Reward System

What is Reward System?

A reward system, commonly known as an employee reward system is a rule,

procedure, and standard for defining, determining, and allocating benefits and
compensations to employees for their contributions.

The reward may be in terms of monetary or non-monetary as well as intrinsic or

extrinsic. It is an effective tool to motivate employees. It creates a positive impact
on employees’ willingness which ultimately improves their performance and
productivity.

As such, the reward system affects the performance of the organization in both
the short and long run. It should be much more attractive so that the best
employees not only are retained but wish to contribute their best to the
organization.

Sometimes organizations use rewards as an extra payment to employees in

addition to their basic pay. For instance, when employees perform
extraordinarily they are given bonuses, recognition, and other various gifts.

Characteristics of Effective Reward System

An effective reward system has the quality to satisfy and motivate employees
within the organizational scope. It has the following features.

Transparent

The reward system should be transparent. Each employee should know the
reward at a different level of performance. They ought to be aware of their desire
for the compensation that other workers receive at varying levels of output.

Based on Needs

It should also be based on the needs of employees. As we know, different

employees have different needs and desires. Different employees may be guided
by different motives.
Even within the same employee, there might be different levels of needs at a

time. Therefore, the reward system should be able to satisfy the diverse needs of

employees.
If the rewards and needs of employees do not match, employee satisfaction
remains low. The system will unnecessarily be expensive without fulfilling the
objectives.

Equitable

The system should be based on the principle of equitable distribution. Rewards

for different employees performing at the same level should get the same
rewards. There should not be any bias for pay and perks.

Performance Based

Reward systems must be based on the performance of employees. If the reward

is not related to performance, based on the nearest and dearest basis, then it
discourages loyal and devoted employees. So, everything in the reward must be
attached to the performance.

Economic

Reward programs should not be unnecessarily expensive. Every provision of the

reward program influences the organization in the long run. So, to determine it,
management should examine the long and short-term impact of the policy taken.
As such, the reward program should not result in a financial burden to the
organization.

Variety in Rewards

Reward systems should be managed in a way that the reward or output at the
different levels of performance should be different. The same reward for all the
levels of output may not be interesting and hence do not encourage the
employees.

Reinforcement Based

The reward should be provided on a continuous basis so that it will positively

reinforce employees’ behavior. Terminating rewards for a long time can not
motivate employees. If possible, additional rewards like incentives, bonuses, or
other facilities should be divided into different interval payments.

Types of Reward System

The reward system can be classified into two basic forms as mentioned below:

Financial and Non-Financial Rewards

The reward can be classified into two types on the basis of whether it is linked to
direct cash i.e. monetary term or not. Salary, pay, commission, allowances, and
other monetary words are directly related to financial reward. With the belief
that money is a powerful motivator since it meets both the employees’ and their
possessions’ basic requirements, financial rewards are given to the workforce.

Most people are highly motivated since it is deeply ingrained and affect how
employees live. Financial benefits include a good salary, bonus, allowance,
overtime compensation, etc. The socioeconomic component of the job
determines how much money is awarded.

Non-financial rewards, however, can take any form depending on the company’s
culture and behavior. Non-financial rewards are those that cannot be directly
translated into monetary values. Verbal incentives (such as thanks, good work,
well done, praise, etc.), time off, employee of the month awards,
recommendations, taking part in decision-making, promotions, etc. are just a few
examples. Such rewards are crucial to satisfying the higher needs of professional
and personal success.

Intrinsic and Extrinsic Rewards

Apart from money, power, authority, and status, people also derive satisfaction
from their job. Job satisfaction is also considered to be one of the rewards for
people. Job design, job enlargement, job enrichment, empowerment, etc. which
make the job more challenging are job-related rewards.

Such rewards make employees satisfied from the inner heart which is therefore
internal rewards. In simple words, self-induced rewards because of the job itself
are intrinsic rewards. Employees feel motivated with satisfied. Intrinsic rewards
are related to job content which guarantees employees’ growth and
advancement.

On the other hand, if the rewards can be seen by other people, they are called
extrinsic rewards. They are in the form of salary, bonus, allowances, promotion,
authority, etc. Such rewards are related to the job performance of the employee,
the policy and financial position of the organization, the cost of living, and the
business environment.

Benefits of Reward System

An effective reward system may provide the following benefits to your

organization.

Employee Motivation

Employees’ motivation increases when they perceive a fair reward practice in the
organization. The more fair, reasonable, and practical reward practice is
maintained in the workplace the more motivated employees will be.

Increased Attendance

It is obvious that when employees are motivated they show their greater
willingness toward the interest of the organization. As such, they tend to show
higher attendance during organizational activities and also encourage others to
stay longer.

Increased Performance and Productivity

It is a well-known fact that when employees are motivated they always do more
than the average. An effective reward system also increases the satisfaction of
employees. Satisfied and motivated employees put their best effort into dealing
with organizational matters, and as a result, there seems increased performance
and productivity of both employees and the organization.

Financial and Non-Financial Incentives

Companies give companies financial and non-financial incentives to their

employees to boost their motivation. In this article, we will discuss what
incentives are and their types.

Motivation plays a vital role in every employee’s performance and influences

their attitude towards work in various ways. Companies have established various
incentives/motivational packages to boost staff morale and, as a result, increase
performance. The positive motivators that aid in improving a person’s
performance are known as Incentives. Both financial and non-financial incentives
drive workers or employees.
What are incentives?

An inducement that motivates or inspires one to take action in a desirable

direction is an incentive. Thus, all the steps executed by a company’s
management or business to increase the performance of its personnel can be
classified as incentives.

Modern businesses use many incentives to inspire their staff that can be divided
broadly into two categories: financial and non-financial incentives. Let’s discuss
them one by one in great detail.

Financial Incentives

Financial incentives are directly monetary, i.e., money that can be measured in
monetary terms. Money has become a crucial component of our lives in today’s
socioeconomic climate, both in urban and rural areas.

Since money has purchasing power, it meets practically all our demands. Thus,
financial incentives and promotions positively impact employee engagement and
loyalty around the world.

Salaries, bonuses, retirement benefits, commission, benefit sharing or gain

sharing, promotions, medical reimbursement, and employee stock ownership are
all examples of financial advantages and rewards necessary for an organisation’s
plan.

Every organisation that wants to recruit and retain employees, their

management must improve these financial incentives. Financial incentives can be
given to them individually or in groups to satisfy employees’ monetary or future
security needs.

Types of Financial Incentives

Financial incentives are types of remuneration linked to monetary incentives or

need monetary payment. This type of incentive can come in a variety of shapes
and sizes. The most prevalent financial incentives are listed below.

1. Salary and allowances

Every employee’s primary incentive to work efficiently for a business is their

salary. Basic pay, dearness allowance, house rent allowance, and other
comparable benefits are part of the salary.
Employees receive annual raises in basic pay and periodic increases in their
allowances under the salary system. These raises are sometimes dependent on
the employee’s performance during the year.

2. Pay for performance

This is the most common form of financial incentive, and most businesses are
aware of this type of incentive. This is sometimes also known as “pure financial
incentive.” It refers to a pay structure in which employees are paid based on their
ability to meet performance goals. It’s a simple device that taps into a primary
human reaction, i.e., once someone gets paid to do something, they are more
inclined to do it. This is also very cost-effective.

3. Profit-sharing

Profit-sharing refers to a sort of financial incentive in which employees are paid

out of a percentage of the company’s pre-tax income. Under this, employees
typically receive a share of the company’s profits in addition to their regular pay.

This indicates that a company or workplace will give profit-sharing payments

only based on the company’s earnings or other considerations such as excellent
customer service.

Profit-sharing schemes also increase workers’ loyalty. Sharing a company’s

profits with employees allows them to feel like they are a valuable part of the
organisation.

Non-Financial Incentives

Financial incentives sometimes may not be enough or adequate to motivate the

workers. Managers can combine financial incentives with other incentives to
increase employees’ productivity.

