often measured in terms ----------------------
of its membership, its financial strength and the nature of its leadership. ----------------------
A strike or a threat of a strike is and was the most powerful weapon used
by it. Sometimes trade unions forced wages up faster than increases in ----------------------
productivity would allow and became responsible for unemployment or
higher prices and inflation. However, for those remaining on the payroll, a ----------------------
real gain was often achieved as a consequence of a trade union’s stronger ----------------------
bargaining power. The tendencies of unions to resort to strike have
substantially subsided. ----------------------
8. Job requirements: Generally, the more difficult a job, the higher are the ----------------------
wages.

Notes Measures of job difficulty were frequently used when the relative value
of one job to another in an organisation was to be ascertained. Jobs
---------------------- were graded according to the relative skill, effort, responsibility and job
conditions required.
----------------------
9. Managerial Attitudes: These had a decisive influence on the wage
---------------------- structure and wage level since judgment was exercised in many areas of
wage and salary administration - including whether the firm should pay
----------------------
below average, or above average rates, what job factors should be used
---------------------- to reflect job worth, the weight to be given for performance or length of
service, and so forth, both the structure and level of wages were bound
---------------------- to be affected accordingly. These matters required the approval of the
top executives. It was observed, “Top management’s desire to maintain
----------------------
or enhance the company’s prestige had been a major factor in the wage
---------------------- policy of a number of firms. Desires to improve or maintain morale, to
attract high-calibre employees, to reduce turnover, and to provide a high
---------------------- living standard for employees as far as possible also appeared to be factors
in the management’s wage-policy decisions.”
----------------------
10. Psychological and social factors: These determined in a significant
---------------------- manner how hard a person will work for the compensation received
or what pressures he would exert to get his compensation increased.
----------------------
Psychologically, persons perceived the level of wages as a measure of
---------------------- success in life, people might feel secure, had an inferiority complex,
seemed inadequate or feel the reverse of all these. They might or might
---------------------- not take pride in their work, or in the wages they get. Therefore, the
management in establishing wage rates should not overlook these things.
----------------------
Sociologically and ethically people feel that “equal work should carry
---------------------- equal wages” that “wages should be commensurate with their efforts” that
“they are not exploited,” and “that no distinction is made on the basis of
---------------------- caste, colour, sex or religion.” To satisfy the conditions of equity, fairness
and justice, a management should take these factors into consideration.
----------------------

---------------------- 1. _________________ is termed as an organisation’s policy which
generally tended to conform to the wage-rates payable by the industry
---------------------- and the community.
---------------------- 2. A trade union’s _____________ was often measured in terms of its
membership, its financial strength and the nature of its leadership.
----------------------
3. The _____________ pay criterion is an automatic minimum equity
---------------------- pay criterion which reviews pay adjustments based on changes in an
acceptable cost of living index.
----------------------
4. Top management’s desire to maintain or enhance the company’s
---------------------- prestige had been a major factor in determining __________.

7.13 COMPENSATION AND BENEFITS IN PERSPECTIVE Notes
Compensation put into perspective is nothing more than a reinforcement ----------------------
of management techniques and a reflection of the company’s values. A
good compensation package will fail to be effective unless backed by ----------------------
suitable managerial input. Factors like job content, career growth prospects,
----------------------
organisational climate, empowerment and autonomy, learning opportunities
and the employee’s realisation of his/her self-perceived potential areas are ----------------------
important, if not greater determinants of an employee’s satisfaction and morale.
----------------------
The companies today, in order to compete, have to strike a fine balance
between bottom- line orientation and a genuine concern for the employee. To ----------------------
keep an employee happy and productive and to constantly provide venues for
him/her to hone and make optimum use of his/her skills and competencies is a ----------------------
challenge that compensation managers will constantly have to deal with. ----------------------
Compensation at the end of the day is seen as a hygiene factor - low
salaries will not fetch world-class talent but neither will it pay top dollar - unless ----------------------
compensation practices are seamlessly aligned to managerial intent. HR leaders ----------------------
feel that how much you pay is not as important as how you pay and what you
pay for. According to an HR leader, “many of our competitors have innovation ----------------------
as a stated value but look at their PMS, the entire variable pay is based on
meeting financial targets. We, on the other hand are competitive because we pay ----------------------
for what we value. Our compensation practices reinforce our values.” ----------------------
7.14 COMPENSATION AND BENEFITS: A TOOL TO ATTRACT ----------------------

TALENT ----------------------
Talented people are the key resources for any organisation in any sector. Given ----------------------
the upswing in the economy, the plethora of career alternatives and employment
opportunities, attracting the right talent has emerged as one of the big challenges ----------------------
for HR managers of today. How are employers addressing this challenge? What
----------------------
do HR managers perceive as being important to employees? What factors do
they emphasise on while ‘selling’ positions to potential employees? ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 7.3: Critical Factors in Attracting Talent to an Organisation

Notes It is evident from the above that HR managers have their finger on the
pulse when it comes to the key factors behind attracting talent i.e. Career Growth
---------------------- and Learning opportunities followed by brand equity of the organisation;
Compensation and Benefits comes in a distant but significant third. The message
---------------------- is clearly and well understood all across money matters but not at the cost of
---------------------- growth. Factors like a professional working environment and a caring employer
matter more than a fat pay cheque when a prospective employee looks at options.
----------------------
The good news is that HR managers of India’s leading companies are
---------------------- aware of this sentiment. Surprisingly, job content does not seem to figure as
a factor for employees when choosing a career. One line of thought regarding
---------------------- this, as expressed by an HR head- “Job content has today become a hygiene
factor. Everyone in an organisation - Top Management, Line, HR, is only too
----------------------
aware of the need for enrichment. Look at the Telecom industry - is it anybody’s
---------------------- case that say, a training role in company X is different from a training role in
company Y? Employees today carve out their own roles in an organisation.”
----------------------
However, in the pharmaceutical and financial sector and across brand
---------------------- management and production, employees rank compensation and benefits
in second position and brand equity of the organisation as a distant third.
---------------------- Compensation is also relatively more important to employees in functions like
customer relationship and HR. Policymakers would be interested to know that
----------------------
employees in the pharmaceutical sector (especially entry level employees)
---------------------- attribute significantly lower importance to Brand Equity (10%) while employees
in Telecom (especially entry and junior management level employees) attribute
---------------------- significantly higher importance to Brand equity of the organisation (18%).
---------------------- The writing on the wall for HR managers to see is that - Compensation may
be important; but if one wants to attract the best talent, the Organisation needs to
---------------------- package itself as an attractive destination where employees have opportunities
to acquire new skills, hone existing ones and work in an environment that’s
----------------------
professional and conducive.
---------------------- How much does an MBA matter?
---------------------- The mad scramble for an MBA degree gives some indication. Consider the
statistics - 75% of HR managers polled said that an MBA was offered a premium
---------------------- in their organisation. An MBA today earns 26% more than a simple Graduate;
---------------------- an MBA commands a 22% premium over a non MBA Postgraduate. MBA is
the preferred qualification for recruitment at the entry level for Marketing, Sales
---------------------- and HR. Only in Finance CA’s are preferred, MBA’s and Post graduates less so.
----------------------
----------------------
----------------------
----------------------
----------------------

7.15 COMPENSATION AND BENEFITS AS A TOOL TO DRIVE Notes
PERFORMANCE AND BUILD WORKFORCE
----------------------
CAPABILITY
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 7.4: Critical Factors that Drive Performance across Sectors ----------------------
The graph represents critical factors that drive performance from an
employee perspective. ----------------------
As is evident, Compensation and Job content are critical across all industry ----------------------
sectors, with compensation being highest at 22% and Job Content coming a close
----------------------
second at 21% on a total basis. This trend is maintained in Frontline functions,
reversed in Support functions (job content 26%, compensation 20%) while ----------------------
for Line functions compensation is ranked third (job content 23%, working
environment 20%, compensation 15%). ----------------------
The BPO Sector seems to be doing something right in aligning the PMS to ----------------------
the developmental needs of employees as employees feel that the PMS is almost
as vital as Compensation in building workforce capability. Senior Management ----------------------
rate Job content as primary and Compensation as much less important, but it is
----------------------
still at second place. Trends indicate that the importance of job content increases
at higher levels of the management hierarchy. ----------------------
So Compensation and Job content are the keys. HR managers understand ----------------------
this? Is their perception of what drives performance in sync with what
employees say? As is evident, there is dissonance - what HR managers see as ----------------------
key (performance management system) features only in the 3rd or 4th position
in an employee’s mind. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 7.5: Employee Opinion Vs HR Opinion
---------------------- To build workforce capability, managers say they are currently focusing
---------------------- on talent fit and job content. But considering that 76% of employees feel (either
‘agree’ or ‘strongly agree’) that a higher pay package would motivate them to
---------------------- work harder towards organisational goals, one wonders - is the importance of
compensation being underrated?
----------------------
Compensation was the most important determinant of job satisfaction
---------------------- for 72% of employees (‘agree’ or ‘strongly agree’). The message is clear -
compensation needs to feature more prominently in strategies aimed at driving
---------------------- performance and building workforce capability.
----------------------
----------------------
Fill in the blanks.
----------------------
1. In order to compete, the companies have to strike a fine balance
---------------------- between ________ and a _________ for the employee.
---------------------- 2. The key factors behind attracting talent are ________and ________.
---------------------- 3. ________ and ________ are critical factors that drive performance
from an employee perspective.
---------------------- 4. Compensation needs to feature more prominently in strategies aimed
---------------------- at driving ________ and building _______ capability.
----------------------
---------------------- 7.16 ROLE OF COMPENSATION AND BENEFITS IN

ARRESTING ATTRITION
----------------------
It is not enough to attract the right talent, it is equally important to retain
---------------------- it. In order to retain talent, HR Managers need to understand reasons for attrition
and factors contributing to the same.
----------------------
How bad is the attrition problem?
----------------------
It is manageable for most part. Expectedly, it is at a high 40% in the BPO
---------------------- sector. Expectedly again, Marketing and Sales functions see the highest attrition
in all sectors. Retaining technical people is a challenge in the IT Sector.
So why do employees leave? Notes
The chart below reflects employee speak
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Fig. 7.6: Reasons of Attrition ----------------------
As is evident, career growth opportunities are the primary reason followed ----------------------
by the lure of better compensation.
Is this true across sectors? ----------------------
Although compensation is significantly more important to employees in ----------------------

manufacturing, employees in the telecom sector (particularly senior managers)
----------------------
place significantly higher emphasis on career growth opportunities. Across
sectors the trends are the same (i.e. career growth and compensation being the ----------------------
critical reasons for attrition). Only, as in the examples above, the proportions vary
slightly. In the IT sector, work-life balance is a stronger influencer to consider ----------------------
other employment opportunities as compared to job content (8% rated the
----------------------
former as the key influencer while only 4% named the latter).Across functions,
Marketing seems to place equal emphasis on job content and compensation- ----------------------
(13% refer to job content while 12% refer to compensation).
----------------------
Interestingly, the BPO/ITES sector place higher emphasis on job content
as compared to their counterparts from other industries. 10% of employees ----------------------
working in BPO cite Job Content as a factor. When comparing across levels,
senior management (12% named it as a factor) attributes more importance to ----------------------
job content and work-life balance as compared to junior management (6% said
----------------------
that it matters).
So do HR Managers and employees see eye to eye on this one? Do HR ----------------------
managers really understand why employees leave?
----------------------
----------------------
----------------------
----------------------

Notes 68%
70% HR Managers
57%
---------------------- 60% Perspective
(Base : 28)
50% 46% Employees
----------------------
40% Perspective
---------------------- (Base : 174)
30%
---------------------- 20% 16%
7% 8%
---------------------- 10% 4% 5%
---------------------- 0%
Compen- Career Growth Job Work-life
sation & Learning Content balance
---------------------- Oppotunities
68%
---------------------- 70% 64%
56% HR Managers
60% Perspective
----------------------
(Base : 28)
50%
---------------------- Employees
40% Perspective
---------------------- (Base : 341)
30% 23%
---------------------- 20%
7%7% 7%
10% 4%
----------------------
0% Compen- Career Growth Job Work-life
---------------------- sation & Learning Content balance
Oppotunities
----------------------
Fig. 7.7: Reasons for Attrition at Entry and Junior Management Level
----------------------
HR managers seem to think that entry level employees are easily lured by
---------------------- money- but employees at this level claim to differ - they say career growth and
learning opportunities are the key enticers, compensation is a distant second.
---------------------- Should this be believed? Considering that a significantly higher number of
employees (10% entry level employees as opposed to 3% Junior management,
----------------------
5% middle mgmt and 0% Senior management) said they would jump ship even
---------------------- for a hike of less than 20%, maybe employee - speak at this level needs to be
taken with a pinch of salt.
----------------------
At a junior management level also, HR managers underestimate the importance
---------------------- of growth and learning opportunities - to employees it is clearly more important
than compensation. This is probably true given the fact that a majority of the
---------------------- employees at this level said that they would job hop only for salary differentials
---------------------- of 30-40%.
----------------------
----------------------
----------------------

79% Notes
80%% HR Managers
70%% Perspective
(Base : 28) ----------------------
60%% 54% Employees
46% Perspective ----------------------
50%%
(Base : 295)
40%% 29%
----------------------
30%% 23%
----------------------
20%%
9%
10%% 4% 4% ----------------------
0%% ----------------------
sation & Learning Content balance
Oppotunities ----------------------
79%
80%
----------------------
HR Managers
Perspective
70% ----------------------
(Base : 28)
60% 51% Employees
45% ----------------------
50% Perspective
(Base : 76)
40% ----------------------
30% 25% ----------------------
17%
20% 12%
10%
7% 8% ----------------------
0% ----------------------
sation & Learning Content balance ----------------------
Oppotunities
Fig. 7.8: Reasons for Attrition at Middle and Senior Management Level ----------------------
At the middle management level, HR managers seem to have better ----------------------
understood the pulse of the employees - their understanding follows the same
trend as employee perception although the importance attributed to parameters ----------------------
is different. Senior managers clearly state that compensation is a distant second,
----------------------
and this is verified from the fact that almost none of them would consider a job
switch for a pay hike of less than 20%. Majority would only move if the salary ----------------------
differential were above 40%. However, HR Managers give a higher billing
to Job Content over Compensation for Senior Management. They are clearly ----------------------
underestimating the importance of Compensation for executives at this level.
----------------------
Thus, contrary to popular opinion, it is Career Growth and not
Compensation, which prompts employees to jump ship. Given this, spot ----------------------
payments and renegotiated salaries (even deferred payments) can be rather ----------------------
ineffective. If organisations want to retain talent, they need to ensure that their
high potential employees don’t feel stagnated. ----------------------
Yet compensation is important as is evident from above, so it is important ----------------------
for HR managers to understand how much of a salary hike would make an
employee jump ship? Although close to 40% of the employees say 30-40% hike ----------------------

Notes in pay, responses vary across levels, sectors and functions.
The below mentioned charts give an idea about the same.
----------------------
45% 43%
HR Managers Perspective
---------------------- 40% (Base : 28) Mean % 11
36%
---------------------- 35% 32% Employees Perspective
(Base : 174) Mean % 31
---------------------- 30%
25%
25%
---------------------- 21%
20% 18%
---------------------- 15%
10%
---------------------- 10% 7%
5%
----------------------
0%
Upto 20% 20 - 30% 30 - 40% Above 40%
----------------------
% 31% 43%
---------------------- 45% HR Managers Perspective
%
40% (Base : 28) Mean % 11
----------------------
%
35% 31% Employees Perspective
---------------------- 28%
%
30% (Base : 344) Mean % 24
24%
---------------------- %
25% 21%
%
20%
----------------------
%
15% 11%
----------------------
%
10%
---------------------- %
5% 3%
---------------------- %
0%
Upto 20% 20 - 30% 30 - 40% Above 40%
---------------------- 43%
45% HR Managers (Base : 28)
39% Mean % 11
---------------------- 40%
35% 33% Employees (Base : 296)
----------------------
29% Mean % 35
30%
----------------------
25%
---------------------- 19%
20% 18%
14%
---------------------- 15%
10%
---------------------- 5%
5%
----------------------
0%
Upto 20% 20 - 30% 30 - 40% Above 40%
----------------------
----------------------

45% Notes
45% HR Managers (Base : 28)
Mean % 10
40% ----------------------
34%
35% 32% Employees (Base : 77)
29% Mean % 38 ----------------------
30%
25% ----------------------
25%
20% ----------------------
16%
15% ----------------------
10%
4% ----------------------
5% 1%
----------------------
0%
Upto 20% 20 - 30% 30 - 40% Above 40%
----------------------
Fig. 7.9: Charts indicating % Increase in Salary that will make People
shift their Jobs at Entry, Junior, Middle and Senior Management Levels ----------------------
HR managers appear to have underestimated the salary differential, ----------------------

which will cause a person to change his/her job across levels. Across sectors,
----------------------
a significantly higher number of employees in BPO/ITES (especially frontline
employees) said that they would consider a job switch even for a less than ----------------------
20% hike in pay, while in the IT sector majority of the employees say they will
consider a switch for a salary hike of 30-40%. If one was to compare sectors ----------------------
to judge the ‘priciest’, it would have to be IT- significantly higher number
----------------------
of employees here said they would jump only for a salary hike of more than
40%. The ‘pricier among the priciest’ were junior management and frontline ----------------------
employees in the IT sector.
----------------------
Across functions, Brand Management and HR clarify that they would not
consider a switch if salary difference was less than 20%. Employees working in ----------------------
Customer Relationship though, would jump largely for a 30-40% pay hike.
----------------------
Interestingly, people working for companies which rank amongst the top
10% paymasters seem to be the most flighty - a significantly higher percentage ----------------------
said that they would jump even for a raise of less than 20% as compared to
those who work for companies which are in the bottom 50% paymasters. ----------------------
Where do employees leave? ----------------------
IT was the hottest destination for most respondents (33% want to move ----------------------
there), followed by the financial sector (28%) and telecom (18%). Despite
inflated salaries, BPO/ITES ranks lower than manufacturing (12%); BPO/ITES ----------------------
ranks alongside Pharmaceuticals and FMCG at 11%. The trend seems to be
moving to another company operating in the same sector rather than jumping ----------------------
sectors. Only BPO/ITES employees said that they would prefer to move to the ----------------------
IT sector rather than another organisation operating in the BPO/ITES domain,
perhaps because they perceive a value add in moving to IT. ----------------------
Across functions, production/manufacturing seems the least vulnerable to ----------------------

Notes attrition, finance, Training, legal matters, quality, actuarial less so. As expected;
attrition in Marketing and Sales and HR is comparatively higher.
----------------------
----------------------

1. Across functions, IT Industry seems the least vulnerable to attrition,
----------------------
finance, Training, legal matters, quality etc.
---------------------- 2. HR managers underestimate the importance of growth and learning
opportunities at a junior management level.
----------------------
3. Across levels, HR managers overrate the importance to the salary
---------------------- differential, which causes a person to change his/her job.
---------------------- 4. In the IT sector, work-life balance is a stronger influencer to consider
other employment opportunities as compared to job content.
----------------------
---------------------- Activity 2
----------------------
Explain with examples how compensation and benefits as tool to attract
---------------------- talent is effective today.
----------------------
7.17 COMPENSATION STRUCTURES TODAY
----------------------
The following table indicates the pay scales across the sectors of an
----------------------
industry. These are monthly salaries in Rupees (gross figures).
---------------------- Level All Manufacturing IT BPO/ Pharma Telecom Financial
Industry ITES
----------------------
Number of 19 3 3 3 3 3 4
---------------------- responses
Entry Level 17, 912 20,861 18,333 11,500 17,555 22,972 16,667
----------------------
Junior 32, 672 29,671 33,333 25,583 31,111 48,611 28,958
---------------------- Management
Middle 70,380 45,464 65,556 57,500 81,667 83,333 84,167
----------------------
Management
---------------------- Senior 1,51,345 1,39,959 1,15,556 1,35,000 1,50,000 1,47,000 1,99,167
Management
----------------------
Telecom clearly comes across as the top paymaster overall. It is the
---------------------- market leader at the entry and junior levels and second only to the Financial
sector when it comes to paying salaries at the middle level. At the senior level
---------------------- however, it is behind both, Pharma and Financial sectors.
---------------------- Manufacturing is competitive only at the entry level and senior levels.
This is evident from the fact that the manufacturing sector is seen to be a good
---------------------- launch pad for fresh engineers. According to a fresh IIT graduate working in a

leading manufacturing organisation, “Manufacturing is not glamorous but if you Notes
really want to learn, this is where every engineer should begin his career. Even
on Campus, the really bright ones go for the bigger manufacturing firms, not as ----------------------
popular perception will tell you, to IT. For a fresher, in-fact the manufacturing
biggies pay better. The good ones, however, don’t stay, they want to go in for ----------------------
higher studies.” ----------------------
This also partly explains why the sector has been successfully able to lay
----------------------
hands on some high profile talent at the very top level. This is only a partial
explanation, though. As a senior executive with a telecom firm, who has earlier ----------------------
worked with the Tata Group, puts it. “What manufacturing offers besides a
career is a lifestyle. Something we here, are trying to emulate. Besides, look at ----------------------
the challenge. You are dealing with thousands, not hundreds of people and such
----------------------
a heterogeneous profile from double PhDs to matriculates. Where else do you
get to handle complexity of this magnitude?” ----------------------
Summary ----------------------
●● proper survey provides stability in earning, allow individuals to

A ----------------------
reach their full earning potential and to ensure that all staff share in the ----------------------
organisation’s prosperity.
----------------------
●● he compensation package in IT Industry is based on various factors such
T
as his/her educational level, relevant experience in the industry, job’s ----------------------
position in the hierarchy, skills and attributes and job related technicality.
The IT sector designs its compensation packages in ways so as to attract the ----------------------
best talent available. This can be termed innovative and path breaking as
----------------------
the basic compensation components and perks and benefits are combined
in novel and unique ways. ----------------------
●● erk are employee benefits, which in most of the cases are given in
P
----------------------
addition to salary and standard employee benefits. The word, perk or
perks, is a short form of the word perquisite which means incentives, ----------------------
bonuses, extras etc.
----------------------
●● Efforts like compensation surveys etc. are widely used these days to
maintain parity in payment among employees. These surveys ensure ----------------------
that the compensation is competitive, flexible, effectively addresses post
retirement needs, etc. ----------------------
●● merging trends in Compensation are Performance based pay, performance
E ----------------------
based rewards, ESOPs, Fringe benefits etc for making the paying policies
employee friendly. ----------------------
●● he engineering industries are going through the worst phase in their life
T ----------------------
cycles. The products manufactured are getting a lukewarm response from
the customers. As a result, the industrialists are not also willing to risk ----------------------
their investments. The trend of stock exchange for such industries had ----------------------
also been not very encouraging.
----------------------

Notes ●● xcept for a few industrial sectors like pharmaceuticals, fertilisers or agro-
E
based industries, food industries, rest of engineering or manufacturing
---------------------- industries have resorted to the go steady as far as compensation policies
are concerned.
----------------------
---------------------- Keywords
---------------------- ●● evelopment: In the second phase, which is the developmental phase of
D
the company, continues to tap its financers for capital. At this stage the
----------------------
business is seeing its first real revenue flows. The brand is being built up.
---------------------- ●● I deation: At this stage the ideas for the company are germinated and sold
to probable financers. The focus of the start-up is to obtain venture capital
----------------------
funding and launch the idea in the market.
---------------------- ●● J ob requirements: Generally, the more difficult a job, the higher are the
---------------------- wages. Measures of job difficulty were frequently used when the relative
value of one job to another in an organisation was to be ascertained. Jobs
---------------------- were graded according to the relative skill, effort, responsibility and the
job conditions required.
----------------------
●● he living wage: This criterion means that wages paid should be adequate
T
---------------------- to enable an employee to maintain himself and his family at a reasonable
level of existence.
----------------------

---------------------- 1. What are the observations on the compensation survey of IT/Telecom
---------------------- industries?
2. What are the issues related to compensation in the Service/Hospitality
---------------------- industry?
---------------------- 3. Explain the findings of wage and salary administration in the Hospitality
industry.
----------------------
4. What are the aspects of manufacturing or engineering industries’
---------------------- compensation survey?
---------------------- 5. What are the factors that influence wage and salary structure in
manufacturing industries?
----------------------
---------------------- Answers to Check your Progress

Fill in the blanks.
----------------------
1. Jobs in the hospitality sector in general and in hotels in particular are
---------------------- predominately low-skilled and low-paying.
----------------------

2. Mere determination of the wage structure is not enough; it must be Notes
properly implemented and administered.
----------------------
3. A competitive and equitable pay structure ensures industrial peace and
lowered percentage of labour turn-out. ----------------------
----------------------
Fill in the blanks.
----------------------
1. Perks comes up to mean benefits or extras over and above the normal
comprehensive benefits package. ----------------------
2. Employee Stock Options plans is used as a means of ensuring that ----------------------
employees take more responsibility and ownership for their work by
making them a shareholder in the growth of the company. ----------------------
3. The business expansion and globalisation of Indian organisations has ----------------------
made telecom sector a viable career option.
----------------------
1. False ----------------------
2. True ----------------------
3. True
----------------------
----------------------
1. False ----------------------
2. True ----------------------
3. False ----------------------
----------------------
----------------------
1. True
2. False ----------------------
3. True ----------------------
Fill in the blanks.
----------------------
1. Prevailing Market Rate is termed as an organisation’s policy which
generally tended to conform to the wage-rates payable by the industry ----------------------
and the community.
----------------------
2. A trade union’s bargaining power was often measured in terms of its
membership, its financial strength and the nature of its leadership. ----------------------
----------------------

Notes 3. The cost of living pay criterion is an automatic minimum equity pay
criterion which reviews pay adjustments based on changes in an acceptable
---------------------- cost of living index.
---------------------- 4. Top management’s desire to maintain or enhance the company’s prestige
had been a major factor in determining wage policy.
----------------------
---------------------- 1. In order to compete, the companies have to strike a fine balance between
bottom- line orientation and a genuine concern for the employee.
----------------------
2. The key factors behind attracting talent are Career Growth and Learning
---------------------- opportunities.
---------------------- 3. Compensation and Job content are critical factors that drive performance
from an employee perspective.
----------------------
4. Compensation needs to feature more prominently in strategies aimed at
---------------------- driving performance and building workforce capability.
----------------------
----------------------
1. False
---------------------- 2. True
---------------------- 3. False
---------------------- 4. True
----------------------
Suggested Reading
----------------------
---------------------- Managerial Remuneration and Wage & Salary Administration: a
Professional Manual. Deep and Deep Publications.
----------------------
----------------------
---------------------- 4. Goel, Diwakar. Performance Appraisal and Compensation Management:
----------------------
5. Henderson, Richard I., Sandra Vasa-Sideris, Barbara Bernal Thomas.
---------------------- Compensation Management in a Knowledge-Based World: Exercise
6. Upadhyay, S.S. Compensation Management: Rewarding Performance.
---------------------- Global India Publications.
----------------------
----------------------

Pay Structure Today and Tomorrow
UNIT
8
Structure:
8.1 Introduction
8.2 Compensation Structure
8.3 Types of Compensation
8.5 Tax Planning and Payroll Components
8.6 Perquisites
8.7 Budget : How to save Income Tax
8.8 What does the Budget hold for Retail Investors
8.9 Pay Structure: Today and Tomorrow
8.10 New Trends in Compensation, Expectations of the Executive Cadre
vis-a-vis Rational Pay Structure
Summary
Key Words
Suggested Reading
Pay Structure Today and Tomorrow 217

Notes
Objectives
----------------------
----------------------
• State the components of compensation structure
----------------------
• Justify how the tax planning is done
---------------------- • Evaluate the valuation of perquisites as per Income Tax Act
---------------------- • Explain the budgetary provisions to save the income tax
---------------------- • Compare the pay structure of today’s with that of tomorrow
----------------------
---------------------- 8.1 INTRODUCTION

---------------------- Compensation system, policies and review philosophies of any
organisation are the most vital factors for motivation, retentions and the morale
---------------------- amongst the employees. The evaluation of the compensation system for the
---------------------- larger organisations came mostly from the pre independence British companies
and was generally paternalistic and protective. The system provided 20-30 year
---------------------- grade skill of basic salary of each level of employees with other fixed allowances
for each grade. To meet the inflationary trends, a dearness allowance system
---------------------- was introduced during the World War II days in the early forties.
---------------------- Many companies had chosen to use somewhat shady reimbursements or
perquisite routes, in order to contain the overall costs in the assumption of
---------------------- being non-taxable, and therefore, meeting the compensation needs more easily,
---------------------- rather than the larger cost of taxable increases for the same net gain. The basic
salary as the main component of overall compensation had also consequently
---------------------- lowered with reduced indirect component cost that affected the retiral benefits
substantially, often ignored by the company.
----------------------
---------------------- 8.2 COMPENSATION STRUCTURE

---------------------- Management compensation plays a very significant part along with
the working style and environment. Some of the common components of
---------------------- compensation are as follows:
---------------------- ●● Basic salary or consolidated salary.
---------------------- ●● earness allowance which varies as per the changes in cost of living
D
allowance
----------------------
●● rade-wise flat allowances such as house rent allowance, conveyance
G
---------------------- allowance, canteen allowance, uniform washing allowance, entertainment
allowances, etc.
----------------------
●● eimbursement of expenses such as telephone reimbursement, petrol
R
---------------------- reimbursement, medical reimbursement, uniform reimbursement, etc.

