COMPENSATION AND BENEFIT

MANAGEMENT
UNIT 1
Compensation – Meaning and Concept

Compensation is the reward that the employees receive in return for the work performed and
services rendered by them to the organization. Compensation includes monetary payments
like bonuses, profit sharing, overtime pay, recognition rewards and sales commission, etc.,
as well as nonmonetary perks like a company-paid car, company-paid housing and stock
opportunities and so on.

Apart from the basic financial pay the employees receive paid vacations, sick leave,
holidays and medical insurance, maternity leave, free travel facility, retirement benefits,
etc., and these are called benefits.

compensation is a systematic approach of providing monetary value to employees in

exchange for work performed. It may help to achieve several purposes, such as recruitment,
job performance and job satisfaction. It is also defined as the package of quantifiable
rewards an employee receives for her or his labour.

Concept of Compensation Management:

Compensation is a systematic approach to providing monetary value to employees in

exchange for work performed. It is a tool used by management for a variety of purposes to
further the existence of the company. It may be adjusted according to the business needs,
goals and available resources.

i. Individual worth – The value of a job is related to similar jobs of the company or
the competitors but the value of an individual to perform that job may vary
according to his/her skill/knowledge, expertise and more so his behaviour on the
job and with associating persons.

ii. Cost to Company – Human resource is considered as an asset to the organisation.

The investment on this asset by the company with respect to skill, competence or
expertise is a cost to the company and the employer’s intention is to make aware
the employees that he/she has to ensure return on this investment through his/her
consistent and continuous performance.
 iii. Flexible Compensation Package – Employees are being offered compensation
structure with numbers of benefits to choose to plan tax plan and provide freedom
to choose to get maximum benefit.

Goals of Compensation Management

1. Acquire Qualified Personnel: Compensation needs to be high enough to attract
applicants. Pay levels must respond to the supply and demand of workers in the labour
market since employers compete for workers.

2. Retain Current Employees: Employees may quit when compensation levels are not
competitive, resulting in higher turnover.

3. 3. Ensure Equity: Compensation management strives for internal and external equity.
Internal equity requires that pay be related to the relative worth of a job so that similar
jobs get similar pay
.
4. Reward Desired Behaviour: Pay should reinforce desired behaviors and act as
an incentive for those behaviors to occur in the future.
Effective compensation plans reward performance, loyalty, experience, responsibility,
and other behavior.

5. Control Costs: A rational compensation system helps the organization obtain and retain
workers at a reasonable cost. Without effective compensation management, workers
could be overpaid or underpaid.

6. Comply with Legal Regulations: A sound wage and salary system considers the legal
challenges imposed by the government and ensures the employer’s compliance.

7. Facilitate Understanding: The compensation management system should be easily

understood by human resource specialists, operating managers, and employees.

8. Further Administrative Efficiency: Wage and salary programs should be designed to

be managed efficiently, making optimal use of the human resource information system,
although this objective should be a secondary consideration compared with other
objectives.

Theories of Compensation
1. Reinforcement and Expectancy Theory: This theory is based on the assumption that, the
reward-earning behavior is likely to be repeated, i.e. an employee would do the same thing again
for which he was acknowledged once.
 Similarly, in the case of Expectancy Theory, given by Vroom, the employee is motivated to do a
particular thing for which he is sure or is expected that performance will be followed by a
definite reward or an outcome.

2. Equity Theory: According to this theory, there should be equity or the uniformity in the pay
structure of an employee’s remuneration. If the employee feels he is not being paid fairly for the
amount of work he does in a day will result in lower productivity, increased turnover and high
absenteeism. The remuneration system should comply with three types of equity:
2.1 Internal Equity: The employee perceives the fairness in different pay for different jobs based
on the nature of work involved, i.e. he must feel that pay differentials among the jobs are fair.

2.2 External Equity: The employee should feel the fairness in what they are being paid is in line
with what other players in the same industry are paying to their employees for the same kind of
job.

2.3: Individual Equity: The employee perceives the pay differentials among the individuals who
are performing the same kind of a job and within the same organization. Usually, an individual
with more experience gets high remuneration as compared to the fresher irrespective of the
nature of a job.