In addition to meeting monetary and future security demands, an employee has

psychological, social, and emotional needs that need to be satisfied. Fulfilling
these social, economic, and psychological requirements is vital for their
motivation.

Non-financial incentives primarily focus on meeting these requirements and

cannot be calculated in monetary form. Personal attention, business vehicles,
preparation and career advancement, approval and appreciation, recognition are
some examples of non-financial incentives.
Furthermore, there is a possibility that a non-financial incentive will also include
a financial incentive. For example, when employees get a promotion in their job,
this increases their salary or bonus and fulfils their psychological demands
because they gain more authority and their position also rises in the
organisation.

Types of Non-Financial Incentives

Using techniques other than money, a company can stimulate good behavioural
change and encourage employees to work more efficiently. Some of the most
common forms of non-financial incentives have been discussed below.

1. Recognition

Recognition is an expression of gratitude for a level of performance, an

accomplishment, or a contribution to a goal. It might be private or public,
informal or formal. Employee appreciation is one of the most effective ways to
empower employees.

It makes them feel valued, which increases employee recruitment and retention.
When done right, recognition is a cost-effective approach to boost performance
and make employees feel more invested in the company’s work.

2. Career advancement opportunities

The lack of job growth options has an impact on motivation and achievement.
Suppose employees are provided with the opportunity to progress their careers
by adopting new skills, technology, and competencies required to improve
performance and promotion. In that case, they will feel appreciated and
encouraged.

Employees’ productivity will also increase since they will be reminded regularly
that their efforts will help them achieve their goals and increase their prospects
of growth.

3. Organisation’s work environment

Individual performance increases due to a better working environment because a

better working environment increases employee happiness, which leads to
increased performance. A person is motivated by a work environment where
they feel they have incentives to accomplish work and are given importance for
doing their job.
 Productivity declines in working environments if workers lack enough resources,
software, sufficient ventilation, comfortable furniture, or lighting, making
employees uncomfortable and impairing productivity.

What Are Fringe Benefits?

Employers pay fringe benefits, also known as voluntary benefits, to their

employees as a supplement to their regular salary. Fringe benefits can be used as
an effective tool to attract, recruit, motivate and retain a high-quality workforce.
They may be taxable or nontaxable. In this article, we will discuss fringe benefits,
their examples and benefits.

Fringe benefits are perks or extra compensation over and above regular salary.
Some fringe benefits are for all the employees, whereas others are offered only to
certain categories of employees. For instance, the amount of paid time off an
employee receives is typically directly proportional with length of employment.

Most fringe benefits are taxable at fair market value but some benefits, such as
health and life insurance, are nontaxable. As an employer you can choose to
estimate total annual taxes payable by the employee and distribute it over every
paycheck. Or, you can choose to deduct, collect and pay taxes once a year.

There are some fringe benefits that are almost mandatory because the employees
expect them. If you don’t provide these benefits, you will find it difficult to hire
and retain good employees.

In addition, you may choose to provide unique fringe benefits to attract good
employees. You must choose benefits that are used by the employees and do not
end up draining your resources in the long run.

Required Fringe Benefits

These are some fringe benefits you generally must provide to your employees:

 Health Insurance: If you employ less than 50 full time employees, it is not
mandatory to provide health insurance under the ACA. However, this is a fringe
benefit that you should consider providing to all your employees because
 individual medical coverage can be expensive and employees expect to have this
covered by their employer.
 Workers’ Compensation: Workers’ compensation is insurance that covers lost
wages, medical expenses and rehabilitation costs for employees that have fallen
sick or gotten injured on the job. It also includes death benefits to the next of kin
of employees killed on the job. Most businesses with employees are required to
have workers’ compensation insurance.
 Family and Medical Leave: The Family and Medical Leave Act (FMLA) requires
employers to provide employees up to 12 weeks of unpaid leave of absence for a
serious medical condition, or to care for a newborn or family member. Group
health benefits continue during this period. The FMLA applies to companies that
employ more than 50 employees within a 75-mile radius.
Optional Fringe Benefits

These are some additional fringe benefits you can choose to provide:

 Retirement Plans: You can set up a 401k plan that allows your employees to
start investing into their retirement plan through payroll deductions. This has
benefits for your business as well because any matching contributions you make
are tax deductible.
 Paid Vacation: You can allow your employees to take paid time off (PTO) work
to deal with health emergencies or go on vacation to recharge themselves. Since
this is not mandatory under the FLSA, paid time off depends only upon the
agreement between you and your employee.
 Gym memberships: Providing gym memberships to employees is an easy way to
demonstrate that you care about the health and well being of your employees.
 Meal subsidy: If you have cost-effective numbers, you can have an in-house
cafeteria. Otherwise, you can provide coupons or vouchers redeemable at local
restaurants.
 Commuter Benefits: Under the IRS rules, employers may provide tax-free
transportation benefits to their employees. The transportation that qualifies for
benefits includes public transit, vanpooling, bicycling and parking.
 Employee Stock Ownership Plan (ESOP): Distributing stock ownership to
employees according to their payscale, grade and range of responsibilities can
help you attract capable employees. You must consult your legal as well as
finance and accounting teams for framing the rules and regulations for
distributing ESOPs.
 Benefits of Offering Fringe Benefits

Employees feel valued if they are provided excellent benefits packages. These are
some of the benefits of offering fringe benefits to your employees:

 Attract top talent. Generous fringe benefits can help you attract talented and
competent job candidates.
 Keep employees motivated. Offering fringe benefits makes employees feel
valued, which can keep them motivated and highly productive.
 Improve loyalty and employee satisfaction. Fringe benefits demonstrate to
the employees that you care for them, improving employee satisfaction and
loyalty.
 Ensure good health of employees. If employees are unable to work due to ill-
health or injuries, business suffers. So it makes sense to offer benefits that ensure
excellent employee health.
 Reduce employee turnover. When employees feel motivated and valued, get
appropriate remuneration for all the hard work they put in, and are satisfied with
their work as well as compensation, they have no reason to leave the
organization.

Definition of Incentive
Incentive in simple terms is something that encourages a person or organization
to do or achieve something. It is something that incites or has a tendency to incite
a determination. This is usually given in cash or in kind.

In business, the objective of incentive is to increase employee productivity,

improve industrial and interpersonal relations, and as result increase the overall
profit of the organization.

Types of Incentives
Incentives can be generally classified as financial (monetary) incentives and non-
financial (non-monetary) incentives.

1. Financial (Monetary) Incentives

Financial incentive pertains to those incentives which are in the form of money
or can be measured in monetary terms. This is sometimes referred to as
monetary benefit offered to consumers, employees, and organizations to
encourage behavior or actions which otherwise would not take place.
 These incentives can be given on an individual or group basis and satisfy the
monetary and future security needs of individuals. It lifts the eagerness and self-
confidence of the employees thus, resulting in better productivity and
performance.

The most commonly used financial incentives are:

Pay and allowance salary is the basic incentive given to every employee to work
efficiently and effectively in an organization. This includes the basic pay,
dearness allowance, clothing allowances, house rent allowances, and other
similar allowances. It is paid most commonly monthly.
Typically, employees are given annual increments in their basic pay and
allowances depending on the employee’s performance during the year.

 Bonus
It is a sum of money added to the basic salary or wages on a seasonal basis, as a
reward for a good performance. Many companies offer bonuses during the
festivals of Diwali, Christmas, New Year, etc.

 Productivity linked Wage Incentives

This refers to performance-linked compensation given to increase productivity.
Wage incentives are offered to employees to make them perform beyond the
accepted standards.

For example, a manufacturing worker is paid 50 dollars per item if he produces

50 items a day but if he produces more than 50 items a day, he is paid 5 dollars
extra per item. Thus, on the 51st item, he will receive 55 dollars.

 Profit-Sharing
It is an incentivized compensation program in which an employee receives a
direct share of the company’s profits. The amount granted is normally based on
the company’s positive earnings over a set period. This motivates them to
perform efficiently and give their best to increase the company’s profits.