●● Annual payments such as bonus, ex-gratia and LTA, etc. Notes
●● enefits such as company-owned or leased accommodation, use of
B
----------------------
company or leased vehicle, medical coverage, retirement benefits such as
provident fund, pension fund, superannuation and gratuity, post retirement ----------------------
medical assistance, low or zero interest loans for housing, cars or vehicles,
furniture or utility items, renting employee owned housing, club entrance ----------------------
fee reimbursement, provision of security, driver or gardening assistance,
----------------------
sale of products or assets at concessional rates, relocation and transfer
expenses, etc. ----------------------
●● Employee stock option schemes.
----------------------

1. Compensation system, policies and review philosophies of any ----------------------
organisation are the most vital factors for motivation, retentions and
the morale amongst the employees. ----------------------
2. To meet the inflationary trends, a dearness allowance system was ----------------------

introduced during the World War II days in the early forties.
----------------------
3. Management compensation never plays a significant part along with
the working style and environment. ----------------------
----------------------
8.3 TYPES OF COMPENSATION
----------------------
There are two major kinds of wage and salary payment plans:
----------------------
Those under which remuneration does not vary with output or the quality
of output, but depends on the time unit consumed in performing work. These ----------------------
are known as time wage plans. The time unit may be the day, week, fortnight or ----------------------
month. Time plans are non-incentive in the sense that earnings during a given
time period do not vary with the productivity of an employee during that period. ----------------------
The second kind is concerned with the output or some other measure ----------------------
of productivity during a given period of time. To earn more, an employee is
required to put in more labour and produce more. This kind is known as the ----------------------
piece or output wage plan. It is a direct financial incentive plan, thus, the ‘time’
and the ‘output’ wage plan are the two basic systems. All the other plans are ----------------------
simply variations of these two. ----------------------
8.4 ROLE OF COMPENSATION AND REWARDS IN ----------------------

MODERN ORGANISATIONS ----------------------
A compensation framework that supports a long-term strategic vision for ----------------------
compensation and implements new initiatives will provide the needed direction,
and the changes will involve moving towards solving special salary problems ----------------------

Notes using innovative concepts. The way we compute compensation is undergoing
a major change towards a more flexible and timely corporate compensation
---------------------- systems. The new system will have increased delegation to managers and will
be driven by the business needs of government and ministries. It will be faster,
---------------------- more efficient and eliminate duplication and focus on a long-term approach to
---------------------- compensation management.
It will move from being a highly centralised approach whereby senior
----------------------
managers will have increased authority to make decisions, integrate compensation
---------------------- with other areas of human resource management and emphasise transparency,
monitoring, reporting and accountability. The vision for compensation will
---------------------- assist the public service in attracting and retaining key employees.
---------------------- Managers will have more accountability for compensation of their
employees and will be profiled with the required tools, systems and support.
---------------------- Senior managers will also have the authority to approve the classification levels
of pre-identified jobs within their organisation.
----------------------
Rewards and compensation must be scrutinised. Employee motivation
---------------------- and performance are critical. Non-monetary rewards can be as important as
monetary rewards.
----------------------
Framework of a compensation policy, employee motivation and
---------------------- performance management depend on good systems that offer both, financial
---------------------- and non-financial rewards. This performance management article applies to
all organisations. Constant changes and high expectations are taking their toll
---------------------- in some organisations, as well as in the industry and government generally.
Sometimes this is shown in employee turnover. Sometimes it is hidden because
---------------------- of job insecurity. Many employees make a New Year’s resolution to seek other
---------------------- employment. Many are also seeking more balance in their life.
In some organisations, a multitude of different salary and pay arrangement
---------------------- exists. It is time to bring these different systems into a new framework.
---------------------- Employees at all levels need to have confidence in the salary administration
system. Employees want the rewards to be shared fairly and equitably. If they
---------------------- are not, dissatisfaction can cause severe morale and performance problems.
---------------------- If they haven’t done so already, leading organisations will need to
establish an improved salary administration structure. It is possible to develop
---------------------- a simple structure that overcomes the difficulties of the past, yet is simple
enough for everyone in the organisation to understand. This structure can be
---------------------- tied to a completely new performance management approach, including better
---------------------- performance appraisal mechanisms.
Some industry’s remuneration systems have been dominated by the
----------------------
industrial relations system. Enterprise bargaining and local area agreements,
---------------------- individual performance based contracts and the effects of compensation on
organisational structures have had a big impact.
----------------------
A good rewards and remuneration system ensures that each person
---------------------- receives the appropriate financial and non-financial recognition to account for

the personal contribution they are making and the overall value of their position Notes
to the organisation.
----------------------
This includes
●● reating and maintaining an organisational structure and culture that
C ----------------------
facilitates employee and organisational performance.
----------------------
●● ecognising and rewarding individual and team performance, financially
R
or otherwise, in relation to the overall contribution implementing ----------------------
compensation systems that fairly treat and recognise all employees
----------------------
regardless of their level within the organisation. This is the equity issue. It
involves matching remuneration with the contribution made, particularly ----------------------
where job requirements can change rapidly.
----------------------
The best performance appraisal system in the world will not work if it
is linked to a rewards and remuneration system that employees do not trust or ----------------------
support.
----------------------
A motivated employee will achieve a great deal. A de-motivated employee
will be slow, prone to error and not likely to achieve. Motivation influences ----------------------
performance. It also suggests that the ‘lack of’, ‘promise of’, or ‘receipt of’
either financial or non-financial rewards may also influence motivation. A ----------------------
feedback loop between motivation and performance exists, with each potentially ----------------------
impacting the other.
Remuneration is a component of both financial and non-financial rewards; ----------------------
financially, in terms of cash and benefits received; non-financially in terms of ----------------------
recognition, status and esteem, for example, the status of full private use of
a motor vehicle. Job evaluation is a process to determine the contribution of ----------------------
a position to an organisation. It needs to be seen by both the employee and
organisation as fair and equitable. ----------------------
Good salary administration requires that employees receive financial ----------------------

reorganisation for the contribution that they make, and that positions of equal
----------------------
value should be entitled to equal compensation. If an organisation handles
this incorrectly, or manipulates it in some way, the impact on the employee is ----------------------
significant. Past pay systems often paid little attention to incentives. It is only
in the recent years that some systems have provided for differentials based on ----------------------
performance. The concept of fair incentives should be on the agenda.
----------------------
The only way the employees will fulfil your dream is to share in their
dream. Reward systems are the mechanisms that make this happen. However, ----------------------
reward systems are much more than bonus plans and stock options. While they
----------------------
often include both of these incentives, they can also include rewards and other
recognition, promotions, reassignment, non- monetary bonuses (for example, ----------------------
vacations), or a simple thank you.
----------------------
----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. __________ are remuneration which does not vary with output or
---------------------- the quality of output, but depends on the time unit consumed in
performing work.
----------------------
2. Framework of a compensation policy, __________ and __________
---------------------- depend on good systems that offer both, financial and non-financial
rewards.
----------------------
3. Employees rewards when not shared fairly and equitably, can cause
---------------------- _______ and __________ problems.
---------------------- 4. Good salary administration requires financial reorganisation
which ensures positions of equal value should be entitled to equal
---------------------- __________.
----------------------
---------------------- Activity 1
---------------------- Prepare a compensation structure for your executives.
----------------------
---------------------- 8.5 TAX PLANNING AND PAYROLL COMPONENTS

---------------------- Section 15 of Income Tax Act 1961 states that tax is chargeable in respect
of salaries, which are due from an employer or former employer, whether paid
---------------------- or not, which are paid whether due or not and any arrears of salary paid or
allowed to an assessee in the previous year.
----------------------
According to Section 17 (1) the salary chargeable includes:
----------------------
1. Salary/Wages
---------------------- 2. Any annuity or pensions, gratuity, etc. Gratuity paid to employees by the
---------------------- Government, a local authority is altogether excluded from the computation
of the total income.
---------------------- 3. Any gratuity, in case of employees in private employment, the amount of
---------------------- gratuity to be excluded from total income will be the least of the following:
a) 15 days salary for each completed year of service
----------------------
b) Rs. 20,00,000/-
---------------------- 4. Any fees, commission, perquisites or profits in lieu of or in addition to
any salary or wages, voluntary payments by the employer.
----------------------
5. Any advance of salaries.
---------------------- 6. Any annual accretion to the account of any employee participating in a
---------------------- recognised provident fund in excess of 12% of employee’s salary and
interest thereon.
7. The balance transferred from an unrecognised provident fund to a Notes
recognised provident fund account of an employee.
----------------------
8. The amount refunded in the previous year out of the deduction made
previously under the Additional Emoluments Compulsory Deposit Act is ----------------------
included in the salary income.
----------------------
9. Payments received by an employee from the employer on retirement,
termination or dismissal from the service. ----------------------
8.6 PERQUISITES ----------------------
----------------------
The payment of perquisites is included in the term salary, which includes
any casual emolument, fee or profit attached to an office in addition to the salary ----------------------
paid by the employer to his employee voluntarily or otherwise, and they may be
in cash or kind or in the form of benefits and amenities. ----------------------
Perquisites are classified as under: ----------------------
1. Taxable in all cases
----------------------
a) Value of rent-free or concessional rent accommodation
----------------------
b) Any sum paid by the employer in respect of any obligation which
would have been payable by the assessee for example, insurance ----------------------
premium.
----------------------
c) Any sum payable by the employer directly or through a fund to
effect an assurance policy on the life of the employee or to effect a ----------------------
contract or an annuity.
----------------------
2. Taxable under specific cases
----------------------
The value of the following perquisites is included in salary income only
in respect of the assessee. ----------------------
a) Who is a director of a company ----------------------
b) Who has a substantial interest in the employer-employee i.e. holding
shares carrying 20% or more voting rights. ----------------------
c) Whose income under the head salary exceeds Rs. 24000/- p.a. the ----------------------
perquisites are valuation of a motorcar provided by the employer,
value of gas, electricity, water provided free of cost, gardener’s ----------------------
wages paid by employer, educational expenses in case the employer ----------------------
runs educational institutions, wages of sweepers/ watchman paid by
the employer. ----------------------
3. Non taxable perquisites ----------------------
The value of following perquisites is exempt from tax and it is not included
----------------------
in salary income of any employee.
a) Valuation of reimbursement of medical expenses/medical facilities ----------------------
by the employer. Exemption from tax will be available in respect of
----------------------

Notes expenses incurred by the employer in respect of an employee and
members of his family in an employer’s hospital. Reimbursement of
---------------------- medical expenses incurred by an employee on his medical treatment
or that of any member of his family in a government of local authority
---------------------- or government approved hospital, in respect of prescribed diseases
---------------------- in a hospital approved by the chief commissioner of income tax,
provided that he fulfils certain conditions.
----------------------
Payment or reimbursement of premium in respect of health insurance
---------------------- of the employee or any member of his family under the scheme
approved. Reimbursement of expenses incurred for the treatment of
---------------------- an employee or any member of his family in a private nursing home
not exceeding Rs. 15000/-.
----------------------
b) Recreation facilities: Any expenditure incurred by an employer in
---------------------- respect of recreational facilities provided to a group of employees.
---------------------- c) Gardener’s wages: If the employer for a house in which the
employee resides employs a gardener and the wages paid to him by
---------------------- the employer are exempt but if the house belongs to an assessee or
if the employer rents it, this exemption is not allowed.
----------------------
d) Refreshment: Any expenditure incurred by the employer in respect
---------------------- of refreshment provided to the employee during office hours and
---------------------- in the office premises only. However, expenditure up to Rs. 35/-
per day per employee shall be treated as employee’s income if the
---------------------- amount is paid directly to the supplier.
---------------------- e) Transport facilities: Transport facilities given free of charge or at

concessional rates by the employer engaged in transport business to
---------------------- his employee or member or member of his family.
---------------------- f) Telephone bill: Payment of telephone bill by the employer for the
telephone installed at the residence of an employee.
----------------------
g) Refresher course etc.: Amount spent by an employer on training of
---------------------- employees or on undergoing any refresher course or management
course. However, if the employee pays fees for attending such a
---------------------- course from deduction from salary income is not allowed.
---------------------- h) Perquisites allowed or allowances paid by the government to a
citizen of India, outside India for rendering services outside India.
----------------------
i) Premium paid by the employer on the personal accident policy of
---------------------- the employees.
---------------------- j) Goods manufactured by the employer sold to employees at

concessional rates.
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. Value of rent-free or concessional rent accommodation is a perquisite,
which is taxable in all cases. ----------------------
2. Valuation of reimbursement of medical expenses/medical facilities ----------------------
by the employer is not a tax exempted perquisite.
----------------------
3. Goods manufactured by the employer sold to employees at
concessional rates is a tax exempted perquisite. ----------------------
----------------------
8.7 BUDGET: HOW TO SAVE INCOME TAX
----------------------
Tax reforms have conventionally been considered to be a rather contentious
----------------------
area that was left untouched by most in the past. However, the finance minister
ventured into this contentious territory and has emerged standing tall! ----------------------
As a part of the process, benefits under Section 88 have been scrapped
----------------------
and Section 80L has been omitted. Instead the finance minister has proposed a
new regime wherein each taxpayer will be allowed a consolidated limit of Rs 1 ----------------------
lakh for savings.
----------------------
Simply put, investors can now make investments up to Rs 1 lakh, from
their income chargeable to tax; the same will be treated as a deduction from the ----------------------
income. More importantly, all prevailing sectoral caps have been removed i.e.
within the abovementioned Rs 1 lakh investors will have a free hand to make ----------------------
investments as per their own choice.
----------------------
This is contrary to the earlier regime wherein Section 88 benefits could be
claimed by investors subject to stated upper limits for example, investments in ----------------------
equity-linked savings schemes (ELSS) had a cap of Rs 10,000 for the purpose ----------------------
of claiming tax benefits.
Also, deductions in certain areas like interest payments towards home ----------------------
loans, contributions towards medical insurance premium, interest on loans taken ----------------------
for higher education, etc. have been left unchanged. Investors are free to claim
benefits from the same over and above the stipulated Rs 1 lakh investments. ----------------------
A new tax structure has been introduced as well. ----------------------
8.8 WHAT DOES THE BUDGET HOLD FOR RETAIL ----------------------

INVESTORS ----------------------
Retail investors have every reason to rejoice. While Section 88 benefits ----------------------
and Section 80L have ceased to exist, investors continue to have the opportunity
to reduce their tax liabilities by investing the earmarked sum of Rs 1 lakh. ----------------------
Investments in small savings schemes, ELSS, contributions to insurance policies
----------------------

Notes and pension plans, etc have all been made a part of the eligible Rs 1 lakh. On
a positive note, tax benefits will no longer dictate the investors’ investment
---------------------- decisions.
---------------------- Now investors have the opportunity to create a portfolio based on their
individual preferences and needs rather than from the tax-saving perspective.
---------------------- Hence, if you are an investor with a high-risk appetite, invest a significant
portion of your portfolio to ELSS, and on the contrary, retirees and conservative
----------------------
investors can opt for the small savings segment.
---------------------- In the erstwhile tax regime, investors with a gross total income of more
than Rs 5 lakh could not claim any benefits under Section 88; this disparity has
----------------------
been done away with since investors across tax brackets can utilise the Rs 1
---------------------- lakh deduction. The new tax regime permits investors to plan their finances as
per their individual needs, round of applause for his efforts.
----------------------
(*Students should refer to the latest changes and amendments in the
---------------------- Income Tax laws for updated knowledge.)
---------------------- 8.9 PAY STRUCTURE: TODAY AND TOMORROW

----------------------
The social impact of pay structure on an individual’s lifestyle is evident as
---------------------- persons working in multinational companies on a higher position enjoy lavish
lifestyle. Their overall lifestyle is expensive, they are fond of health clubs,
---------------------- expensive cars, living in large housing complexes with five star amenities,
wearing of expensive and branded clothing, and have a small family with
----------------------
an addiction for consumerism. The individuals from various levels of the
---------------------- organisation have different lifestyles and habits.
As both husband and wife are working now-a-days, family values have
----------------------
drastically changed. The necessities of crèches, ready to cook recipes and junk
---------------------- food have transformed the family. The joint family system has diminished, old
age homes are a reality, and parent-child relationships have undergone a sea
---------------------- change.
---------------------- Because of rapid industrialisation, the gap between rich and poor is
widening. Due to continuous increase in salaries and wages every year, the
---------------------- habits of spending have undergone a change. The persons who have jobs and a
---------------------- reasonable salary or wage are not worrying about the money and are willing to
buy things, and articles beyond their buying capacity. The tendencies of resorting
---------------------- to availing loans from financial institutions, banks and buying articles, a house,
luxury items, car and two wheelers on instalment have an impact on changing
---------------------- pay structures. Saving habits have been getting converted into spending habits.
---------------------- The members of society have had a direct impact of such changes in
the pay structures. Society also becomes money minded. The value systems
---------------------- changes, issues like consumerism, corruption and dreaming for unrealistic
---------------------- dreams bring about the change in every member of society. The whole society
undergoes the change in their approach of life and is called an industrial society.
----------------------

The changes in the pay structures of a few handfuls, in the hierarchy Notes
of the different business organisations bring about a change in the pricing of
real estate, construction as well as infrastructure industries. The prices of flats ----------------------
and houses have gone up. The persons employed with sufficient salaries and
wages opt for lucrative offers from the builders and construction industries. ----------------------
New complexes are constructed to suit the needs of these newly born class of ----------------------
consumers who are willing to pay extra for the amenities offered to them. The
gap between rich, higher middle class, middle class and poor is increasing day ----------------------
by day.
----------------------

1. The changes in the pay structures in the hierarchy of business ----------------------
organisations, does not bring about a change in the economic scenario.
----------------------
2. Industrial Society is affected with issues like consumerism, corruption
and dreaming for unrealistic dreams by members of society. ----------------------
3. An investor with a high-risk appetite invests his money in small ----------------------
savings segment.
4. Because of rapid industrialisation, the gap between rich and poor is ----------------------
widening. ----------------------
----------------------
8.10 NEW TRENDS IN COMPENSATION, EXPECTATION
OF THE EXECUTIVE CADRE Vis a Vis RATIONAL PAY - - - - - - - - - - - - - - - - - - - - - -
STRUCTURE ----------------------
Executive compensation plays a very significant part along with the ----------------------
working style and environment in the organisational success strategy. However,
individual organisations may have differences in their methodologies based ----------------------
on factors best suited to them but some general trends are evident and are as ----------------------
follows:
----------------------
a) Salary, basic salary or consolidated salary continuously to remain
the major component of compensation. Individual salary now-a-days ----------------------
is decided by using certain grades or scales initially but thereafter
performance, contribution to targets or results generated determine the ----------------------
revisions periodically, has been the reason for such varying salary from
----------------------
individual to individual.
b) Grade wise flat allowances have also been considered generally, except ----------------------
where tax exemption benefits are still available. Allowances may be
----------------------
linked to the salary as a percentage or by slabs. However, the preference
is still on flat amounts, which do not increase automatically and as such ----------------------
increases could be discretionary and are controllable.
----------------------

Notes c) Reimbursements of expenses incurred on company work has become
limited and in line to conform to the tax laws. They are not considered as
---------------------- a part of compensation unless it is provided towards personal benefits.
---------------------- d) Annual payments such as bonus, commission and leave travel are common
features and some tax reliefs apply for the later. Some kind of attendance
---------------------- bonus or management incentive plan depending on the performance of
individuals is also being designed to maintain the manpower required in
----------------------
the organisation.
---------------------- e) Additional benefits like unfurnished company owned or leased
accommodation, use of company or leased vehicles, medical coverage,
----------------------
retrial benefits covering provident fund, pension or super annuation and
---------------------- gratuity, post-retiral medical assistances, easy loan schemes at low or zero
interest rates for house building, cars or vehicles, furniture or utility items,
---------------------- etc. renting employee owned housing, club entrance fee reimbursement,
etc. Minor benefits could be provision of security, driver or gardening
----------------------
assistance, sale of products or assets at concessional rates, relocation and
---------------------- transfer expenses including admission, etc. fees for children, credit card
fees, phones, etc. are also getting popular among modern day organisation.
----------------------
f) Employee stock option plans (ESOP) which is popular in the IT industry
---------------------- is not extensively used yet by other industries nor seen as being very
attractive with lesser growth trends and a fall in the share values, especially
---------------------- in the well established older companies.
---------------------- g) Most companies used the total cost to the company concept as basis for
calculation.
----------------------
Cost of most benefits are averaged or computed on actual basis and
---------------------- included in the above. Greater openness is practiced and individual
flexibility within the system of the overall cost with greater compliance
---------------------- of the tax laws is practiced.
---------------------- h) Retiral benefits are important to any employees but the younger generation,
especially the IT professionals, do not consider it as an advantage unless
---------------------- the benefit value is available to them on moving to a new job.
---------------------- i) Performance bonus that does not increase future liabilities is being given
more and more as a recognition as a result generated. Emphasis on variable
----------------------
performance pay or bonus as a reward is getting to be an important and
---------------------- growing component of the compensation system. It requires transparently,
a balance and fair system and also agreed targets by managers in advance
---------------------- during planning and review discussions.
---------------------- j) Compensation review periods have become annual generally and
sometimes often as compared to every 3 to 5 years earlier in the fast
---------------------- changing market situation. The employee cost increase has to be set off
through productivity and greater contribution from the resources. This
----------------------
requires constant market data on compensation practices and its analysis
---------------------- for determining the strategy.

k) Retention strategies employed are generally the attractive interest free or Notes
low rates for loans, on which market rate of interest may apply on early
exit, renting employee owned property to set off repayment of loans, ----------------------
qualifying periods or attractive service benefits provided to the retiral
benefits or post-retiral benefits etc. besides the terms, compensation ----------------------
and any special deals. Managers and teams having commitment require ----------------------
empowerment, a lean and supportive structure and healthy organisational
climate. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. In Executive Compensation, individual salary revision is determined
by ________, contribution to targets or periodical ___________. ----------------------
2. Emphasis on _______ or bonus as a reward is an important and
----------------------
growing component of the compensation system.
3. ___________ is a popular Executive compensation mode in the IT ----------------------
industry. ----------------------
4. ______________ requires constant market data on compensation
practices and its analysis for determining the strategy. ----------------------
----------------------
----------------------
Activity 2 ----------------------
Prepare tax planning for an employee drawing a salary of Rs. 5 lakhs p.a. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Summary
---------------------- ●● ompensation structure is the most important factor of employee
C
remuneration.
----------------------
●● he types of compensation systems and the role of compensation and
T
---------------------- rewards cannot be underestimated.
---------------------- ●● here is also another factor which is most important from the point of view
T
of both the management and the employees, which is the tax planning and
---------------------- payroll components.
----------------------
Keywords
----------------------
●● ardener’s wages: If the employer for a house in which the employee
G
----------------------
resides and employs a gardener and the wages are paid to him by the
---------------------- employer, they are called the gardeners wages.
●● Recreation facilities: Any expenditure incurred by an employer in
----------------------
respect of recreational facilities provided to a group of employees.
---------------------- ●● efreshment: Any expenditure incurred by the employer in respect of
R
refreshment provided to the employee during office hours and in the
----------------------
office premises only.
---------------------- ●● efresher course etc.: Amount spent by an employer on the training of
R
---------------------- employees or on undergoing any refresher course or management course.
●● ransport facilities: Transport facilities given free of charge or at
T
---------------------- concessional rates by the employer engaged in transport business to his
---------------------- employee or member or member of his family.
●● elephone bill: Payment of the telephone bill by the employer for the
T
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Describe the components of income from salaries.
2. How can income tax be saved? ----------------------
3. What is the role of compensation and rewards in a modern organisation? ----------------------
4. Describe the social impact of pay structure on an individual’s lifestyle. ----------------------
5. Explain the new trends in executive compensation.
----------------------
6. Write short notes.
----------------------
a. Perquisites
b. New tax brackets and rates ----------------------
c. Components of compensation ----------------------
d. Income from salaries ----------------------
e. Non-taxable perquisites
----------------------

1. True
----------------------
2. True
----------------------
3. False
1. Time wage plans are remuneration which does not vary with output or the ----------------------
quality of output, but depends on the time unit consumed in performing work.
2. Framework of a compensation policy, Employee motivation and ----------------------
Performance management depend on good systems that offer both, ----------------------
financial and non-financial rewards.
3. Employees rewards when not shared fairly and equitably can cause ----------------------
Morale, and Performance problems. ----------------------
4. Good salary administration requires financial reorganisation which
----------------------
ensures positions of equal value should be entitled to equal Compensation.
1. True ----------------------
2. False
----------------------
3. True

----------------------
1. False
----------------------
2. True
---------------------- 3. False
---------------------- 4. True

Fill in the blanks.
----------------------
1. In Executive Compensation, individual salary revision is determined by
---------------------- performance, contribution to targets or periodical results.
---------------------- 2. Emphasis on variable performance pay or bonus as a reward is an
important and growing component of the compensation system.
----------------------
3. Employee stock option plans (ESOP) is a popular Executive compensation
---------------------- mode in the IT industry.
---------------------- 4. Compensation review requires constant market data on compensation

practices and its analysis for determining the strategy.
----------------------

---------------------- 1. Bhatia, S.K. New Compensation Management in Changing Environment:
---------------------- 2. Bhattacharya, Dipak Kumar . Compensation Management. OUP India.
---------------------- 3. Bhattacharya, Mausomi. Compensation Management. Excel Books India.

----------------------
----------------------
Book. Prentice Hall.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Incentives, Reward System and Pay Restructuring
UNIT
9
Structure:
9.1 Introduction and Meaning of Incentive

9.2 Determinants of Incentives
9.3 Wage Incentives
9.4 Features of Profit Sharing
9.5 Pre-requisites of a Good Wage Incentive Scheme
9.6 Non-monetary Incentives
Summary
Key Words
Suggested Reading
Incentives, Reward System and Pay Restructuring 233

Notes
Objectives
----------------------
----------------------
• Define the meanings and determinants of incentives
----------------------
• List the merits of wage incentive schemes
---------------------- • Explain the features and characteristics of profit sharing
---------------------- • Describe the types, forms and requisites for profit sharing
---------------------- • Justify the pre-requisites of wage incentive schemes in India
----------------------
---------------------- 9.1 INTRODUCTION AND MEANING OF INCENTIVES

---------------------- “The thing about an incentive plan is that people take notice. [If you don’t
have the right objectives], you can meet your goal and run yourself right out of
---------------------- business.” - Jim Bernstein, CEO, General Health Inc.
---------------------- An ‘incentive’ or ‘reward’ can be anything that attracts a worker’s
attention and stimulates him to work. In other words, “An incentive scheme is a
---------------------- plan or a programme to motivate individual or group performance. An incentive
---------------------- programme is most frequently built on monetary rewards (incentive pay or
monetary bonus), but may also include a variety of non-monetary rewards or
---------------------- prizes.”
---------------------- On the other hand, the term “incentive system has a limited meaning
that excludes many kinds of inducements offered to people to perform work,
---------------------- or to work up to or beyond acceptable standards. It does not include: i) wage
salary payments and merit pay, ii) overtime payments, pay for holiday work
----------------------
or differential according to shifts i.e., all payments which could be considered
---------------------- incentives or perform work at undesirable times; and iii) premium pay for
performing danger tasks. It is related with wage payment plans which tie wages
---------------------- directly or indirectly to standards of productivity or to the profitability of the
organisation or to both the criteria.”
----------------------
The use of incentives assumes that people’s actions are related to their
---------------------- skills and ability to achieve important longer-run goals. Even though many
organisations, by choice, or tradition or contract, allocate rewards on non-
----------------------
performance criteria, rewards should be regarded as a “pay off” for performance.
---------------------- An incentive plan has the following important features:
---------------------- ●● An incentive plan may consist of both, ‘monetary’ and ‘non-monetary’
elements. Mixed elements can provide the diversity needed to match the
---------------------- needs of individual employees.
---------------------- ●● The timing, accuracy and frequency of incentives are the very basis of a
successful incentive plan.
----------------------

●● The plan requires that it should be properly communicated to the Notes
employees to encourage individual performance, provide feedback and
encourage redirection. ----------------------
----------------------
9.2 DETERMINANTS OF INCENTIVES
----------------------
These features are contingencies, which affect the suitability and design
of incentives to varying degrees. The effective use of incentives depends on ----------------------
three variables - the individual, work situation, and incentive plan.
----------------------
The Individual and the Incentives: Different people value things
differently. Enlightened managers realise that all people do not attach the same ----------------------
value to monetary incentives, bonuses, prizes or trips. Employees view these
things differently because of age, marital status, economic need and future ----------------------
objectives. However, even though employee reactions to incentives vary ----------------------
greatly, incentives must have some redeeming merits. For example, there might
be a number of monetary and non-monetary incentive programmes to motivate ----------------------
employees. Money, gift certificates, praises, and merit pay, are of the continuous
parade of promotions. ----------------------
The work situations: This is made up of four important elements: ----------------------

a) Technology, machine or work system: if speed of equipment operation ----------------------
can be varied, it can establish the range of the incentive
----------------------
b) Satisfying job assignments; a workers’ job may incorporate a number of
activities that he finds satisfying. Incentives may take the form of earned ----------------------
time-off, great flexibility in hours worked, extended vacation time and
other privileges that an individual values ----------------------
c) Feed back; a worker needs to be able to see the connection between his ----------------------
work and rewards. These responses provide important reinforcement
----------------------
d) Equity, a worker considers fairness or reasonableness as part of the
exchange for his work Incentives, in general, are important motivators. ----------------------
Their effectiveness depends upon three factors: drives, preference
value, and satisfying value of the goal objects. “Beyond subsistence ----------------------
level, becoming/career needs (self-actualisation needs) possess greater ----------------------
preference value and are more satisfying than deficiency needs (which are
necessary for survival). Below the subsistence level, however, the reverse ----------------------
holds true.”
----------------------
Following generalisations are derived from above:
----------------------
i) Incentives, whether they are monetary or non-monetary, tend to increase
the level of motivation in a person. ----------------------
ii) Financial incentives relate more effectively with basic motivation or
----------------------
deficiency needs.
iii) Non-financial incentives are linked more closely with higher motivation, ----------------------
or becoming needs. ----------------------

Notes iv) The higher the position of a person in an organisation’s hierarchy, the
greater is his vulnerability to non-financial incentives.
----------------------
“While budgetary restrictions and temporary improvements in performance
---------------------- place a limit on the potency of money as a motivator, non-financial incentives
involve only human ingenuity as investment and also insure a relatively stable
---------------------- acceleration in output. Monetary incentives imply external motivation; non-
financial incentives involve internal motivation. Both are important. It is a
----------------------
judicious mix-up of the two that tends to cement incentives with motivation.”
---------------------- Rewards or incentives can be classified into:
---------------------- i) Direct compensation and
---------------------- ii) Indirect compensation

Direct Compensation includes the basic salary or wage that the individual
---------------------- is entitled to for his job, over-time work and holiday premium, bonuses based
---------------------- on performance, profit sharing and opportunities to purchase stock options, etc.
Indirect Compensation includes protection programmes (insurance
---------------------- plans, pensions); pay for time not worked, services and perquisites. But these
---------------------- are maintenance factors rather than reward components. Since they are made
available to all employees, irrespective of performance, they will tend to retain
---------------------- people in the organisation but not stimulate them to greater effort and higher
performance.
----------------------
Sometimes, the rewards are also termed as ‘Intrinsic’ rewards and
---------------------- ‘Extrinsic’ rewards. The former are those that an individual receives for himself.
They are largely a result of the job that the worker does. The techniques of
----------------------
job enrichment, shorter work weeks, flexible work hours, project structures,
---------------------- and job rotation can offer intrinsic rewards through providing interesting and
challenging jobs, and allowing the market greater freedom.
----------------------
On the other hand, the latter rewards refer to direct compensation, indirect
---------------------- compensation, and non-financial rewards. The diagram on the next page gives
us some idea about the structure of rewards.
----------------------
Controversy prevails over the issue whether only ‘money’ motivates the
---------------------- individual. The supporters of the view say that money is potentially an effective
motivation. For example:
----------------------
“Money may potentially be an effective motivator, regardless of the level
---------------------- one has attained and the organisation or the amount of money he is earning.”
---------------------- “Money does appear to have a good deal of symbolic value, and it does
mean different people having differing bio-graphics or backgrounds of training
---------------------- and experience.”
---------------------- “For same people, money can be instrumental in satisfying their esteem
and recognition needed as well as basic physical needs. Motivating people with
---------------------- financial rewards is not a picker’s game. A company must be willing and able
to give certain employees very large raises and/or bonuses, if pay is to motivate
----------------------

performance. If a company cannot afford to do this, or is not willing to do so, it Notes
should probably forget about using pay to motivate performance.”
----------------------
“Pay in one form or another is certainly one of the main-springs of
motivation in our society. The most evangelical human relationist insists it is ----------------------
important while protesting that other things are (and are perhaps in his view)
nobler too. It would be unnecessary to labour the point if it were not for a ----------------------
tendency for money drives to slip out of focus in a miasma of other values and
----------------------
other practices. As it is, it must be repeated: Pay is the most important motivator
used in our organised society.” ----------------------
Contrary to these observations, “Money incentive alone does not bring
----------------------
about the desired motivation. Employees in an industry are not ‘economic men’
so much as they are ‘ego men’. What they want, above all else, is credit for ----------------------
work done, interesting tasks, appreciation, approval and congenial relations
with their employers and fellow-workers. They desire for these satisfactions ----------------------
even more than high wages or job security.
----------------------
“Workers will normally respond to monetary incentives only to a certain
point. Beyond it, money becomes ineffective as an inciter of action. This is for ----------------------
two reasons:
----------------------
i) Money is not foreseen as having the ability to satisfy an urgent need.
----------------------
ii) The worker may respond to money as a motivator if he believes that the
benefits will be greater than the expenses incurred by him. If the benefits ----------------------
perceived are less than the personal cost, he will not respond to money as
an incentive any further. In effect, a break-even point is reached in which ----------------------
additional money earnings become marginal or even undesirable because ----------------------
of the efforts and conditions demanded to earn the added income.
----------------------
Perceived
The response ----------------------
personal cost The perceived
Greater to money as
in terms of value of ----------------------
Than an incentive
effort, sacrifice, monetary
is reduced or ----------------------
unpleasant work reward
eliminated
demands etc. ----------------------
----------------------
The attraction ----------------------

The perceived
Less to opportunity ----------------------
Perceived value of
to earn more
personal cost Than monetary ----------------------
money is
reward
enhanced ----------------------
Fig. 9.1: Relationship between perceived Personal Cost and perceived ----------------------
Value of obtained Monetary Rewards
----------------------

