Unit of competency: Administer

Remuneration and employee benefits

Department: HRM

Level: IV
What is Compensation in HRM?
Objectives, Types, Management

What is Compensation?
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. Compensation may achieve several purposes assisting in
recruitment, job performance, and job satisfaction.
An ideal compensation management system will help you significantly boost the
performance of your employees and create a more engaged workforce that’s willing to go
the extra mile for your organization.

Compensation is one way or the other reward given to the employees by the employer in
return to their services or contribution to the organization. It plays a very significant role
in human resource management because it helps in attracting, retaining & motivating
employees.

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Compensation is the key deciding factor for any employee to take up a job offer or stay
loyal to the current job. The compensation of an employee decides his standard of living,
his position in society and in turn reflects his loyalty, motivation levels etc. It also helps
in improving organizational efficiency.

Compensation also helps in maintaining coordination between work & employee

relationships by providing them monetary & non-monetary benefits. In other words,
compensation can be defined as the monetary worth given to the employee by the
employer in return for their service to the organization.

Employees are provided compensation in three different forms:

 Pay: Provided in the form of periodic wage & salary.

 Benefits: Provided in the form of medical facility, insurance facility, recreational
benefits etc.
 Incentives: Provided in the form of bonuses, commissions etc. to award the good
performers.
Compensation Management
Compensation management practice is essential for every organization’s performance.
Organizations have used compensation management practices to achieve their
performance, particularly in relation to retention. The impact that compensation
management practice has on an organization’s performance is apparent, as many
researchers have shown in their studies from the United States and Europe, to Asia and
Africa.
Compensation management practice consists of policies and practices that are used by
managers to reward and maximize the potential of human resources in the organizations.
Compensation management is been studied extensively by researchers and it is shown to
have a significant effect on firm performance. Compensation management is needed in
organizations for the financial income and well-being of their employees.

Armstrong stated that compensation management is an integral part of the human

resources management approach to productivity improvement in the organization. It deals
with the design, implementation and maintenance of compensation systems that are
geared to the improvement of the organizational, team and individual performance.

Objectives of Compensation Planning

As we have already discussed that compensation is a very important part of an
organization therefore, we must consider certain objectives before planning for
compensation to the employees. These are as follows:-

 Internal & External Equity

 Attract Quality Candidates
 Retain Employees
 Cost Control
 Comply with Legal Rules
 Ease to Understand and Operate
Internal & External Equity
The employees should be paid in accordance to the services delivered by them. In
internal equity, if an employee is performing a difficult or more complex task he should
be paid more in synchronization with his contribution to the organization.

The absence of internal equity can lead to discontent amongst the employees and an
unhealthy work environment. In external equity, an employee’s job should be fairly
reimbursed to similar jobs in the market. In the absence of which the employees might
leave in the hunt of greener pastures.

Attract Quality Candidates

Quality candidates are in demand in every organization. In order to attract and retain
them the compensation offered by an organization needs to be high enough to retain
them. An organization should offer higher salaries which will motivate talented
candidates to apply.

Retain Employees
Nowadays there are ample opportunities available to the candidates in the market hence
the most challenging task of an organization is to retain its employees. If the organization
wants to retain efficient employees it should maintain an effective level of compensation.
If the level falls employees can switch to other organizations.

Cost Control
A good organization always ensures that their employees are neither paid too less nor too
much. Both situations are harmful to the organization. They should always be paid in
proportion to the services provided by them. The organization should also take care that
the cost of recruiting new talents is not too high.

Comply with Legal Rules

while giving the compensation to the employee’s government policies and rules should
also be kept in mind regarding minimum wage, allowances, benefits, bonuses etc.

Ease to Understand and Operate

The compensation planning should be easy to understand and operate. It should be
comprehensive and clear and the employees, managers and union should be able to refer
to them with ease.

Factors Influencing Compensation

Planning
 Job Level and Needs
 Organizations Ability to Pay
 Supply of Labor in the Market
 Cost of Living
 Productivity
 Prevailing Market Rate
 Trade Union’s Bargaining Power
 Attitude of Management
Job Level and Needs
If the level of the job is high or the task to be performed is difficult and complex in nature
employees will be given higher compensation. Also there are certain tasks that need a
specific and unique skillset and knowledge that will end up demanding higher
compensation.