 Retirement benefits
Retirement benefits like gratuity, pension, provident fund, leave encashment, etc.
provide financial security to the employees upon retiring from the company
Hence, they work properly during their term of service.

 Commission
Some companies offer a commission on top of the employee’s salary for
successfully hitting targets over a set period. This incentive motivates the
employees to increase the client base of the organization.
 Perquisites
Several organizations offer perquisites and fringe benefits such as free
accommodation, medical, educational, and recreational facilities, car allowances,
etc. in addition to the salary and allowances to their employees. Sometimes, this
incidental payment, benefit, or privilege is enjoyed as a result of one’s position.

 Co-partnership/Stock Option
Under this incentive system, employees are offered shares at a price that is lower
than the market price. This practice helps in creating a feeling of ownership
among employees and motivates them to give their all-out contribution towards
organizational growth and success.

2. Non-Financial (Non-Monetary) Incentives

These are types of rewards that do not form part of an employee’s pay or cannot
be measured in terms of money.

While the monetary and future security needs are important, the fulfillment of an
individual’s social, psychological, and emotional needs also plays an important
role.

 Status
It is one’s social or professional position. In an organization, this refers to the
position in the hierarchy of the organizational chart. Management-level
employees have more authority, responsibility, recognition, salary, etc., than
those of the rank-and-file employees.

The level of authority and responsibility determine the status of an employee in

an organization. Status increases the self-esteem, confidence, and psychological
needs of an individual resulting in a motivated attitude at work.

 Organizational Climate
Organizational climate refers to the environmental characteristics of an
organization as perceived by its employees. It conveys the impression that
people have towards the internal environment of the company within which they
work and have a key influence on their performance.

This differs from one organization to another. Several factors may influence the
organizational climate of a company, such as organizational structure, individual
responsibility, risk and risk-taking, warmth, and support within the company, its
tolerance and conflict, and more. A positive organizational climate tends to
increase the efficiency of employees at work.
 Career Advancement Opportunity
Organizations have to establish the appropriate skill and career development
programs, and even a sound promotion policy for their employees, that serves as
a booster for them to perform well and get promoted. Upward progress in one’s
career, such as promotion, shows recognition and appreciation of an employee’s
work, motivating him to do better.
 Job Enrichment
It refers to the designing of jobs in such a way that it involves challenging and
variety of tasks, requiring a higher level of knowledge and skill, more autonomy
and responsibility, and more growth opportunities and thus, could also increase
employees’ pay. Sometimes, when the job itself is interesting, it already serves as
a good source of motivation.

 Job Security
Job security offers future stability and a sense of security among the employees
in an organization. Not having to worry about the future gives a sense of
enthusiasm at work. While there is an undesirable aspect of this incentive, like
employees taking their jobs for granted, the increasing rate of unemployment in
our country makes this a great work incentive.

 Employee Recognition Programs

The organization adopts this to raise employee morale, attract and retain key
employees, elevate productivity within an organization, and increase
competitiveness. This pertains to employers’ initiatives to reward their
employees for achievements, new behaviors, anniversaries, and milestones
unlocked during their stay in the company.

For example, rewarding the best performer of the month, and announcing and
displaying their names on the notice boards, are programs for employee
recognition.

 Employee Participation and Empowerment

This refers to the employee’s involvement in decision making on the matters
related to them (participation) inducing a sense of belongingness and giving
them more autonomy and powers to subordinates (empowerment) to make
them feel the importance of their presence and service to the organization.

 Commission
Some companies offer a commission on top of the employee’s salary for
successfully hitting targets over a set period. This incentive motivates the
employees to increase the client base of the organization.

 Perquisites
 Several organizations offer perquisites and fringe benefits such as free
accommodation, medical, educational, and recreational facilities, car allowances,
etc. in addition to the salary and allowances to their employees. Sometimes, this
incidental payment, benefit, or privilege is enjoyed as a result of one’s position.

 Co-partnership/Stock Option
Under this incentive system, employees are offered shares at a price that is lower
than the market price. This practice helps in creating a feeling of ownership
among employees and motivates them to give their all-out contribution towards
organizational growth and success.

2. Non-Financial (Non-Monetary) Incentives

These are types of rewards that do not form part of an employee’s pay or cannot
be measured in terms of money.

While the monetary and future security needs are important, the fulfillment of an
individual’s social, psychological, and emotional needs also plays an important
role.

 Status
It is one’s social or professional position. In an organization, this refers to the
position in the hierarchy of the organizational chart. Management-level
employees have more authority, responsibility, recognition, salary, etc., than
those of the rank-and-file employees.

The level of authority and responsibility determine the status of an employee in

an organization. Status increases the self-esteem, confidence, and psychological
needs of an individual resulting in a motivated attitude at work.

 Organizational Climate
Organizational climate refers to the environmental characteristics of an
organization as perceived by its employees. It conveys the impression that
people have towards the internal environment of the company within which they
work and have a key influence on their performance.

This differs from one organization to another. Several factors may influence the
organizational climate of a company, such as organizational structure, individual
responsibility, risk and risk-taking, warmth, and support within the company, its
tolerance and conflict, and more. A positive organizational climate tends to
increase the efficiency of employees at work.
 Career Advancement Opportunity
Organizations have to establish the appropriate skill and career development
programs, and even a sound promotion policy for their employees, that serves as
a booster for them to perform well and get promoted. Upward progress in one’s
career, such as promotion, shows recognition and appreciation of an employee’s
work, motivating him to do better.
 Job Enrichment
It refers to the designing of jobs in such a way that it involves challenging and
variety of tasks, requiring a higher level of knowledge and skill, more autonomy
and responsibility, and more growth opportunities and thus, could also increase
employees’ pay. Sometimes, when the job itself is interesting, it already serves as
a good source of motivation.

 Job Security
Job security offers future stability and a sense of security among the employees
in an organization. Not having to worry about the future gives a sense of
enthusiasm at work. While there is an undesirable aspect of this incentive, like
employees taking their jobs for granted, the increasing rate of unemployment in
our country makes this a great work incentive.

 Employee Recognition Programs

The organization adopts this to raise employee morale, attract and retain key
employees, elevate productivity within an organization, and increase
competitiveness. This pertains to employers’ initiatives to reward their
employees for achievements, new behaviors, anniversaries, and milestones
unlocked during their stay in the company.

For example, rewarding the best performer of the month, and announcing and
displaying their names on the notice boards, are programs for employee
recognition.

 Employee Participation and Empowerment

This refers to the employee’s involvement in decision making on the matters
related to them (participation) inducing a sense of belongingness and giving
them more autonomy and powers to subordinates (empowerment) to make
them feel the importance of their presence and service to the organization.
Do Wages Affect Employee Productivity
As employers strive to achieve high employee productivity, one strategy that
often comes into play is wage increases.

Wages affect employee productivity in several ways, but the most significant
impact may be on worker motivation and satisfaction.

Raising wages will likely make employees happy because they will see an
increase in their take-home pay. They will also be more committed to their
work because they will feel they are getting paid fairly for their efforts.

Employers use wage increase strategies to improve employee productivity for

various reasons, but there are a few drawbacks to using this approach.

Why employers want high employee productivity

Employers want employees who are highly productive and satisfied. But why?

Well, productivity is one of the key factors that businesses value most. It
determines the output level and can be improved through various means, such
as training and development programs.

In addition, a good working environment and motivating employees are also

essential for achieving high productivity levels.

If you’re looking for productivity growth, focus on finding ways to increase

worker satisfaction. This way, you’ll achieve the desired results more
efficiently.

Higher employee productivity leads to cost savings.

Employers need their employees to be productive and save time and money.
This is why improved communication and collaboration between employees are
so important.
Often, employers can gauge productivity through surveys or performance
reviews.

However, there are other means of measuring employee productivity, for

example, by measuring the amount of work done in a given period relative to
the number of hours worked.

By understanding which methods work best for your business, you will achieve
better cost savings and increased productivity among your staff!