Notes “Using money as a motivator may decrease intrinsic motivation. To use
money and other extrinsic reward as effective motivators, they must be made
---------------------- contingent upon the performance.”
---------------------- It may be summed up that a more reasonable interpretation would be that
intrinsic motivation is increased by money if two conditions are met: (i) the
---------------------- monetary reward closely follows performance so as to be reinforcing, and (ii)
the monetary reward is perceived by the employee to be a function of his work
----------------------
behaviour.
---------------------- Further, it may be fair to conclude that pay holds motivational properties.
However, the issue is considerably more complex than merely stating, “Money
----------------------
motivates.”
----------------------
9.3 WAGE INCENTIVES
----------------------
The term wage incentives have been used both in the restricted sense
----------------------
of participation and in the widest sense of financial motivation. Authors have
---------------------- defined it differently. We give below a few of these definitions.
“It is a term which refers to objectives in the external situation whose
----------------------
function is to increase or maintain some already initiated activity, either in
---------------------- duration or in intensity.”
“It refers to all the plans that provide extra pay for extra performance in
----------------------
addition to regular wages for a job.”
---------------------- “It refers to increased willingness as distinguished from capacity.
---------------------- Incentives do not create but only aim to increase the national momentum
towards productivity.”
---------------------- According to the National Commission on Labour, “Wage incentives
---------------------- are an extra financial motivation. They are designed to stimulate human effort
by rewarding the person, over and above the time rated remuneration, for
---------------------- improvements in the present or targeted results.”
---------------------- “A wage incentive scheme is essentially a managerial device of increasing
a worker’s productivity. Simultaneously, it is a method of sharing gains in
---------------------- productivity with workers by rewarding them financially for their increased
rate of output.”
----------------------
The above definition is based on the principle that “An offer of additional
---------------------- money will motivate workers to work harder and more skilfully for a greater
part of their working time, which will result in a stepped-up rate of output.”
----------------------
We may define a wage incentive as a system of payment under which
---------------------- the amount payable to a person is linked with his output. Such a payment may
also be called as payment by results. The term incentive has gradually acquired
----------------------
a wide connotation and includes all the possible factors, besides economic
---------------------- gains, which can possibly motivate human beings towards a better and greater
performance.
----------------------

Objectives of Wage Incentive Schemes Notes
Wage incentive schemes aim at the fulfilment of one or more of the
----------------------
following objectives:
i) To improve the profit of a firm through a reduction in the unit costs of ----------------------
labour and materials or both;
----------------------
ii) To avoid or minimise additional capital investment for the expansion of
production capacity; ----------------------
iii) To increase a worker’s earnings without dragging the firm into a higher ----------------------
wage rate structure regardless of productivity; and
----------------------
iv) To use wage incentives as a useful tool for securing a better utilisation of
manpower, better production, scheduling a performance control, and a ----------------------
more effective personnel policy.
----------------------
Merits of Wage Incentive Schemes
----------------------
Such schemes are regarded as beneficial to both, employers and workers.
They are accepted as a sound technique for the achievement of greater ----------------------
production on the ground that workers would work at their best if they were
offered monetary rewards for a good performance. For employers, the need ----------------------
for a vigorous supervision is reduced, and consequently there is a cut in the
----------------------
expenditure on supervision. The position of the supervisors changes from that
of being “watch dogs” to that of managers of “machines and materials”. On ----------------------
the other hand, workers have the advantage of working in a relatively calm
atmosphere to the extent to which the supervision over their activities is relaxed. ----------------------
Moreover, incentives may be regarded as a step in the direction of linking a
----------------------
worker’s compensation with his productivity - an important prerequisite of
economic development. ----------------------
The experience gained in India and elsewhere indicates that wage
----------------------
incentives have resulted in gains in productivity. “In a majority of cases, the
existence of payment by results was related to increased output, higher earnings, ----------------------
and lower costs.” In India, in a survey conducted by it, the National Productivity
Council (NPC) pointed out that about 70 per cent of the reporting companies ----------------------
had wage incentive plans. On an average, the schemes seemed to have achieved
----------------------
increases in output, which ranged between 30 per cent and 45 per cent. The
increase in productivity has also been reported in other cases too; for example, ----------------------
in the National Coal Development Corporation, the group productivity index
improved from 30 per cent to 50 per cent in the pre-incentive period. Due to this ----------------------
scheme, the Corporation was able to achieve 80 per cent rated capacity.
----------------------
“In the majority of the jobs investigated, wage incentive schemes
succeeded in raising productivity, increasing earnings and reducing direct ----------------------
labour costs.”
----------------------
The National Commission on Labour has reached the conclusion that,
“under our conditions, wage incentive is the cheapest, quickest, and surest ----------------------
means of increasing productivity.” In support of this, its report indicates ----------------------

Notes that productivity has been progressively increasing and the costs falling in
the Chittaranjan Locomotive Works, where incentive schemes have been in
---------------------- operation since 1954.
---------------------- Demerits of Incentive Schemes
Despite the rosy picture, the experience with the working of incentives in
----------------------
the highly industrialised countries of the West is not quite happy. Some studies
---------------------- on the subject show that incentive schemes have a dubious value for increase
in output. Even where an incentive scheme yields an increased output, it may
---------------------- generate tensions among the different parts of an organisation. Such tensions
often create difficult managerial problems and may eventually affect the output.
----------------------
A sound and effective administration of incentive schemes would depend upon an
---------------------- understanding of the problems of human relations as well as those of engineering.
Wage Incentive Schemes in India
----------------------
What is the need for this System? In a country like India, the role of financial
---------------------- incentives as a primary tool for motivating workers cannot be overemphasised.
---------------------- Besides, the necessity of raising the productivity of Indian labour is also getting
due attention. In this context, the First Plan recommended the introduction of
---------------------- incentive schemes to promote a more efficient working of industries with due
safeguards for the interests of workers through the guarantee of a minimum
---------------------- wage and protection against fatigue and undue speed-up. The Second Plan
---------------------- recommended that the earnings beyond the minimum wage should be related
to results, and that the workers should be consulted before a system of payment
---------------------- by results was introduced in an establishment. The Third Plan emphasised the
need for higher productivity and reduction in the unit cost of production. It put
---------------------- the responsibility on the management to provide the most efficient equipment,
---------------------- correct conditions and methods of work; impart training and create suitable
psychological and material incentives for workers. The Study Group of the
---------------------- National Commission on Labour has recommended that, “under our conditions,
a wage incentive is concerned with an effective utilisation of manpower which
---------------------- is the cheapest, quickest and surest means of increasing productivity. The only
---------------------- practicable and self-sustaining means of improving manpower utilisation is to
introduce incentive schemes and stimulate human efforts to provide a positive
---------------------- motivation to greater output.
---------------------- The need for introducing wage incentive schemes in India has been felt
on the following grounds:
---------------------- i) The efficiency of the Indian worker is very low, and needs to be raised.
---------------------- Wage incentives can play an important part in improving his efficiency.
ii) The average Indian worker is financially very poor. Financial incentives
----------------------
therefore, are likely to tempt him to work better.
---------------------- iii) India is at a low level of technology, and wage incentives can help in
promoting the use of electronic devices.
----------------------
iv) A proper application of wage incentive schemes can so affect the prices
---------------------- that the community would be benefited.

v) In the national interest, it is felt that wage incentive schemes should be Notes
applied to all economic activity.
----------------------
Types of wage incentive plans
Wage Incentive plans may be discussed as (i) plans for blue-collar workers ----------------------
(ii) plans for white-collar workers and (iii) plans for managerial personnel -
----------------------
because each of these categories of employees have separate and distinct needs
and specific plans tailored for each category may prove beneficial. Incentive ----------------------
Plans for Blue-Collar Workers and for Individuals may be:
----------------------
A) Short-Term Plans
These systems may be broadly classified into three categories: ----------------------
a) Systems under which the rate of extra incentive is in proportion to ----------------------

the extra output;
----------------------
b) Systems under which the extra incentives are proportionately lower
rate than an increase in output; ----------------------
c) Systems under which the rate of incentives is proportionately higher ----------------------
than the rate of increase in the output;
----------------------
d) Every employer wants his workmen to do the maximum work they
are capable of doing. On the other hand, there is a feeling among the ----------------------
workers that an increase in effort benefits only the employer even
when they are employed on a piece-rate basis. The result is that ----------------------
they never produce to their full capacity, and in most cases, put in
----------------------
the minimum necessary work. This feeling on the part of workers
may be removed either through fear or through expectation of gain. ----------------------
It has been found that fear can never produce the desired effect,
but a hope of earning a bonus does induce them to work harder ----------------------
and produce more. Incentive plans are therefore known as premium
----------------------
plans because they offer a premium for outstanding performance.
All bonus or premium plans relate to two factors, one, they set a standard ----------------------
time for the completion of a definite output or piece of work for a fixed ----------------------
wage, two, the fixing of a rate of percentage by which bonus would be
earned by a worker over and above his set wage, if the standard time is ----------------------
saved or the standard output is exceeded.
----------------------
Merits
i) When well-designed and properly applied, payment by results may ----------------------
generally be relied upon to yield increased output, lower the cost of ----------------------
production, and bring a higher income to the workers.
----------------------
ii) A works study associated with payment by results is a direct stimulus
to workers to improve the organisation of work and to eliminate lost ----------------------
time and other waste.
----------------------
iii) Labour and total costs per unit of output can be estimated more
accurately in advance. ----------------------

Notes iv) Less direct supervision is needed to keep output up to a reasonable
level.
----------------------
v) The conflicting interests of employers and employees are unified.
---------------------- Increased efficiency and smooth working can therefore be promoted
and sustained.
----------------------
Demerits
---------------------- i) Quality tends to deteriorate unless there is a stricter system of
checking and inspection.
----------------------
ii) Payment by results may lead to opposition or restriction on output
---------------------- when new machines and methods are proposed or introduced. This
---------------------- is because of the fear that the job may be restudied and earnings
reduced.
---------------------- iii) When paid by result, workers tend to regard their highest earning
---------------------- as norms, and therefore press for a considerably higher minimum
wage.
---------------------- iv) The amount and cost of clerical work increases.
---------------------- v) There is a danger of disregarding safety regulations and thereby
increasing the rate of accidents.
----------------------
vi) Some workers tend to over-work and thus undermine their health.
----------------------
vii) Jealousy may arise among workers because some are able to earn
---------------------- more than others or because fast workers are dissatisfied with the
slower or older workers in the group.
----------------------
viii) It is difficult to set piece or bonus rates accurately. If they are too
---------------------- low, workers may be under pressure to work too hard and become
dissatisfied, and if too high, they may slacken their efforts to avoid
---------------------- a revision of rates.
---------------------- A successful wage incentive plan should consist of the following key
points:
----------------------
i) The management should recognise that the effectiveness of an
---------------------- incentive depends on the total situation, which includes worker-
management confidence, relations with the trade union, the quality
----------------------
of communication and of supervision and the traditions in an
---------------------- industry.
ii) Management should not introduce an incentive system until it has
----------------------
taken action to ensure full understanding of what is involved. This
---------------------- may call for procedures for the participation of employees and
negotiations with the trade union.
----------------------
iii) The management should avoid any action that may be interpreted
---------------------- as unfair. There must be proper machinery for handling grievances.
The management should avoid actions that resemble “rate cutting”
---------------------- because of the need to change methods and rate from time to time.

iv) It is essential that the management pay in proportion to output, once Notes
this output has risen above that required amount for guaranteed pay.
----------------------
v) The management should train supervisors all the way down the
line so that foremen and department managers are able to deal with ----------------------
problems within their own departments.
----------------------
vi) Great care should be taken in setting up standards to avoid rates that
are too loose or too tight. ----------------------
Some important Wage Incentive Plans are:
----------------------
i) Halsey Premium Plan
----------------------
ii) Halsey-Weir Premium Plan
iii) Rown Premium Plan ----------------------
iv) The 100 per cent Premium Plan ----------------------

v) The Bedeaux Point Plan ----------------------
vi) Taylor’s Differential Piece Rate Plan ----------------------
vii) Merric’s Multiple Piece Rate Plan
----------------------
viii) Gantt Task Plan
----------------------
ix) Emerson Efficiency Plan
x) Co-Partnership System ----------------------
xi) Accelerating Premium Plan ----------------------
xii) Profit Sharing ----------------------
i) Halsey Premium Plan
----------------------
This is a time-saved bonus plan, which is ordinarily used when
accurate performance standards have not been established. Under ----------------------
this plan, it is optional for a workman to work on the premium plan
or not. His day’s wage is assured to him whether he earns premium ----------------------
or not, provided that he is not so incompetent as to be useless. ----------------------
A standard output within a standard time is fixed on the basis of
previous experience. The bonus is based on the amount on the basis ----------------------
of 33 percent of the time saved. He thus gets wages on the time
rate basis. If he does not complete the standard output within the ----------------------
stipulated time, he is paid on the basis of a time wage. The plan is ----------------------
a combination of the day wage and the piece wage in a modified
form. ----------------------
Example: Suppose the standard time is 20 hours, the number of ----------------------
units to be completed is 10, and the hourly rate is 25 paise. Then,
the working of the scheme will be: ----------------------
Time taken (hrs)…14 ----------------------
No. of hours saved…… 6 ----------------------

Notes Amount of wages received…Rs. 3.50 Amount of bonus………Re.
0.75 Total Earnings……..Rs. 4.25
----------------------
Example: If 8 hours is the standard time of a job and Re. 0.50 is
---------------------- the guaranteed wage per hour, the worker, if he takes 8 hours to
perform the work, receives Rs.
----------------------
4.00. If he performs the task in less than 8 hours he receives an extra
---------------------- premium on the time saved (i.e. for 2 hours).
---------------------- Bonus Total Wage

If the work is completed in 6 hours… 0.66 Rs. 4.66
----------------------
----------------------
---------------------- If the work is completed in 1 hour… 14.00 Rs. 18.00
---------------------- Formula: Bonus = ½ of Time saved/Time taken x Daily wage
---------------------- Merits
---------------------- a) It guarantees a fixed time wage to slow workers and, at the same
time, offers extra pay to efficient workers.
----------------------
b) The cost of labour is reduced because of the percentage premium
---------------------- system; the piece rate of pay gradually decreases with increased
production.
----------------------
c) The plan is simple in design and easy to introduce.
---------------------- d) As the wages are guaranteed, it does not create any heartburning
---------------------- among such workers as are unable to reach the standard.
Demerits
----------------------
a) It depends upon past performance instead of setting new standards.
----------------------
b) The workers can beat the game by spurting on certain jobs to capture
---------------------- a premium and soldiering on other jobs to rest under the protection
of the guarantee of the day wage.
----------------------
c) From the point of view of administration, the policy is one of drift,
---------------------- for, in this plan, the worker is left alone to decide whether or not to
produce more after the standard has been reached.
----------------------
ii) Halsy-Weir Premium Plan
---------------------- This plan is similar to the Halsey Premium Plan except that 50 per
---------------------- cent of the time saved is given as a premium to worker.
Formula: Bonus = ½ of Time saved x Hourly rate
----------------------
iii) Rowan Premium Plan
----------------------
This plan differs from the Halsey Plan only in regard to the
---------------------- determination of the bonus. In all other respects, the two are the

same. In the Rowan Plan, the time saved is expressed as a percentage Notes
of the time allowed, and the hourly rate of pay is increased by
that percentage so that total earnings of the worker are the total ----------------------
number of hours multiplied by the increased hourly rate, which is
often cut by the employer when the worker’s efficiency increase ----------------------
beyond a certain limit. The premium is calculated on the basis of ----------------------
the proportion which the time saved bears to standard time.
----------------------
For example, if 8 hours were the standard time for doing a job and
Rs.4/- the day wage, the premium and total wages would be as ----------------------
follows:
----------------------
Premium Total wages
If the work is completed in 5 hours…1.00 Rs. 5.00 ----------------------
If the work is completed in 1 hours…3.50 Rs. 7.50
----------------------
The Rowan Plan has all the merits and demerits of the Halsey Plan
except that, because of the limitation of earnings, it does not provide ----------------------
an incentive for maximum productivity. Moreover, the complex
----------------------
method of premium calculation is generally unintelligible to the
worker. He cannot, therefore, be expected to take much interest in ----------------------
the plan.
----------------------
These premium plans may be classified as differential piecework
systems and have been evolved with view to giving the benefit to ----------------------
both parties. They are based on the fundamental principle that a
worker’s earning should increase when his production rises above ----------------------
a pre-determined target. As his extra earning is not in proportion to
----------------------
his usual wage rate, the overall production cost per piece falls when
the output increases. ----------------------
It will be seen that, for a little time saving, the Rowan Plan gives ----------------------
more bonus than the Halsey or the Halsey-Weir Plans. Up to 50 per
cent of the time saved, the bonus earned under the Halsey-Weir or ----------------------
the Rowan Plan is equal, but above 50 per cent of the time saved, the
Rowan Plan pays more than the Halsey Plan. However, under the ----------------------
Rowan Plan a worker gets his maximum bonus when he completes ----------------------
the task in half the standard time allowed. If he saves more than 50
per cent of the time, the bonus he earns decreases and his increase ----------------------
in wage is at a diminishing rate. But under the Halsey and Halsey-
Weir Plan, it is progressively higher. ----------------------
iv) The 100 Per Cent Premium Plan ----------------------
Under this plan, time study or work sampling sets task standards, ----------------------
and rates are expressed in time rates rather than in money (for
example, 0.20 hour piece).A definite hourly rate is paid for each ----------------------

Notes task-hour of work performed. The plan is identical with the straight
piece-rate plan except for its higher guaranteed hourly rate and the
---------------------- use of task time as a unit of payment instead of a price per piece.
The worker is paid the full value of the time saved. If he completes
---------------------- the task of 10 hours in 8 hours and if the hourly rate is Re.50.00, his
---------------------- total earnings will be Rs.8 x 50.00 + (10-8) x 50.00 = Rs. 400/- +
Re. 100/- = Rs. 500/-
----------------------
v) The Bedeaux Point Plan
---------------------- This plan is used when carefully assessed performance standards
have been established. It differs from the 100 per cent plan; in that
----------------------
the basic unit of the time is the minute termed as B. Every job is
---------------------- expressed in terms of Bs (after Bedeaux), which means that a job
should be completed in so many minutes.
----------------------
If a particular work is rated at 60 Bs (or one B hour), the worker is
---------------------- allowed one hour for its completion and receives a bonus of 75 per
cent for the number of Bs, i.e., time saved. Suppose a worker earns
---------------------- 600 Bs in a day, if the rate per point is Re. 0.01 his total earnings
would be:
----------------------
Rs. 4.80 * 0.01 + ¾(600-480)*.01
----------------------
= Rs.4.80 + Re. 0.90 =Rs. 5.70
---------------------- The chief advantage of this plan is that it can be applied to any kind
---------------------- of a job. It is particularly suitable for plants in which workers are
assigned diverse kinds of jobs, shifted from one job or department to
---------------------- another. All the points, which a worker earns in a day, are recorded
and the bonus is calculated on that basis.
----------------------
vi) Taylor’s Differential Piece Rate Plan
----------------------
Taylor introduced this system with two objectives. First, to give
---------------------- sufficient incentives to workmen to induce them to produce up to
their full capacity and second was to remove the fear of a wage cut.
---------------------- There is one rate for those who are below the standard, so that the
hope of receiving a higher rate (that is a bonus) may serve as an
----------------------
incentive to comp up to the standard. Workers are expected to do
---------------------- certain units of work within a certain period of time. This standard is
determined on the basis of time and motion studies. Such scientific
---------------------- determination ensures that the standard fixed is not unduly high
and is within the easy reach of workers. The success of the scheme
----------------------
depends on a proper determination of the standard.
---------------------- This system is designed to encourage the especially efficient worker
---------------------- with a higher rate of payment and to penalise the inefficient by a
lower rate of payment. In practice, this plan is seldom used now.
---------------------- vii) Merric’s Multiple Piece Rate System
---------------------- This system too is based on the principle of a low piece rate for

a slow worker and a higher piece rate for higher production but Notes
the plan differs from Taylor’s Plan in that it offers three graded
piece rates instead of two. (i) Suppose 83% of standard output a ----------------------
piece rate+10% of time rate as bonus. (ii) Above 83% and 100% of
standard output ----------------------
- same piece rate +20% of time rate and (iii) Above 100% of ----------------------
standard output - same piece rate + 20% of time rate over 17% of
----------------------
production above 83%.
viii) The Gnatt Task and Bonus Plan ----------------------
H.L. Gnatt has devised this plan and it is the only one that pays a ----------------------
bonus percentage multiplied by the value of standard time. Under
this system, fixed time rates are guaranteed. Output standards and ----------------------
time standards are established for the performance of each job.
----------------------
Workers completing the job within the standard time or in less time
receive wages for the standard time plus a bonus, which ranges ----------------------
from 20 per cent to 50 per cent of the time allowed and not the time
saved. When a worker fails to turn out the required quantity of a ----------------------
product, he simply gets his time rate without any bonus.
----------------------
Under this plan there are also three stages of payment: i) Below the
standard performance: only the minimum guaranteed wage is to be ----------------------
paid ii) At the standard performance: this wage +20% of time rate ----------------------
will be paid as a bonus and iii) When the standard is exceeded a
higher piece rate is paid but there is no bonus. ----------------------
For example, if the standard task for a day is 8 units and the day ----------------------
wage is Rs. 4, the bonus at 50 per cent and the total wages would be:
----------------------
Units of Work Task Wages Rs. Bonus Rs. Total wages Rs.
If 6 units are completed in a day 4.00 NIL 4.00 ----------------------
8 units are completed 4.00 2.00 6.00
----------------------
10 units completed 4.00 2.50 7.50
----------------------
12 units completed 4.00 3.00 9.00
This system is the most profitable, for workers’ efficiency is very ----------------------
high. The basic wages rise proportionately as under the ordinary
----------------------
piece wage system; and the bonus is allowed on the increased wage.
In addition to this, workers with lower efficiency are not penalised ----------------------
as they are in Taylor’s Differential Piece Rate.
----------------------
ix) Emerson Efficiency Plan
Under this system a standard time is established for a standard ----------------------
task. The day wage is assured. There is no sudden rise in wages ----------------------
on achieving the standard of performance. The remuneration based
on efficiency rises gradually. Efficiency is determined by the ratio ----------------------
between the standard time fixed for a performance and the time
actually taken by a worker. Thus, if the period of 8 hours is the ----------------------

Notes standard time for a task and if a worker performs it in 16 hours his
efficiency is 50 per cent. He who finishes the task in 8 hours has 100
---------------------- per cent efficiency. No bonus is paid to a worker unless he attains
efficiency at 66 2/3 per cent and at which stage he receives a nominal
---------------------- bonus. This bonus goes on increasing till when he achieves 100 per
---------------------- cent efficiency the bonus comes to 20 per cent of the guaranteed
wage. At 120 per cent efficiency a worker receives a bonus of 40
---------------------- per cent and at 140 per cent efficiency the bonus is 60 per cent of
the day wage.
----------------------
x) Co-Partnership System
----------------------
This system tries to eliminate friction between capital and labour.
---------------------- Under this system, not only does a worker share in the profits of the
undertaking but he also takes part in its control and therefore, shares
---------------------- its responsibilities. There are different degrees of this partnership
and control allowed to the operatives in different cases but in a
----------------------
complete co-partnership system, the following factors are present:
---------------------- a) The payment of the existing standard wages of labour
---------------------- b) The payment of a fixed rate of interest on the capital
---------------------- c) The division of the surplus profit between capital and labour
in an agreed proportion
---------------------- d) The payment for a part of the workers labour by the allotment
---------------------- of a share in the capital.
e) The sharing in the control of the business by the representatives
----------------------
of labour.
---------------------- The system arouses and sustains the interest of the workers in their
work. By giving them a voice in the management of the factory
----------------------
it raises their status as well. As they have become partners in the
---------------------- business, they try to make it a very profitable enterprise.
---------------------- xi) Accelerating Premium Systems

These are the systems which provide for a guaranteed minimum
---------------------- wage for the output below standard. For low and average increase in
---------------------- output above the standard, small increment in earnings are allowed.
Increasingly large earnings are conceded for above average output,
---------------------- the increment being different for each 1% increase in output. Very
significant increases in earnings are given for really high output.
---------------------- In this system, the production is pushed up higher and higher by
---------------------- discouraging low output and rewarding at an increasingly effective
rate the higher outputs.
---------------------- Such schemes are generally adopted when much higher outputs
---------------------- than what are currently obtained are to be achieved.
----------------------

B) Long-Term Wage Incentive Plans Notes
Under such plans each member of the group receives a bonus based on the
----------------------
output of the group as a whole. There are several reasons for adopting such
a plan. Sometimes (as on assembly lines) several jobs are inter-related. ----------------------
Here, worker’s performance reflects not only his own effort but that of
his co-workers too. In such cases group incentive plans are advantageous. ----------------------
Secondly, such plans also encourage cooperation among group members.
----------------------
There tends to be less bickering among group members as to who has tight
production standards and who has loose ones. Thirdly, the groups can ----------------------
bring pressure to bear on their members (through badgering, ostracism,
etc.) and help keep shirkers in line. This in turn can help eliminate some ----------------------
of the need for close supervision. Fourthly, group production levels tend
----------------------
to be more stable than individual ones and group incentive payments very
less than individual ones. Finally, the group incentive plans also facilitate ----------------------
on the job training since each member of the group has a vested interest
in getting a new group member trained as well and as quickly as possible. ----------------------
The chief disadvantages of the group plans are: i) Each worker’s rewards ----------------------
are no longer based solely or directly on his own efforts. To the extent that
person does not see his effort leading to the desired reward, a group plan ----------------------
is probably not as effective as an individual plan. ii) There is unevenness
----------------------
of performance of different members of the group and this may lead to
resentment of active members against mere passengers. iii) Ill-feeling may ----------------------
be generated among the groups themselves where the technology is such
that one group’s earnings depend on the performance of another group. ----------------------
Group incentive plans are usually applied to small work groups, for ----------------------
example, 5 or 6 people who must assemble a component together. The
incentives usually take three forms: ----------------------
1. Standard Output ----------------------
a) A standard output i.e., target production may be laid down for a ----------------------
month or a larger period and bonuses are paid if this is achieved.
b) A standard output per man-hour is laid down for a department or for ----------------------
the plant as a whole and the bonus is paid in proportion to which ----------------------
the actual output per man hour exceeds the standard, the other
conditions of work remaining the same. ----------------------
2. The Value added by manufacture at factory cost leading to cost ----------------------
reduction forms the basis for calculating the bonus. If the actual
cost production is lower than the standard cost to the extent the ----------------------
workers are able to influence such reduction by working harder,
----------------------
saving in materials, fuels, lubricants, etc.
3. Bonus can also be calculated on the increased value of sales where ----------------------
this result is obtained by increased production. The Group Incentive
----------------------
Plans are usually: i) The Profit sharing schemes and ii) The Scanlan
Plan. ----------------------

Notes 9.4 FEATURES OF PROFIT SHARING
---------------------- Profit sharing is regarded as a stepping-stone to industrial democracy.
It is observed, “Profit-sharing is an arrangement by which employees
---------------------- receive a share, fixed in advance of the profits.” The International Co-
operative Congress held in Paris in 1889 considered the issue and defined
----------------------
profit sharing as “an agreement (formal or informal) freely entered into by
---------------------- which an employee receives a share fixed in advance of the profits.”
---------------------- Profit sharing usually involves the determination of an organisation’s

profit at the end of the fiscal year and the distribution of a percentage of
---------------------- the profits to workers qualified to share in the earnings. The percentage to
be shared by the workers is often predetermined at the beginning of the
---------------------- work period and is communicated to the workers so that they have some
---------------------- knowledge of their potential gains. To enable the workers to participate
in profit sharing, they are required to work a certain number of years
---------------------- and develop some seniority. The theory behind profit sharing is that the
management feels that its workers will fulfil their responsibilities more
---------------------- diligently if they realise that their efforts may result in higher profits,
---------------------- which will be returned to the workers through profit sharing.
The main features of the profit sharing schemes are:
----------------------
a) The agreement is voluntary and based on the joint consultation
---------------------- freely made between the employers and the employees.
---------------------- b) The payment may be in the form of cash, stock of future credits of
some amount over and above the normal remuneration that would
---------------------- otherwise be paid to employees in a given situation.
---------------------- c) The employees should have some minimum qualifications such as
tenure or satisfy some other condition of service, which may be
---------------------- determined by the management.
---------------------- d) The agreement on profit sharing having been mutually accepted is
binding and there is no room on the part of the employer to exercise
---------------------- discretion in a matter, which is vital to the employees.
---------------------- e) The amount to be distributed among the participants is computed
on the basis of some agreed formula, which is to be applied in all
---------------------- circumstances.
---------------------- f) The amount to be distributed depends on the profits earned by an
enterprise.
----------------------
g) The proportion of the profits to be distributed among the employees
---------------------- is determined in advance.
---------------------- It should be noted that profit sharing is not a system of wage payment
but is something else. Profit sharing and bonus (also known as profit-sharing
---------------------- bonus) are two different things. For the former, sharing implies sharing on an
equal footing rather than yielding on the part of a management to a persistent
----------------------

demand. Profit-sharing bonus on the other hand refers to the distribution of Notes
profits on the basis of a certain percentage on one’s monthly wages. Moreover,
it is not voluntary and is based on agreement. ----------------------
Profit sharing is a distinctly progressive measure towards industrial ----------------------
harmony. It may be considered as a step short of joint consultation or co-
partnership schemes. Wage business affairs are managed and shared on a ----------------------
footing of equality. Essentially this means the creation of a mental climate in
----------------------
which a strong sense has to grow that the business is the business of all, since
it is the joint effort of the workers and the management, since one cannot carry ----------------------
on a business without the help of the other. This is the inner essence of profit
sharing, which has often been over looked. ----------------------
Characteristics of Profit Sharing ----------------------
There are three main characteristics of labour remuneration in the form
----------------------
of profit sharing, which distinguish it from gain sharing and from an ordinary
system of wage payment. These features are: ----------------------
a) A share in profits is payable at long intervals when the final accounts of a ----------------------
firm are prepared and its profit or loss ascertained.
b) The payment is of an uncertain nature because of the uncertainty of ----------------------
profits. Sometimes there may be no profits or very high profits. In other ----------------------
cases, there may actually be some losses.
c) The payment is not based on individual work, efficiency or merit but is ----------------------
the remuneration due to workers being equally divided among them or in ----------------------
some agreed proportion.
----------------------
d) The payment is sometimes regarded as windfall gain or as something
to which a worker is entitled and not as something in recognition of his ----------------------
efficiency.
----------------------
Types of Profit Sharing
Employers often regard employee profit sharing as a supplementary ----------------------
benefit programme. Although plans differ widely as to specific details, three ----------------------
basic types of profit sharing plans are in use:
a) Current (cash profits are paid directly to employees in cash or by cheque ----------------------
or in the form of stock as soon as profits are determined (for example, ----------------------
monthly, quarterly, biannually or annually).
b) Deferred profits are credited to employee accounts to be paid at the time ----------------------
of retirement or in particular circumstances (i.e. disability, death, and ----------------------
severance or under withdrawal provisions during employment).
----------------------
c) Combination by which a part of the profits is paid in cash and a part is
deferred and placed in the employee’s account in a trust fund. ----------------------
Objectives of Profit Sharing: Profit sharing is more than just another
----------------------
employee benefit. It may be the most important part of a progressive personnel
policy. It may incorporate incentive features and produce results not possible by ----------------------

Notes the implementation of other programmes. Companies which offer this incentive
have realised higher profits and increased efficiency and have created a climate
---------------------- for better employee relations.
---------------------- The critical ingredient in profit sharing is the desire of the employees
and the management to ensure the success of a programme. The programme is
---------------------- formulated at the top because profit sharing is first and foremost a principle and
technique of leadership.
----------------------
The real objective of profit sharing is to foster “the unity of interest and
---------------------- the spirit of cooperation”. From the point of view of the employees, profit
sharing may serve a multiple of objectives, depending upon the type of plan,
----------------------
which is adopted. A cash plan contributes directly to an employee’s immediate
---------------------- economic gain. Deferred plans and combination plans contain features very
similar to benefit plans which provide for retirement benefits and against the
---------------------- loss of income following disability for benefits to dependants in the event of
the death of an employee and for other related benefits. From the viewpoint
----------------------
of the organisation, employee productivity is the overriding objective of profit
---------------------- sharing. At the same time, it may contribute to employee satisfaction because
profit sharing provides for rewards which are related to employee needs.
----------------------
A profit sharing scheme is generally introduced to achieve the following
---------------------- objectives:
---------------------- a) To promote industrial harmony and the stabilisation of the work force.
b) To eliminate waste in the use of materials and equipments.
----------------------
c) To instil a sense of partnership among employees and employers and to
---------------------- increase employee interest in the company in which he works.
---------------------- d) To attract desirable employees and retain them, thereby reducing the rate
of turnover.
----------------------
e) To encourage employee thrift.
---------------------- f) To provide a group incentive for a larger output.
---------------------- g) To ensure employee security
---------------------- h) To demonstrate some measure of social justice to employees.