If the task is simple and of routine nature and very less efforts are required to perform it,
it will attract less compensation.

Organizations Ability to Pay

The profits earned by an organization will influence the amount of compensation to be
paid. There are certain products and services that lead to higher profits, company’s
manufacturing such products and providing such services will be able to pay high salaries
to its staff.

Less compensation will be given during the time of losses.

Supply of Labor in the Market

The compensation administration is always affected by the demand & supply condition of
labor in the market. When the demand for a specific type of labor is more & supply is
less, the organization is forced to pay a high rate of compensation in order to meet its
requirements.

Where as, when the demand for a specific type of labour is less and its supply is more,
the organization offers a minimum amount of compensation.

Cost of Living
Cost of living is an important factor in determining the salary of the employees especially
at the time of rising prices. As the cost of living rises the real wage declines which
directly affects the employee purchasing power.

A portion of employee’s compensation is kept in a variable form by the organizations

such as dearness allowance because of the change in the cost of living. That portion is
fixed on the basis of the existing cost of living and changes when the cost of living
changes.
Productivity
Due importance is given to the productivity of labour in the organization as it relates to
the reputation of the organization. If the employee is performing good or is highly
productive he will be paid more and if the employee is less productive he will be paid
less amount of compensation.

This is termed as merit-based payment where the wages are paid on the basis of the
quality of work, rather than on seniority.

Prevailing Market Rate

These provide the basis for comparing the compensation rates of one industry with that of
the other. If there are two industries of the same nature offering different compensation
rates, employees will always be attracted towards the one offering higher compensation
rates.

In this case, it will become difficult for the organizations to retain potential employees.

Trade Union’s Bargaining Power

If there is a powerful trade union in the organization the compensation rates will be high.
But if these unions are disorganized and are not united, management can take advantage
of it. Management can easily lower down the compensation rates.

These unions can even go for strikes and lockouts to get their wages increased.

Attitude of Management
The attitude of the management should be positive towards providing compensation to
the employees. If any employee is doing a better job he should be entitled to a fair
amount of compensation but if the employee is not doing a good job he should be given
lesser compensation.

The management should be impartial and unbiased towards providing compensation.

Types of Compensation
Compensation is the pay given by the employer to the employee for the services provided
by him. It can be given in the following three types:
 Base Pay
 Variable Pay
 Benefits
Base Pay
It is the basic compensation given to the employee by the employer. It is given either in
the form of wage or salary. Base pay is further classified into two namely Hourly Base
pay and Salaried Base Pay. Hourly base pay is given to the employee on the basis of
time.

Employees paid hourly receive wages, which are calculated on the basis of a number of
hours worked in a day in an organization. Whereas, salaried base pay is given on the
basis of the nature of the job. It can be given weekly, fortnightly or monthly. It is fixed in
amount regardless of the number of hours worked. Those who get salaries are considered
higher in status than those who get wages.

Variable Pay
It is the direct compensation given to the employee which is not fixed but variable in
nature. It is given as per the individual, team or organizational performance. The amount
of variable pay to be given depends on the quality of work that is produced.

Variable Pay is given in the form of bonuses, incentives, holidays, cash kind etc. It is a
one-time payment as it is always re-established and reconsidered before the next
performance period.

Benefits
Benefits are indirect in nature. These are not given in the form of cash. These are given to
the employees or group of employees regardless of their performance. Examples of
benefits are health insurance, retirement, pension etc.

Importace of Compensation on
Employee Performance
A well-designed compensation and benefits plan helps to attract, motivate and retain
talent in the organization. A well-designed compensation & benefits plan will benefit in
the following ways:

 Job satisfaction
 Motivation
 Drive employee performance
 Low Absenteeism
 Low Turnover
 Peace of Mind
 Increases self-confidence
Job satisfaction
Employees would be happy with their jobs and would love to work for organization if
they get fair rewards in exchange with their performance.

Motivation
We all have different kinds of needs. Some of us want money so they work for the
company which gives them higher pay. Some value achievement more than money, they
would associate themselves with firms which offer greater chances of promotion,
learning and development. A compensation plan that hits workers’ needs is more likely to
motivate them to perform in the desired way.