Improved organizational performance and agility

By improving organizational performance and agility, companies can save

money in recruitment, improve output, reduce costs while still meeting quality
standards, and achieve high employee productivity.

In turn, this leads to increased competitiveness in the market as well as

improved customer satisfaction.

Wages and employee motivation

Employee motivation is one of the most important factors determining how fast
a company can grow. And one of the factors in employee motivation is wages.

When businesses offer competitive wages, it will help them attract the best
employees and keep them around for a long time. However, it’s not just about
offering high salaries. Businesses must also provide fair wages commensurate
with their employees’ skills and experience.

When workers feel they are paid fairly, they are likelier to put their best effort
into their jobs. As a result, the company will have an increase in productivity.

Rewards and recognition play an essential role in motivating employees.

Employees are motivated by different things. Knowing what motivates your

employees is essential to keeping them productive and engaged. You need to
give them the right incentives to make them happy and satisfied with their
work.

If low wages are a problem, giving employees incentives such as bonuses or

better working conditions can help improve productivity. Appreciation can also
take various forms, such as bonus payments, higher paycheques, and more
perks.

However, not every employee responds positively to monetary compensation

alone – some prefer recognition in the form of awards, prestigious certificates,
or even emotional gestures like hugs or flowers.

Payroll systems that use different types of rewards and recognitions offer an
ideal way for companies to motivate their workforce effectively without
resorting too much to money alone.

Higher wages often lead to increased employee productivity.

Raising wages is often seen as a contentious topic, with many employees

believing it will lead to decreased productivity.

However, research has consistently shown that higher wages often increase
employee motivation and productivity. To ensure that your wage increase is
well-deserved and not just based on seniority or skillset requirements, you
should conduct surveys or focus groups on measuring the true impact of wage
increases on employee motivation and productivity.

You can also target raises specifically towards those areas where they are
needed the most – such as training costs or moving expenses.

Does wage affect employee productivity?

As businesses strive to remain competitive, it’s essential to consider the effect

of wages on employee productivity.
Theoretically, higher wages could lead to significant business savings because
of reduced staff turnover rates and lower training costs.

Higher pay can increase employee motivation and effort, producing better
quality work. Ultimately, it’s up to businesses to decide whether wage affects
employee productivity positively or negatively.

Theories about wage and productivity

There are several theories about how wage growth affects employee
productivity. The most popular theory is the substitution effect, which states
that employees will switch to different tasks or carry out the same job more
efficiently as wages increase.

The second theory is the income effect, which suggests that higher total wages
will cause workers to demand more leisure time and reduce hours worked per
week.

Evidence from economic experiments

There is evidence that increasing real wages does have a positive impact on
employee productivity. Studies show that when employees are fairly rewarded
for their efforts, it leads to increased efficiency and better overall performance
in the workplace.

This boost in productivity is usually small – around 3%. However, over time it
can lead to larger gains as the wage growth-earner becomes more motivated
and focused on their job. Furthermore, they may be less likely to leave or seek
other employment opportunities to meet pay gap levels.

What determines wages?

Wage levels are influenced by various factors such as geographical location,

industry, company size, etc.
However, little evidence suggests that higher wages increase organizational
productivity or efficiency. An employee’s level of experience and skills usually
determines their wage rate.

Productivity vs. wages

Employees are a valuable asset for any business, and a recent study has shown
that pay-for-performance schemes lead to productivity increases in businesses.

The key is finding the right balance, ensuring wage inequality increases don’t go
overboard and damage employee morale, but at the same time making sure
employees feel rewarded for their hard work.

When do employers use wages as a strategy to boost productivity growth?

It’s challenging to know when and how to raise your salary. After all, you want
to be fair and reasonable while still meeting your employer’s needs.

Here are four common scenarios in which employers use salary as a strategy to
improve employee productivity:

 When top talent is hard to recruit

 When employees are not meeting expectations
 When employees are leaving for other opportunities, and When
employees are not performing at their best.

When evaluating your situation, it’s essential to understand your employer’s

specific goals and expectations.

Do the research and determine what salary would be fair and reasonable for
your position, considering the company’s history, size, and other factors.

Once you understand your employer’s goals, you’ll be able to make informed
decisions about your salary and career growth!
Economic Policy Institute study on productivity and wages

The Economic Policy Institute has found that productivity and wages have
become increasingly disconnected in the United States. From 1979-2020,
productivity increased 61.8%, while wages only increased 17.5%, so
productivity grew 3.5x as much as average pay.

Productivity, a measure of the output of goods and services per hour of work,
has been rising steadily for decades.

However, wages have stagnated, despite this increase in productivity.

Currently, Income inequality has become a significant problem in the United
States.

The study found that workers are not benefiting from their increased
productivity and that the benefits go mainly to shareholders and corporate
executives. This disconnect between productivity and wages is a major
contributing factor to income inequality, and it is something that policy-makers
need to address.

Labor Productivity and economic growth

Labor productivity and economic growth are intimately connected. Productivity

is a measure of output per hour of labor, which is the key driver of economic
growth. As productivity increases, workers can produce more goods and
services in the same amount of time, leading to higher living standards.

Hourly compensation growth. Historically, hourly compensation has grown in

line with productivity so that workers have shared in the gains from higher
productivity. However, in recent years, hourly wage has stagnated even as
productivity has risen. As a result, the benefits of increased productivity have
accrued disproportionately to capital owners, leading to increased inequality.
Boosting hourly compensation growth is essential for ensuring that the gains
from increased productivity are shared more broadly and that all enjoy the
benefits of economic growth.

Wage Pressure in productivity vs. wages

Wage pressure is a term that describes the amount of demand for employees in
a given industry, the degree of competition amongst companies for employees,
and how much those employees are currently earning.

Wage pressure is often associated with a skills shortage in the marketplace,

which results in a noticeable uptick in the number of money companies are
paying their employees.

How Does Wage Pressure Affect Employee Productivity?

Wage pressure can have a variety of different effects on employee productivity.

For example, increasing your employees’ wages may reduce stress and overall
job satisfaction.

Raising wages without considering the work an employee has done in the past
can lead to resentment and conflict. In some industries, wage pressure can even
lead to increased absenteeism if employees feel they are being paid unfairly.

Wage pressure can also make it more challenging to attract new employees
while keeping your current employees happy.

Why Does Wage Pressure Matter in Employee Productivity?

Depending on the industry, an increase in wages can have an overwhelmingly

positive or negative impact on employee productivity. To determine whether
the former or latter will be the case for your staff, you should first understand
why wage pressure matters in employee productivity in the first place.
The general expectation is that when your employees receive a pay increase,
they are more likely to relax and enjoy their workdays than they would
otherwise.

When employers do not pay their employees fairly, they may not put in their
best effort at work. The specific impacts vary depending on the type of industry
you operate in.

3 Strategies to Deal with Wage Pressure in Employee Productivity

You can deal with wage pressure in employee productivity in a few different
ways.

1. The first is to offer better benefits. In some industries, this is easier than
in others, depending on what your company can provide.
2. The second way to deal with wage pressure is to consider hiring a new
employee. Depending on your needs and industry, this may or may not be
possible for your business.
3. The third way to deal with wage pressure is to have your employees sign
a contract or work agreement that specifies their new wage and how it
will affect their work.

Why Does Wage Pressure Reduce Employee Productivity?

When a business uses the same salary structure, and pay raises year after year
without considering what employees contribute, employee productivity is likely
to decline.

However, productivity increases when a business considers both the quality

and quantity of work employees contribute and adjusts salary accordingly.
Ways to Overcome the Effects of Wage Pressure on Employee Productivity

Employers should see the effects of wage pressure on employee productivity as

an opportunity to improve their business.

Here are five ways for employers to overcome the effects of wage pressure on
employee productivity:

Invest in employee training

Employees who learn something new are more likely to feel more productive
and thus more motivated. Investing in employee training and development can
do a lot to help mitigate the effects of wage pressure and encourage employee
productivity.

Change the performance evaluation process.