3. Agency Theory: This theory states that both the employer and the employee are the stakeholders
of the company, and the remuneration paid to the employee is the agency cost. The employee
will try to get an increased agency cost whereas the employer will try to minimize it. Hence, the
remuneration should be decided in such a way that the interest of both the parties can be aligned.

Compensation strategy: Inter-Industry Wage Differentials

A compensation strategy is a critical component of an organization's overall human resources
strategy. It outlines how an organization plans to attract, retain, and motivate its employees
through various forms of compensation, including wages and benefits. Inter and intra-industry
wage differentials are important considerations when developing a compensation strategy.

1. **Inter-Industry Wage Differentials:**

Inter-industry wage differentials refer to the variations in compensation levels between

different industries or sectors of the economy. Several factors can influence these differentials:

- **Industry Demand:** Industries with high demand for specific skills or expertise may offer
higher wages to attract and retain talent. For example, technology companies often pay higher
salaries to software engineers compared to industries with less demand for these skills.
 - **Profitability:** More profitable industries generally have greater resources to offer
competitive compensation packages. For example, the finance and healthcare sectors are often
associated with higher wages due to their profitability.

- **Regulation:** Some industries, such as healthcare and aviation, have strict regulatory
requirements that can drive up labor costs. Compliance with regulations can be expensive and
may be reflected in higher wages.

- **Geographical Location:** Geographic disparities in the cost of living can lead to wage
differentials. Industries located in high-cost-of-living areas may offer higher wages to
compensate for the increased expenses employees face.

- **Unionization:** The presence of labor unions can influence wage differentials, as unions
negotiate for higher wages and better benefits for their members.

- **Education and Skill Requirements:** Industries that require specialized education,

training, or skills may offer higher wages to attract qualified workers. For instance, the IT sector
often pays well for individuals with in-demand technical skills.

2. **Intra-Industry Wage Differentials:**

Intra-industry wage differentials refer to variations in compensation within the same industry
or company. These differentials can be influenced by several factors:

- **Experience and Tenure:** Employees with more experience or longer tenure within the
same organization often receive higher wages. This is typically a reward for loyalty and the
accumulation of knowledge and skills.

- **Performance-Based Pay:** Companies often have performance-based pay structures that

reward high-performing employees with higher wages, bonuses, or other incentives.

- **Job Roles and Responsibilities:** Different job roles within the same industry may have
varying levels of responsibility, skill requirements, and market demand. Consequently, wages
may differ accordingly.
 - **Location:** Even within the same company or industry, wage differentials can exist based
on geographic location. For example, employees in high-cost-of-living areas may receive higher
salaries than their counterparts in lower-cost regions.

- **Education and Training:** Employees with higher levels of education or specialized

training may earn more within the same industry, as they bring valuable skills and knowledge to
their roles.

Developing an effective compensation strategy involves analyzing both inter and intra-industry
wage differentials. Organizations need to consider market benchmarks, industry standards, and
their own financial capabilities to ensure their compensation packages are competitive and
aligned with their business goals. Additionally, it's important to regularly review and adjust
compensation strategies to remain competitive in the job market and retain top talent.

Components of compensation
Compensation packages for employees typically consist of several components that collectively
make up their total compensation. These components can vary depending on the organization,
industry, and the specific job role, but here are the most common components of compensation:

1. **Base Salary/Wages:**

- Base salary or wages represent the fixed amount of money an employee earns regularly,
typically on an hourly, weekly, bi-weekly, or monthly basis. It forms the core of an employee's
compensation.

2. **Bonuses:**

- Bonuses are typically one-time payments made to employees based on their performance,
achievement of specific goals, or other criteria. They can be discretionary (given at the
employer's discretion) or tied to predetermined metrics.

3. **Commissions:**

- Commissions are a form of variable pay, often used in sales roles, where employees earn a
percentage of the sales they generate. The more they sell, the more they earn.

4. **Profit Sharing:**

- Profit-sharing plans distribute a portion of a company's profits among its employees. The
amount can vary from year to year based on the company's performance.
5. **Stock Options and Equity Grants:**

- Some employees, especially in technology and startup sectors, may receive stock options or
equity grants as part of their compensation package. This gives them the opportunity to purchase
company stock at a specified price or receive shares.