The purpose of profit sharing is the achievement of industrial harmony.
----------------------
Forms of Profit Sharing
----------------------
a) Industry Basis: Here the profits of a number of industrial units in the
---------------------- same industry may be pooled together to determine the share of labourers.
Such a scheme has the advantage of putting the whole labour force in a
---------------------- particular industry on a uniform basis. Moreover, if a certain industrial unit
somehow shows a loss in a particular year, its workers are not deprived of
----------------------
their remuneration because other units have made a good profit.
---------------------- b) Locality Basis: Industrial units in a particular locality may pool their profits
---------------------- to determine labour’s remuneration by way of profit sharing. However, if

there are heterogeneous industrial units in a locality, where labour’s work Notes
is of a widely divergent nature, there may be great difficulties in bringing
about an adjustment in their share. ----------------------
c) Unit Basis: This is the simplest way of giving a labourer a share in the ----------------------
profits of the individual undertaking in which he is employed. This mode
of profit sharing establishes a close relationship between the efforts of ----------------------
labour and rewards it receives. In the first two schemes, the reward of the
----------------------
workers depends on the combined efforts of all in a number of units.
d) Department Basis: Sometimes the various departments of an industrial ----------------------
unit may have their separate profit sharing schemes. The workers in a
----------------------
particular department share in the profits made by that department. This
aims at bringing about an even closer relationship between a worker’s ----------------------
efforts and the reward he receives.
----------------------
e) Individual Basis: A worker receives a proportion of the profit, which
may have been earned by a business through the efforts of that particular ----------------------
worker. This aims at bringing about a direct and most intimate relationship
between individual effort and reward. In practice, it is impossible to ----------------------
determine such profits.
----------------------
Requisites for Profit Sharing
----------------------
Effective profit sharing schemes should be based on the following
considerations: ----------------------
a) Profitability of Industrial Units: Industrial units should be profitable for ----------------------
without profitability, the profit sharing scheme would not succeed. No
scheme should be launched until business conditions are favourable. A ----------------------
business or any industry may be stabilised by an expansion in production
by the adoption of sound distribution methods and by keeping a ----------------------
constant vigilance over its functioning. In other words, there should be ----------------------
comprehensive and flexible schemes for incentives and other kinds of
bonus, which promote productivity. Until these essentials have become ----------------------
permanent features in an industry, unless working conditions in a business
have been stabilised the purchasing power of the people has considerably ----------------------
increased and profits are sufficiently high to ensure their distribution ----------------------
between workers and shareholders, no profit sharing scheme would be
sound or anything more than a paper scheme. ----------------------
b) Computation of Surplus Profit: Deducting from it the normal profit, ----------------------
one should arrive at the computation of surplus profit for distribution
and additional depreciation and initial or development rebate, so that the ----------------------
replacement or modernisation cost of plant and equipment is properly
----------------------
provided for. Losses when they occur should also be deducted before
the profits for the subsequent year are declared. If additional bonus is ----------------------
to be paid, its payment will have to be made out of the balance left over
after the above deductions. The margin of profits should be adequate and ----------------------
substantial so that after providing for all these expenses, there must be a
----------------------
surplus of a sizable amount to be distributed among the workers.

Notes c) Fair Return on Capital: The return on the capital invested in an enterprise
should be that which would encourage partnership investment. It should
---------------------- be at least 6 per cent on paid-up capital, with a charge of 10 per cent to be
made for reserves.
----------------------
d) The Scanlon Plan: This plan was developed in 1937 by Joseph Scanlon,
---------------------- a lecturer at the Massachusetts Institute of Technology and a trade union
leader in a steel mill. The plan was designed to involve the workers in
----------------------
making suggestions for reducing the cost of operation and improving
---------------------- working methods and sharing in the gains of increased productivity.
The plan has two basic features: one, that financial incentives aimed at
----------------------
cutting costs and thereby increasing efficiency are installed. Two, a network of
---------------------- departmental and plant screening committees are set up to evaluate employee
and management cost-cutting suggestions. The plan is essentially a suggestion
---------------------- system and assumes that efficiency requires company-wise/plant-wise co-
operation.
----------------------
Usually all employees in the plant participate in the plan. Workers,
---------------------- supervisors and managers make cost-cutting suggestions that are screened and
evaluated by the various screening committees. If a suggestion is implemented
----------------------
and is successful, all employees usually share in 75% of the savings and the rest
---------------------- 25% is set-aside for the months in which labour costs exceed the standard.
---------------------- The Scanlon plan has been successful where adopted. It tends to encourage
a sense of partnership and sharing among workers, less overtime and employee
---------------------- insistence on efficient management.
---------------------- Certain conditions need be fulfilled to make the plan successful:

i) They are more effective where there are a relatively small number of
---------------------- participants, generally less than 1000.
---------------------- ii) It is more successful where there are stable product lines and costs.
---------------------- iii) There should be good supervision and healthy labour relations.
iv) There should be a strong commitment to plan on the part of management,
----------------------
particularly during the confusing phase in period.
---------------------- The prevalent systems in India
---------------------- The most widely prevalent incentive scheme in Indian industries is the
piece-rate system. In industries like iron, steel and chemicals however, only a
---------------------- small percentage of workers are paid on the piece-rate basis.
---------------------- Another incentive system that is prevalent in Indian industries is the
payment of production bonus, usually at a differential rate for the output
----------------------
produced in excess of the normal output for a unit of time. The norms are
---------------------- generally fixed on the basis of job analysis and oblige or time studies. The
incentive scheme operates on a group or individual basis, depending on the
---------------------- measurability of the work of individual workers and the interdependence of
their output and performance. Engineering and chemicals have mostly the
----------------------

group system, while textiles have mainly the individual system of incentives. Notes
The group incentive system is more widely prevalent in the Indian industry than
the system of individual incentive or a combination of both. ----------------------
Wage incentive plans other than the piece-rate system bristle with some ----------------------
problems in their operation.
----------------------
Multiple Choice Multiple Response. ----------------------
1. Which of the following is true about incentives?
----------------------
i. Incentive plan consists of both monetary and non-monitory
elements ----------------------
ii. The timing, accuracy and frequency of incentive is very
----------------------
important
iii. Incentive plans should be properly communicated to the ----------------------
employees
----------------------
iv. Incentive plans are only for production workers
2. Non-monetary incentives includes: ----------------------
i. Bonus
----------------------
ii. Autonomy and authority
iii. Promotion ----------------------
iv. Overtime payment ----------------------
----------------------
1. The higher the position of an individual in the organisation’s hierarchy,
the greater is his vulnerability to non-financial incentives. ----------------------
2. Employee insurance plans, pension, pay for time not worked and
perquisites are motivating factors which always lead to higher ----------------------
performance and productivity ----------------------
3. Using money as a motivator may increase intrinsic motivation
----------------------
4. Financial incentives relate more effectively with basic motivation or
deficiency needs. ----------------------
5. Employees views regarding motivation differs because of age, marital
status, economic needs and future objectives. ----------------------
----------------------
Activity 1 ----------------------
----------------------
1. Undertake a study of various incentive schemes in Indian industry and
try to figure out their merit and demerits. ----------------------
2. Choose any two wage incentive plans of your choice and compare
----------------------
their merits and demerits.
----------------------

Notes 9.5 PRE-REQUISITES OF A GOOD WAGE INCENTIVE
SCHEME
----------------------
The installation of an incentive scheme presupposes the existence of
---------------------- certain pre-requisites, which are more often than not ignored. Quite often,
---------------------- incentive payments are just taken to be a necessary part of the total wage packet
and hastily conceived schemes are introduced primarily because of pressures
---------------------- from workers and trade unions. Such schemes naturally result in a number of
personnel problems, which may in fact be impediments to improve productivity.
---------------------- It is therefore advisable to ensure that a proper climate exists for the introduction
---------------------- of such schemes. Some important considerations, which should ordinarily be
taken into account while choosing a particular type of wage incentive schemes,
---------------------- are:
---------------------- i) The management should strive to create a proper climate by adopting
sound policies of recruitment, promotion, training, etc. and concern for
---------------------- improving productivity, even a well conceived incentive scheme, may not
yield the optimum results. Therefore, the management must concentrate
----------------------
on creating a proper industrial relations climate before introducing
---------------------- incentive schemes.
ii) The objectives of the scheme must be clear and these should be well
----------------------
understood at the levels of management and of workers. Certain specific
---------------------- factors may be selected as the basis for a scheme. Too many factors
selected at a time may make it complicated. The scheme should suit both,
---------------------- the particular enterprise and its workers. At every stage, right from the
conception of the scheme to conducting studies, etc. all the workers and
----------------------
supervisors should be consulted so that they understand the objectives
---------------------- and benefits of the scheme and may contribute to its success.
---------------------- iii) Incentive schemes should be installed only when production has reached
60 per cent or 70 per cent of the rated capacity. Care should be taken to
---------------------- provide a suitable gestation mechanism in the scheme on a time bound
basis so that incentive payments at a lower level of the performance are
---------------------- allowed only for limited time periods. The quantum of incentive paid at
---------------------- the low levels of production and efficiency should be such as to ensure
that earnings continuously increase when the targets are raised.
---------------------- iv) The scheme chosen should be one, which would result in overall economy
---------------------- for the establishment. Incentives should not only increase production but
also result in higher productivity and lower cost per unit and the gains of
---------------------- increased productivity should be shared both, by the employer and the
employed.
----------------------
v) The scheme should not be very costly in operation, i.e. it should not involve
---------------------- the maintenance of very elaborate records, complicated calculations and
too much material handling.
----------------------
vi) The scheme should be based on the work contents of various jobs and
---------------------- should be stabilised.

vii) In principle, each individual or group should be paid according to effort Notes
and productivity, for disparity in earnings may create discontent. Unless
the scheme is well defined, it may turn out that indirect groups may ----------------------
receive higher incentive earnings than the main production group.
----------------------
viii) The scheme should have elasticity to take care of technological and other
changes taking place from time to time and rectify errors that may have ----------------------
crept in at the time of its initial introduction.
----------------------
ix) The scheme should not undermine co-operation amongst the workers. It
should rather stimulate co-operation with a view to achieving the common ----------------------
objective of increasing the well being of the business and therefore, of the
----------------------
workers in general.
x) Performance standards and norms for incentive payments should be set ----------------------
up at the average performance level of the employees i.e. they should not
----------------------
be too high nor too low. Such performance standards should be set as are
within the control of employees. The adoption of objective assessment ----------------------
procedures and the use of functional responsibility are to be advocated in
addition to such indices of productivity as wage cost per unit sale, salary ----------------------
savings on the inventory, etc.
----------------------
xi) To make the scheme effective, a climate should be created in which the
employees feel that the management is fair and just in its dealings with ----------------------
them on wage incentive matters. For this purpose, mutual discussions and ----------------------
the appropriate management action would be called for.
xii) Incentive payment should be made as soon as possible after a job is ----------------------
completed. Any hastily conceived or haphazardly introduced incentive ----------------------
scheme does more harm than good. Therefore, it should be introduced
after a proper consideration of the various preparatory measures. ----------------------
Incentive plans for white-collar workers/salesman ----------------------
The salesmen are usually given incentives in the form of sales commissions.
----------------------
One study reported that almost 75% of the organisation surveyed paid salesmen
on some type of incentive basis. This is due to three factors: i) the unsupervised ----------------------
nature of most sales work ii) tradition in the market and iii) the assumption
that incentives are needed to motivate salesmen. There are several incentive ----------------------
plans each appropriate for different markets, products, etc., but all plans are
----------------------
basically variations of three types of plans: straight salary, straight commission
and combination plans. ----------------------
a) Straight Salary Method: Straight Salary Method is an incentive plan.
----------------------
The salesman is simply paid on weekly, monthly or on a yearly basis.
The advantages of this method are that i) the salesmen know in advance ----------------------
what their income will be and ii) the expenditure on salesmen is known
beforehand. The disadvantages are i) this method tends to shift the ----------------------
salesman’s emphasis to just making the sale rather than prospecting and
----------------------
cultivating long term customers and ii) pay is not related to results. This
lack of relationship reduces the salesmen’s performance. ----------------------

Notes b) Straight Commission Basis: Under this method, the salesmen are paid
on the basis of sales effected i.e. they are paid for results and only for
---------------------- results. Therefore, high performance salesmen are generally attracted.
But the disadvantages are: i) salesman focuses on making a sale and
---------------------- on high volume items. Cultivating dedicated customers and working to
---------------------- “push” hard-to-sell items are often neglected, ii) Salesmen tend to be less
company oriented and more money oriented and the company has less
---------------------- control over them iii) Salesmen’s income generally fluctuates widely.
---------------------- c) Combination Method of Salary and Commission Basis: Under this method,
the salesman not only gets a fixed salary but also a commission in proportion
---------------------- to the sales effected. The advantages of this method are: i) since salesmen
are assured of minimum earnings, they are relieved of financial worries. ii)
----------------------
The company has more control over its salesmen, as there is a sizable salary
---------------------- component in most combination plans, so that it can direct the salesman’s
activities by detailing what services and salary component is being paid for.
---------------------- But the main disadvantage is that salary is not related to performance, only
incentive value of money is being traded off for its security value. Such
----------------------
plans also tend to become very complicated and misunderstandings often
---------------------- results in frustration. In spite of these disadvantages, these plans are widely
used with several basic variations, like:
----------------------
d) Salary Plus Commission: Commission Plus Drawing Account where not
---------------------- only the commission is paid, but the salesman is also allowed to draw
on future earnings to get him through low sales period, commission plus
---------------------- bonus where salesmen are paid primarily on the basis of commission but
they are also given a bonus for activities like “slow moving” items and
----------------------
salary plus bonus, wherein salesmen are paid a basic salary and are also
---------------------- given a bonus for carrying out specified activities.
Incentives for Management Employees
----------------------
In many organisations, the managers are paid a bonus. There are two types
---------------------- of bonus plans: One determined by formula (i.e., some criteria like increased
---------------------- sales) and two, determined by some discretion used in allocation of bonus (i.e.,
paid on more or less permanent basis). The bonus plans are generally reviewed
---------------------- annually to make them more effective.
---------------------- For top-level management, bonuses are generally tied to the overall
corporate results. The size of bonus is much higher for top level executives, and
---------------------- lower for the lower level executives.
---------------------- Failure of Incentive Plans
Many of the incentive plans, aimed at increasing the motivation of
----------------------
employees often fails to have their desired impact. This is due to several reasons,
---------------------- most of which become apparent when it is considered that for motivation to
take place, the worker must believe that his effort will lead to rewards and that
---------------------- he must want that reward. In most cases incentive plans fail because one or both
of these facts are not met.
----------------------

The principal reasons of failure are: Notes
1. Unfair Standards: These are a great hindrance in the way of motivating
----------------------
employees.
In order to motive them, the standard must be viewed as fair and attainable. ----------------------
2. Fear of Rate Cut: There is fear in the minds of the employees that ----------------------
standards will be raised high or that rates will be cut if they earn too
much. ----------------------
3. Group Restrictions: Peer pressure is a double-edged sword when it comes ----------------------
to incentive plans. If the group views the plan as fair, it can keep loafers
in line and maintain high production. If the group feels that the plan is not ----------------------
in its interest it will, through education, ostracism or punishment see that ----------------------
the production levels of group members is kept at a minimum.
4. Employees do not understand the Plan: This happens when either the ----------------------
details of the plans are not communicated to employees or if communicated, ----------------------
the employees do not clearly understand them. If employees cannot
understand how performance will lead to rewards, the plans would not ----------------------
prove fruitful in motivating them.
----------------------
5. Lack of required Tools, Training, Equipment, etc.: The lack of required
machines and tools, equipment and absence of a sound organisational ----------------------
structure often break the effort reward link and without that link, the
incentive plan fails. ----------------------
6. Other Causes: The inequitable wage structure with the organisation and ----------------------
the inter group conflict also lead to non-cooperation of the employees.
----------------------
‘Time’ or ‘Output’ basis Incentive Plan
----------------------
The employees may be paid on a time basis under following circumstances.
1. When units of output are difficult to measure. ----------------------
2. When employees have little control over the quantity of the output, such ----------------------
as on much paced assembly lines.
----------------------
3. When there is no clear direct relationship between the worker’s effort and
his output, such as when jobs are highly interrelated. ----------------------
4. When delays in the work are frequent and beyond the employee’s control. ----------------------
5. When quality is a primary consideration as with engineering and other
----------------------
professional personnel.
6. When precise advance knowledge of unit labour costs is not required by ----------------------
competitive conditions. ----------------------
On the other hand, payment on ‘output’ basis would be preferable if:
----------------------
1. Units of output can be measured.
----------------------
2. There is a clear relationship between employee effort and the quantity of
the output. ----------------------

Notes 3. The job is standardised, the workflow is regular and delays are few or
consistent.
----------------------
4. Quality is less important than quantity or if quality is important, it is easily
---------------------- measured.
5. Competitive conditions require that unit labour costs be definitely known
----------------------
and fixed in advance of production.
---------------------- Requisites or guidelines for effective incentive plans
---------------------- Monetary incentive plans do motivate employees. There is considerable
evidence that installation of such plans usually results in greater output per man-
---------------------- hour, lower unit cost and higher wages in comparison with outcomes associated
---------------------- with the straight payment systems.
But these plans will not be effective unless a careful planning is done
---------------------- and the plans properly implemented. Several authors have suggested a list of
---------------------- requisites the monetary incentive plans should meet if the incentive method is
to be attractive to the employee and at the same time administratively sound.
---------------------- Some of the more important requisites/specific guidelines for developing
effective incentive plans are:
----------------------
1. Ensure that efforts and rewards are directly related: The incentive
---------------------- plan should reward employees in direct proportion to their performance
and increased productivity. Employees must also perceive that they can
---------------------- actually do the tasks required. The standard set has to be attainable,
---------------------- necessary tools, equipment, training etc. should be provided in time and
the employee should have adequate control over the work process.
----------------------
2. The reward must be valuable to the employees: Increased monetary
---------------------- earnings must have the potential to satisfy the existing needs of the worker
if the worker is to be attracted to them. In other works, the monetary
---------------------- incentives offered must be relative to current or visible future needs.
---------------------- 3. The reward must be clearly identifiable: Individual or groups contributions
and efforts must be clearly identifiable, if rewards are to be given for
---------------------- specific performance.
---------------------- 4. Methods and procedures must be carefully studied: Since effective
incentive plans are generally based on a meticulous work method study,
---------------------- the services of an Industrial Engineer or other methods, expert should be
---------------------- obtained who may, through careful observation and measurement, define
fair performance standards on which the plan is to be based.
---------------------- 5. The plan must be understandable and easily calculable by the employees:
---------------------- The workers should easily understand the incentive plan so that they can
easily calculate personal cost and personal benefit for various levels of
---------------------- effort put in by them.
---------------------- 6. Effective standard must be set: The standards of which the plan is to
be based should be effective, i.e. they should satisfy these conditions:
---------------------- i) standards are viewed as fair by the subordinates. ii) They should be

set high but be reasonable (i.e., there should be about a 50-50 chance at Notes
reaching it iii) they should be specific and iv) They should be complete.
Do not just focus on quantity and disregard quality unless that is the ----------------------
intention.
----------------------
7. Standards must be guaranteed: The standard should be viewed as a
contract with the employees. Once the plan is operational, great caution ----------------------
should be used before decreasing the size of the incentive in any way.
----------------------
8. An hourly base rate must be guaranteed: At least the plant employees
should be guaranteed the base rate. Moreover, there should be one base ----------------------
rate for a job regardless whether or not it is on “incentive”.
----------------------
9. Clear policies and rules must be developed: Specific policies and rules
concerning how employees will be paid and the rules for attaining the ----------------------
standard (and incentives) should be clear to both, manager and employees.
----------------------
10. Rewards must be consistent with Government regulations: The
incentives offered must govern regulations regarding compensation. The ----------------------
level of the reward and the frequency of it must meet minimum wage ----------------------
guidelines.
11. Rewards must be granted promptly: The incentive plan should provide ----------------------
for rewards to follow quickly after the performance that justifies the ----------------------
reward.
12. The plan must be within the financial and budgetary capacity of the ----------------------
organisation: It must be compatible with the financial resources available. ----------------------
13. Additional reinforcement must be provided: The incentive plan can
----------------------
be more effective if high performance is encouraged and reinforced
by management and subordinates. Reinforcement in terms of points ----------------------
accumulated or incentives given should be as frequent as possible,
preferably daily or weekly. ----------------------
14. It must minimise friction between workers: Ideally, the plan encourages ----------------------
workers to support each other rather than to be non-cooperative.
----------------------
15. Employee participation may be useful: For increasing the effectiveness
of incentive plans. ----------------------
Thus, it may be said that each incentive and method must be weighed to ----------------------
determine its ability to meet the criteria stated above. Some piece rate methods
meet most of these requirements successfully. Others do not. The bonus paid ----------------------
after a period often fails to meet criteria. In many cases, there is a time lag
between the performance bonuses. The cause effect relationship may become ----------------------
muddled and confused and the desired reinforcement effect can be lost. ----------------------
Profit sharing programmes also suffer weaknesses at times, particularly in
meeting criteria 1, 3, 5 and 11. Often a worker sees little relationship between ----------------------
his own efforts and the rewards he receives. He also feels that there are many ----------------------
things affecting profits that are outside his realm of control.
----------------------

Notes
----------------------
----------------------
1. Bonuses are more likely to be viewed as one-time rewards for defined
---------------------- work rather than ongoing ___________.
---------------------- i. Recognition
ii. Commissions
----------------------
iii. Payment
----------------------
iv. Entitlements
---------------------- v. Incentives
---------------------- 2. Paying workers a fixed-sum for each unit of production completed is
called _____
----------------------
i. Flat-rate
----------------------
ii. Piece-rate
---------------------- iii. Gain sharing
---------------------- iv. Bonuses
---------------------- 3. Gain sharing differs from profit-sharing in that_______.

i. It focuses on productivity gains rather than profits.
----------------------
ii. Employees receive incentive rewards only when a company is
---------------------- profitable
---------------------- iii. It rewards specific behaviours that are more influenced by
external factors.
----------------------
iv. It focuses on profits rather than productivity gains.
---------------------- v. It rewards specific behaviours that are less influenced by internal
---------------------- factors.
----------------------
9.6 NON-MONETARY INCENTIVES
----------------------
While monetary incentives often appear as important motivators, many
---------------------- factors unrelated to money can also serve as ‘attention-getters’ and ‘encouragers
of action.’ The classification of such non-financial incentives tends to be
----------------------
a smorgasbord of desirable things that are potentially at the disposal of the
---------------------- organisation. The creation of such rewards is only limited by manager ingenuity
and the ability to assess payoffs that individuals within the organisation find
---------------------- desirable and which are within the manager’s jurisdiction. As the old proverb
goes: “One man’s food is another man’s poison” certainly applies to rewards.
----------------------
What one-employee views something as what he has have always wanted,
---------------------- another finds it superfluous. Therefore, care must be taken in providing the right
reward for each person.
Following are some examples of non-monetary incentives Notes
The need motives for affiliation, power and recognition in particular can
----------------------
be appealed to by such incentives. For example:
●● person with a strong need for affiliation may respond readily to job
A ----------------------
assignments that provide him with opportunities to relate to socially
----------------------
attractive and satisfying individuals or groups.
●● he opportunity to communicate with and relate to others is a factor many
T ----------------------
workers emphasise and seek.
----------------------
●● ersons who are very status conscious can be motivated with the
P
availability of a panelled office, a carpeted floor and wall paintings, a ----------------------
large desk and aristocratic furniture or a private bathroom, impressive ----------------------
job title, their own visiting cards, their own secretary and telephone, or a
well located parking place with their name clearly painted underneath the ----------------------
“Reserved” sign, all of which are status symbols.
----------------------
●● n employee with high level desires for power may respond easily
A
to opportunity whereby he can gain leadership and administrative ----------------------
responsibilities. He may be stimulated by participative or free rein
leadership in the decision making process. The use of job enlargement ----------------------
provides an added incentive to some employees because they feel capable ----------------------
of controlling wider sets of activities than they previously performed.
●● ersons interested in enhancing their reputations and receiving recognition
P ----------------------
in the eyes of others may respond to verbal praise or to publicised awards. ----------------------
●● ersons proud of their long service may be attracted by awards recognising
P
----------------------
their seniority.
●● orkers in safety minded organisations are often attracted by competition
W ----------------------
on awards for best safety performance records.
----------------------
●● I ndividuals proud of their past accomplishments may feel recognised and
rewarded if their superiors extend opportunities for participation on more ----------------------
complex and more important job assignments. ----------------------
In short, management may look to many non-monetary incentives for the
effective motivation of those who are most need conscious. In many cases, ----------------------
these non-monetary incentives might stimulate even more attention than the ----------------------
monetary ones.
The Problem of Equity ----------------------
It is a general practice all over that employees make comparisons between ----------------------
themselves and their co-workers. They perceive what they get from a job
----------------------
situation (output) in relation to what they must put into it (inputs). They also
compare their output-input ratio with the output-input ratio of their fellow- ----------------------
workers. If a person’s ratio and that of others are perceived to be equal, a state
of equity is said to exist. If they are unequal, inequity exists, i.e. the individual ----------------------
considers himself as under rewarded or over-rewarded. When an employee
----------------------
envisions an equity, he may choose any one or more of five alternatives: i)

Notes distort either his own or others inputs or outputs ii) behave in the same way so
as to induce others to his own inputs or outputs iii) behave in same way so as to
---------------------- change his own inputs or outputs iv) choose a different comparison referent and
v) leave the job.
----------------------
Equity approach recognises that individuals are concerned not only with
---------------------- the absolute amount of money they are paid for their efforts but also with the
relationship of this amount to what others are paid. They make judgements as
----------------------
to the relationship between their inputs and outputs with those of the others.
----------------------
----------------------
Match the following.
----------------------
i. Halsey Premium Plan a.
Bonus= ½ of time saved x Hourly
---------------------- rate
---------------------- ii. Halsey-weir Premium Plan b. Bonus= ½ of time saved/time
taken x Daily wage
---------------------- iii. Perks and perquisites c. Payment of gratuity, pension,
---------------------- medical benefits and accident
relief, uniform, canteen etc.
---------------------- iv. Fringe Benefits d. Hotel stays, free refreshments,
leisure activities on work time
----------------------
e. Bonus= ¾ of time saved + hourly
---------------------- rate+ daily wage
f. Commission and travelling
---------------------- expenses
----------------------
---------------------- Activity 2
---------------------- Undertake a comparative analysis of various non-monetary incentives

offered by few government and private organisations.
----------------------
----------------------
Summary
----------------------
●● I ncentives can be anything which attracts a workers attention and
---------------------- stimulates him to put extra efforts. Incentives plans may consist of both
monitory and non-monitory elements.
----------------------
●● here is a direct relationship between perceived personal cost and
T
---------------------- perceived value of obtained monetary rewards which further decide the
employees’ efforts and involvement at work.
----------------------
●● ome important wage incentives are Halsey premium plan, Rowan
S
---------------------- premium plan, Bedeaux point plan, Taylor’s differential piece rate plan
and Emerson’s efficiency plan.
----------------------

●● he main feature of the profit sharing schemes is voluntary agreement
T Notes
and the amount to be shared is computed based on agreed formulae and
depends on the profits earned by the enterprise. ----------------------
----------------------
Keywords
----------------------
●● I ncentive scheme: It is a plan or programme to motivate individual or
group performance. ----------------------
●● rofit sharing: It is an arrangement by which employees receive a share,
P ----------------------
fixed in advance of the profits
----------------------
1. What is incentive? What are the determinants of incentives? ----------------------

2. What are the wage incentive schemes? Explain their merits and demerits. ----------------------
3. What are the points to be considered for a successful wage incentive plan? ----------------------
4. What is profit sharing? Explain its features and characteristics.
----------------------
5. Write short notes.
----------------------
a. Incentive plans for white-collar workers/salesman
b. Incentive plans for management employees ----------------------
c. Non-monetary incentives ----------------------
d. Cafeteria style compensation ----------------------
6. Explain in detail the requisites for effective incentive plans.
----------------------
1. Which of the following is true about incentives?
----------------------
i. Incentive plan consists of both monetary and non-monitory elements
----------------------
ii. The timing, accuracy and frequency of incentive is very important
iii. Incentive plans should be properly communicated to the employees ----------------------
2. Non-monetary incentives includes: ----------------------
ii. Autonomy and authority ----------------------
iii. Promotion
----------------------
----------------------
1. True
2. False ----------------------

Notes 3. False
4. True
----------------------
5. True
----------------------
---------------------- 1. Bonuses are more likely to be viewed as one-time rewards for defined
work rather than ongoing entitlements.
----------------------
2. Paying workers a fixed-sum for each unit of production completed is
---------------------- called piece-rate.
---------------------- 3. Gain sharing differs from profit-sharing in that it focuses on productivity
gains rather than profits.
----------------------
---------------------- Match the following.
---------------------- i. – b
---------------------- ii. – a
iii. – d
----------------------
iv. – c
----------------------

---------------------- 1. http://managementhelp.org/payandbenefits/
---------------------- 2. Chingos, Peter T. Paying for Performance: A Guide to Compensation
Management (CPA Practice Guide Series).
----------------------
3. Handbook of Compensation Management. Geneva: ILO Publication.
---------------------- 4. Milkovich, George T. and Jerry M. Newmann. Compensation. McGraw-
Hill.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Process and Steps for Preparation of Payroll
UNIT
10
Structure:
10.1 Introduction
10.2 Wage and Salary Determination
10.3 The Wage Determination Process
10.4 Possible Deductions from Wage/Salary
10.5 Possible Inputs to the Payroll Process
10.6 Possible Outputs from the Payroll Process
10.7 Preparation of Payroll/Wage Sheet
Summary
Key Words
Suggested Reading
Process and Steps for Preparation of Payroll 267

Notes
Objectives
----------------------
----------------------
• Describe the wage and salary determination process
----------------------
• List possible deductions from the wage / salary
---------------------- • Identify possible inputs to and outputs from the payroll process
---------------------- • Discuss the payroll / wage sheet
----------------------
---------------------- 10.1 INTRODUCTION

---------------------- Wage and salary determination, difference between salary and wages, the
basis for compensation fixation, deductions from salary and wages, Inputs to
---------------------- be provided to the payroll process and the outputs expected from the Payroll,
the processes and steps in the preparation of the payroll, disbursement, issues
----------------------
related to disbursal, controls to be exercised before the disbursal of payroll,
---------------------- issues of employees/workers, payments to casual workers, piece workers, issues
of contractors’ employees, controls to be exercised before and after disbursal
---------------------- of contractors’ employees, legal impact of payments/non-payments to contract
employees, etc. are discussed in this unit.
----------------------
---------------------- 10.2 WAGE AND SALARY DETERMINATION