When employees are evaluated fairly and are rewarded according to their
productivity, they are more motivated to do their best work. To ensure that
your employees’ quality of work is considered, you must have a performance
evaluation process.

Set realistic expectations for employees

When managers set realistic expectations for their employees, they are less
likely to feel frustrated with the workload and more likely to feel productive.

Be flexible with employees.

Flexibility with employees can help you avoid some significant issues that wage
pressure can cause, such as absenteeism and major turnover.

Provide additional training for supervisors and managers

Being a supervisor or manager can give you much extra power in the
workplace. Managers can use this power to help their employees be productive.
Public and Private Compensation and Benefits in
Human Resource Management
The salary and financial and non-financial benefits the company offers its
employees in the workplace are referred to as compensation and benefits in
human resource management. It is a crucial tool used by human resource
managers to maximize people’s potential at work. Employees often evaluate and
compare the C&B plans that companies offer and prefer to work for
organizations with better C&B plans. Therefore, compensation and benefits are
essential tools to attract quality talent.
The remuneration structure is the reflection of an organization’s culture.
Employee contribution-based remuneration reflects a performance-driven
culture, while skills-based remuneration reflects a knowledge-driven culture.
To improve the overall performance and efficacy of the personnel working for
the firm, compensation is
Crucial in human resource management. It is one of the primary motivators for
employees to drive them to give their best performance.
A good compensation plan should be able to take care of employees’ extra
monthly expenses, contribute to their savings and allow them to cope with
inflation rates.
Compensation and benefits (commonly referred to as Comp & Ben or C&B in
India) come under the purview of the Human Resources department. Generally,
in small set-ups with up to 150 employees, HR generalists, in collaboration with
the finance team, manage all aspects of C&B, whereas, in large organizations,
dedicated C&B specialists manage the function.
HR will find this toolkit helpful and will be able to use this as a reference to
device compensation and benefits policy for their establishments.

Objectives of Compensation and Benefits Management

There can be a contrast in the views of employees and employers concerning

C&B. While employees would negotiate to get a higher pay package, employers
would like to save big on their allocated budget for a particular position.
Therefore, compensation management should aim to address and fulfil the needs
of the employees and employers to come to a consensus. The objectives of an
excellent C&B plan are:
 1. Compensation must satisfy the employees' general requirements and
expectations for the work performed.
2. To create a competent and fair compensation strategy to assist in
recruiting qualified talent and reward achievement.
3. To help prevent talent drain from the organization.
4. To aid in improving a company’s ranking on digital platforms in terms of
employee satisfaction and motivation
5. To design the compensation and benefits according to India’s legal
provisions, labor laws, and the Minimum Wages Act of 1948. As per the
Wages Act 2019, workers from all industries are entitled to receive
minimum wages fixed by their respective state governments.
6. To control the overall cost to the company (CTC).

Types of Compensation

Typically, employees take compensation as synonymous with salary.

Compensation is far more than just the paycheck. Compensation can be monetary
or non-monetary, known as direct or indirect benefits.
1. Direct Compensation
This involves direct monetary benefits given to the employees. This mainly
includes employee salary and variable pay for work. Other direct components
include monetary forms of compensation given below.
Monetary forms of compensation include:

1. 1. Salary
2. 2. Bonus
3. 3. Profit share

1. 4. Sales incentives
2. 5. Monetary rewards
3. 6. Overtime payment

1. 7. Retirement pay
2. 8. Allowances
2. Indirect Compensation
Indirect compensation does not involve direct and fixed money transfers to
employees. Apart from a fixed salary, employees are given various types of
allowances, reimbursements, and benefits that are not fixed. Examples of indirect
compensation are given below.
 1. 1. Medical reimbursement
2. 2. Mobile phone usage reimbursement
3. 3. Internet Reimbursement
4. 4. Fuel reimbursement
5. 5. Health Insurance
6. 6. Life Insurance
7. 7. Stock options

1. 8. Company-paid accommodation
2. 9. Company vehicle for office use
3. 10. Scholarships for courses
4. 11. Promotion opportunity
5. 12. Shifting to a desired role or location
6. 13. Other forms of public recognition

1. 14. Overtime pay

2. 15. Passes, tickets, or coupons to movies, matches, or shopping
3. 16. Retirement benefits such as pension plans
4. 17. Gratuity
5. 18. Flexitime
6. 19. Transportation or shuttle service
All the reimbursements are to be claimed by the employees and approved by
their supervisor. Other components, such as compensatory off, paid holidays, free
lunch, etc., can also be a part of the compensation and benefits package. One
employment may be a better financial proposition than the other even when two
occupations offer the same salary due to differences in the indirect compensation
or benefits package.

Mandatory Benefits in India

The employment benefits that are considered a must-offer to keep

employees motivated at the workplace are given below.
1. Health Insurance – As a part of the health insurance benefits policy,
employers are mandated to provide medical insurance to their employees.
Generally, this policy covers the employee, spouse, and kids. Employers can also
offer extensive plans to cover an employee’s parents as well.
2. Gratuity – As per the payment of the Gratuity Act 1972, every employee is
entitled to gratuity. Gratuity is a sum of money paid by an employer to an
employee for services rendered in the company. The gratuity amount is equal to
one-fourth of the last-drawn basic salary of an employee for each completed six-
month period.
See. Gratuity Rules & Calculation

1. Completion of a minimum of five years of service – In case an employee

resigns after working for a minimum of five years with a company.
2. Employee retirement - If an employee retires, the gratuity is factored into
the retirement plans given by the company
3. Employee death - In the event of the death of an employee.
4. Employee disability – In case of an employee suffering any disability due to
prolonged illness or accident.
3. Employee's Provident Fund (EPF) - The employee’s provident fund in India
is governed by the Employees' Provident Fund and Miscellaneous Provision Act,
1952.

1. Employee contribution: As per the Act, employers should determine

12% of employees’ Basic pay + Dearness allowance to EPF. Employees may
also choose to contribute 24% of the EPF.
2. Employer contribution: Employer contribution is designated as 12% of
the employee’s Basic pay + Dearness allowance, out of which 8.33% goes
to the employee pensions scheme (EPS), and the remaining 3.67% goes to
the employee provident fund (EPF) account.
The contributions are made on the wage ceiling, i.e., Basic Salary + DA or a new
salary threshold of ₹15,000. However, there are two standard methods for
calculating EPF contribution amount if the income exceeds the wage threshold of
₹15,000. Additionally, the employer is free to apply any of the methods.
See. EPF & EPS Rules & Calculation
4. Leaves and holidays – Leaves and holidays include benefits of paid time off for
employees for annual holidays, maternity leaves, and sick leaves.
See. Leave Encashment Rules & Calculation
5. Workplace security – The service laws of organizations must provide a healthy
workplace for employees. Companies must ensure the protection of employees
from all kinds of harassment, such as sexual harassment of women (covered
under the Sexual Harassment of Women at Workplace Act 2013).
In India, sexual harassment is punishable under the IPC organizations must
create a policy to prevent it.
It is mandatory for the companies to set up an internal complaint committee in
all offices to deal with such acts.
Salary and its Components