Drive employee performance

The basic idea is that if an employee knows that his/her bonus depends on the occurrence
of a specific event (or paid according to performance, or if a certain goal is achieved),
then the employee will do whatever he/she can to secure this event (or improve their
performance, or achieve the desired goal). In other words, the bonus is creating an
incentive to improve business performance.

Low Absenteeism
It employees enjoy the office environment and are happy with the compensation. Their
performance will be high and absenteeism will be very low.

Low Turnover
Would employees want to work for any other organization if a working organization
offers them fair rewards.

Peace of Mind
An organization offering of several types of insurances to workers relieves them from
certain fears. Workers as a result now work with relaxed minds. They perform very well
without any mental stress.

Increases self-confidence
A reward system helps to increase the self-confidence of the employees. It helps to
increase the performance of the employees in the organization.

Characteristics of a Desirable Wage Plan

 Flexible
 Equitable
 Cost-Effective
 Certain
 Balanced
Flexible
A wage plan should be made flexible so that the necessary changes can be made at any
time when required. A flexible wage plan should not involve an excess administrative
cost it.

Equitable
There should be equal distribution of wages. Every employee should be given wages on
the basis of a number of hours worked or a number of units produced. Their wages
should be in proportion to their contribution to the organization.

Cost-Effective
A good wage plan always ensures that it is utilizing its cost in a proper and economical
manner. It should not involve an excess operative and administrative cost.

Certain
Every desirable wage plan should be certain. There should not be any kind of ambiguity.
It should be clear enough to create confidence in the mind of the workers that they are
getting a fair amount of wages.

Balanced
Wage payment should be made impartial. On the basis of the job evaluation of the
employees, they should be given wages.
Methods of Wage Payment
There are two types of wage payment systems:

 Time Wage System

 Piece Wage System
Time Wage System
In this system wage payment is made on the basis of time spent on the job. The wages
given depends on a certain period of time. The period of time may be an hour, a day, a
week, a fortnight or a month. It is calculated by the sum total of numbers of hours worked
multiplied by the hourly rate. This is the oldest and the most common system. The time
wage system is very suitable when it is difficult to fix the standard time for doing a job.

For example, Akshay an employee of a company works 9 hours a day and his standard
rate per hour is Rs. 7. His total wage will be 9*7= 63 Rs.

Advantages of time wage system

 Easy to Understand: Time Wage System is very simple and easy to understand.
Workers can easily calculate their wage on the basis of time and rate per hour. It
reduces the chances of misunderstanding between workers and management.

 Quality of Work: Here quality of work is of much importance than the quantity of
work to be done. Product quality is maintained under this method because workers are
paid on the basis of time spent on the job, therefore they take time and produce better
quality product.

 Less Damage of Machinery & Equipment: As workers give their required time to
complete the job, therefore there is no need to speed up the operation. The task is
performed with an ease. Machinery and equipments can be used very safely.

 Equal Wage Distribution: Workers are distributed according to equal wages if they
are working for a similar job and for the same number of hours or time. This avoids
the jealousy and difference between the workers. This ultimately helps in smooth
functioning of the organization.

 Feeling of Security: Workers feel more secure under this method because they know
in advance what will be their total wages at the time of completion of the job. They
can plan their personal expense in advance and can avoid all the doubts and confusion
in this regard.
Disadvantages of time wage payment
 Inefficiency of Labor: There is no link between the wage distribution and the
productivity of the work. The workers can any time slow down the speed of the work
 because of their inefficiency in performing a particular task.

 Constant Supervision: Supervisors will need to check the workers at a regular

interval. To maintain the productivity strict supervision is required. Close supervision
will ensure better productivity.

 Lack of motivation: There is no difference between the efficient and the inefficient
workers. They both are treated in the same manner. No extra incentives or
encouragement is provide to the workers. A worker feels less motivated and works in
his regular routine.
Piece Wage System
Under this system wage payment is made on the basis of the output of the work. Wage
payment is made on the basis of the amount of work completed or the number of units
sold. Workers will take only average time to complete their job because time is not an
essence here. A worker’s individual skill and efficiency will be judged in this system and
he will be paid on the basis of his speed of the work. The more units of a product he will
produce, the more wages he can earn.

For example, Vishal an employee of a company produces 30 units at a time and a rate per
unit is 20. Therefore, his wages will be 30*20 = Rs. 600.

Advantages of piece wage payment

 Encourage Efficient Workers: It encourages the efficient workers to produce more
because they will be paid higher wages in comparison to inefficient workers.