---------------------- Wage and Salary are the two terms used to describe the compensation
payable to the workmen and staff respectively. The amounts payable are
----------------------
determined on the basis of the job description, job specification and the
---------------------- performance of the individual performing such jobs. Not everyone is paid
at equal rates. There are factors like the skill, qualification, performance,
---------------------- experience of the employee/workmen concerned, organisation’s ability to pay
and willingness to pay. However, it will be worthwhile if we first look into what
----------------------
is “wage” and “salary” respectively.
---------------------- Wage: A ‘wage’ (or pay) is the remuneration paid, for the service of labour
in production, periodically to an employee/worker. “Wages” usually refer to
----------------------
the hourly rate paid to such groups as production and maintenance employees
---------------------- (“blue-collar workers”).
Salary: On the other hand, ‘Salary’ normally refers to the weekly or
----------------------
monthly rates paid to clerical, administrative and professional employees
---------------------- (“white collar workers”).
---------------------- The wage levels represent the money an average worker makes in a
geographic area or in his organisation. It is only an average, specific markets or
---------------------- firms and individual wages can vary widely from the average.
---------------------- The term ‘wage structure’ is used to describe wage/salary relationships

within a particular grouping. The grouping can be according to occupation Notes
or organisation such as wage structure for craftsman (carpenters, mechanics,
bricklayers, etc.) ----------------------
The wage structure or ‘grade’ comprises jobs of approximately equal ----------------------
difficulty or importance as determined by job evaluation. If the ‘point’ method
of job evaluation is used, the ‘pay- grade’ consists of jobs falling within a range ----------------------
of points. If the ‘factor comparison’ plan is used, the grade consists of a range
----------------------
of evaluated wage rates (or points, if the wage rate is converted to points). If the
‘ranking’ plan is used, the grade consists of a specific number of ranks. If the ----------------------
‘classification’ system is used, the jobs are already categorised into ‘classes’ or
‘grades’. ----------------------
----------------------
10.3 THE WAGE DETERMINATION PROCESS
----------------------
The steps involved in determining wage rates are:
----------------------
1) Job analysis
2) Wage surveys ----------------------
3) Analysis of relevant organisational problems forming the wage structure ----------------------
4) Framing rules of wage administration, explaining these to the employees ----------------------
5) Assigning grades and
----------------------
6) Assigning a price to each job and paying the guaranteed wage
----------------------
The process of job analysis
This results in job descriptions, which lead to job specification. A job ----------------------
analysis describes the duties, responsibilities, working conditions and inter-
----------------------
relationships between the job as it is and the other jobs with which it is
associated. It attempts to record and analyse details concerning the training, ----------------------
skills, required efforts, qualifications, abilities, experience and responsibilities
expected of an employee. After determining the job specifications, the actual ----------------------
process of grading, rating or evaluating the job occurs. A job is rated in order
----------------------
to determine its value relative to all the other jobs in the organisation, which
are subject to evaluation. The next step is that of providing the job with a price. ----------------------
This involves converting the relative wage levels.
----------------------
1. The term salary refers to payments made weekly/ monthly to;
----------------------
i. Clerical staff
ii. Administrative staff ----------------------
iii. Professionals ----------------------
iv. Consultants
----------------------

Notes
2. The important elements of wages determination process include;
---------------------- i. Job Analysis
ii. Wage surveys
----------------------
iii. Trade unions demand
---------------------- iv. Money value in market
---------------------- 3. The amount payable of wage / salary is determined on the basis of;
i. Job description and Job Specification
----------------------
ii. Demand of company’s product in the market
---------------------- iii. Performance of the individual employee
iv. Organisations ability to pay
----------------------
----------------------
10.4 POSSIBLE DEDUCTIONS FROM WAGE/SALARY
----------------------
These deductions can be normally divided into two broad categories:
---------------------- 1. Statutory Deductions: These deductions are to be made from the
---------------------- salary/wage of the employee/workmen since these are to be statutorily
to be made. The relevant enactment prescribes the rates at which such
---------------------- deductions are to be made.
---------------------- These deductions include deductions like
a) Provident Fund: This is normally deducted at 12% of basic or
----------------------
basic plus Dearness Allowance if any. Employees’ Provident Fund
---------------------- and Miscellaneous Provisions Act, 1952 govern these deductions.
b) Profession Tax: This tax is to be deducted as per the enactment
----------------------
applicable to the respective state since it depends upon the State
---------------------- Government and its concerned enactment and rate at which such
a deduction is to be made. There are various slabs of gross salary
---------------------- payable against which specific amounts deductible are mentioned
to be deducted.
----------------------
c) Income Tax: The income tax is to be deducted from the salary/
---------------------- wage of the employee depending upon the gross income he/she
---------------------- is likely to earn in the relevant financial year. The slabs and rate
at which such tax is to be deducted is specified in the finance bill
---------------------- of the country every year else it is to be deducted on the basis of
provisions of Income Tax Act, 1961.
----------------------
d) Labour Welfare Fund: These deductions are made twice in the
---------------------- year. An amount equal to Rs.5/- is to be deducted and contributed
to the Labour Welfare Fund constituted under the respective State
---------------------- Government if applicable. Such deductions are normally made in
---------------------- July and December every year.
----------------------

e) ESI Contribution: It is a contribution under the ESI Scheme. Notes
2. Other Deductions: Such deductions can be made only if the employee/
----------------------
workmen authorises the employer to do so. Such deductions include:
1. Salary Advance: In case any salary advance is granted to any ----------------------
employee/ workmen to meet any of his/her urgent/genuine needs and
----------------------
such application has been made to the employer and employer has
been authorised to deduct such advance paid from the subsequent ----------------------
month’s salary/wage, such deduction can be made from the salary/
wage of such employee/workmen. ----------------------
2. Festival Advance: Many a times the employer allows the employee/ ----------------------
workmen to avail what is called as Festival Advance. Such advances
granted typically during Diwali, Durga Pooja, Ganpati Festival or ----------------------
Christmas occasions. The employee/workmen has to apply for such
----------------------
advance and also has to authorise in writing for the deductions of
such advance from the salary/wage of the subsequent month/s. Such ----------------------
advance paid can be deducted from employee/workmen’s salary/
wage in as many instalments as agreed mutually. ----------------------
3. Housing Loan: If loan is taken from financial institutions like ----------------------
HDFC, LIC Housing Finance Ltd., Canfin, etc. Now–a-days, it
has become quite common that the employee/workmen apply ----------------------
for housing loans from financial institutions like HDFC, ICICI, ----------------------
LIC Housing Finance Ltd., etc. After such loans are sanctioned
and granted, the amounts of instalments become payable to such ----------------------
institutions. Therefore, such amounts of instalment payable to such
institutions can be deducted from salary/wage and remitted to such ----------------------
institutions on behalf of such employee/workmen if such deduction ----------------------
is authorised by the concerned employee/workmen in writing.
4. Insurance Premium payable to the Life Insurance Corporation of ----------------------
India: The premium payable to LIC can be deducted and remitted ----------------------
to LIC on behalf of such employee/workmen who authorises the
employer to deduct such a sum and remit such a sum on his/her ----------------------
behalf.
----------------------
5. Company Loan given for vehicle/car/housing/other purposes, etc.:
The employer grants a loan from his resources for two- wheeler/ ----------------------
car or buying a flat or house or even for some other purpose. The
loan granted is to be recovered in instalments and such deductions ----------------------
can also be effected from the salary/wage if authorised by such ----------------------
workmen in writing.
----------------------
6. Deduction due to absence from duty and such leave being leave
without pay: This typically happens in the case of the employee/ ----------------------
workman who is a habitual absentee and avails more leaves than
are available to him/her. In such circumstances, having regard to ----------------------
the service rules prevailing in such employment, an employer is
----------------------

Notes authorised to deduct the salary/wage for such employee/workmen
for the days for which the employee/workmen is not authorised to
---------------------- receive salary/ wage for.
---------------------- 7. Canteen recovery if authorised: The employer provides the canteen
facility to the workmen/employees. But the food provided as such
---------------------- could be costlier than the subsidy provided by such an employer.
Therefore, in such circumstances, the employee/workmen will have
----------------------
to bear the extra amount spent by the employer on the food offered
---------------------- in such a canteen. The recovery therefore, can be made from the
salary/wage of the employee/workmen if so authorised.
----------------------
8. Transportation charges/bus fare if authorised for example, bus fare
---------------------- for local transport to and fro office/works and home: Sometimes the
employer provides the transport facility himself even though he is
---------------------- not bound by any law to do so. Under such circumstances he may
ask the employee/workman to share the burden of the expenditure
----------------------
incurred by him and as such, may require the employee/ workmen
---------------------- to authorise him to deduct the amount of the transportation charges
for example, bus fare from the salary/wage of such employees/
---------------------- workmen.
---------------------- 9. Fine if any for damages caused to the company’s property: If any
employee/ workmen wilfully damages the property of the company,
---------------------- the employer may require such employee/workmen to make good
the damages sustained to company’s property. The deduction can
----------------------
therefore be made from the employee’s/ workman’s salary/wage.
---------------------- 10. Any loss sustained due to over/under invoicing, acceptance of
---------------------- counterfeit coins in case of cashier in Railway Administration/
Bank, etc. There could be some occupational consequences which
---------------------- may result in any loss to the organisation, for example, over/under
invoicing, acceptance of counterfeit coins or notes by the cashier
---------------------- may result in loss to the organisation. In such a case, the employer
---------------------- can deduct such loss sustained from the wage/salary of such an
employee/workman.
----------------------
----------------------

1. Provident fund, professional tax and income tax are components of
---------------------- _______ deductions.
---------------------- 2. Recovery of salary advance, festival advance, EMI of housing loan is
_______ deductions.
----------------------
3. The term which describes the study of duties, responsibilities, working
---------------------- conditions and interrelationship between different associated jobs is
known as ________.
----------------------

Notes
Activity 1
----------------------
Make a list of possible statutory and other permissible deductions from the
----------------------
salary /wage of employees.
----------------------
10.5 POSSIBLE INPUTS TO THE PAYROLL PROCESS ----------------------
The payroll process is an important function of any business organisation. ----------------------

This function is handled either by the Human Resources Department or
----------------------
the Finance Department. If the organisation is large in size, this function
is independently handled and really speaking, it has the flavour of both the ----------------------
departmental activities. The Payroll Department is in fiduciary position to the
HR and Finance department respectively. The major of the inputs received by ----------------------
the Payroll Department, hereinafter called “The Payroll Process”, are as follows:
----------------------
From Human Resources/Personnel Department
----------------------
●● ttendance of every employee for whom the payroll is to be processed
A
for the month. ----------------------
●● ew Employee Input viz. Employee No, Name, Date of Joining, Date
N ----------------------
of Birth, Basic Rate of Pay, Allowances payable, his/her Bank Account
No., where his/her salary/wage is to be sent, his/her other entitlements/ ----------------------
eligibilities, annual/monthly entitlements for any part of compensation
administered outside the payroll process or flexible pay packet like medical ----------------------
reimbursements, Leave Travel Assistance/Leave Fare Assistance, etc. ----------------------
●● romotion/Increment/Revisions: Input for promotions, increments
P
----------------------
and oblige or revisions is also to be provided to the payroll department.
Arrears if any will have to calculated and paid in the month under process. ----------------------
The input will include Employee No, Name, Effective Date of such
Promotion/Increment/Promotion, Old Designation, New Designation if ----------------------
applicable, Old Basic, New Basic, Old Allowances and New Allowances,
----------------------
etc.
●● Details of perquisites payable to such promotees, new entrants, etc ----------------------
●● ny recovery to be made on account of loss/damage to the property,
A ----------------------
any recoveries to be made for any training programs that were chargeable
from each such participant, etc ----------------------
●● Details of employee/workman left during the period, his/her last salary/ ----------------------
wage payable, period for which he/she is payable, his/her last date i.e.
date of leaving/relieving etc., any dues payable to him/her like part of ----------------------
entitlements, leave balance, leave encashment payable, any advice related ----------------------
to Gratuity payable, etc.
●● ny other payments like Additional Bonus, Special Incentives; Cash
A ----------------------
Prizes payable through payroll is to be sent through the inputs from the ----------------------

Notes HR department.
●● Every input sent from HR department must have Employee No. as
----------------------
a unique code allotted to each and every employee and the inputs must
---------------------- necessarily have the Employee No., without which the input shall be
incomplete.
----------------------
●● R department can also send directives about the policies designed for
H
---------------------- various promotions, transfers, perquisites and such compensation related
matters.
----------------------
●● R department also has to send important communications received
H
---------------------- with reference to any a changes in legal provisions of any enactments
to which the payroll process is directly or indirectly connected. For
---------------------- example, changes in the slab rate of Profession Tax if such change takes
place in the relevant enactment applicable to the State. Similarly changes
----------------------
in various enactments like Payment of Gratuity Act, Payment of Bonus
---------------------- Act, Employees’ Provident Fund and Miscellaneous Provisions Act, etc.
are also to be notified to the payroll department so that necessary changes
---------------------- will be carried out while calculating the wage/salary for the relevant
period.
----------------------
●● I t must send communication regarding change in the Cost of Living
---------------------- Index to enable to payroll process calculate the Dearness Allowance
---------------------- correctly if applicable and implement the same in the salary payable for
the month.
---------------------- ●● ow-a-days the HR department has also to communicate and coordinate
N
---------------------- closely with the Payroll Department with special reference to Voluntary
Retirement Schemes, the compensation payable, Tax deductible and the
---------------------- advice to be made to employees concerned as well as to the management
are to be coordinated with the help of the payroll Department.
----------------------
---------------------- Activity 2
---------------------- Undertake and analyse the possible inputs to the payroll process from the
---------------------- personnel department of any 3 organisations near your area.
----------------------
10.6 POSSIBLE OUTPUTS FROM THE PAYROLL PROCESS
----------------------
Pay-slips: The most important output from the payroll process is the pay-
---------------------- slip. The employee/workman eagerly waits for this basic output from the payroll
---------------------- process. The payslip depicts amounts of Earnings and Deductions in case of
the employee/workman as well as depicting the Net Amount Payable, which
---------------------- is normally, credited to his/her bank Account. The pay-slip is a statement of
earnings and deductions. It shows the number of days the employee/workman
---------------------- has worked, the rate of pay, basic and allowances as applicable, bonus if any,
---------------------- overtime payment if any, incentive, etc. Similarly, it shows the amounts deducted

on account of PF, Income Tax and Profession Tax. This statement also shows Notes
the leave balance and loan balance if any. Thus, it can be treated as one of the
most informative statements for every employee/workman, which is distributed ----------------------
to each of them on a monthly basis. It is treated as the conclusive evidence
of wage/salary payment made by the organisation. It is one of the documents ----------------------
proving the monthly earning of an employee/ workman. It is the basis on which ----------------------
he/she can apply for loans. This helps him/her in proving his/her employment.
----------------------
The pay-slips are generally prepared in duplicate. The second copy serves
as a record for the employer. It is also one of the requirements of The Shops and ----------------------
Establishments Act, the Factory Act, etc. It is a proof for the employer of the
payment of the wage/salary made for the month. ----------------------
●● Earnings and Deduction Statement: It is a summary of the pay- ----------------------
slips for the month. It shows both the earnings and the deductions of
all the employees or workmen in the organisation. The statement is the ----------------------
requirement of the Accounts Department as well being statutorily required
----------------------
to be preserved for inspections of various authorities like Provident Fund
Inspector, Factory Inspector and Profession Tax Inspector. They also form ----------------------
the basis for the Journal Entry required to be passed on a monthly basis to
account for the payment made for that month. ----------------------
●● ecovery Statements: Recovery statements like the Provident Fund
R ----------------------
Statement, Income Tax recovery Statement; Profession Tax Deducted
Statement showing the various slabs and the number of employees for ----------------------
each slab tallying with the total amount of recovery made, statement
----------------------
of recovery of E.S.I., company loan deducted, festival advance,
salary advance, miscellaneous recoveries, canteen recoveries, society ----------------------
contributions, Society Loans, HDFC loan deducted, LIC Housing
Finance Loan deducted, LIC premium recovered, etc. Statements are also ----------------------
required.
----------------------
●● Journal Entry: A journal entry, which is required to be passed through
the Accounting System, is to be generated out of such a payroll processing ----------------------
system. The entry shows the amounts of debits and credits. The balance ----------------------
is shown as the Net Salary payable. This is treated as control entry to
book expenses for the month on account of payroll as well as to book ----------------------
deductions effected during the month. Such deductions effected as credited
to respective accounts in the ledger and subsequently as per the due dates ----------------------
such remittances are made to the respective authorities by debiting the ----------------------
respective ledger accounts. Such remittances are to be made along with
the challans of the respective authorities. This is the statutory requirement ----------------------
to be fulfilled by the payroll processing system.
----------------------
●● ax deductible statement for each employee or Taxable Income
T
Estimates are required to be generated periodically to be able to track the ----------------------
Income Tax deductible for each of the employees.
----------------------
●● nnual reports include the Salary Certificate in Form 16 required to be
A
filed with Income Tax Department as well as Form No.24 showing the ----------------------

Notes summary of each employee employed during the year and the amounts of
salary income paid during the year, the tax deducted and remitted to Income
---------------------- Tax authorities. Both the reports are a crucial requirement of Income Tax
Compliance on the part of the employer. Form No.16 is required to be
---------------------- prepared in quadruplicate. First two copies need to be distributed to the
---------------------- employees concerned. The employer along with the Form No.24 should
submit a third copy, duly signed to the Income Tax department, before
---------------------- 30th April every year.
---------------------- ●● Summary of Salaries paid during the year is also prepared in the form
of the Pay- Register. This constitutes the record for the employer. This
---------------------- normally serves as historical record of the payroll for the year. Such a
record is maintained year after year.
----------------------
●● ny other reports, which are a part of the validation procedures, are
A
---------------------- also preserved for future reference. Periodical review of the employee
muster is taken and any time barred and old records would be moved to a
----------------------
separate muster for future reference.
---------------------- ●● he requirements of the HR department and Finance Department
T
may require any more reports from the payroll processing, for example,
----------------------
strength report for which the payroll processed for the month, revision/
---------------------- up-gradation/promotion, etc. require certain reports to be generated for
the HR department.
----------------------
---------------------- 1. The payroll department is in fiduciary position to the HR and finance

department.
---------------------- 2. Every input to the payroll process sent from HR department must
---------------------- have an employee number.
3. Form 16 filed with income tax department is very important document
----------------------
from both employer and employees point of view.
----------------------
---------------------- Activity 3
----------------------
Try to analyse salary slip of some employees of different organisation. Study
---------------------- the components of earnings and deductions.
----------------------
----------------------
----------------------
----------------------

10.7 PREPARATION OF PAYROLL/WAGE SHEET Notes
The source documents for the preparation of such sheets are Daily Time ----------------------
Sheet or Weekly Time Sheet or Attendance Register.
----------------------
A payroll may be defined as a statement wherein the Gross Earnings, Total
Deductions and Net amount payable as Wage or Salary is shown against the ----------------------
name or token number or code number of an employee for the period, generally
a month in case of salaried employees, and in the case of workers a week. ----------------------
Computation of Earnings ----------------------
Net Earnings = Gross Earnings – Deductions
A) The components of Gross Earnings are as follows: ----------------------
●● Basic salary ----------------------
●● Dearness allowance
----------------------
●● Other allowances, like House rent allowance, Medical allowance,
Overtime ----------------------
●● Ex-gratia
----------------------
●● Bonus
●● Incentives ----------------------
●● Other occasional incomes like Cash rewards ----------------------
●● Leave encashment, leave travel allowances, etc.
----------------------
B) Components of Deductions
●● Profession Tax ----------------------
●● Income Tax
----------------------
●● E.S.I. contribution of Employee
●● Fine, Leave without pay ----------------------
●● Charges for services provided by the organisation, e.g. transport, ----------------------
canteen, housing, furniture, gas, electricity, etc.
●● Premium of Life Insurance Corporation ----------------------
●● Union membership contribution ----------------------
●● Housing loan instalments
----------------------
●● Credit society instalments
●● Other bank loan instalments ----------------------
C) Net Earnings, which popularly known as take home salary is worked out ----------------------
as
Net Earnings = Gross Earnings – Gross Deduction. ----------------------
In case of piece workers, the remuneration is the product of the number ----------------------
of pieces or units completed and the rate for each piece. This is also called as
payment by results. ----------------------
In case of time paid workers, the remuneration is the product of time ----------------------
spent on in terms of hours and an hourly rate. For overtime work the rate is
higher than the normal rate. ----------------------

Notes Disbursement and Internal Checks
It needs a considerable amount of effort to deliver physically and paying
----------------------
of the workers. A company like Telco, Pune having strength of 40,000 plus
---------------------- employees, management of actual payments to the employees is a complex
task.
----------------------
Now a days, the most convenient way evolved is payment through a bank.
---------------------- However in the business where manual work assumes very high proportion
and the payments are on a weekly basis, an internal check is a very important.
---------------------- Examples of such business are Construction work, Transportation; Film making,
Bidi rolling, Packing industry, Processed food industry, Agro products, etc. This
----------------------
is because majority of the workers are illiterate. Many times they do not know
---------------------- how much they will be paid, how the amounts are calculated, the problem is
that of language. English is not understood by most of them. They know the
---------------------- local language.
---------------------- In such circumstances, the scope for fraud and cheating such workers is
large. Therefore internal check is as important as the preparation of a pay roll.
---------------------- For an adequate and effective internal check on disbursement of wages, the
following factors are important.
----------------------
1. Time recording should be supervised properly.
----------------------
2. Normal time, overtime and other records should be certified by the
---------------------- responsible authority who is not involved in time keeping activities.
---------------------- 3. In case of piece workers the accepted pieces or units should be certified
by two individuals i.e. foreman and the production in charge.
----------------------
4. The details of time and output should be crosschecked from the entries
---------------------- made in the documents used for the purpose.
5. Pre-sanction of overtime work should be made necessary with the
----------------------
Justification thereof.
---------------------- 6. Terms of remuneration and incentive schemes should be well defined.
---------------------- 7. It should be ensured that every worker understands the terms of and the
method of payment.
----------------------
8. Calculations of wages and salary should be prepared by one person which
---------------------- should be at least test checked by another person.
---------------------- 9. Cashier or the person responsible for the actual payment should not be
involved in the preparation of a payroll or wage sheet.
----------------------
10. There should be a surprise check on calculations and payments.
---------------------- 11. Identity cards should be given to ensure that the remuneration is paid to
the worker who has worked.
----------------------
12. The workers who are not present at the time of payment, their undisbursed
---------------------- wages should be entered in ‘undisbursed wage register’ and accounted
---------------------- for.

Wage Analysis Notes
Before analysing wages, the documents useful for the purpose are as follows:
----------------------
1. Cards – clock, job and idle time
----------------------
2. Wage sheet
3. Payroll ----------------------
4. Wage Analysis Book ----------------------
5. Wage Abstracts ----------------------
6. Accounting Registers – Journal and Ledger
----------------------
Standard Output Formats
----------------------
PF/EPS Report
Month: ----------------------
Sl Emp. Emp. PF. Ps. Wages Employee Employer VPF ----------------------

No. Code Name No. No. for per Contribution
PF PS
PF ----------------------
----------------------
----------------------
----------------------
Total
----------------------
Un Exempt Exempt
A/c no. 1 Mem’s Contbn 12% NPS/EPS 8.33% ----------------------
Co’s Contbn 3.67% Inspection Chgs 0.18%
----------------------
A/c no. 10 NPS/EPS 8.33% EDLI Chgs 0.50%
A/c no. 02 Admn Charges 1.10% Admn Chgs on ----------------------
A/c no. 21 EDLI 0.50% EDLI Chgs 0.01%
A/c no. 22 Admn Charges Trust/Fund 15.67% ----------------------
On EDLI
Members Contr of 12% & Co. ----------------------
Contr of 3.67% should go to ----------------------
Fund/Trust
----------------------
----------------------
Pay Slip for the Months of ____________________ ----------------------
Emp Code Emp Name
----------------------
Location Father’s Name
Department Cost Centre PF No. ----------------------
DOB Designation ESI No.
DOJ Bank A/c No. PAN ----------------------
Nationality Residential Status EPS No.
LTA Block ----------------------

Notes Leave Type Op. Bal Availed CL. Bal PF Op Bals A Op Bal
PL Credited Credited
---------------------- SL
CL
----------------------
Others 1
---------------------- Others 2 PF Cl. Bal SA Cl. Bal
Loan Type EMI Loan Amount Recover CL. Bal
---------------------- Car Loan
---------------------- App. Loan
Fur. Loan
---------------------- Per. Loan
LTA Loan
---------------------- Others
---------------------- Reim. Head Eligibility Availed Balance
LTA
----------------------
Medical
---------------------- Others
---------------------- Present LOP Leave Shift OT Sat/Sun Weekly

Days Days Details Hours Off
----------------------
---------------------- Earning Amount TD Deductions Amount YTD

---------------------- Basic PF
DA PT
---------------------- HRA IT
---------------------- Conv. Loans
Spl. Allw Others
---------------------- OT
---------------------- Others
Gross XXX XXX Total Deductions XXX XXX
---------------------- Income
---------------------- Net Pay (In Rupees) in Words XXX
---------------------- Bank Name Branch Date

Others
----------------------
---------------------- Authorised Signatory

Remarks
----------------------
Message
----------------------
Greetings
----------------------
----------------------

Notes
----------------------
Match the following.
----------------------
i. Wage analysis a. Monthly employees attendance, promotion
/ increment list of employees, New joinees ----------------------
inputs
----------------------
ii. Statutory b. Provident Fund, Professional Tax, Income
deductions tax ----------------------
iii. Inputs to the c. Basic, DA, HRA, Bonus, Incentives etc.
----------------------
payroll process
iv. Components of d. Wage sheet, Payroll, Wage abstract, ----------------------
gross earnings accounting registers
----------------------
Summary ----------------------
----------------------
●● ages and salaries are decided on the basis of Job description, job
W
specification and the performance of individuals. Not everyone is paid at ----------------------
equal rate.
----------------------
●● eductions from salaries or wages can be classified as statutory deductions
D
and non-statutory deductions. PF, PT and income tax are statutory ----------------------
deductions whereas the loans, recoveries and advances are non- statutory
deductions. ----------------------
●● The payroll department is in fiduciary position to the HR and Finance ----------------------
department and process inputs received from human resource information
system.. ----------------------
●● he payslip is a statement of earnings and deductions and gives an idea of
T ----------------------
payments under various heads and also leave and loan balance, if any.
----------------------
Keywords ----------------------
●● alary: ‘Salary’ normally refers to the weekly or monthly rates paid

S ----------------------
to clerical, administrative and professional employees (“white collar
----------------------
workers”).
●● age: A ‘wage’ (or pay) is the remuneration paid, for the service of
W ----------------------
labour in production, periodically to an employee/worker (“blue-collar
----------------------
workers”).
●● age levels: It represents the money an average worker makes in a
W ----------------------
geographic area or in his organisation. It is only an average, specific ----------------------
markets or firms and individual wages can vary widely from the average.
●● age Structure: The term ‘wage structure’ is used to describe wage/
W ----------------------
salary relationships within a particular grouping. The grouping can be ----------------------

Notes according to occupation, or organisation such as the wage structure for
the craftsman (carpenters, mechanics, and bricklayers)
----------------------

---------------------- 1. What are the possible deductions that can take place from the Wage/
Salary?
----------------------
2. Explain the possible inputs to the payroll process.
---------------------- 3. What are the possible outputs from the payroll process?
---------------------- 4. Explain how the earnings are computed.
----------------------
----------------------
----------------------
Multiple Choice Multiple Response.
---------------------- 1. The term salary refers to payments made weekly/ monthly to;
---------------------- i. Clerical staff
---------------------- ii. Administrative staff

iii. Professionals
----------------------
2. The important elements of wages determination process include;
----------------------
i. Job Analysis
---------------------- ii. Wage surveys
---------------------- 3. The amount payable of wage / salary is determined on the basis of;
---------------------- i. Job description and Job Specification

iii. Performance of the individual employee
----------------------
iv. Organisations ability to pay
----------------------
---------------------- 1. Provident fund, professional tax and income tax are components of
statutory deductions.
----------------------
2. Recovery of salary advance, festival advance, EMI of housing loan is
---------------------- authorised deductions.
---------------------- 3. The term which describes the study of duties, responsibilities, working
conditions and interrelationship between different associated jobs is
---------------------- known as job analysis.
----------------------
----------------------

----------------------
1. True
----------------------
2. True
3. True ----------------------
Match the following. ----------------------
i. – d
----------------------
ii. – b
----------------------
iii. – a
iv. – c ----------------------
----------------------
Suggested Reading
----------------------
1. Chingos, Peter T. Paying for Performance: A Guide to Compensation
----------------------
2. Milkovich, George T. and Jerry M. Newmann. Compensation. McGraw- ----------------------
Hill.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------
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----------------------

Tax Planning and Payroll Components
UNIT
11
Structure:
11.1 Introduction
11.2 Income from Salaries
11.3 Provident Funds
11.4 Approved Superannuation Fund [Sec.10 (13)]
11.5 Deductions from Salaries [Sec.16]
11.6 Distinction between Different Types of P.F.
11.7 Meaning of Salary for Different Purposes
11.8 Value of Rent-Free Accommodation
Summary
Key Words
Suggested Reading
Tax Planning and Payroll Components 285

Notes
Objectives
----------------------
----------------------
• Identify various components of income from salaries and the
---------------------- perquisites
---------------------- • Explain the provisions related to provident fund and superannuation
fund
----------------------
• Differentiate various components of allowable deductions from
---------------------- salaries
---------------------- • Analyse the meaning of salary for different purposes
----------------------
11.1 INTRODUCTION
----------------------
Tax planning, overview of future trends in compensation management,
---------------------- calculation of income tax implications while calculating the income of an
individual, cost to the company, valuation of perquisites, taxability of various
---------------------- components of salary and wages like allowances, gratuity, leave encashment,
receipts on voluntary retirement scheme, leave travel assistance, medical
----------------------
reimbursement, employees’ stock option scheme, fixation of tax liability, tax
---------------------- deduction at source, deductions and tax rebates are to be considered while
deciding tax deducted at source, tax deduction certificates.
----------------------
All incomes are subject to charge of income-tax and hence computation
---------------------- of total income has been classified under the following heads:
---------------------- 1. Income from Salaries

2. Income from House Property
----------------------
3. Profits and Gains of Business or Profession
----------------------
4. Capital Gains
---------------------- 5. Income from Other Sources
----------------------
11.2 INCOME FROM SALARIES
----------------------
Section 15 of the Income Tax Act, 1961 - According to this section, tax is
---------------------- chargeable in respect of salaries, (i) which are due from an employer or former
employer, whether paid or not, (ii) which are paid whether due or not, and
----------------------
(iii) any arrears of salary paid or allowed to an assessee in the previous year
---------------------- (provided they were not taxed previously.)
According to Section 17 (1) the salary chargeable for the purpose of
----------------------
Section 15 and 16 includes:
---------------------- 1. Wages
---------------------- 2. Any annuity or pension @ annuities, pensions, gratuities, etc. Gratuity

paid to employees by the Government, a local authority is altogether Notes
excluded from the computation of total income.)
----------------------
3. Any gratuity paid as per provisions of Payment of Gratuity Act, 1972
(except as stated below). In case of employees in private employment, the ----------------------
amount of gratuity to be excluded from total income will be the least of
the following: ----------------------
(i) 15 days salary or wages for each year of completed year of service ----------------------
(ii) A ceiling of Rs. 20, 00,000.
----------------------
4. Any fees, commission, perquisites or profits in lieu of or in addition to
any salary or wages, voluntary payments by the employer. ----------------------
5. Any advance of salaries, (but not any other advances for example, an ----------------------
advance for purchasing a car or building or a house, etc.)
----------------------
6. Any annual accretion to the account of any employee participating in
a recognised provident fund. This accretion includes the employer’s ----------------------
contribution in excess of 12% of employee’s salary and the interest on his
provident fund account in excess of 12% of the rate. ----------------------
7. The balance transferred from an unrecognised provident fund to a ----------------------

recognised provident fund account of an employee.
----------------------
8. The amount refunded in the previous year out of the deduction made
previously under the Additional Emoluments Compulsory Deposit Act ----------------------
is included in Salary Income. (However, interest on such deposits is
----------------------
included in “Income from Other Sources.”)
9. Payment received by an employee from the employer on retirement, ----------------------
termination or dismissal from service. (However, retrenchment ----------------------
compensation received by an employee under the Industrial Disputes Act
or under any other Act or Award, is exempt U/S 10(10B) ----------------------
[Personal gifts for reasons of honesty or exceptional loyalty are exempt ----------------------
U/S 10(3).]
Tax is chargeable in respect of salaries (i) which are due whether paid or ----------------------
not (ii) which are paid whether due or not, (iii) which are paid and are in respect ----------------------
of the year or years preceding the previous year.
----------------------
Important Points: In the case of salary income the relation of employer and
employee is important. If there is no such relation, the remuneration received ----------------------
for holding an office does not come under the term ‘Salary’ for example, fees
received by a director of a company. ----------------------
If the employment is merely incidental to the exercise of a profession ----------------------
the gains from such employment would be professional earnings and not
‘salary’ for example, the earnings of a lawyer engaged in a certain case are the ----------------------
income from his profession, but his earnings from employment as a regular
----------------------
legal adviser of a certain company are ‘salary’. Thus, when a person occupies a
regular post or office amounting to service, it is an employment as distinct from ----------------------