The regular payment (usually monthly in India) made by the employer to the
worker for the work done is termed a salary. The terms and components of the
salary structure are mentioned in the employment agreement or the
appointment. The components of the salary structure are:
Basic Salary: Basic salary is the remuneration given to employees for their
services to the company. This is generally offered hourly, weekly, or monthly.
The employee’s basic pay is the main part of the salary, usually comprising 40%
to 50% of the total salary. The basic pay is a fixed component of the Cost to
Company (CTC) package.
Dearness Allowance: This is a cost-of-living adjustment allowance mainly paid
to government employees, including pensioners in the public sector. However,
companies in the private sector are free to include dearness allowance as a salary
component. It is calculated as a fixed percentage of an employee’s basic salary
and is adjusted per the inflationary trends to mitigate the impact of inflation on
the employees.
House Rent Allowance (HRA): This salary component is offered to employees
with rented accommodation. The HRA is partially or fully exempt from taxes
under Section 10(13A) of the Income Tax Act. It is fully taxable if an employee
does not live in rented accommodation.
See. House Rent Allowance Rules & Calculation
Leave Travel Allowance (LTA): LTA is the allowance given to employees for
travel expenses. Workers must submit proof of travel to claim the allowance. A
salaried person can claim the LTA exemption under Section 10(5) of the Income
Tax Act.
Special Allowance: Special allowance component is fully taxable in the salary
structure. Special allowance usually comprises the remaining part of the salary
after allocating it to other major components such as basic pay and HRA.
Bonus: Some employers agree to pay a quarterly, biannual, or annual
performance incentive to the employees, called bonus. The bonus is a part of the
gross salary and is fully taxable at the employee’s end.
Employee contribution to the PF: The employee provident fund (EPF), receives
monthly contributions of 12% of the employee’s Basic pay + Dearness allowance
from both the employer and the employee. A deduction for the employee's
contribution to the EPF is allowed under section 80C of the Income Tax Act,
1961.
Professional Tax: It is levied by the state as the tax on employment. The state
can charge a maximum of ₹ 2,500 as a professional tax in a financial year. A
professional tax of ₹ 2400 yearly is applicable in Karnataka.
Net Salary Calculation

Net or take-home salary calculation can be understood by the following

illustration.
Illustration:
Your Cost to Company (CTC) = ₹ 10 lakh
Bonus in a financial year = of ₹ 100,000
Then your total Gross salary will be calculated by subtracting the Bonus from the
Cost to Company (CTC).
Gross salary =₹10,00,000 – ₹100,000 = ₹ 9,00,000
Following the simple method of EPF calculation, the EPF contribution will be
computed on a minimum salary threshold of ₹15,000 per month. 12% of ₹15000
as the employee contribution will be = ₹1,800 a month or ₹21,600 per year.
Now, the employer will make the exact contribution of ₹21,600 towards the EPF
(8.33% of the employer’s contribution gets diverted to the employee pension
scheme).
Total Deductions = Employee Contribution + Employer Contribution
Total Deductions = ₹ 21,600 + ₹ 21,600 = ₹ 43,200.
Take Home Salary = Gross Pay – Total Deductions
Net Salary = ₹ 9,00,000 – ₹ 43,200 = ₹ 8,56,800

Other Deductions

In addition to the above standard deductions, some companies also deduct a

yearly amount of ₹ 3,000 towards employee insurance. Please factor this in total
deductions in case your company makes this deduction.
In Karnataka, the professional tax of ₹ 2,400 per year is deducted from the gross
salary. Please factor in this deduction if your employer deducts professional tax.
So, the Total Deductions after factoring in the other deductions will be = ₹21,600
+ ₹21,600 + ₹3,000 + ₹2,400 = ₹48,600
Take Home Salary = Gross Pay – Total Deductions
Take Home Salary = ₹ 9,00,000 – ₹ 48,600 = ₹ 8,51,400
Some companies also deduct the amount towards Medical Insurance in which the
annual premium payable is equally borne and paid by employer and employee. In
some cases, the entire premium amount is borne and paid by the employer. This
should also be factored in accordingly while calculating net salary.
See. Pay Calculator with Basic+DA taken as Actual for EPF Calculation
See. Pay Calculator with the Threshold of 15k for EPF Calculation

Components of Compensation Planning

1. Market Information Based – Keep an eye on the employment markets and

what the competitors offer. This helps create a competitive compensation and
benefits plan. Compensation should be commensurate with the broader job
market to keep employees motivated.
2. Performance Based – Salary alone might not be sufficient to keep employees
enthusiastic about delivering their best performance. Building a system of
incentivizing performance and allocating rewards can be a game changer in
accelerating performance.
3. Skills, Position, and Job-Based – Keeping employees’ compensation
commensurate with their skills and role in the company is vital in keeping them
engaged and retained.
4. Individual career development – Take ownership of the employees’ career
growth by providing them opportunities to upskill themselves and strengthen
their existing skills. Businesses prosper where the knowledge & skills of
employees prosper.
5. Consistent and Fair – Build an environment of fairness in the procedure and
distribution of payments and deliver on the promises to earn employees’ trust.
Automating the payments helps achieve this objective. There is a strong
correlation between fairness in pay distribution and engagement. Employees
tend to increase their engagement when they understand that their
compensation is fair and consistent.

Determining Compensation and Benefits

Organizations are free to fix salaries and set salary structures for each role and
level, keeping in mind the minimum wages set by the Government of India as per
the Minimum Wages Act, 1948. However, employers must be cognizant of the
fact that accessing a quality talent pool will be challenging if they are unwilling to
pay the market rate.
Each position has a market rate or, let’s say, the rate at which employees are
willing to offer their services. However, it isn’t easy to ascertain it as people are
hardly transparent about their salaries.
To invite compensation data from various organizations, salary surveys can be
conducted by the compensation specialist to determine the market rate for a
specific position in a particular sector. Survey results can then be used to
determine the average rate for each position in a business.
Since all candidates differ in experience and skill, their compensation is also
ideally different. Hence, the compensation specialists determine each position's
ideal salary and salary range. Each range has a mid-point known as compa-ratio.
Compa-ratio of 100 percent means the exact midpoint of the salary range.
The other method is fixing the salary at an agreed percentile in the salary band.
Salary bands differ from company to company. Percentiles are established based
on existing pay ranges or what competitors are offering in a certain industry.
Determining an individual’s fitment within the salary range is a complex
procedure. To determine a fair salary for a position, the following variables are
considered –

 Highest degree earned and specialization

 Total years of experience
 Relevant experience

 Current salary
 Tenure with the company
 Full-time or part-time role

 Individual’s location
 Salary bands or grades followed by the company
 Performance rank or rating

Total Rewards Model

Total Rewards is a scientific approach that considers all the work-life aspects
impacting the satisfaction and motivation of an employee. Following are the
elements the model considers while determining an employee’s compensation.
1.1. Transactional Rewards – These are tangible rewards comprising direct and
indirect compensation and benefits. Transactional rewards and benefits include
the following components.
1.1.1. Salary – Fixed base pay and dearness allowance in some cases
1.1.2. Benefits – Other indirect monetary benefits, including allowances,
reimbursements, retirement pay, and health care benefits
1.1.3. Rewards – Bonus, performance incentives, and commissions
1.2. Relational Rewards – These are intangible rewards and benefits, which
include the following.
1.2.1. Organizational culture - Culture should be inclusive, supportive of new
ideas, free from bias, and allow for making mistakes and learning.
1.2.2. Recognition – Employee recognition programs include various category
awards for performance, achievements, etc. Promotion and verbal appreciation
in peer presence are also examples of employee recognition.
1.2.3. Total Wellbeing – It includes employee assistance programs to assist them
in overcoming financial, physical, relationship, or mental challenges. Giving
employees the opportunity to volunteer for social causes also foster their well-
being. Further, total well-being includes company-sponsored events for
employees and their families to allow employees to socialize, forge peer
relations, and foster belonging to the organization.
1.2.4. Flexibility – After the pandemic, flexibility has become essential for
employees when selecting a job or deciding to stay in an organization. Hybrid
work arrangements and offering flexitime go a long way in reducing employee
turnover.
1.2.5. Career and personal development – These initiatives include company-
sponsored training, educational programs, and mentorship programs to
empower employees by enhancing their competence at work. These initiatives
also serve as the foundation for employees to develop within the company and
realize their full potential.
The basis of this model is the fact that pay alone is not a sufficient factor to keep
employees happy and engaged at the workplace. Other factors, such as culture
and management practices, are significant hooks for employees to be glued to the
organization.
i. Evaluate the current system and what is already in place.
ii. Invite employee feedback to determine the missing factor and to take their
views on the existing practices.
iii. Involve leadership in identifying goals and priorities of the C&B strategy.
iv. Align the C&B strategy with organizational objectives and values.
v. Keep the total rewards plan inclusive, flexible, and fair.
vi. Communicate total rewards to employees and how they will help achieve the
desired results.