 Provide motivation: There is a direct link between wage distribution and

productivity. It will motivate the workers to generate more output and increase
productivity. The workers producing more output will be given higher wages.

 Transparency: This system ensures complete transparency between wage distribution

and productivity. Workers producing more will get more wages, workers producing
less will get less wages.

 Less cost of supervision: In order to get the rewards for better performance, workers
work very hard on their own. No supervisor is required to watch over them. No strict
supervision is required to increase productivity.

 Economical: The total unit cost of production comes down with larger output because
the fixed overhead burden can be distributed over a greater number of units.
Disadvantages of piece wage payment
 Low quality: If the wages are distributed on the basis of output, workers will produce
more to earn more wages. This will lead to increase in quantity but the quality of the
 product will be sacrificed. There should be close inspection to safeguard the quality.

 Unequal wage distribution: Workers doing same nature of job do not get the equal
wages irrespective of the time spent by them because in this method wages are paid on
the basis of units produced not the time taken.

 Health hazards: In order to get more units produce and more wages paid workers try
to complete their job in eagerness and take themselves to the extreme level of
exhaustion. In this method health of the workers suffers to some extent.

 More wastage: The workers to get more output speed up their work which requires
speeding up of machinery. This will lead to wastage of fuel, power, material etc. There
are also chances of breakdowns, accidents, frequent alteration in work in progress
resulting in great loss to the organization.

Wage Structure and Wage Policy

It is a policy that defines the structure of wages to the workers in an organization. Under
this policy guidelines are defined by the government in regard to wages and salary system
of the nation. In an organization there are workers working on different grades and their
wages are different on the basis of their grades. Wage policy is that wage structure in
which various pay scales showing ranges of pay with in each grade are defined.

Pay structure in India generally consists of the following components:

 Basic Wage
 Dearness Allowance
Basic Wage
This is the foundation of the pay structure, it constitutes the payment for the service
rendered by the worker over a period of time. It varies according to the requirements of
the job measured by job evaluation like skills and experience required, difficulty of
work,responsibilities involved etc.

Wage policy in India covers the below statutory wages

Minimum Wage
These wages are fixed by the government. These wages should be enough to provide the
workers the basic amenities of life. Minimum wages are sufficient to sustain and preserve
the efficiency of workers. These wages must be invariably paid to every worker
irrespective of the fact that the company is small or big, profitable or not . If the
organization can not pay the minimum wages they do not have the right to exist.

Minimum Wages should be able to cover the below aspects as per the Statutory standards
laid down by the government.

 Standard working class family should be assumed to comprise of three consumption

units for one earner.
 Minimum food requirements should be calculated as per the standards laid by the
government.
 Clothing requirements should be estimated as per the statutory parameters
 Rent component should be accommodated.
 Lighting, fuel and other expenditure should constitute 20% of the total minimum
wage.
Fair Wage
These wages are more than the minimum wages but less than the living wages. These
wages are fixed by the employers. According to the Committee on Fair Wages – “ while
the lower limit of the ‘fair wages’ must obviously be the minimum wage, the upper limit
is set by the capacity of the industry to pay. Between these two limits, the actual wages
will depend on:

 The productivity of labour.

 The prevailing rates of wages.
 The level of the national income and its distribution.
 The place of the industry in the economy of the country.
Living Wage
The amount of living wages is proposed by the government and the highest of all. It aims
at maintaining the wellbeing of the workers in a particular society by providing him
certain amenities up and above the necessities of life. It focuses on improving the
standard of life of the employees

According to the Fair Wages Committee, “the living wage should enable the male earner
to provide for himself and his family not merely the bare essentials of food, clothing and
shelter but also a measure of frugal comfort including education for children, protection
against ill-health, requirements of essential social needs and measure of insurance against
the more important misfortunes including old age.”

Dearness Allowance
Dearness Allowance is paid to neutralize the impact of inflation. It is paid as a percentage
of an employee’s basic salary to enable them to face the increasing price of the essential
commodities. Instead of increasing the base pay. It is beneficial to provide dearness
allowance as it is flexible and can fluctuate.
Incentive Plans
Incentives are given to the workers both in monetary and non-monetary terms over and
above their wages. These are provided to them for their exceptional performance over a
period of time. It rewards productive employees in order to motivate them and retain
them in the organization.