Notes mere engagement in the course of the profession.
Perquisites or profits or any remuneration received by reason of his
----------------------
employment from person other than employer, is taxable under the head ‘income
---------------------- from other sources’ for example, examinership fees received by a professor.
Perquisites
----------------------
The payment of perquisites is included in the term salary and the term
---------------------- means any casual emolument, fee or profit attached to an office in addition to
the salary paid by the employer to his employee voluntarily or otherwise, and
----------------------
they may be in cash or kind or in the form of benefits and amenities.
---------------------- Perquisites are classified as under:
---------------------- 1. Taxable in all cases
---------------------- 2. Taxable in specific cases
3. Non-Taxable, i.e. exempt from tax
----------------------
1. Taxable in all cases
----------------------
(i) Value of Rent-free accommodation or provided at a concessional
---------------------- rent by the employer to his employee.
---------------------- (ii) Any sum paid by the employer in respect of any obligation which,
but for such payment, would have been payable by the assessee for
---------------------- example the sums spent by the employee on gas, electricity, water,
etc.
----------------------
(iii) Any sum payable by the employer directly or through a fund (not
---------------------- being recognised provident fund or an approved superannuation
fund) to effect an assurance policy on the life of an employee or to
---------------------- effect a contract or an annuity.
---------------------- 2. Taxable under Specific Cases
---------------------- The value of the following perquisites is included in ‘salary’ income only
in respect of the assessee,
----------------------
1. Who is a director of a company, or
---------------------- 2. Who has a substantial interest in the employer-company i.e. holding
---------------------- shares carrying 20% or more voting rights, or
The perquisites are:
----------------------
a) Valuation of motorcar provided by the employer
----------------------
b) Value of gas, electricity, water provided free of cost
---------------------- c) Gardener’s wages paid by employer for rented accommodation
provided by the employer to employee.
----------------------
d) Education expenses in case the employer runs education institution.
----------------------
e) Wages of sweeper/watchman paid by the employer.
----------------------

3. Non-taxable Perquisites Notes
The value of following perquisites is exempt from tax and it is not included
----------------------
in the salary income of any employee.
A) Valuation of re-imbursement of medical expenses/medical facilities ----------------------
by the employer.
----------------------
In India
----------------------
(i) Exemption from Tax will be available in respect of expenses incurred by
the employer in respect of an employee and members of his family (i.e. ----------------------
parents, sisters and brothers, wholly or mainly dependent on employee)
in the employer’s hospital. ----------------------
(ii) Reimbursement of medical expenses incurred by the employee on his ----------------------

medical treatment or that of any member of his family.
----------------------
a) In a Government or local authority or government approved
hospital; ----------------------
b) In respect of the prescribed diseases or ailments in a hospital ----------------------
approved by the Chief Commissioner of Income Tax, provided he
fulfils certain conditions. ----------------------
(iii) Payment or reimbursement of premium in respect of health insurance of ----------------------
the employee or any member of his family under the scheme approved.
----------------------
Outside India
A) The expenditure on medical treatment and the stay abroad will be exempt ----------------------
only to the extent permitted by the Reserve Bank of India ----------------------
B) Recreation Facilities: Any expenditure incurred by the employer in
respect of recreational facilities provided to a group of employees. ----------------------
C) Gardener’s Wages: If the employer for a house in which the employee ----------------------
(i.e. assessee) resides, and the house is owned by the employer; employs
----------------------
a gardener, the wages paid to a gardener by the employer are exempt.
(However, the amount of wages is included for determining the fair rent ----------------------
of the house)
----------------------
If the house belongs to assessee or if the employer rents it this exemption
is not allowed ----------------------
D) Refreshments: Any expenditure incurred by the employer in respect
----------------------
of refreshment provided to the employee during office hours and in the
office premises only. ----------------------
E) Transport Facilities: Transport facilities given free of charge or at ----------------------
concessional rates by the employer engaged in transport business to his
employee or members of employees ‘ family. ----------------------
F) Telephone Bill: Payment of telephone bill by the employer for the ----------------------
----------------------

Notes G) Refresher Course etc.: Amount spent by an employer on the training of
employees or on undergoing a refresher course or management course.
---------------------- However, if employee pays fees for attending such course, is not allowed
for deduction from salary income.
----------------------
H) Perquisites allowed or the allowances paid by the Government to a
---------------------- citizen of India outside India for rendering services outside India.
---------------------- i) Premium paid by the employer on personal accident policy of
employees.
----------------------
j) Goods manufactured by employer and sold to employees at a concessional
---------------------- rate.
---------------------- Value of Perquisites

Value of various perquisites made is as explained below:
----------------------
1. Value of Rent-free Accommodation provided by an Employer
----------------------
A) Unfurnished Accommodation
---------------------- i) Government Employees: The value will be taken at 10% of the
salary, irrespective of Government rules.
----------------------
ii) Semi-Government Employees: The value will be taken at 10%
---------------------- of his salary, value is Nil and pays less than 10% and the actual
---------------------- payment is treated as value.
iii) Private Sector Employees: Value of free accommodation is taken at
---------------------- 10% of salary or fair rent whichever is less.
---------------------- i) Fair Rent: Rent for which the house is likely to be let out or
the municipal valuation, whichever is more.
----------------------
Additionals are the salary of a gardener, if any, expenses on
---------------------- maintenance of garden, maintenance of ground attached, or
of a swimming pool, etc.
----------------------
ii) Meaning of Salary: Salary includes all regular monetary
---------------------- payments i.e. pay, all taxable allowances, commission or fees,
income tax, professional tax, electricity gas, water bills etc.
----------------------
paid by employer.
---------------------- However, ‘Salary’ does not include:
---------------------- i) Dearness allowance, if it does not enter into the computation of
Superannuation or retirement benefits of the employee.
----------------------
ii) Employer’s contribution to the Provident Fund,
---------------------- iii) Allowances, which are exempt from tax,
---------------------- iv) Entertainment allowance to the extent of exemption limit and
---------------------- v) Value of the free use of a motor car
----------------------

Example: Ascertain the value of rent-free accommodation given by a private Notes
company in Mumbai to its employee Shri. Sharma.
----------------------
Basic Salary 30000
Bonus 5000 ----------------------
Entertainment Allowance 2000
(w.e.f. 1-4-84) ----------------------
Refund of ABCD 2000
Electricity expenses paid by employer 2000 ----------------------
Project Allowance 3000 ----------------------
edical expenses paid employer 2000
Medical expenses paid by employer 2000 ----------------------
Employer’s contribution 600
E.P.F. over 12% of salary ----------------------
Gas bill paid by employer 1000
----------------------
Rent free house (Owned by employer) 12000
Salary of gardener paid by employer 3000 ----------------------
Garden maintenance exps. 2000
Salary of sweeper & watchman 1200 each ----------------------
Solution: ----------------------
Fair rent = Fair rent + Gardener’s Salary + Garden maintenance exps. =17000
----------------------
Salary means = Basic salary + bonus + entertainment allowance + electricity
Expenses + payment of gas bill + project allowance ----------------------
=30000+5000+2000+2000+1000+3000 = 43000 ----------------------
Hence, value of free accommodation is = 10% of Salary i.e. 10% of 43000/- = ----------------------
Rs.4300
If fair rent had amounted to Rs.30000 the value of free accommodation would ----------------------
have been Rs.8500 as under. ----------------------
10% of Salary Rs.43000 = Rs.4300
----------------------
Add: Excess of fair rent over 60% of Salary
----------------------
i.e. Fair rent Rs.30000 – (60% of Rs.43000)
i.e. Rs.25800 = Rs.4200 ----------------------
Total value = 4300+4200 = 8500 ----------------------

(It can be calculated as under ----------------------
Fair Rent Rs.30000
----------------------
Less: 50% of Salary Rs.21500 Net Rs.8500
----------------------
B) Value of Furnished Accommodation
i) First value the house as if unfurnished, and then, ----------------------
ii) Add 10% of the cost of furniture, television, other appliances etc. supplied ----------------------
by the employer, or if they are taken by the employer on hire, the hire
charges paid by the employer. ----------------------

Notes 2. Value of Accommodation provided at Concessional Rent First Value
of accommodation is to be determined as above: Less: Rent recovered
---------------------- from an employee (if any):
---------------------- Value ––––––
If the rent paid by the employee is equal to or more than the value of rent-
----------------------
free house, the value of the concession in rent is Nil.
---------------------- 3. Value of Free Accommodation to Hotel Employees (Other than specific
cases)
----------------------
i) Lodging: 10% of salary in the case of unfurnished accommodation
---------------------- and 12½% in the case of furnished accommodation, or the usual
---------------------- rent, whichever is less.
ii) Boarding: Actual cost (including overheads) of the food supplied.
----------------------
4. Value of Free Education
----------------------
i) Where fixed education allowance is given, it will be exempt up to
---------------------- maximum of two children.
Hostel Allowance up to a maximum of 2 children
----------------------
ii) Where school/college fees are paid by the employer or reimbursed
---------------------- to the employee the amount paid or reimbursed is taxable.
---------------------- iii) If the educational institution is run by the employer, the value will
be the cost of such education charged in similar institution in or near
---------------------- the locality and it is taxable in the hands of only specific employees.
---------------------- iv) Amount spent in providing education facilities to, and training of
the employee; is not taxable.
----------------------
5. Value of use of Motor Car
----------------------
Where an assessee owns a car but expenses are met or reimbursed to
---------------------- him by the employer, the value will be the actual sum expended for the
private use of the car by assessee. If all expenses are paid by an employee,
---------------------- nothing is to be added.
---------------------- 6. Gas, Light and Water
---------------------- i) If the employer pays the bill for supply of gas, light or water to the
employee, the amount paid by the employer is to be taken as the
---------------------- value of these items. If it is used for personal purpose only.
---------------------- ii) If the supply of these items is made by the employer from his own
sources without purchasing from any outside agency, the value is
---------------------- taken manufacturing cost per unit incurred by the employer.
---------------------- 7. Valuation of Free Transport

If the employer is not having a transport business and such employer does
----------------------
not own the conveyance used by the employee, amount spent to and from
---------------------- place of work to office is taken as nil.

Transport Allowance is granted to an employee to meet his expenditure Notes
for the purpose of commuting between place of his residence and place of
his duty and is exempted. ----------------------
8. Value of Free Domestic Servants ----------------------
If an accommodation owned by the employer is given to an employee
----------------------
without any rent i.e. free, services of sweeper, or watchman, actual wages
are paid by an employer, ----------------------
In the case of a gardener, wages paid by the employer are not added to
----------------------
salary but are included in the fair rent of the house provided.
Where the house is rented by the employer or no accommodation is ----------------------
provided by the employer, but the above servants are employed and paid ----------------------
by the employer the wages paid by employer are fully taxable in the hands
of specified employee only at actual ----------------------
If an employee engages them, the perquisite is taxable in all cases. ----------------------
9. Profits in lieu of Salary [Sec.17 (3)]
----------------------
It includes the following:
----------------------
i) Any compensation due to or received by an employee from his
employer or former employer from an unrecognised provident fund ----------------------
or from any other fund (not being an approved superannuation
fund) except to the extent to which it consists of the return of the ----------------------
employee’s own contributions and interest thereon, or any payment
----------------------
other than gratuity, pension, retrenchment compensation, H.R.A.
due to or received by an employee ----------------------
10. House Rent Allowance ----------------------
The exempt house rent allowance will be the minimum of the following
sums: (Exemption is not available to those who reside in their own house ----------------------
or those who do not pay rent). ----------------------
i) The actual amount of the house rent allowance
----------------------
ii) The excess of actual house rent paid over 10% of the salary
----------------------
iii) a) 50% of the salary if the residential accommodation is situated
in Delhi, ----------------------
Mumbai, Kolkata and Chennai and
----------------------
b) 40% of the salary in any other place
----------------------
(Salary means Basic Salary and Dearness Allowance and
excludes any other allowances.) ----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. Which of the following is not a classification of head under the
---------------------- computation of total income?
i. Income from salaries
----------------------
ii. Income from house property
---------------------- iii. Income from borrowings
---------------------- iv. Capital gains
2. Which of the following is not paid monthly?
---------------------- i. Salaries
---------------------- ii. Wages
iii. Gratuity
----------------------
iv. Allowances
---------------------- Multiple Choice Multiple Response.
---------------------- 1. Perquisites are classified as:
i. Taxable in all cases
---------------------- ii. Taxable in specific cases
---------------------- iii. Non-taxable
iv. Privileges.
----------------------
----------------------
Activity 1
----------------------
1. List down any four items of income from salaries and perquisites. Try
----------------------
to analyze the correlation.
---------------------- 2. Seek appointment of HR / Accounts head of an establishment and try
---------------------- to understand the computation of executive’s salaries. Special focus
should be on the perks given to senior executives.
----------------------
---------------------- 11.3 PROVIDENT FUNDS

---------------------- The different kinds of provident funds are as follows:
---------------------- 1. Statutory Provident Funds: These are the Provident Funds to which
the Provident Fund Act 1952 applies. The Government, railways, local
---------------------- authorities, universities and colleges, etc. maintain such Provident Funds.
---------------------- 2. Recognised Provident Fund: It means a fund, which has been continued
to be recognised by the Commissioner of the Income Tax as such. The
---------------------- funds, which are instituted under the Employees’ Provident Fund Act,
1952, are also included under this category.
----------------------

Banks, companies, and other industrial undertakings maintain these Notes
funds.
----------------------
3. Unrecognised Provident Fund: The provident funds, which are not
recognised by the commissioner of income tax. ----------------------
[Contributions to provident funds are made at a certain rate or at a certain
----------------------
percentage of salary both, by employee and employer.
Salary means Basic Salary, Dearness Pay or D.A. (if it enters into ----------------------
contribution of pay for service benefits.)]
----------------------
4. Public Provident Fund: It is Provident Fund instituted by the Central
Government for the benefit of the public. Self employed persons such as ----------------------
doctors, lawyers, accountants etc. can make use of the Provident Fund ----------------------
and get the facilities allowed for the Statutory Provident Fund. Post
Offices and branches of the State Bank of India and its subsidiaries accept ----------------------
subscriptions. The accumulated interest on this fund is non-taxable. Total
amount standing in the fund is not liable for wealth-tax. Refund is also ----------------------
non-taxable. ----------------------
1. Salary does not include employer’s contribution to provident fund. ----------------------

2. For salaried employees, the rate of House rent allowance is uniform ----------------------
across India.
----------------------
3. Value of the free use of office vehicle is included in the salary of
employees. ----------------------
----------------------
11.4 APPROVED SUPERANNUATION FUND [SEC.10 (13)]
----------------------
This is a scheme for the retirement of an employee. The employer makes
contribution. Employer may or may not contribute. The fund must be one ----------------------
approved by the Commissioner of Income Tax. The provisions relating to such ----------------------
fund are as follows:
----------------------
i) Employee’s contribution will qualify for rebate U/S 88.
ii) Employer’s contribution and interest credited to fund are fully exempt ----------------------
from tax.
----------------------
iii) Fund amount, including interest, received is fully exempt from tax.
----------------------
Where any contributions made by the employer, including interest, if any,
are paid to an employee during his lifetime in the circumstances other than U/S ----------------------
10(13), the tax should be deducted by the trustees of the fund from such an
amount at an average rate. ----------------------
----------------------

Notes 11.5 DEDUCTIONS FROM SALARIES [SEC.16]
---------------------- The income chargeable under the head ‘Salaries’ should be computed
after making the following deductions:
----------------------
1. Standard Deduction [Sec.16 (i)]
---------------------- This deduction is applicable to an employee even if he is in receipt of
---------------------- conveyance allowance or he is provided with a motorcar, motorcycle,
scooter or other moped, by the employer, or allowed to use any such
---------------------- conveyance from the pool.
---------------------- For this section salary means all monetary and non-monetary benefits to
be included under the head ‘salary’.
----------------------
(Expenditure made by an assessee on his own conveyance, books
---------------------- purchased etc. is not allowed for deduction.)
2. Entertainment Allowances [Sec.16 (ii)]
----------------------
Entertainment allowance equal to 1/5th of salary or Rs.5000 or actual
---------------------- amount whichever is less in the case of a Government Servant, and 1/5th
---------------------- of salary or Rs.7500 or the amount he was getting whichever is less.
3. Tax on Employment [Sec.16 (iii)]
----------------------
Professional Tax paid by an employee.
----------------------
4. Contribution to LIC Pension Plan (‘Jeevan Suraksha’)
---------------------- Deduction as per the rule is allowed.
----------------------
11.6 DISTINCTION BETWEEN DIFFERENT TYPES OF P.F.
----------------------
The differences between types of PF are given in the table below.
----------------------
Type of Fund Amount Amount not Amount Treatment
---------------------- included included i.e. on which of Refund of
in Salary exempt from Rebate is Balance at the
---------------------- Income Tax allowed U/s end of Service
---------------------- 88
1 2 3 4 5
----------------------
1. Statutory Employee’s i) Employer’s Employee’s Full amount of
---------------------- Contribution Contribution actual Refund is exempt
ii) Interest contribution from tax.
----------------------
accumulated on
---------------------- Balance
----------------------
----------------------
----------------------

Type of Fund Amount Amount not Amount Treatment Notes
included included i.e. on which of Refund of
in Salary exempt from Rebate is Balance at the ----------------------
Income Tax allowed U/s end of Service ----------------------
88
1 2 3 4 5 ----------------------
2. Recognised i) Employee’s Employer’s Employee’s Full amount of ----------------------
Contribution contribution contribution Refund is exempt
up to 12% of provided he is ----------------------
ii) Employer’s
Contribution Salary. in service for
----------------------
exceeding 12% Interest up to atleast 5 years or
of salary. 12% on balance required to leave ----------------------
service before 5
iii) Interest years for reasons ----------------------
exceeding beyond his
12% on ----------------------
control.
accumulated ----------------------
balance
3. Unrecog- Employee’s Employer’s NIL Employer’s ----------------------
nised contribution Contribution, as portion and
----------------------
also interest on interest thereon
balance. is included in ----------------------
salary income of
that year. Interest ----------------------
or Employee’s
----------------------
portion is added
to “Income from ----------------------
other Sources”.
----------------------
11.7 MEANING OF SALARY FOR DIFFERENT PURPOSES ----------------------
1. Valuation of Rent Free Accommodation: Basic salary, Dearness pay, ----------------------
Dearness allowance (if it enters into pay for service benefits), salary in
lieu of leave, bonus, commission, fees, taxable portion of entertainment ----------------------
allowance and of conveyance allowance, City Compensatory allowance,
Education allowance, other taxable allowances such as Project allowance, ----------------------
Medical allowance, etc. Income tax paid by employer, professional tax ----------------------
electricity/gas expenses paid or reimbursed by employer. Value of free
use of motorcar, advance salary or arrears, watchman, education expenses ----------------------
etc. are not to be included.
----------------------
2. House Rent Allowance
----------------------
3. Entertainment Allowance: Basic salary, D.P. or D.A. (if it enters into
computation of pay for service benefits.) ----------------------
----------------------

Notes 4. Gratuity @ 15 days salary for every completed year of service and part
thereof
----------------------
5. Contribution to Provident Fund
---------------------- 6. Statutory Deduction U/S 16(I): All items of income to be included under
the head ‘Salary’ to arrive at Gross Salary Income. (Even before deduction
----------------------
of entertainment allowance allowed for deduction.)
---------------------- 7. Salary: All incomes included under ‘salary’ exclusive of all benefits or
amenities not provided for by way of monetary payments, such as free
----------------------
gas, electricity, water, free education, free conveyance etc. salary exempt
---------------------- U/S 10 and amount deductible U/S 16(i) & (ii).
---------------------- Dearness pay is that portion of Dearness allowance which Government

declares to be pay for all purpose. Hence, it is treated as salary for all purposes.
---------------------- Value of Perquisites to be included in ‘Salary’ only if:
---------------------- i) The assessee is a director of a company or
---------------------- ii) The assessee has a substantial interest in the employer company, i.e. he is
holding shares carrying 20% or more voting rights.
----------------------
a) Valuation of motor car provided. b) Value of gas, electricity, water.
---------------------- c) Gardener’s wages paid by employer for rented accommodation
provided by employer. d) Education expenses in case education
---------------------- institution is run by employer. e) Value of free lunch. f) Wages of
sweeper, watchman.
----------------------
---------------------- 11.8 VALUE OF RENT-FREE ACCOMMODATION

---------------------- The various statutes about rent free accommodation are:
---------------------- 1. If a house owned by the employer is provided, the gardener’s wages paid
by the employer are added to the value of free accommodation to find out
---------------------- the fair rental value of the house.
---------------------- 2. If the house is not owned by the employer; actual wages paid to the
gardener are included in the salary income of the assessee if the assessee
---------------------- is either a director of that company, or having a substantial interest.
---------------------- 3. If the house is owned by the employee, the actual wages of the gardener
paid by the employer are included in the salary income of the assessee of
---------------------- any category.
---------------------- 4. Salary advance or taxable portion of pension received from the previous
employer is not to be included in the salary income of the assessee for the
---------------------- purpose of calculation of the value of rent-free accommodation.
---------------------- 5. Education allowance is to be included, but the value of the free use
of motor car is not to be included in the salary income, as it is not an
----------------------
allowance within the meaning of the definition of salary.
----------------------

Value of Free use of Car Notes
Where the employee uses more than one car, out of which one is of more than
----------------------
16 H.P., valuation is to be made at the rates prescribed for more than 16 H.P.
cars. ----------------------
House Rent Allowance
----------------------
House rent allowance paid to an employee residing in his own house, or
in a rent-free house, belonging to any other party, is not exempt from tax i.e. it ----------------------
is to be included in his salary income.
----------------------
Entertainment Expenditure
----------------------
If actual expenditure made by the employee is given, it is not allowed for
deduction. ----------------------
Additional Dearness Allowance ----------------------
Amount deposited in the additional emolument (Compulsory deposit)
----------------------
Act, 1974, i.e. 50% of the increased D.A. is allowed for deduction from salary.
But on the receipt of refund, the amount received, including interest, is included ----------------------
in the salary income of that year.
----------------------
Salary Income at a Glance
i) Salary or wages (including arrears and/or advance) ----------------------
ii) Pension ----------------------
iii) Taxable amount of Gratuity ----------------------
iv) Annuity
----------------------
v) Fees and Commission
----------------------
vi) Dearness Allowance, Education Allowance, Medical Allowance, City
or Local Compensatory Allowance, Wardenship Allowance, Project ----------------------
Allowance, etc.
----------------------
vii) Entertainment Allowance
viii) Taxable portion of House Rent Allowance ----------------------
ix) Taxable portion of Conveyance Allowance ----------------------

x) Employer’s contribution to Recognised Provident Fund, over 12% of ----------------------
salary of an employee
----------------------
xi) Interest on accumulated balance or recognised Provident Fund, over 12%
rate ----------------------
xii) Transferred balance in a recognised P.F. from unrecognised P.F. to the
----------------------
extent of employer’s share therein and the interest thereon
xiii) Compensation on termination or dismissal ----------------------
xiv) Value of rent-free accommodation or at concessional rent ----------------------
----------------------

Notes xv) Annuity contribution or insurance premium or any other obligation of
employee paid by employer on behalf of an employee
----------------------
xvi) Taxable portion of earned leave salary on retirement on superannuation
---------------------- xvii) Employer’s share in the accumulated balance of unrecognised P.F. and
interest thereon, (when received by the employee)
----------------------
xviii) Education expenses on employee’s family members paid or reimbursed
---------------------- by the employer
---------------------- xix) Valuation of motorcar provided by the employer
---------------------- xx) Value of gas, electricity, water provided free of cost or the reimbursements
of expenses.
---------------------- xxi) Value of Education facilities provided to the family members of employee
---------------------- in case the employer runs the education institution
xxii) Value of free lunch supplied by the employer
----------------------
xxiii) Wages of sweeper/Watchman paid by the employer
----------------------
xxiv) Discount on shares issued at discount by the employer company to the
---------------------- employee
---------------------- xxv) Interest on interest free loan/advance given by the employer to the employee
Gross Salary Income ______
----------------------
Less: Deductions
---------------------- Standard Deduction U/S 16 (i)
---------------------- Entertainment Allowance U/S 16(ii)
---------------------- Professional Tax ___________
Total Salary Income _________
----------------------
Important: *Valuation of items xix to xxv is to be included in salary income in
---------------------- respect of specified employee only i.e.
---------------------- a) A director of a company or
---------------------- b) Who has a substantial interest or

c) Whose salary income exceeds the prescribed limit
----------------------
---------------------- Summary
---------------------- ●● omputation of total income has been classified as income from salaries,
C
income from house property, gains from business, capital gain and income
---------------------- from other sources.
---------------------- ●● erquisites are classified as: taxable in all cases, taxable in specific cases
P
and non-taxable perquisites, i.e. exempt from tax.
----------------------
●● mployee Provident fund is a retirement fund and intends to help
E
---------------------- employees in old age, sickness and unemployment etc.

●● ublic provident fund is instituted by the central government for the
P Notes
benefit of self employed persons and the facility is available with SBI and
Post offices. ----------------------
●● he understanding of computation of salary is tricky as its computation
T ----------------------
differs for employees, executives and directors.
----------------------
Keywords ----------------------
●● ublic Provident Fund: It is the Provident Fund instituted by the Central
P ----------------------
Government for the benefit of the public. The accumulated interest on this
fund is non-taxable. Total amount standing in the fund is not liable for ----------------------
wealth-tax. Refund is also non-taxable.
----------------------
●● ecognised Provident Funds: It means a fund, which has been
R
recognised by the Commissioner of Income Tax as such. The funds, ----------------------
which are instituted under the Employees’ Provident Fund Act, 1952, are ----------------------
also included under this category.
●● tatutory Provident Funds: These are the Provident Funds to which the
S ----------------------
Provident Fund Act 1952 applies. ----------------------
●● nrecognised Provident Fund: The provident funds, which are not
U
----------------------
recognised by the commissioner of income tax.
----------------------
1. “Value of perquisites is one of the important elements of tax planning and ----------------------
payroll components” Explain.
2. What are the deductions under Section 16 of the Income tax Act, 1961? ----------------------
3. Write a note on treatment of House Rent Allowance and its exemption. ----------------------
4. Write a note on the value of rent-free accommodation. ----------------------
----------------------
1. Which of the following is not a classification of head under the computation ----------------------
of total income?
----------------------
iii. Income from borrowings
2. Which of the following is not paid monthly? ----------------------
iii. Gratuity ----------------------
----------------------
----------------------

Notes Multiple Choice Multiple Response.
1. Perquisites are classified as:
----------------------
i. Taxable in all cases
----------------------
ii. Taxable in specific cases
---------------------- iii. Non-taxable

1. True
----------------------
2. False
----------------------
3. False
----------------------
---------------------- 1. Lakhotia, Ram Niwas. 51 Tips for Saving Income Tax (F.Y. 2013-2014).
Vision Books.
----------------------
2. Lakhotia, Ram Niwas, Subhash Lakhotia. How to Save Income Tax
---------------------- through Tax Planning Practical and time-tested methods for saving
income tax. Vision Books.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Emerging Issues and Trends
UNIT
12
Structure:
12.1 Introduction
12.2 An Individual’s Lifestyle
12.3 Marriages and Family Values
12.4 Consumerism
12.5 Society
12.6 The New Environment
12.7 Business Process Re-engineering
12.8 Minimising downsizing Pains
Summary
Key Words
Suggested Reading
Emerging Issues and Trends 303

Notes
Objectives
----------------------
----------------------
• Recognise the social impact of pay structure on an individual’s
---------------------- lifestyle
---------------------- • Describe new trends in executive/managerial compensation
• Explain various welfare schemes, fringe benefits, perquisites and
---------------------- their approach
---------------------- • Analyse the problems of downsizing, HR issues pertaining to
restructuring and re-engineering, voluntary retirement schemes /
---------------------- golden handshakes etc.
• Justify the benefits of business process outsourcing (BPO),
----------------------
subcontracting
----------------------
---------------------- 12.1 INTRODUCTION
---------------------- The social impact of pay structure on an individual’s lifestyle is evident in
the urban society. The persons working in multinational companies, occupying
---------------------- the higher positions in the hierarchy enjoy a lavish lifestyle. They stay in large
housing complexes with five star amenities like a swimming pool, clubhouse,
----------------------
gymnasium, etc. They stay in very expensive penthouses and possess a high
---------------------- taste for garments. These persons normally have a small family and they are
addicted to consumerism. They prefer expensive cars and their eating habits are
---------------------- very flashy as well. They prefer lunch and dinners as well as partying in five star
hotels and pubs.
----------------------
---------------------- 12.2 AN INDIVIDUAL’S LIFESTYLE

---------------------- Since they devote most of their time for their employment and job, they
do not find time for their family. Whenever they are with their family, they
----------------------
find time for themselves for picnics and outings. Overall, their lifestyle is
---------------------- expensive and might even have a pinch of alcoholism, which might spoil their
health. However, they also are at times found to be crazy about the health clubs.
---------------------- Depending on the hierarchy they belong to, their lifestyle keeps on changing.
The habits of food and drinks are an integral part of their life. Being busy
----------------------
throughout the week makes them vulnerable about their health issues.
---------------------- The individuals from various levels of the organisation have different
lifestyles. But as well as being together for the most of the time, the habits of
----------------------
such individuals depend upon the group to which they belong.
----------------------
12.3 MARRIAGES AND FAMILY VALUES
----------------------
Since normally both husband and wife are working people, the family
----------------------
values have drastically changed. The necessities of the crèches, ready to cook

recipes and junk food have transformed the family into a bunch of consumers. Notes
These trends are more evident in urban areas. Since, the towns are getting
converted into cities and cities into Metros, the family values have undergone ----------------------
a drastic change. The joint family system has diminished over a period of time. ----------------------
It might even perish in due course. Old age homes are the reality. The parent
and child relationship is also undergoing a sea change. The parents are now ----------------------
content with the amenities provided to their children. The matter of ‘Sanskar’,
cultivating good and divine habits, has just remained in holy books. ----------------------
Marriages ----------------------
The institutions of marriage and family are to be found in every society. ----------------------
With the changes in the structure of society, these institutions also undergo
changes. Traditionally, the Indian society has recognised marriage to be a ----------------------
sacred and religious institution but in the modern industrial society it has been
reduced to a contract. In the past, marriage was considered to be a permanent ----------------------
and inalienable bond, which could not be terminated at will. ----------------------
But now, under the impact of industrialisation and constant restructuring
----------------------
of compensation packages, divorce and marriage go side by side. Now it is
not considered an evil to terminate contentious and miserable marriages. The ----------------------
following discussion will make explicit the impact of industrialisation and
such reviews and changes in the pay packets of the employees on the marriage ----------------------
institutions.
----------------------
1) Marriage is a social contract: Prior to heavy industrialisation of India,
marriage in this country was considered to be a religious and sacred ----------------------
institution. It was commonly believed by Hindus that marriage was
----------------------
necessary for emancipation or salvation and anyone who died without
getting married could not find salvation in this life. Besides, marriage was ----------------------
regarded to be a permanent bond. Marriages were supposed to be made
in heaven and only God could sever a marital bond. But with the advance ----------------------
of industrialisation these beliefs are considered superstitious and anyone
----------------------
holding them is looked down upon. Today marriage is regarded to be
only a social contract between a man and a woman. The aim of marriage ----------------------
in modern times has ceased to be spiritual and now its aims are only
economic, social and psychological. ----------------------
2) Higher Age of Marriage: In Indian society only a few decades back, ----------------------
parents used to marry their children at a very early age. Child marriages
were quite common. But with industrialisation, the age of marriage is ----------------------
advancing. Age cannot get ‘higher’. In metropolitan towns today, boys
----------------------
and girls are generally marrying at the age of 25 to 35.
3) Practice of non-marrying: As seen above, the aim of marriage in India ----------------------
is no longer spiritual. The marital bond is no longer looked upon as sacred ----------------------
or inviolable. As a consequence many young men and women in big cities
and towns prefer to live single. According to the thinking and beliefs of ----------------------
these young persons, the major need fulfilled by marriage is biological
and this can be easily satisfied out of wedlock. ----------------------