Pay Model of Compensation

The pay model of compensation developed by G.T. Milkovich and J.M. Nemwan in
2002 defines compensation as financial gain and tangible benefits given to
employees for work. The model comprises three components:

1. Compensation Objectives
2. Compensation Policy
3. Compensation Techniques
1. Compensation Objectives
As per the pay model of compensation, the objective of remuneration systems is
to achieve organizational objectives, including fairness, efficiency, and
conformity to regulations.
i. Fairness – Fairness refers to having a reward system that rewards
performance, not people. It should be competitive to employee roles, experience,
and industry standards. Rewards can be automated to achieve consistency in
payouts.
ii. Efficiency – The effectiveness of compensation systems translates to improved
performance, satisfied customers, and cost reduction.
iii. Compliance with legislations and regulations – For an organization to abide by
the law, its compensation model must conform to the national/ central
regulations and legislations. It must be updated from time to time as per the
revised regulations.
2. Compensation System Policies
As per the Pay Model of Compensation, the remuneration system must relate to
business objectives, competitive performance, and the contribution of
employees. The policy of compensation structure is based on the following four
pillars.
1. Internal Alignment – Internal alignment means rewarding different sorts of
jobs while also matching remuneration for similar work. Positions are evaluated
according to how much they contribute to the organization’s goals. If employees
believe that the compensation structure is just, they will be more likely to
develop and accept training.
2. Competitiveness - The compensation plan must be sufficiently competitive in
comparison to what competitors offer.
3. Contributions – Employee contribution is crucial in keeping their
performances competitive to deserve/attract the best remuneration in a system.
Incentives and rewards must be based on what employees contribute.
4. Adaptable – The remuneration system must be efficient to adapt to new
requirements. New requirements can result from new regulations or new
objectives for the business.
3. Compensation Techniques
As per the pay model of compensation, the techniques of the compensation
model close the gap between policy and objectives. Techniques such as skills
analysis, work analysis, or market analysis can be adopted to develop a
compensation structure. Tools such as surveys, assessing employee contribution
based on performance guidelines, open communications, etc., are an essential aid
to the compensation techniques.
Types of Compensation as Per Pay Model of Compensation
An employer has the freedom to select and put together a basket of benefits that
best suit the company’s objectives and employee needs. The popular forms of
compensation, as listed by the pay model, are listed below.
1. Basic Salary - see above under the section ‘salary and its components.
2. Commission – Commission is generally offered apart from the basic salary for
target-oriented roles such as meeting sales targets, etc.
3. Overtime Pay – As per the pay model, employees should be compensated for
the extra hour they work for a company. Overtime pay is the remuneration given
to compensate workers for hours exceeding the regular work hour mentioned in
an employee's employment agreement.
4. Bonus or Profit Sharing – Bonus is given over and above the basic salary.
Employers may determine a bonus pool, of which a certain percentage can be set
aside for each role type. A larger bonus share should be designated for the
employees in positions with greater responsibility.
5. Stock Options – A stock option is a benefit wherein employees are awarded
company stocks annually. Employee motivation is increased since they receive a
portion of the company's profits and are involved in its expansion in this way.
6. Reimbursement, such as travel, meal, housing expenses, etc., helps cover
employees’ mandatory expenses.
7. Health Insurance – It is mandatory to provide health benefits to employees.
8. Employee Provident Fund and Employee Provident Schemes - see above under
the section ‘Mandatory Benefits in India’.
9. Other benefits that employers can choose from are:

 a. Dental Insurance – Dental treatment is expensive and hence an

important consideration in some countries. In India, this is not much
popular or mandatory to provide dental insurance.
 b. Life Insurance
 c. Pension and Retirement Benefits
 d. Tax Benefit Schemes
 e. Accidental Cover
 f. Mutual Funds
The Pay Model Compensation provides a structured way of organizing
remuneration systems. The three components of the model – objectives, policies,
and techniques are its three backbones. The compensation system must be
competitive and aligned with the company’s goals.
 Wage Board:
Wage boards are set up by the Government, but in selection of members of wages
boards, the government cannot appoint members arbitrarily. Members to wage
boards can be appointed only with the consent of employers and employees. The
representatives of employers on the wage boards are the nominees of employers’
organization and the workers’ representatives are the nominees of the national
center of trade unions of the industry concerned.

The composition of wage boards is as a rule tripartite, representing the interests

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

The main objectives of wage boards are;

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

Composition and Functions of Wage Boards

The wage board is, as a rule, tripartite body representing the interest of labor,
management and the public. Labor and management representatives are
nominated in equal numbers by the government, after consultation with and
with the consent of major central organizations. Generally, the labor and
management representatives are selected from the particular industry which is
investigated. These boards are chaired by government – nominated members
representing the public.

They function industry – wise with broad terms of reference, which

include recommending the minimum wage, differential cost of living
compensation, regional wage differentials, gratuity hours of work, etc.

Wage boards are required to:

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

In addition to these common items, some wage boards may be asked to deal with
the question of Bonus (like that of the wage boards for cement, sugar and jute
industries); gratuity (like that of the wage boards for iron ore mining, limestone
and dolomite mining industries) and the second wage board on cotton textile
industry; demands for payments other than wages (wage boards for jute and iron
and steel industry); hours of work (rubber plantation industry); interim relief
(wage boards for jute industry and post and dock workers). Some wage boards
(Wage boards for sugar, jute, iron ore, rubber, tea and coffee plantations,
limestone and dolomite mining industries) have been required to take into
account the ‘special features of the industry’.

Thus, wage boards have had to deal with a large number of subjects. Of these, the
fixation of wage – scales on an industry – wise basis constitutes the biggest of all
the issues before them. In evolving a wage structure, the board takes into
account:

1. The needs of the industry in a developing economy including the need for
maintaining and promoting exports:
2. The requirements of social justice, which ensures that the workman who
produces the goods has a fair deal, is paid sufficiently well to be able at least to
sustain himself and his family in a reasonable degree of comfort, and that he is
not exploited;
3. The need for adjusting wage differentials (which is in relation to occupational
differentials; inter-firm differentials; regional or inter-area differentials; inter-
industry differentials and differentials based on sex) in such a manner as to
provide incentives to workers for improving their skills.

For the determination of fair wages, the board has to take into consideration
such factors as the degree of skill required for his work, the fatigue involved, the
training and experience of the worker, the responsibility under-taken, the mental
and physical requirements for work, the disagreeableness or otherwise of the
work and the hazards involved in it. The board is required to make due
allowances for a fair return on capital, remuneration to management and fair
allocation to reserve and depreciation.
 Working of Wage Boards

Although wage boards are set up by the government, the basic reason for their
establishment is the pressure brought to bear on the government, by the trade
unions, industrial federations and national organizations on the one hand after
the employers’ formal or informal consent on the other. Pressure has been used
for the appointment of wage boards for the jute industry by the jute workers
association and for the coal mining industry by their trade union. The formation
of wage boards in other industries has been the result of similar demands and
pressures on the part of trade unions – such as plantations, iron and steel,
engineering, sugar and electricity.

The government cannot appoint members of the wage boards in an arbitrary

way. Independent members can be appointed only with the consent of employers
and employees. The representatives of employers on wage boards are the
nominees of the employer’s organisation and the workers representatives are the
nominees of the national organisation of trade unions of the industry concerned.
However, before their actual appointment, a great deal of negotiations take place
not only between the two main recalcitrant interests but also among different
groups representing particular interests.

Item to be included for the consideration of the wage boards are the outcome of
the negotiations between the parties. The issues are unanimously determined by
trade unions and employers; but these invariably relate to gratuity, bonus, hours
of work and grant of interim relief. The quantum of interim relief is also decided
by negations and bargaining which have sometimes resulted in temporary
deadlocks.

The wage boards functions in three steps:

1. The first step is to prepare a comprehensive questionnaires designed to collect

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

The role of independent members on the board is limited to conciliation and

mediation; they try to prevent deadlocks by promoting communication between
labour and management representatives. They also offer advice and suggestions
to the parties, but the final decision must result from the parties give – and – take
attitudes and compromises.