This in turn results into increased efficiency and better performance at the workplace.
Some of the incentive Plans are discussed below.

 Individual Based Incentive Plans

 Group or Team Based Incentive Plans
 Organization Wide Incentive Plan
Individual Based Incentive Plans
Taylor’s Differential Piece Rate System
This plan was defined by F. W. Taylor. He was the father of scientific management. In
his view, the efficiency of each worker is different form the other. Efficient workers
should be paid greater incentives than inefficient workers.

Time and motion study is used to define the standard task and two different piece rates
are set up. Workers performing more or equal to the standard performance will be given a
high piece rate but the worker failing to reach the standards will be given a low piece
rate.

Merits
 It is simple and easy to understand.
 Efficient workers can be easily identified.
 Inefficient workers can be easily eliminated.
 Time and motion study is used to identify the standard task.
Demerits

 Under this method minimum wages to the workers are not guaranteed.
 Do not provide better quality work.
 Workers are treated in a very unsympathetic way because of their inefficiency.
 Workers are treated as machinery rather than human beings.
Merrick’s differential Piece Rate System
This system is a modification of Taylor’s plan. Under this plan, Merrick defines three-
piece rates. One was for beginners, second for the developing workers and third for the
highly skilled workers. Under this method, workers tries to improve their efficiency.
Every worker wants to reach the third piece rate. These piece rates are defined as follows:

Up to 83% – Ordinary Piece Rate

83 – 100% – 110% of ordinary piece rate
Over 100% – 120% of ordinary piece rate

Merits
 This plan is very flexible.
 It provides wages on the basis of efficiency of the workers ranging from beginner to
highly skilled labor.
Demerits
 Does not guarantee minimum wages to the workers.
 Better quality work is not achieved.
Halsey Plan
This plan was introduced by F. A. Halsey. On the basis of past performance records, a
standard time for completion of work is fixed. Workers who complete their job within the
standard time or more than the standard time are given guaranteed wages. Whereas,
workers who complete their job in less than the standard time is rewarded with the
‘bonus’, which is calculated on the basis of time saved.

Merits
 Easy to understand.
 Motivates the workers.
 Extra wages can be earned by efficient workers.
Demerits
 Only 50% of the wages paid for the time saved.
 Attention is not paid on the quality of the work.
Rowan Plan
It was introduced after Halsey plan. It is a modified form of the Halsey plan and was
given by James Rowan. In this plan, a standard time is determined in advance, and
minimum wages are guaranteed to every worker, this helps the slow workers and they are
not made to suffer.To further reward the efficient workers’ bonus is calculated as that
proportion of wages which is the time saved based on standard time.

Merits
 This plan is good for beginners
 Workers are not forced to complete the work speedily
Demerits
 Lower incentives at higher production level.
 Efficient and inefficient workers cannot be identified.
Gantt task and Bonus Plan
This system guarantees minimum wages on the basis of time. Fixed time rates are
guaranteed. Every worker gets the minimum wages according to this plan, but if any
worker completes his task in less than the standard time or stipulated time, he gets a hike
in his wage rate. This hike is given to him in the form of a percentage bonus.

Merits
 This plan ensures minimum wages to all the workers.
 Workers feel more secured under this plan.
 Incentives are also provide to the efficient workers.
 Proper planning and supervision is done under this plan.
Demerits
 Due to very high standards very few workers earn bonus which leads to
dissatisfaction.
 Very focused attention is needed to be paid during fixation of time rate and standard
time.
Bedeaux Plan
In this plan B’s represent the standard minutes for every operation. A worker gets his
wages as and when he completes his job in standard time. If his actual performance
exceeds standard performance in terms of B’s then out of his total wages 75% of wages
of time saved is paid to the worker as a bonus and 25% is given to the foreman. This is
done considering the fact that a worker cannot show good results without co-operation
and proper direction from the foreman.

Merits
 Higher productivity from workers.
 Since foreman receives 25% of the increased wages, he is motivated to get higher
productivity from the workers.
 Minimum wages are always guaranteed even if the work is not completed in stipulated
time.
Demerits
 Incentives are not easy to calculate under this plan and workers find it difficult to
understand.
 It might leave the workers disappointed if the bonus is shared by the foreman.