Notes 4) Practice of Love-marriages: In industries, men and women usually
work together.
----------------------
In mills, factories, offices, companies and other places men and women
---------------------- work together. Under these circumstances they get a chance of coming
together, meeting and exchanging ideas and opinions. As a result of this
---------------------- human concourse individuals become intimate and the intimacy becomes
---------------------- love, which ultimately blossoms in marriage.
5) Increase in Divorce: The industrial society is becoming more and more
----------------------
complex every day. The philosophy of individualism is flourishing in
---------------------- society. Even husband and wife have different outlooks and attitudes.
Both of them as a rule work in separate social spheres. As a result of this,
---------------------- marital bonds are from time to time rent by discord. The mental conflict
---------------------- increases and the situation of divorce develop. In all industrial societies
today there is a legal sanction for divorce.
----------------------
Family values
---------------------- 1) Difference regarding function of family: As a result of industrialisation
---------------------- and restructure of pay packets, the function of family has changed
considerably. Compared to today, the family had many more functions
---------------------- in the past. Now a number of functions, which used to be performed
by families in the past, have been taken over by other institutions.
----------------------
Traditionally, an Indian family used to be a centre of birth, rearing and
---------------------- education of children. The children used to get training in the ancestral
profession. The function of socialisation of children, too, used to be
---------------------- performed by the family. But in the industrialised society of today the
---------------------- family is not required to fulfil these roles. Today children are born in
hospital. Even for the nurture of the children there are today a number
---------------------- of official and non-official institutions. In big towns we find a number of
infant-care centres and children’s homes. Today, the education of children
----------------------
takes place in schools and not in homes.
---------------------- 2) Breaking up of joint family: Traditionally, most of the Indian families
---------------------- were joint families. As result of industrialisation, most of these joint
families are breaking up and are being replaced by nuclear families.
---------------------- There are a number of reasons for this. First, in industrial towns there is
an acute shortage of residential accommodation. Most of the people have
----------------------
to content themselves with a single or two room accommodation. In these
---------------------- circumstances, it is physically exceedingly difficult if not impossible to
retain the joint family system. Secondly, as a sequel to industrialisation
---------------------- family trades and professions have been eliminated. The sense of the
---------------------- same parents differs widely in respect of economic and social levels. This
has given rise to individualisation. As a result of all these conditions the
---------------------- joint family is all but finished in industrial towns.
----------------------

3) Small families: As a result of industrialisation, the cost of living has gone Notes
up. At the same time the standard of living has also gone up considerably.
Everybody wants good clothes, houses and other comforts of life. ----------------------
Obviously, it is not possible to maintain this standard within a big family.
----------------------
Therefore, people these days want to keep small families. The prevalence
of contraceptives and abortion has made this goal easily attainable. Thus, ----------------------
we find that there is a strong trend towards small families in industrialised
towns. ----------------------
4) Change in the status of Women: In the past, the status enjoyed by women ----------------------
in Indian society was rather low. Women were shut up in the four walls of
----------------------
the home. From economic and social points of view, women were subject
to men. The women enjoyed no independence. Without a husband, the ----------------------
condition of a woman was miserable. As a result of industrialisation there
has been much improvement in the status of women. They are therefore ----------------------
becoming independent in all walks of life. Their status and respect in ----------------------
society has therefore improved considerably. Now-a-days, women
consider themselves equal, even superior, to men. As a result, many ----------------------
women today do not like to marry. They wish to assert their independence
----------------------
by defying the laws of society.
5) Disintegration of Family: As a result of industrialisation the outlook of ----------------------
intense individualism has grown. Everyone wants to have his own way; ----------------------
no one likes to be subject to anybody. Nobody these days appreciates the
need for adjustment and give and take. Thus, we find families breaking up ----------------------
under this stress in modern society. There is continuous tension and conflict
----------------------
in the minds of family members. As a consequence of this situation, it is
no wonder that families are breaking up fast in urban society. ----------------------
6) Difference in Family Goals: The goals and ideals, which nourished the ----------------------
traditional Indian family, were spiritual and religious. The housewives
used to regard their husbands as God or a divine being. They willingly ----------------------
subjected themselves to each and every whim of their husbands. Even
----------------------
children used to give unqualified respect to their parents. The father was
regarded to be head of the family and his command was rarely defied. In ----------------------
Indian homes, Ram and Sita were ideals of paternal devotion and a wife’s
dedication to husband respectively. In the modern industrial society, there ----------------------
is no room for such ideals. For a modern wife, the husband can be at best ----------------------
an honourable colleague and under no circumstances a god. The status
of the father in a family is being lowered as a result of industrialisation. ----------------------
Compared to parents, children now have more say in the family affairs.
----------------------
In the past, the functions which were regarded as a sacred duty and ideals
are now considered acceptable only from the utilitarian point of view. The ----------------------
father no longer holds sway over family members.
----------------------
----------------------

Notes
----------------------
----------------------
1. Which of the following is not true about marriages in Indian societies?
---------------------- i. Marriage is a social contract
ii. Practice of non- marrying / late marrying is more rampant in
----------------------
metro cities
---------------------- iii. Practice of love marriage / live-in relationship is more in modern
towns
----------------------
iv. There is substantial decrease in the number of divorce cases
---------------------- every year
2. Which of the following is not true in case of Indian families’ values?
----------------------
i. Most of the joint families are breaking up leading to individualism.
---------------------- ii. The value education of children today takes place at homes
through internet
----------------------
iii. Small family norms are followed in many industrialised towns
---------------------- iv. The status of elders in a family is being lowered as a result of
---------------------- industrialisation.
----------------------
Activity 1
----------------------
---------------------- Undertake a comparative study of marriages and family values in rural and
industrial developed regions.
----------------------
---------------------- 12.4 CONSUMERISM

---------------------- Due to rapid industrialisation, the comparative gap between rich and poor
---------------------- is widening. Those with jobs and those without are the reality of the rat race of
daily life. Those with money are willing to spend it for their comforts and those
---------------------- without it are resorting to unsocial activities resulting in an increase in crimes
especially, financial crimes like dacoits, embezzlement, misappropriations, etc.
---------------------- It is the impact of the continuous increase in salaries and wages every year,
---------------------- that the habits of spending have undergone change. In such a society, those
who have jobs and a reasonable salary or wage are now not worrying about
---------------------- the money in their pockets. Such persons are willing to buy things and articles
beyond their buying capacity. There are increasing tendencies of resorting to
---------------------- availing loans from financial institutions and banks. The tendencies of buying
---------------------- the articles, house, luxury items, car, and two-wheelers on instalments have also
been a result of changing pay structures.
----------------------
----------------------

12.5 SOCIETY Notes
The members of society have a direct impact of such changes in the pay ----------------------
structures. The society also becomes money minded. The ideals change and
----------------------
immoral things are pretended to be sound and worth following. The value
system changes too. The issues like consumerism, corruption and unrealistic ----------------------
dreams; bring about the change in every member of the society. The shopkeepers
change their style of selling. Landlords change their rate of rents. Even the ----------------------
grocer starts selling items, which he would never have, given his/her religion,
----------------------
since the matter of religion is neglected while selling certain items. The whole
society undergoes this change in its approach to life. Such a society is called an ----------------------
industrial society.
----------------------
Main features of such a society are as follows:
1. Domination of machines: In this society machine dominates man. ----------------------
Everything is done with the help of machines, so that the importance of ----------------------
man and manual work decreases very much.
2. Mass production: In industrialisation, there is always mass production. It ----------------------
is because unless society is in a position to feed the machines, there will ----------------------
be no industrialisation. Goods are produced on a large-scale basis.
----------------------
3. Exploitation of workers: In this society, there is naked exploitation of
workers. ----------------------
They are paid basic minimum wages so that they survive and work for
----------------------
industry. They are not given any share in profits. Even their wages are
increased after a lot of agitation. ----------------------
4. No identification with the work: Another feature is that the worker is not
----------------------
identified with the work which he is doing. The owner of the industry is
interested only in getting his goods and making his brand popular in the ----------------------
market, rather than bring workers on the forefront.
----------------------
5. Poor working conditions: The workers are not paid adequately with the
result that they cannot afford to live in good houses. They live in slums in ----------------------
miserable conditions. Working conditions in which labourers are required
to work are not good either. This is a continuing feature of the industry. ----------------------
6. Environmental Pollution: Industry brings with it pollution in the ----------------------

environment. Smoke of chimney of factories, noise of the machines,
chemical water flowing out of factories and residue of factory raw ----------------------
materials and dust all create problems of environment pollution and that ----------------------
is unavoidable in the factory situation.
7. Trend towards urbanisation: Industries are bound in places where ----------------------
communication and other facilities are easily available. Once industries ----------------------
have been set up, a town develops around that. There are always
employment opportunities in the industries. The people therefore, start ----------------------
migrating from rural areas. In this way a trend towards urbanisation starts.
----------------------

Notes 8. Pressure on existing institutions: Industrialisation exerts a heavy pressure
on existing institutions like marriage, family rural life, educational system
---------------------- and so on. With industrialisation the institution of marriage has come
under a heavy strain. It is now considered a friendship and not a religious
---------------------- institution. So is the case with religion. Many religious practices are now
---------------------- questioned. The single-family system is replacing old joint family system.
There is an awakening among people in rural areas where people are not
---------------------- prepared to accept everything blindly. In fact, there is no existing social
institution, which does not come under strain with industrialisation.
----------------------
9. Scientific advancement: The modern society is more inclined towards
---------------------- new inventions. This is possible only when more attention is paid to
scientific advancement. Every effort is made to have scientific inventions
----------------------
so that new machines can carry out maximum work within minimum
---------------------- time.
10. Material prosperity: Industrialisation has brought with it material prosperity.
----------------------
These nations, which are industrially advanced, are economically rich. In
---------------------- fact, the outlook of these nations is purely materialistic and they weigh
everything in terms of money.
----------------------
11. Colonialism: Industrialisation brought with it the colonialism and the
---------------------- evils which this system brings with itself. It is unavoidable because the
mass production carried out with the help of machines calls for heavy
---------------------- marketing; else they create many problems.
---------------------- In this way, the industrial society has its own advantages and disadvantages
but the fact remains that today every nation is in a race to industrialise itself.
----------------------
Pricing trends of Construction/Infrastructure Industries
---------------------- The changes in the pay structures of a handful, in the hierarchy of the
---------------------- different business organisations, bring about a change in the pricing of real
estates, construction as well as infrastructure industries. The prices of flats and
---------------------- houses are on a high and the housing and infrastructure industries have got a
face-lift. The persons employed with sufficient salaries and wages, opt for the
---------------------- lucrative offers from the builders and construction industries. New complexes
---------------------- are constructed to suit the needs of these newly born classes of customers who
are willing to pay extra for the amenities and facilities being offered with such
---------------------- kind of housing complexes. The cities are blessed with the great skylines. The
difference/gap between rich, higher middle class, middle class and poor is
---------------------- increasing day by day.
---------------------- Food habits, Flexible Work Timings, Partying and Alcoholism
---------------------- The so-called high society class members have got new friends. These
friends are professionals, executives or fat salaried personnel who enjoy their
---------------------- company over hotel food and drinks. This has brought about a change in the
eating habits of these people. Those who never used to stay till late evening
----------------------
hours now prefer to socialise in the late night parties thrown for one reason or
---------------------- the other.

All this has a reverse impact on their health. Those who are not used to Notes
late night dancing, parties, liquor and irregular sleeping timings have got major
health hazards like high blood pressure, diabetes, etc. ----------------------
Following are the ways in which industrialisation and rationalisation of ----------------------
pay packets have influenced the morals:
----------------------
1. Development of Rational Outlook: The Indian society has been
traditionally based upon morality and religion. In India there has been ----------------------
little critical thinking with regard to moral principles and beliefs. The
moral principles were accepted as universal truths beyond the sphere ----------------------
of doubt and reason. As a result, the outlook of the common man has
----------------------
changed. Now people demand rational justification as to why a particular
action is considered right or wrong. In industrial societies it is believed ----------------------
that the moral principles are man-made and that morality is for the sake
of human life and society and not vice versa. The tendency to examine ----------------------
and evaluate every moral principle before acquiescing to it; is departing
----------------------
in modern society.
2. Development of Materialistic Outlook: On account of industrialisation ----------------------
and rationalisation of pay structures, the importance and value of physical
----------------------
progress and development have enhanced. An average citizen of today
does not appear to be satisfied and contented. The maximum material ----------------------
acquisition seems to have become the aim of modern life. It is for this
reason that a common man of today is averse to religion and spirituality. ----------------------
Today there is strong competition for acquiring as much wealth as
----------------------
possible.
3. Individualism: The industrial societies are increasingly becoming ----------------------
complex and there is specialisation in all spheres of life. Due to ----------------------
industrialisation, large metropolises are coming up. In large communities
there is a drop in fellow feeling. In such societies therefore, the community ----------------------
feeling or the feeling of mutual belongingness is missing. Life has become
rapid and mechanical and people have little opportunities to look after the ----------------------
welfare of others. Life in industrial societies has become self-centered. As ----------------------
a result of this, there is growth and development of individualism in these
societies. ----------------------
4. Permissiveness in Sexual morals: As a result of industrialisation, the ----------------------
sexual morals have become lax. There are numerous reasons for this laxity.
First, the opportunities for both sexes coming together have increased. ----------------------
Now-a-days, boys and girls can meet without much difficulty and social
opposition. In mills, factories and offices men and women work together. ----------------------
As a result of these frequent encounters of the sexes, there is a laxity in ----------------------
sexual morals. Moreover, industrialisation has given rise to materialistic
thinking and according to this, the traditional taboos on sex are harmful ----------------------
and free sex is consistent with a healthy and sane life. This is why today
pre-marital sex is not considered to be immoral. Sex without marriage is ----------------------
becoming the norm. ----------------------

Notes 5. Increase in crimes: As a result of industrialisation, there is an all round
rise in the criminal incidences. It is a common observation that the rate of
---------------------- crime is very high in industrial towns. In a large metropolis, family life
is subject to many pressures. On account of the disintegration of family
---------------------- life, the control of family over individuals is becoming lax; encouraging
---------------------- criminal tendencies. In every industrial town, prostitution and liquor
consumption are rampant. Besides, theft and dacoits also are common in
---------------------- industrial towns. The incidence of violence and murders is also high in
industrial towns and cities.
----------------------
6. Loosening of social control: In industrial towns, labourers and artisans
---------------------- come in search of jobs from far - off places. Thus, they settle in those
towns. In industrial towns like Delhi, Kanpur, Mumbai and Kolkata, etc.
----------------------
workers from all over India have settled. As most of those workers are
---------------------- outsiders, they are not subject to the usual social controls. Moreover,
caste and clan considerations are almost non-existent in a big metropolis.
---------------------- On account of all these factors social control becomes loose and lax. In
industrial towns it is neither the family nor the caste or society in general
----------------------
that exercises social control. Law and law enforcing agencies like police
---------------------- and courts exercise it.
●● ew trends in executive/managerial compensation, expectations of the
N
----------------------
managerial/ executive cadre vis a vis a rational pay structure
---------------------- ●● Nature of reimbursements and tax implications
---------------------- ●● arious welfare schemes, fringe benefits, perquisites and the approach of
V
executive/managerial staff towards the perquisites, fallout and impact on
---------------------- costs to the company
---------------------- New trends in executive/managerial compensation, etc
---------------------- Executive/Managerial Compensation now plays a very significant part
along with the working style and environment, empowerment, etc. in the
---------------------- organisation’s success strategy. However, individual organisations may have
differences in their methodologies based on the factors best suited to their
---------------------- perceived needs. Some general trends are evident, and are discussed below:
---------------------- 1. Salary, Basic Salary or Consolidated Salary continues to remain as
the major component of compensation, though Salary Scales are often
----------------------
discarded these days, or used only as guides. Individual salary is
---------------------- nowadays generally decided initially using the scale. But, thereafter;
performance, contribution to targets or results generated determine the
---------------------- revisions periodically, as the reasons for varying such scales widely differ
from individual to individual. Such a phenomenon is called ‘Salary broad
----------------------
banding’. This trend is therefore getting recognition and acceptance.
---------------------- 2. Grade-wise Flat Allowances are also being considered generally, except
where tax exemption benefits are still available, when they continue
----------------------
as separate components. Allowances may be linked to the salary as
---------------------- a percentage or by slabs. However, preference is still for flat amounts,

which do not increase automatically, and as such, increase could be Notes
discretionary, and therefore controllable.
----------------------
3. Reimbursements of expenses incurred on company work has become
limited, and in line to conform to the tax laws. Being actuals in most ----------------------
cases, they are not considered as a part of the compensation, unless it is
provided towards personal benefits. ----------------------
4. Annual payments: Bonus or Commission, and Leave Travel are common ----------------------
features - some tax reliefs apply for the latter. Some kind of attendance
bonus or Management Incentive Plan depending upon the performance of ----------------------
the individual are also being designed to maintain the best man power in
----------------------
the organisation.
5. Additional benefits like unfurnished company owned or leased ----------------------
accommodation, use of company or leased vehicles, medical coverage,
----------------------
retiral benefits covering Provident Fund, Pension or Superannuation and
Gratuity, post-retiral medical assistance, easy loan schemes at low or zero ----------------------
interest rates for house building, cars or vehicles, furniture or utility items,
etc. renting employee owned housing, club entrance fee reimbursement, ----------------------
etc. Minor benefits could be the provision of security, driver or gardening
----------------------
assistance, sale of products or assets at a concessional rate, relocation and
transfer expenses including admission, etc. fees for children, credit card ----------------------
fees, phones etc. are also getting popular among modern day organisations.
----------------------
6. Employee stock option schemes, which has been popular in the IT
industry, is not extensively used yet, not being tax advantageous to other ----------------------
industries, nor seen as being very attractive with lesser growth trends for
their share values especially in the well-established older companies. This ----------------------
has been dismissed as a day dream. And with the unpredictable nature of ----------------------
the stock price, this option is not popular in industries other than IT.
7. Most companies, as against earlier visible costs, use the “Total Cost to ----------------------
the Company” concept as basis. Cost of most benefits are averaged or ----------------------
computed on an actual basis, and included in the above. Greater openness
is practiced, and some permit individual flexibility within the system of ----------------------
the overall cost, but with greater compliance to tax laws, this ‘basket
concept’ is on the wane. ----------------------
8. As mentioned earlier, retiral benefits are important to many, whilst the ----------------------
younger generation and specially IT professionals, do not consider it as
an advantage, unless the benefit value is available to them on moving to ----------------------
a new job. This is a complex issue, and may require attention. Some in ----------------------
recognition of the past contribution of pensioners, and partly to offset
the inflation of post retirement practices, have a periodic improvement in ----------------------
pensions, or a guaranteed grade minimum pension.
----------------------
9. Against the past practice of modest gradual increases applicable to
all, with only marginal addition to the good performer, the differential ----------------------
in performance is now being recognised through very substantial and
----------------------

Notes varying increases during the review to the good performer, and often a
Salary freeze is being used for poor performers! This strategy manages
---------------------- the rewards often within the same total cost.
---------------------- 10. While the salary increase in the past resulted in benefits continuing during
the rest of the service period, now large amounts in once off Performance
---------------------- Bonus that do not increase future liability is being given more and
more as a recognition of the results generated. Emphasis on Variable
----------------------
Performance Pay or Bonus as a reward is getting to be an important and
---------------------- growing component of the compensation system. It requires transparent,
balanced and fair systems and benchmarks, and also agreed targets by the
---------------------- managers in advance during planning and review discussions.
---------------------- 11. From the earlier grade oriented compensation system within reasonable
boundaries, compensation often has to be somewhat tailor made for
---------------------- specialist or key contributors to retain them in the very volatile job
market. This has many repercussions, and therefore policies for such
----------------------
compensation need to be carefully built into the system in an open manner
---------------------- to avoid loss of credibility.
12. Compensation review periods have become annual generally and
----------------------
sometimes oftener, as compared to every three to five years earlier, in
---------------------- the fast changing market situation. The quantum of increase has jumped
of late and successful organisations need to not only keep pace, but also
---------------------- have to be seen and reputed to be amongst the best to attract talent. The
employee cost increase has to be set off through productivity and greater
----------------------
contribution from the resources. This requires constant market data on
---------------------- compensation practices, and very pragmatic analysis for determining
strategy.
----------------------
13. Retention strategies employed are generally attractive interest free or
---------------------- at low rates for loans, on which the market rate of interest may apply
on early exit, renting employee owned property to set off repayment of
---------------------- loans, qualifying periods or attractive service benefits added to the retiral
---------------------- benefits or post retirement benefits etc., besides the terms, compensation
and any special deals. Managers and teams having commitment require
---------------------- empowerment, a lean and supportive structure, a healthy organisational
climate- which are all great retention motivators, and also end up as
---------------------- ‘pullers’ from the external environment.
---------------------- To summarise, the need to regularly carry out detailed compensation
reviews both, within or without, and with the full support and commitment
---------------------- from the top is essential. The specific needs of the organisation should be
---------------------- identified and addressed during such reviews. Openness and transparency
are important to the managers in the very sensitive and personal issue of
---------------------- management remuneration, and therefore policies and practices should match.
The remuneration and the systems have to be, and a seen to be, fair and just,
---------------------- non-bureaucratic and dynamic, and which deal with human feelings and with
---------------------- the necessary speed, while still remain competitively attractive.

The approach of the managerial/executive staff towards the perquisites Notes
has changed since the last 10 years. The trends show that the staff does not
wish to continue with an organisation for more than 2 or 3 years. The habits of ----------------------
job-hopping have caught up with the managerial/ executive staff and as such
the staff members are not worried about the post-retiral benefits. Such persons ----------------------
employed are interested in the net take home and not the benefits that are going ----------------------
accrue to them in the future as a result of their service to the organisation. The
old trend of working with an organisation for as long as 30 or 40 years has ----------------------
perished in the process of globalisation. The organisations also do not need to
have a long-term bondage of relationship. They don’t wish to worry about the ----------------------
future of the employee either. They wish to avoid the long term and post retiral ----------------------
benefits. As such, these organisations are now offering an attractive pay packet,
which compensates the employees’ expectation for the moment and does not ----------------------
guarantee any post retiral care. As such the cost of the company has a definitely
great impact on the current budgeting but it also relieves the employer of any ----------------------
pressure of long-term liability. ----------------------
Issues of non-recovery/bad debts/runaways
----------------------
There has been a tendency noticed in the modern day employees, that
they wish to avail of all amenities of life and wish to lead a very lavish, ----------------------
sometimes unaffordable lifestyle. In a frenzy to buy anything, even though not
----------------------
needed and not affordable, they get into web of loans, cash withdrawals and
credit card usage. These have resulted into financial crime histories for a few ----------------------
and as such quite a few moneylenders/financial institutions have issues of bad
debts, runaways and non-recoveries. Even banks are facing the problem of the ----------------------
recoveries of such debts.
----------------------
Problem of downsizing, HR issues pertaining to restructuring and
reengineering, voluntary retirement schemes/golden handshakes. ----------------------
The major beneficiary of liberalisation and consequent competition has ----------------------
been the consumer. For the first time, the Indian consumers have been presented
with many choices, and thus with the power to exercise their discretion. The ----------------------
shakeout in the industry has led to restructuring, increased efficiency and better ----------------------
customer service. Indian companies are outsourcing technology, investing in
R&D, negotiating strategic alliances and focusing on exports. “Survival of the ----------------------
fittest” has become the order of the day, resulting in the closure, takeover or sale
of inefficient units. ----------------------
The process of readjustment inevitably calls for changes in the human ----------------------
resource system and its practices. This means that the challenges for the human
resource function are two -fold. ----------------------
1) Meeting consumer needs 2) Taking advantage of market opportunities in ----------------------

terms of quality, cost and on-time delivery of the product or service.
----------------------
These two factors necessitate a cultural shift in work practices, at the
enterprise level that would focus on employee efficiency, incentives; ----------------------
skill upgradation including multi-skill, induction of new technology, re-
----------------------

Notes engineering, benchmarking human resource practices, and leaner and
flatter organisational structures. A leaner system implies fewer levels
---------------------- of hierarchy, which facilitates an efficient and quick decision-making
environment. Older organisations, in particular, will have to accord more
----------------------
priority to these factors in order to match the competitiveness of the new
---------------------- entrants. The new entrants will enjoy advantages such as the ability to
hire ‘lean’, more efficient and productive work systems with an updated
---------------------- technology.
---------------------- As a result, business strategies are becoming more focused and
organisational structures are getting a re-look. One instance of this
----------------------
is the creation of strategic business (SBUs) so that the efforts put in
---------------------- by employees are more focused. Additionally, employees will be both
empowered and accountable for results. In the services sector, educated
---------------------- needs are being sought after. However, trained and developed manpower
---------------------- is in short supply.
The cutting edge of an organisation is its people. The work culture, thus,
----------------------
is being redefined to bring out the best in employees. To begin with, the
---------------------- complacency has to give way to a new dynamism to meet the challenges
of competition. This means acceptance of better methods of working
---------------------- where people work in networked teams rather than as individuals
---------------------- working in isolation. Rewards, on the other hand, should correspond
to the achievement of corporate goals and other business performance
---------------------- parameters rather than to seniority, length of service and loyalty to the
organisation. How effectively these issues will be addressed depends
----------------------
on a unique combination of situational factors of each organisation. The
---------------------- human resource function has an important role to play in this process
of transformation and has thus moved from the periphery to the Centre-
---------------------- stage in many organisations. A variety of human resource instruments
---------------------- and strategies have been incorporated by organisations which are
experimented with.
----------------------
It was observed that:
---------------------- 1. Virtually all companies had started placing an emphasis in human
---------------------- resources in the different and professional skills.
2. A flatter organisational structure had resulted in a fewer levels of hierarchy
----------------------
and enhanced empowerment, empowerment to all categories, from shop
---------------------- floor workers to managers, had facilitated independent decision-making,
flexibility and trust. This had led to an improved employee involvement
---------------------- and motivation.
---------------------- 3. People at the middle levels of management were becoming more
participative and result-oriented. On the other hand, decision making was
---------------------- increasingly being handled at the group level.
----------------------

4. The security level among the employees had diminished and their sense Notes
of responsibility had increased.
----------------------
5. There was emphasis on openness and transparency. An improvement
in the communication channels within the organisation had resulted in ----------------------
better interpersonal relations and networking among units. Month-end
floor meetings, open hours and open sessions had greatly helped in this ----------------------
direction. Communication had also been enhanced through notice boards, ----------------------
house journals, product sessions, etc.
----------------------
6. Changes in recruitment policy had led to the induction of professionals
with diverse technical, managerial and academic backgrounds. There is ----------------------
a fall in the average age of employees. It also results in high salaries
and more responsibilities for young employees. The induction of human ----------------------
resource professionals at senior levels had implied increased recognition ----------------------
of this area.
----------------------
7. Meritocracy in personnel policy which included performance - based
rewards for employees. ----------------------
8. Provisions of Voluntary Retirement Schemes (VRS) by companies to ----------------------
employees are on the increase.
----------------------
9. A new culture that emphasised an employee’s role of supporting rather
than reporting within the organisation. Externally, it emphasised employee ----------------------
commitment to customer satisfaction.
----------------------
10. Networking of various decisions or functions (marketing, manufacturing,
vendor development, human resource management, etc.) within the ----------------------
organisation, with a view to create a responsive, goal - oriented and
competitive organisation. ----------------------
However, the government not only implemented the Pay Commission ----------------------
recommendations but even exceeded the brief, in some cases, without paying
----------------------
heed to the much needed reduction in government spending and for the need of
an increase in efficiency and accountability. According to scholars, the question ----------------------
was, if the government was to wind up all the loss-making units while retraining
and paying the labour, would the cost of the exchequer be much less than that of ----------------------
running them? The government should in fact set an example by delaying and ----------------------
removing inefficiencies and bureaucracy in its systems, while at the same time
effectively implementing a transparent set of rules and controls. ----------------------
The transformation of the role of the state from an all - pervasive controlling ----------------------
force, and a regulator, to that of a committed, supportive one is indeed difficult.
The compulsions of the change of attitude and discipline have to be brought ----------------------
about by a continuous process of culture change and team building. ----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. Compensation package has nothing to do with employee’s lifestyle,
---------------------- family and social values.
2. Consumerism is a social and economic order that encourages the
---------------------- purchase of goods and services in ever-greater amounts.
---------------------- 3. Due to availability of loans and credit cards, people are willing to buy
things beyond their buying capacity.
----------------------
---------------------- 1. Features of industrialised society are;
i. Domination of machines and gadgets
----------------------
ii. Full employment
---------------------- iii. Feeling of no identification with the work amongst the
employees
----------------------
iv. Growing consumerism
---------------------- 2. Rationalisation of pay packages and industrialisation has influenced
---------------------- morals in following ways;
i. Permissiveness in sexual morals
---------------------- ii. disciplined young workforce
---------------------- iii. Selfless service to the organisation
iv. Development of materialistic outlook
----------------------
Fill in the blanks.
---------------------- 1. BPR stands for ______.
---------------------- 2. CTC stands for ______.
3. ESOP stands for ______.
---------------------- 4. VRS stands for _____.
----------------------
----------------------
Activity 2
---------------------- Analyse the main features of an industrial society. Try to contrast these
points with metro cities and towns in India.
----------------------
----------------------
12.6 THE NEW ENVIRONMENT
----------------------
With globalisation and technological changes feeding each other, business
---------------------- paradigms have undergone a major shift. Information technology has resulted in
flatter structures and a less hierarchical control in organisations. This has led to
---------------------- a reduction of supervisory levels with fewer middle managers. Thus, the role of
middle managers will need to be redefined. They can no longer be only collectors
----------------------

and filters of information but will have to add value to the organisation. They Notes
will need to run systems and create new ones if required, facilitate the efficient
flow and utilisation of information, and also work transnationally. ----------------------
Middle managers and supervisors should be trained to become independent ----------------------
entrepreneurs. Moreover, to avoid stagnation, they should aim to get promoted
to higher management levels through continuous learning. Middle managers ----------------------
need to come out of their traditional ways of following instructions from their
----------------------
superiors.
As a result, in some industries, Indian employees are being sought after ----------------------
abroad. This, coupled with competition for employees among Indian companies,
----------------------
has led to an alarming attrition rate for some companies. To meet ambitious
career aspirations and salary expectations, human resource departments are ----------------------
using industry-wise benchmarking for salary revisions.
----------------------
Employee compensation is being linked and programmes are becoming
more focused, responsive and are also constantly reviewed against the external ----------------------
environment.
----------------------
Globalisation has resulted in an influx of foreign managers to India. There
is evidence of greater mobility both within India and abroad. Furthermore, there ----------------------
is greater integration with world market dynamics and practices.
----------------------
Corporate restructuring and redefining of roles are also areas under focus.
In the current Indian scenario, while public services are being privatised, ----------------------
private sector organisations are also in the process of re-examining their ----------------------
structures and job roles. Traditional hierarchies are making way for an innovative
structure to manage organisations. ----------------------
----------------------
Activity 3
----------------------
Do you really think that pay packets improve the morale of the employees?
Collect relevant information by interacting with different employees groups. ----------------------
----------------------
12.7 BUSINESS PROCESS RE-ENGINEERING ----------------------
The contemporary practice for enhancing organisational growth involves ----------------------

a focus on internal and external factors such as customer needs, market trends,
cost, quality, etc. The moment organisation spells the beginning of decline. ----------------------
Perpetuation of methods of doing things (systems) depends upon outdated ----------------------
rules, based on yesterday’s problems. Force-fitting solutions to today’s surprises
create impossible situations, unless adequate variations in the organisational ----------------------
response are built in.
----------------------
Many organisations are patterned around the templates of 50 years ago.
Protected by a command economy, this factor has inhibited new skill acquisition ----------------------
to face challenges in a market driven economy. Nowhere is this as exaggerated
----------------------