The decision – unanimous recommendations – is written down in the form of a

report and submitted to the government, which usually accepts unanimous
agreements, although it may modify any provisions thereof. Then the report is to
be compiled with by the parties. The government has no legal powers to enforce
the board’s recommendations. It tries to persuade the parties to narrow their
differences and aim to unanimity.

Wage boards like their own time in the submission of reports, e.g., the second
wage board for cement and the first wage board for cotton textiles and sugar
took a little less than 3 years; while the wage board for coal mining, non
journalists, jute, iron and steel took a little over 3 years; that for tea plantations
took 5 ½ years and for coffee plantation 4 years and iron ore mining 5 years.
Some of the wage boards constituted in 1964 did not submit reports even by
1969, e.g., heavy chemicals, fertilizers, engineering industries and ports and
docks. The average time taken by wage boards in the finalization of their
deliberations varies from 3 years to 5 ½ years.

The main reasons for the delay in the completion of wage boards work have been
:

1. Routine delays in the recruitment of staff; preparation and printing of

questionnaires;
2. Getting replies to questionnaires
3. Time involved in public hearings and
4. Lack of accord among members in arriving at a decision.

Evaluation of the Wage Boards

The boards have been successful in fulfilling their primary object of promoting
industry – wise negotiations and active participation by the parties in
the determination of wages and other conditions of employment. The board’s
deliberations and awards have contributed significantly towards the
development of a national and ‘development oriented’ outlook on questions
pertaining to particular areas and sectors. They have given serious attention to
 the impact (of wage increase) on factors like prices, employment and the
profitability of the industry.

The committee setup by the National Commission on Labour identified three

major problems from which the wage boards suffer:

1. A majority of the recommendations of the wage boards are not unanimous.

2. The time taken by the wage boards to complete their task has been rather unduly
long and
3. The implementation of the recommendations of the wage boards has been
difficult.

But it concluded that the system of wage boards has, on the whole served a useful
purpose. As bipartite collective bargaining on wages and allied issues on an
industry wise basis at the national level has not been found practicable at present
for various reasons, this system has provided the machinery for the same. It is
true that the system has not fully met all the expectations; and, particularly in
recent years, there has been an erosion of faith in this system on the part of both
employers and employees. The Committee is convinced that these defects are not
such as cannot be remedied.

The committee made some important recommendations. These have been given
below:

1. The chairman of the wage should selected by common consent of the

organizations of employers and employees in the industry concerned.
2. In future, the wage board should function essentially as machinery for collective
bargaining and should strive for unity.
3. Wage boards should be assisted by technical assessors and experts.
4. The terms of reference of wage boards should be decided by the government in
consultation with the organisations of employers and the workers concerned.
5. A central wage board should be set up in the Union Ministry of Labour on a
permanent basis to serve all wage boards through the supply of statistical and
together material and lending of the necessary staff.
6. Unanimous recommendations of wage boards should be accepted and in case of
non – unanimous recommendations, the government should hold consultations
with the organizations of employers and employees before taking a final
decision.
7. Wage boards should not be set up under any statues, but their recommendations,
as finally accepted by the government, should be made statutorily binding on the
parties.
8. For the industries covered by wage boards, a permanent machinery should be
created for follow-up action.
9. Wage boards should complete their work in one years time and the operation of
its recommendation should be between two or three years, after which the need
for a subsequent wage boards should be considered on merit.

Pay Commission:
The Pay Commission is an essential institutional mechanism that plays a pivotal
role in determining the salaries, allowances, and benefits of millions of
central government employees. As a critical component of the country's
administrative setup, the commission periodically evaluates the prevailing
economic conditions and recommends appropriate revisions in pay scales
to ensure fair remuneration for the public sector workforce.

What is Pay Commission?

 The Pay Commission is a body set up by the Central Government that

reviews and recommends changes to the salary structure of employees.
 The composition of the Pay Commission comes under the Department
of Expenditure (Ministry of Finance).
 Pay commissions are usually constituted every 10 years and the first
pay commission was set up in 1946. Since Independence, a total of seven
pay commissions have been formed.
 The latest pay commission was set up in 2014 and its
recommendations came into effect in 2016. Currently, central
government employees and pensioners get salaries based on the
recommendations of the 7th pay commission.
 It is not mandatory for the government to accept the recommendations
of the pay commission. The government may choose to accept or reject the
recommendations.
Why is Pay Commission Required?

 Salary Revisions: The Pay Commission periodically assesses the existing

pay scales, allowances, and other benefits for government employees.
It considers various factors like inflation, economic conditions, the cost
of living, and prevailing market rates while recommending revisions.
o These revisions ensure that government employees receive fair and
competitive salaries, in line with the changing economic landscape.
 Impact on Public Finances: The recommendations of the Pay Commission
have a significant impact on the government's financial expenditure, as
the salaries and allowances of a large number of employees are
affected.
 Ripple Effect on Other Sectors: The recommendations of the Pay
Commission often influence salary structures in the private sector and
various state government organisations. Many state governments and
private companies also use the Central Pay Commission's
recommendations as a reference point while revising their own salary
structures.
 Social Equality: The Pay Commission also addresses the issue of pay parity
and social justice. By ensuring that government employees receive fair and
competitive wages, it helps reduce income disparities between different
sections of society.
 Reviewing Allowances and Perks: Apart from basic pay, the Pay
Commission also reviews and recommends changes to various
allowances and perks provided to government employees, such as
housing allowances, medical benefits, and travel allowances.
What are the Recommendations of the Seventh Central Pay Commission?

 Minimum Pay: Based on the Aykroyd formula, the minimum pay in

government is recommended to be set at ₹18,000 per month.
 Maximum Pay: ₹2,25,000 per month for Apex Scale and ₹2,50,000 per
month for Cabinet Secretary and others presently at the same pay level.
 New Pay Structure: Considering the issues raised regarding the Grade
Pay structure and with a view to bringing in greater transparency, the
present system of pay bands and grade pay has been dispensed with
and a new pay matrix has been designed.
 Grade Pay has been subsumed in the pay matrix. The status of
the employee, hitherto determined by grade pay, will now be
determined by the level in the pay matrix.
 New Pension System: The Commission received many grievances
relating to New Pension System (NPS). It has recommended a number
of steps to improve the functioning of NPS. It has also recommended
the establishment of a strong grievance redressal mechanism.
 Annual Increment: The rate of annual increment is retained at 3%.
 Dearness Allowance (DA): The rate of Dearness Allowance (DA) is
currently decided on the recommendation of the 7th Pay
Commission.
What are the Challenges Faced by the Pay Commission?

 Economic Conditions: Economic fluctuations and uncertainties impact the

government's ability to allocate funds for salary hikes. If the economy is not
growing at a healthy rate, it can limit the resources available for
implementing significant pay revisions.
 Fiscal Constraints: The government has to balance its fiscal
responsibilities, including managing budget deficits and controlling public
debt. Meeting the demands of higher pay for government employees
without compromising fiscal stability can be a troublesome task.
 Inflation and Cost of Living: High inflation rates and rising costs of living
affect the purchasing power of individuals. The Pay Commission needs to
consider these factors to ensure that government employees'
salaries are sufficient to maintain a reasonable standard of living.
 Income Disparities: Addressing income disparities between different
levels of government employees can be challenging. Balancing the need
for pay hikes while maintaining a fair and just salary structure is a complex
task.
 Demands of Various Sectors: Different sectors of the economy have unique
pay and benefits requirements. The Pay Commission must cater to the
diverse needs of employees in various fields, such as defense,
education, healthcare, and public administration.
 Global Economic Factors: Global economic conditions can also influence
India's economic growth and fiscal position, affecting the government's
capacity to implement significant pay revisions.
 Pension and Retirement Benefits: The Pay Commission must also
address pension-related issues and recommend measures to ensure
financial security for retired government employees.