Group or Team Based Incentive Plans

There are certain industries and work processes where the output from each individual
cannot be accurately measured for e.g the electrical industry etc. Hence in such cases the
group or team output is measured and a group or team-based incentive plan is applied.

Team-based incentive plans follow the same principles as the individual incentive plans
discussed above, the only difference is that here it is paid to a group of people for the
output they produce.
Amongst all the individual incentive plans the piece-work system is the most commonly
used in the team based incentive plan. The total incentive awarded to the group may be
divided amongst its members equally if the skills possessed and the contribution made by
each member is similar. If the members of the group possess unequal skills and the
contribution made by each individual varies then the sharing of incentive will be divided
in proportion to their individual contribution or a specified percentage.

Merits
 It encourages cooperation and team spirit amongst the employees.
 Less supervision required due to motivated teams.
 Since they work collectively for a common goal there is reduced absenteeism in the
team.
 The members in the team are more helpful towards each other as the better
performance of the other will lead to higher incentives for all , hence the need of
training is less.
Demerits
 Due to difference in the efficiency levels of the workers an efficient worker may have
to suffer due to the inefficiency of the other.
 Unhealthy competition and relations between the members of the group may defeat the
very purpose of team work.
Organization Wide Incentive Plan
When the organization is growing and is successfully running a profitable business it can
decide to adopt organization-wide incentive plans. These incentive plans not only instil a
feeling of belongingness in the minds of the employees, but it also increases their
commitment and loyalty towards the organization.

Below are the three types of organization-wide incentive plans:

Profit Sharing
In this plan, a particular portion of net profit is agreed to be paid to the deserving
employees. On the basis of certain service qualifications and service conditions, the
employers agree to pay a certain portion of their profits amongst the deserving
employees.. This profit can be shared in the form of cash or shares.

It leads to instilling a sense of belongingness in the employees and increases their loyalty
and commitment towards the organization. It starts a cycle of improved organisational
performance. It increases the motivation levels of the employees and they work more
efficiently producing better results which in turn increases the shares of the workers.
Hence it benefits both the organization and the employees simultaneously.

Gain Sharing
Under this plan, a comparison of a standard performance is made with the actual
productivity in a given time period. When the productivity exceeds the standard set, then
a portion of the savings made is shared with the employees.

These gains are shared on a monthly or quarterly basis on the extent to which the
standard is exceeded. Since it is spread across a large number of employees it helps in
inculcating team spirit and cooperation amongst the employees as they all work towards a
common goal.

Employee Stock Ownership Plan

This plan was originated in the U.S.A but has still not gained so much popularity in India.
Under this plan, eligible employees are allowed to buy the shares of a company at a
reduced rate. The eligibility may depend on the duration of service in the organization,
the position held in the organization etc.

The employees can pay for the shares in instalments or they can be paid in advance as
deductions from their salary every month. Since they become the part owners of the
company they contribute their best and then enjoy the resultant gains in terms of
increased share value held by them.

Bonus
Bonus is the extra payment or incentives made to the workers over and above their
standard wages after a specific time period. Bonus is given in the form of gifts to
employees or workers. Many firms declare bonuses at some special time period like at
the time of Diwali, at the time of New Year or any other special occasion. It reflects the
desire of the employer to share with his workers the surplus generated with common
efforts.

Payment of Bonus Act, 1965

This act was introduced to provide the payment of bonus to the persons who are
employed in a certain establishment on the basis of profit or productivity and the matters
concerned there with.

Applicability
 The act is applied to every factory which is established under the Factories Act, 1948.
 The act is also applied to all those establishments where 20 or more persons are
employed on any day in an accounting year.

 Any employee receiving salary or wages upto 10,000 p.m. (for calculation purpose Rs
3500 p.m maximum will be taken) is eligible for Bonus.

 The employee should have worked in an establishment for not less than 30 days in an
accounting year.

 An employee is entitled to get maximum 20% and minimum 8.33% of bonus of salary
and wages.

 An employee will not be entitled to get the bonus if he is dismissed from his job
because of reasons like conduct of fraud, misbehaving in the office premises, theft etc.
Mode & Time of Payment
Bonus will be paid in cash and within 8 months from the close of an accounting year.
Bonus is Payable only annually.