Notes as in our public sector and government. We still believe that a stenographer
should not be required to type more than twenty pages, foolscap size, double
---------------------- speed, in a day! This in an age where the stenographer is becoming obsolete.
---------------------- Many multinationals in monopolistic markets also have this obsolete
carry-over, partly because it forms the basis of advancement for individuals
---------------------- within the known system. Changing the system means abandoning yardsticks of
progress, and this is too large a leap into the unknown for persons accustomed
----------------------
to the accoutrements of privilege. To test whether you fall into this category,
---------------------- find out how many times your organisational structure has undergone major
changes in the last 20 years. If less than four, you are in!
----------------------
Smart organisations overcome this inertia by encouraging questioning
---------------------- and a degree of disobedience and disrespect for authority. Smart bosses actually
persuade subordinates not to listen to them, and to do things differently. You can
---------------------- carry this too far too fast, as it requires mature followers to handle freedom, and
your own maturing to handle the trusting relationships which emerge. However,
----------------------
the energy that this attitude releases changes followers into leaders in their own
---------------------- right.
In times of declining fortunes, organisations tend to hold on to this
----------------------
inertia, and hope that things will soon change. During decline, learning should
---------------------- be at its highest, but saddled with job security values, and blinkered by feudal
noblesse oblige, the management finds itself unable to solve the problem except
---------------------- by throwing more money at it. Voluntary Retirement Schemes and golden
handshakes are expensive ways of paying for past mistakes.
----------------------
---------------------- Activity 4
----------------------
Executive and managerial positions are being paid more than required
---------------------- compensation. Try to find out the list of highly paid executives in Indian
organisation from internet. Analyse and contrast the findings with
---------------------- compensation package in multinational organisations.
----------------------
----------------------
12.8 MINIMISING DOWNSIZING PAINS
---------------------- Outplacement is an expensive game, as it could have been avoided by

anticipation, and downsizing handled through simple attrition (which in India
---------------------- is high, several organisations falling into the 15-20% personnel turnover
bracket), or by re-skilling, which promotes voluntary attrition. Training costs
---------------------- of re-skilling are a fraction of severance benefits, and the exercise is a fine way
---------------------- of keeping the HRD group awake. Simple literacy and numerical skills (run
by school teachers on Saturday evening for two hours) will open horizons for
---------------------- unskilled workmen in today’s India. They will themselves seek employment
which meets their new aspirations created by skill addition.
----------------------
Another example is to train office clerical staff in computer skills which
---------------------- encourage them to seek employment outside which recognises and uses these

skills. This is an inexpensive way of adding value to people’s employability. At Notes
the same time, it equips the organisation with computer skills for today’s world.
----------------------
Or help by sharing in set-up costs of a business that serves the company.
One example of this is a photocopying shop for redundant workmen (2 or 3, ----------------------
not a crowd), partly funded by security savings with guaranteed volumes of
Company Business at a discounted rate for a specified period of time. ----------------------
Contracting out canteen services to ex-employees is yet another way of ----------------------
helping people outplace themselves.
----------------------
One advertising agency has helped an ex-employee set up a graphic lab
which keeps him fully occupied, earning more, being his own boss, and is less ----------------------
expensive for the agency in terms of salary and add-on costs.
----------------------
There are many other methods that an HRD management can creatively
develop for employees rendered redundant or obsolete, through a little ----------------------
forethought. Do not try to outplace large numbers all at once. Try one at a
time, and it is really surprising that one can achieve great numbers. Each person ----------------------
has different motivators, and if the HRD management is tuned into them, the ----------------------
success is guaranteed.
Business Process Outsourcing (BPO), Subcontracting ----------------------
Outsourcing requires a management effort similar to that of setting up ----------------------

a new project, because its success is very important to you. The alternative is
that you will need to re-import the same non-synergistic activity, after a long- ----------------------
drawn-out death watch. It will then require the HR Management to have spent ----------------------
more in the process, and annoyed more customers through non-performance of
a sub-system, and most of all, lost time. ----------------------
The fit between the parent and the outsourced activity must cover several ----------------------
dimensions. Some of these are:
----------------------
1. Culture: Just as in alliances, the organisations must share values for
being; which are compatible, such as vision, business practices, language, ----------------------
employee backgrounds and education profit/surplus perception, etc.
----------------------
2. Size: Disparities can cause the tail to wag or result in too small a tail to
keep the flies off. ----------------------
3. Technology: Batch, linear-mass, process-production or custom-made ----------------------
products will require compatibility across systems.
4. Environment: Relative stabilities/turbulence of environments is an ----------------------
important determinant of the success of outsourcing. The parent inherits ----------------------
the hazards faced by the vendor. However, the advantages that the vendor
enjoys need not be transferable. For example, his banking problem ----------------------
becomes the problem of the parent, but his supplier credit does not benefit
the parent. ----------------------
As is apparent from the factors above, these elements require constant ----------------------
monitoring to perpetuate a fit in the changing environments. This results in the
----------------------
formation of networks between outsourced activities and the parent.

Notes The ability of networks to focus on performance allows for frequent
monitoring, which helps in much faster decisions. The key role played by
---------------------- information systems, whether mechanical or manual, is fundamental to their
existence. They operate in real time, and require constant attention. The reason
---------------------- why this is mentioned is because this is a massive weakness in the Indian
---------------------- business environment. Our acceptance of delay as a part of life has cost the
country, and the businesses, indecently large amounts of value.
----------------------
----------------------
Summary
---------------------- ●● he trade and profession of society and the attitudes of the members
T
towards these determine the structure of society.
---------------------- ●● he industrialisations have affected the society in every respect. The
T
---------------------- customs and traditions, the fashion and manners, the ways and modes of
living have all been deeply influenced by industrialisation.
----------------------
●● he processes of industrialisation are intimately related with scientific
T
---------------------- processes. The methods and means of social control have changed. The
ancient institutions of marriage and family have also changed. The old
---------------------- values and rules pertaining to religion and morals are undergoing radical
changes.
----------------------
●● It is apparent that industrialisation has influenced every aspect of society.
---------------------- It is not quite easy to judge if this impact is good or bad, but it is possible
to study the consequences flowing from industrialisation.
----------------------
---------------------- Keywords
---------------------- ●● usiness Process Re-engineering (BPR): It is radical rethinking and
B
---------------------- fundamental redesign of business processes to yield dramatic results in
the contemporary measures of cost, quality and service.
---------------------- ●● usiness Process Outsourcing (BPO): The philosophy behind BPO is
B
---------------------- specific, do what you do best and leave everything else to business process
outsourcers. Companies are moving their non-core business processes to
---------------------- outsource providers. BPO saves precious management time and resources
and allows focus while building upon core competencies.
----------------------

---------------------- 1. Explain the impact of the pay structure upon an individual’s lifestyle.
---------------------- 2. What are the impacts of the modern-day pay structure on the marriage
system and family values?
----------------------
3. What is consumerism? How is it affecting the society at large?
----------------------
----------------------

4. What are the modern trends in executive/managerial compensation? What Notes
are the expectations of the managerial/executive cadre vis-a-vis a rational
pay structure? ----------------------
5. What is business process reengineering? How can the pains of downsizing ----------------------
be minimised?
----------------------
----------------------
1. Which of the following is not true about marriages in Indian societies?
----------------------
iv. There is substantial decrease in the number of divorce cases every
year. ----------------------
2. Which of the following is not true in case of Indian families’ values? ----------------------
ii. The value education of children today takes place at homes through
internet ----------------------

1. False
----------------------
2. True
----------------------
3. True
1. Features of industrialised society are; ----------------------

i. Domination of machines and gadgets ----------------------
iii. Feeling of no identification with the work amongst the employees
----------------------
iv. Growing consumerism
----------------------
2. Rationalisation of pay packages and industrialisation has influenced
morals in following ways; ----------------------
i. Permissiveness in sexual morals ----------------------
iv. Development of materialistic outlook
----------------------
Fill in the blanks.
----------------------
1. BPR stands for Business process reengineering.
2. CTC stands for Cost to company. ----------------------
3. ESOP stands for Employee stock ownership plan. ----------------------

4. VRS stands for Voluntary retirement scheme. ----------------------
----------------------

Notes
Suggested Reading
----------------------
1. http://managementhelp.org/payandbenefits/
---------------------- 2. Chingos, Peter T. Paying for Performance: A Guide to Compensation
----------------------
3. Handbook of Compensation Management. Geneva: ILO Publication.
----------------------
4. Milkovich, George T. and Jerry M. Newmann. Compensation. McGraw-
---------------------- Hill.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
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----------------------
----------------------
----------------------
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----------------------

Constitutional and International Labour Standards and
Norms UNIT
Structure: 13
13.1 Introduction
13.2 Constitutional Perspective
13.3 Factors indicating the Requirement of a Wage Policy for India
13.4 Different Living Standards
13.5 The Correlation
13.6 Geographical Differences
13.7 Same Job v/s Same Pay
13.8 Managing the Payroll
Summary
Key Words
Suggested Reading
Constitutional and International Labour Standards and Norms 325

Notes
Objectives
----------------------
----------------------
• Describe the Constitutional perspective of ILO
---------------------- • Name various international labour standards and norms for wage
---------------------- determination
• Analyse the expectations and guidelines of international labour
---------------------- organisations relating to the payment of wages and bonuses
---------------------- • Compare different living standards
• Justify the importance of same job v/s same pay
----------------------
----------------------
13.1 INTRODUCTION
----------------------
Compensation policies or wage policies are an integral part of the
---------------------- economic policies of the country. The aim of the economic policy is to create a
better atmosphere for living, to raise the standard of living of the people and to
---------------------- raise the level of national priority. For the achievement of the above goals it is
---------------------- also essential for a country to evolve a wage policy. A definite purposeful wage
policy is a high-grade necessity of the developing economies like India.
----------------------
“The question of wage policy is of great concern to labour, management
---------------------- and government. Of all the problems that a worker faces, is that of wages, which
is most pressing and persistent. His earnings have the greatest significance for
---------------------- him, as they primarily determine his standard of living and that of his family.
This is particularly so in India where indirect benefits by way of social services
----------------------
and social security are very limited. That these questions loom large before him
---------------------- is easily testified by the fact that most of the disputes in which he is involved
centre around problems of wages/compensation.”
----------------------
Thus, the wage policy is an inseparable part of the various policies
---------------------- adopted by modern governments. It is equally important for the producers and
labourers, though from different angles. Thus, a “national wage policy must
---------------------- aim at establishing wages at the highest possible level, which the economic
condition of the country permit, and it also ensures that the wage earner gets a
----------------------
fair share of the increased prosperity of the country as a whole, resulting from
---------------------- economic development.”
---------------------- Following are some objectives of the wage policy in general:

1) One of the social objectives of the wage policy is to abolish exceptionally
---------------------- low wages and to set up proper or standard hours of work.
---------------------- 2) To increase the economic welfare of the people as a whole
---------------------- 3) In developing economies, the objectives of the wage policy would be to
establish a level and structure of wages conducive to accelerate economic
---------------------- development.

4) To avoid any kind of exploitation of the interests of the labour. Notes
5) To raise the living standard of the workers.
----------------------
13.2 CONSTITUTIONAL PERSPECTIVE ----------------------
The Constitution of India also lays emphasis on the adoption of certain ----------------------
issues as the policy matter. Its intention is to secure better place for the working
people. Articles 39 and 43 explicitly deal with the problems. ----------------------
According to Article 39 ----------------------

“The state shall, in particular, direct its policy towards securing: ----------------------
a) That the citizens, men and women equally, have the right to an adequate
----------------------
means of livelihood.
b) That the ownership and control of material resources of the community ----------------------
are so distributed as best to sub-serve the common good; ----------------------
c) That the operation of the economic system does not result in the
concentration of wealth and means of production to be a common ----------------------
detriment; ----------------------
d) That there is equal pay for equal work for both men and women;
----------------------
e) That the health and strength of workers, men and women, and the tender
age of children are not abused and that citizens are not forced by economic ----------------------
necessity to enter vocations unsuited to their age or strength;
----------------------
f) That, children are given opportunities and facilities to develop in a healthy
manner and in conditions of freedom and dignity, that childhood and ----------------------
youth are protected against exploitation and against moral and material
----------------------
abandonment.”
Further, Article 43 emphasises the need for legislation regarding the living ----------------------
wage of workers: ----------------------
Article 43 reads
----------------------
“The State shall endeavour to secure by suitable legislation or economic
organisation or any other way, to all workers agricultural, industrial or otherwise, ----------------------
working in a living wage, conditions of work ensuring decent standard of
living and full utilisation of leisure and social and cultural opportunities and ----------------------
in particular, the state shall endeavour to promote cottage industries on an ----------------------
individual or cooperative basis in rural areas.”
----------------------
13.3 FACTORS INDICATING THE REQUIREMENT OF A ----------------------
WAGE POLICY FOR INDIA
----------------------
i) “Planning and the fulfilments of its targets require that a National Wage
Policy be worked out and implemented. The maintenance of industrial ----------------------
peace through compulsory arbitration and other statutory restrictions on
----------------------

Notes strikes and lock-outs is not sufficient, since industrial peace in order to be
just has to be based on a reasonable wage policy.
----------------------
ii) The adoption of a socialistic pattern of society as the goal of national
---------------------- development, the achievement of social justice and the provision of equal
opportunities to all for the development of their personalities as required
---------------------- by the Directive Principles of State Policy of the Constitution require that
a suitable wage policy be laid down and steps be taken to enforce it.
----------------------
iii) The absence of a strong and solid trade union movement which may secure
---------------------- to the workers, their proper share in the gains of economic progress and in
their standard of living makes it all the more incumbent upon the state to
----------------------
devise a national wage policy for the protection of the workers.
---------------------- iv) The statutory, administrative and quasi-judicial fixation and revision
which is being widely used in India requires a national wage policy with
----------------------
a clear formulation of the principles which should guide the various
---------------------- authorities charged with the task of wage fixation and revision.”
---------------------- To conclude in the words of V. V. Giri

“The question of wage policy is of great concern to labour, management
---------------------- and government. Of all the problems that face the worker, that of wages is the
---------------------- most pressing and persistent. His earnings have the greatest significance for
him, as they primarily determine his standard of living and that of his family.
---------------------- This is particularly so in India, where indirect benefits by way of social services
and social security are very limited. That these questions loom large before him
---------------------- is easily testified by the fact that most of the disputes in which he is involved
---------------------- centre around the problems of wages.”
Objectives set by International Labour Organisation
----------------------
“The provision of an adequate living wage and recognition of the principle
---------------------- of equal remuneration for work of equal value figure prominently among the
objectives of the International Labour Organisation set forth in the preamble
----------------------
of its constitution. In Declaration of Philadelphia, the International Labour
---------------------- recognises “the solemn obligation of the organisation to further, among the
nations of the world, programmes which will achieve the raising of standard
---------------------- of living, policies in regard to wages and earnings, hours and other conditions
of work, calculated to ensure a just share of the fruits of progress to all and a
----------------------
minimum living wage to all employed and in need of such protection.”
---------------------- Following objectives were laid down by the I.L.O. on the wage policy of
the underdeveloped or developing economies:
----------------------
a) To abolish malpractices and abuses in the wage payment.
----------------------
b) To set minimum wages for workers whose bargaining position is
---------------------- weak because they are either unorganised or inefficiently organised,
accompanied by separate measures to promote the growth of trade unions
---------------------- and collective bargaining.
----------------------

c) To obtain for the workers a just share in the fruits of economic development, Notes
supplemented by appropriate measures to keep the workers expenditure
on consumption goods in step with available supplies so as to minimise ----------------------
inflationary pressure and
----------------------
d) To bring about a more efficient allocation and utilisation of manpower
through wage differentials and where appropriate, systems of payment by ----------------------
results.”
----------------------
“From the point of view of the employer, the wage policy is important
because the wage bill is one of the major elements of the budget. For example, ----------------------
in a textile mill, wage constitutes about 25% of the cost of production of cloth.
----------------------
Management is also concerned with the wages because the demand for higher
wages and better working conditions create price market and production ----------------------
problems. In the matter of industrial efficiency too, the problem of wages holds
a pivotal position because unless the wages are sufficient the worker cannot ----------------------
maintain his efficiency and the choice before him will be either to leave his job
----------------------
or to wear himself out.”
“The workers and the employers are directly and vitally concerned with ----------------------
the problem of wages. But the government also has to keep a vigilant eye on
----------------------
the matter because it is on their shoulders that the burden will finally fall, of
winning some measure of justice for all sections of the community and of ----------------------
finding a solution for major problems of the wage policy. In fact, when compared
with welfare measures that assure for the worker better working and living ----------------------
conditions in respect of health, safety, housing, education, recreation and social
----------------------
security, the guarantee of reasonable remuneration provides the firmest basis for
harmonious industrial relations and therefore, for the economic prosperity of the ----------------------
country. The payment of a satisfactory wage ensures the cooperation of labour
and enables the worker to take his place as a partner in programmes of national ----------------------
development, where the significance of his role has long been accepted.”
----------------------
Indian labour is illiterate, unorganised and to a great extent affected by
the feelings of aloofness. The wage structure is to be made flexible according ----------------------
to the changes in the price level and working efficiency. ‘If greater employment ----------------------
means ability of a large number of persons to satisfy their wants, increased
individual real earnings means greater satisfaction of his wants. Therefore, the ----------------------
wage that a worker receives is of greater significance to him than any other
feature of the industrial structure.’ To quote R.Gadil: ----------------------
“It is no wonder, therefore, that the Indian labour, like his counterpart in ----------------------
other countries, holds tenaciously to what he already receives and seeks every
opportunity of getting the wage increased.” ----------------------
Does cost of living impact salary? ----------------------

The salary of an individual is a combination of various parameters ----------------------
like demand-supply of human resources, availability of skill sets, customer
deadlines, individual qualifications and experience, past performance, future ----------------------
potential, nature of the job, cost of living and geographical location.
----------------------

Notes
----------------------
----------------------
1. Wage / compensation policies are an integral part of the economic
---------------------- policies of the country.
---------------------- 2. National wage policy must aim at establishing wages at the highest
possible level.
----------------------
3. It is because of Article 39 of the Constitution that there is no equal
---------------------- pay for equal work for both men and women.
4. There is no provision of abolition of malpractices and abuses in the
----------------------
wage payment in the objectives of ILO.
----------------------
---------------------- Activity 1
---------------------- Analyse the factors responsible for the requirements of a wage policy in India.
Justify your findings based on the impact of Globalisation, Liberalisation
----------------------
and Privatisation.
----------------------
---------------------- 13.4 DIFFERENT LIVING STANDARDS

---------------------- Let us look at the impact that the cost of living and geographical location
has on salary.
----------------------
The cost of living, in terms of a standard expenditure budget, varies
---------------------- according to the average individual’s income. People with higher incomes have
both, different expenditure patterns and different cost impacts than people with
---------------------- lower incomes, for instance a CEO’s cost of living differs from an ordinary
employee’s cost of living; most fundamentally because they typically have
----------------------
different incomes and thereby experience different spending patterns, even
---------------------- before you take into account their individual specifications such as family size.
People earning the same salary usually experience different individual living
---------------------- costs, based on their life circumstances and choices. For example, a married
man has different costs than a single man, despite identical incomes.
----------------------
Cost of living is one of the factors in deciding the salary of an employee
---------------------- but in the context of the IT industry I would say it is not necessarily the most
---------------------- significant one. The reason being the IT industry’s growth rate has been
exceptionally high (consistently over 30 percent), where other regular industries
---------------------- have been clocking close to a single digit growth rate.
---------------------- In the IT industry, related to global pay structures, cost of living is just one
factor and not an important one. Also, the standard of living is another factor in
---------------------- view of the global exposure to our personnel. 30 percent of our salary may be
sufficient to cover the cost of living in a particular city, the rest 70 percent is to
---------------------- bring in and retain talent as our employees have invested in education and are

therefore expecting salaries that match their aspirations. Cost of living i.e. the Notes
bare minimum thus is not a significant index while mapping salary structures.
----------------------
Network Programs’ cost of living has a significant relationship with the
employees’ pay since their compensation structure is based on compensation ----------------------
survey, which includes the consumer price index. Companies take into account
the inflation rate and consumer price index while designing the compensation ----------------------
structure. In addition to this, they also provide options to employees to plan
----------------------
their income tax within income tax rules.
----------------------
----------------------
----------------------
1. The provision of an adequate living wage and recognition of the
principle of equal remuneration for work of equal value figures ----------------------
amongst the objectives of;
----------------------
i. Ministry of labour
ii. Indian National Labour Conference ----------------------
iii. Government of India’s directive ----------------------
iv. International Labour Organisation
2. Some companies do not prescribe to the theory of same job same pay, ----------------------
they have; ----------------------
i. different pay offers for same job
----------------------
ii. different pay offers for different jobs
iii. competency based structure ----------------------
iv. loyalty based structure
----------------------
----------------------
13.5 THE CORRELATION
----------------------
An increase in salary correlates poorly with an increase in the cost of
living. Salaries do not track cost of living and if in certain organisations it does, ----------------------
then in that case the employee may benefit when moving to a lower cost area in
----------------------
which case he may not see any cut in base or only a small cut even though his
net income will increase with the lower cost. Buying power also correlates to the ----------------------
cost of living. Low cost of living in an area means that you have a proportionally
higher buying power in that area. ----------------------
Part of the increase correlates to the cost of living—calculated with the ----------------------
help of the consumer price index. The consumer price index measures inflation
in rent, food items and other costs that comes to about Rs 1000-1500 per month ----------------------
and if calculated annually that would come to a bare minimum of Rs 10,000. The
----------------------
increment that the company will give to their people runs into many thousands.
Thus, the increase is only partially impacted by the index. ----------------------
----------------------

Notes The other factor that determines increment/increase is the need to retain
talent. To avoid losing them to competition—global as well as in India, an
---------------------- increase is not just needed but imperative, as there is a need to maintain parity
with the industry. When companies offer a salary, it depends on how they
---------------------- benchmark themselves against other people in the same line of business.
---------------------- While revising the salaries of the employees, the company takes into
account the cost of living since it directly correlates with the employees’ personal
----------------------
life and standard of living. It has an impact on the employees’ performance,
---------------------- which is based on self-esteem as well.
---------------------- 13.6 GEOGRAPHICAL DIFFERENCES

---------------------- Geographical differences are the most frequent reasons for a change in
---------------------- an individual’s cost of living, but it usually does not have an impact on the
employees’ salary, for instance if an employee moves from a town to a city, the
---------------------- company will not give him a raise nor will the employer cut the pay to reflect
his lower cost of living if he moves from a city to a town.
----------------------
In India, by and large, salaries do not vary location - wise simply because
---------------------- all employees are subject to transfer anywhere. In an IT company, you need to
work from any location, as skilled workers are more mobile, hence location
----------------------
rarely leads to a salary difference. Also, when companies go for campus
---------------------- recruitment and are recruiting large numbers, they have not decided the exact
locations of the prospective employees, and hence cannot keep different salaries
---------------------- for different locations.
----------------------
----------------------
----------------------
1. ILO set minimum wages for workers whose bargaining position is
---------------------- weak because:
---------------------- i. Workers are generally physically very weak to protest
ii. Workers are generally unorganised to protect their interests
---------------------- iii. Workers are inefficiently organised to protect their interests
---------------------- iv. Indian trade unions are not strong enough to take care of their
members
---------------------- 2. A consumer price index measures
---------------------- i. Inflation in rent
ii. Inflation in food items
----------------------
iii. Inflation in luxury items
---------------------- iv. Ability of the consumers to pay
----------------------
----------------------

3. While revising the salaries of the individuals the company takes into Notes
account ----------------------
i. Bonus being offered to people
ii. Cost of living index at that time ----------------------
iii. Need to remain competitive in the job market ----------------------
iv. To attract the best talents in the industry at the affordable costs
----------------------
----------------------
Activity 2
----------------------
Undertake a comparative analysis of the living standards and its correlation
with geographical differences. ----------------------
----------------------
13.7 SAME JOB v/s SAME PAY ----------------------
The parameters that decide the employees doing the same job are the ----------------------
individual’s competency level, overall efficiency and performance level. A job
is as good as its doer. While some baseline salary may be fixed for a job, the ----------------------
actual salary could vary significantly depending on the individual. This is a ----------------------
factor of ‘performance’ by the individual. The company has review cycles and
appraisals for all employees, and accordingly the salaries are decided. Some ----------------------
companies believe in competency which includes time taken to do the job,
accuracy and generation of customer value. As the performance of a consultant/ ----------------------
employee increases on these parameters, the salary would mirror a proportional ----------------------
jump.
Many companies do not prescribe to the theory of same job, same pay. It ----------------------
is determined by performance. They have a competency-based structure. If the ----------------------
potential is spotted, they recognise and reward it—this is about how one can
distinguish and differentiate top performers and retain them. The starting salary ----------------------
for consultants of the same batch would be the same; however in the long run,
performance determines salary. ----------------------
----------------------
13.8 MANAGING THE PAYROLL
----------------------
If the local living costs affect the willingness of people to work for various
pay rates, it will be reflected in those local competitive pay standards. Hence, ----------------------
employers always manage their payroll so as to assure an adequate supply of ----------------------
competent workers.
Different organisations have different methods of managing the payroll but ----------------------
usually employers manage their payrolls by taking into account the performance ----------------------
of the employees and the market to know the kind of salary been offered to a
particular job. They take into account the base salary along with performance ----------------------
bonus, longevity bonus, and business incentives to assure the adequate supply
of competent engineers and employees. ----------------------

Notes Some companies frequently benchmark its pay structure by salary
surveys, while recruiting freshers, and offer an attractive package to distinguish
---------------------- themselves from competitors. While recruiting laterals they use industry
standards as a benchmark. Two factors that significantly influence talent
---------------------- retention in many industries, is the opportunity provided to forge a global career
---------------------- and the opportunity to work on the latest technology. They have a role and
competency matrix and each competency has three grades. Salaries, designation
---------------------- and position decide the role/salary of the person in the matrix.
---------------------- Companies can manage their payrolls by continuously keeping in touch
with the market, participating in various compensation surveys, initiating
---------------------- compensation surveys, gathering feedback from employees and considering the
performance of the company. Overall the cost of living does not impact the
----------------------
salary unless and until there is a change in the competitive market salaries.
----------------------
Summary
----------------------
●● or balanced industrial growth and development, strong national wage
F
---------------------- policy need to be worked out and implemented. This will achieve the
---------------------- national goal of having a socialistic pattern of society.
●● I LO has contributed a lot by way of conventions and recommendations to
----------------------
increasing the standard of living of working class.
---------------------- ●● eographical differences do not have direct impact on the employee’s
G
salary as companies do not raise or decrease salary of employees if they
----------------------
change location. A marginal difference may be affected in HRA.
---------------------- ●● he parameters that decide the employee’s compensation are the
T
individual’s competency level, overall efficiency and performance level.
----------------------
●● ifferent organisations have different methods of managing the payroll
D
---------------------- but usually employers decide and manage payrolls based on employee’s
---------------------- performance and market rates.
---------------------- Keywords
----------------------
●● onstitutional Perspective: The Constitution of India adopted some
C
---------------------- issues of policy matters to secure better place for working people under
Article 39 and 43, which comes under constitutional perspectives.
----------------------
●● ame Job v/s Same Salaries: If the jobs performed by two or more
S
---------------------- persons are the same, then the salary to be earned by both the persons
should be same as both are doing the same job.
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. What is the constitutional perspective for labour standards and norms in
India? ----------------------
2. What are the objectives set by the International Labour Organisation?
----------------------

State True of False. ----------------------
1. True ----------------------
2. True
----------------------
3. False
----------------------
4. False
1. The provision of an adequate living wage and recognition of the principle ----------------------
of equal remuneration for work of equal value figures amongst the
objectives of ----------------------
iv. International Labour Organisation ----------------------
2. Some companies do not prescribe to the theory of same job same pay;
----------------------
they have
iii. Competency based structure ----------------------
1. ILO set minimum wages for workers whose bargaining position is weak
because ----------------------
ii. Workers are generally unorganised to protect their interests ----------------------

iii. Workers are inefficiently organised to protect their interests ----------------------
2. A consumer price index measures
----------------------
i. Inflation in rent
----------------------
ii. Inflation in food items
iii. Inflation in food items ----------------------
----------------------
----------------------
----------------------

Notes 3. While revising the salaries of the individuals the company takes into
account
----------------------
ii. Cost of living index at that time
---------------------- iii. Need to remain competitive in the job market
---------------------- iv. To attract the best talents in the industry at the affordable costs
----------------------
Suggested Reading
----------------------
1. Chingos, Peter T. Paying for Performance: A Guide to Compensation
---------------------- Management (CPA Practice Guide Series).
---------------------- 2. Milkovich, George T. and Jerry M. Newmann. Compensation. McGraw-
Hill.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

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COMPENSATION MANAGEMENT

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2019 Symbiosis Open Education Society

Prof. Sateeshchandra Joshi

Unit No. TITLE Page No.

Compensation and Costs - Concepts and Context 1

---------------------- • Explain the characteristics of a good compensation system

---------------------- 1.1 INTRODUCTION

Let us explain it this way, compensation/reward means the return an ----------------------

1.3 ESSENTIALS OF AN EQUITABLE AND IDEAL ----------------------

Compensation and Costs - Concepts and Context 3

---------------------- Check your Progress 1

1.4 CHARACTERISTICS OF A GOOD COMPENSATION ----------------------

Compensation and Costs - Concepts and Context 5

---------------------- Check your Progress 2

1.6 ADVANTAGES OF A FAIR COMPENSATION SYSTEM ----------------------

Here, we will have a look on the benefits of having a compensation ----------------------

Compensation and Costs - Concepts and Context 7

Compensation and Costs - Concepts and Context 9

---------------------- iv. Absenteeism

Compensation and Costs - Concepts and Context 11

By cost we mean amount of money a business enterprise spends or incurs ----------------------

Compensation and Costs - Concepts and Context 13

Compensation and Costs - Concepts and Context 15

---------------------- 1.12 COST ASSOCIATED WITH PERSONNEL FUNCTIONS

Recruitment cost reflects the correlation between compensation and ----------------------

Compensation and Costs - Concepts and Context 17

Compensation and Costs - Concepts and Context 19

---------------------- 2. How compensation in terms of wages and salaries can be treated as

Compensation and Costs - Concepts and Context 21

---------------------- The important functions of this department in controlling and accounting

---------------------- e) To maintain a payroll record for each employee.

Compensation and Costs - Concepts and Context 23

Compensation and Costs - Concepts and Context 25

---------------------- 6. New activities and projects taken up by the organisation

---------------------- 12. Change in location/transfers

---------------------- 4) Unsafe or risky operations under the job

12) Unfair or faulty system of appraisal, promotion ----------------------

18) Favoritism and political practices ----------------------

8) National Service ----------------------

Compensation and Costs - Concepts and Context 27

---------------------- 4) It affects the interdependence of employees, which creates bottlenecks in

Compensation and Costs - Concepts and Context 29

---------------------- Check your Progress 7

---------------------- Fill in the blanks.

●● Methods of labour turnover and employee stability calculations. ----------------------

Self-Assessment Questions ----------------------

1. Explain the concept of Compensation. What are the characteristics of a ----------------------

Compensation and Costs - Concepts and Context 31

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1

---------------------- Fill in the blanks.

Fill in the blanks. ----------------------

Fill in the blanks. ----------------------

Compensation and Costs - Concepts and Context 33

Control Systems for Labour Costs 35

---------------------- • Categorise various types of workers

---------------------- 2.1 INTRODUCTION

Control Systems for Labour Costs 37

6. Labour cost accounting System: Wherever possible, automatic time- ----------------------

Control Systems for Labour Costs 39

---------------------- 1) Personnel department 2) Production Planning 3) Rate or Time and