Fringe Benefits
Fringe benefits refers to various extra benefits such as gratuity, medical care, accident
relief, health & group insurance, canteen facilities, recreational facilities etc that are
provided up and above the compensation paid in terms of salaries.

Importance of Fringe Benefits

Fringe Benefits act as a very necessary motivational tool, It helps to retain the employees
by increasing the sense of commitment and loyalty in them. Below are the factors that
make fringe benefits an essential part of compensation planning.

 Motivate the Employees

 Enhance Employee Performance
 Employee Demands
 Trade Union Demands
 Improve Relations
 Provide Social Security
Motivate the Employees
when employees are provided with the benefits in addition to their standard wages and
salary, they feel motivated and work with more dedication for the organization. In order
to get the full efficiency of workers to be utilized it becomes very necessary to keep them
motivated.

Enhance Employee Performance

Benefits provided to the employees also helps in increasing the productivity of the
organization. Employees will put their best efforts when they know their performance
will be viewed and they will be paid more for their good performance. They also feel the
drive to perform to their maximum potential when they feel that they are being taken care
of by the organization.

Employee Demands
Sometimes in an organization employees demand a very high salary if they are not paid
any type of essential benefits. In that case, also fringe benefits should be paid so that they
can raise their standard of living and feel satisfied with the organization. This will make
them stay for long in an organization.

Trade Union Demands

If the trade unions of an organization are very powerful it becomes difficult for the
company to deal with them. They can demand unnecessary hikes and if their demands are
ignored they can go for strikes and lockouts which will affect the reputation of the
company. In that case, it is very important to satisfy the trade unions of the company and
provide such benefits from time to time.

Improve Relations
Fringe benefits will also help in improving relations in the organization. It helps in
harmonizing the relationship between employer and employee, employee and
management and employer and management also. Better relationships will lead to better
working of the organization. In this way objectives of the organization can be achieved
efficiently and effectively.

Provide Social Security

Employee security is a very important factor, which needs to be considered in every
organization. If employees are not secured within an organization, they can at any time
switch to other organizations. With such benefits, employees will feel more motivated &
connected with the organization.

Types of Fringe Benefits

Mentioned below are the various types of Fringe benefits that can be provided to the
employees of an organization.

 Payment for Time not Worked

 Employee Security
 Retrenchment Compensation
 Lay off Compensation
 Safety and Health
 Health Benefits
 Welfare and Recreational Facilities
 Old age and Retirement Benefits
Payment for Time not Worked
This is a sort of benefit where the employee’s salary is not deducted on his absence from
work.Sick leave pay, vacation pay, paid rest and relief time, paid lunch periods, grievance
time, bargaining time, travel time, paid holidays, less hours worked all these kinds of
benefits are provided under this category.

Employee Security
Confirmation of job to employees gives the big relief of security. Employees should be
provided with job security. Security should also be provided to employees’ family
members. Minimum and continuous wages or salaries should be assured to secure their
job.

Retrenchment Compensation
The non-seasonal industrial establishments employing 50 or more workers have to give
one month’s notice or one month’s wages to all the workers who are retrenched after one
year’s continuous service.

Lay off Compensation

Employees in case of lay off will be entitled to get 50% of the total of the basic wage and
dearness allowance for the period of their lay off except for weekly holidays.

Safety and Health

It is the responsibility of the employer to ensure better working conditions to the worker
and protect their health. Safety measures should also be provided. Few of these measures
include cleanliness, disposal of waste, lighting, drinking water, clean urinals, and
spittoons, fencing of machinery or near machinery in motion, easing of new machinery,
pressure plant, the safety of buildings and machinery etc.

Health Benefits
The employees are offered medical cover schemes which they can use in times of their ill
health . It is also extended at times to the dependent family members. These benefits
include sickness benefit, medical benefit, temporary disablement benefit, permanent
disablement benefit, maternity benefit etc.
Welfare and Recreational Facilities
Since long hours of work may become very monotonous and stressful the employees
should be provided welfare and recreational facilities that can be easily approached and
enjoyed at a reasonable price such as canteens, consumer stores, credit societies, housing,
legal aid, employee counselling, welfare organizations, holiday homes, educational
facilities, transportation, parties and picnics.

Old age and Retirement Benefits

Benefits covered under this plan are provident fund, pension. deposit linked insurance,
gratuity, medical benefits, deferred income plans, travelling concession to retired
employees etc.