6. **Benefits:**

- Employee benefits include non-monetary forms of compensation, such as health insurance,

dental insurance, vision insurance, life insurance, disability insurance, and retirement plans (e.g.,
401(k) or pension plans).

7. **Paid Time Off (PTO):**

- PTO encompasses various forms of paid leave, including vacation days, holidays, sick days,
and personal days. It allows employees to take time off while still receiving their regular pay.

8. **Retirement Contributions:**

- Employers may make contributions to retirement savings accounts on behalf of their

employees, such as matching contributions to a 401(k) plan.

9. **Tuition Reimbursement:**

- Some companies offer tuition reimbursement programs to support employees' educational

pursuits by covering a portion or all of their educational expenses.

10. **Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs):**

- These accounts allow employees to set aside pre-tax dollars for eligible medical expenses,
dependent care, or other qualified expenses.

11. **Employee Assistance Programs (EAPs):**

- EAPs provide employees with access to counseling, mental health support, and resources to
help them address personal and work-related challenges.

12. **Severance Pay:**

- In cases of employment termination, organizations may provide severance pay, which is a

financial package to assist departing employees during their transition.

13. **Relocation Assistance:**

- Companies may offer financial assistance to employees who need to relocate for work,
covering expenses like moving costs and temporary housing.
14. **Wellness Programs:**

- Wellness programs promote employees' physical and mental well-being, offering resources
like gym memberships, wellness challenges, and health screenings.

15. **Stock Purchase Plans:**

- Employee stock purchase plans (ESPPs) allow employees to purchase company stock at a
discounted rate, often through payroll deductions.

16. **Performance-Based Awards and Recognition:**

- Organizations may provide awards, plaques, or other forms of recognition to employees for
their outstanding performance or contributions.

17. **Housing or Car Allowances:**

- In some cases, companies provide housing or car allowances as additional forms of

compensation, especially for employees in specific roles or locations.

18. **Professional Development:**

- Employers may invest in their employees' professional growth by offering training,

workshops, conferences, or educational opportunities.

It's essential for organizations to tailor their compensation packages to attract and retain talent,
align with their industry and location, and meet the diverse needs and preferences of their
workforce. A well-structured compensation package can be a key factor in employee satisfaction,
motivation, and retention.

Fringe benefits and supplementary compensation

"Fringe benefits" and "supplementary compensation" are two terms often used to describe
additional forms of compensation and benefits that employers provide to their employees,
beyond their base salary or wages. These terms are sometimes used interchangeably, but they can
have slightly different connotations depending on the context. Here's an explanation of each:

1. **Fringe Benefits:**
 - **Definition:** Fringe benefits, often referred to as "perks," are non-monetary forms of
compensation provided by employers to their employees. These benefits are typically in addition
to an employee's base salary and are meant to enhance their overall compensation package.
Fringe benefits can take various forms, and their availability can vary from one employer to
another. Common fringe benefits include:

- **Health Insurance:** Coverage for medical, dental, and vision expenses.

- **Retirement Plans:** Such as 401(k) plans with employer matching contributions.

- **Paid Time Off (PTO):** Including vacation days, sick leave, and holidays.

- **Life Insurance:** Coverage that pays out a benefit to the employee's beneficiaries in case
of death.

- **Disability Insurance:** Providing income protection in case of disability.

- **Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs):** Pre-tax
accounts for medical expenses.

- **Employee Assistance Programs (EAPs):** Offering counseling and support services.

- **Wellness Programs:** Promoting employee health through initiatives like gym

memberships or wellness challenges.

- **Transportation Benefits:** Subsidies or allowances for commuting or parking.

- **Education Assistance:** Reimbursement or support for continuing education.

- **Childcare or Dependent Care Assistance:** Help with childcare expenses.

- **Meal and Refreshment Benefits:** On-site meals, snacks, or cafeteria discounts.

- **Employee Discounts:** Discounts on products or services offered by the employer.

- **Purpose:** Fringe benefits serve multiple purposes, including attracting and retaining
employees, promoting employee well-being, and complying with legal requirements, such as
providing health insurance under the Affordable Care Act (ACA) in the United States.
2. **Supplementary Compensation:**
- **Definition:** Supplementary compensation refers to additional payments or bonuses that
employees receive on top of their regular salary or wages. These payments are often tied to
specific performance achievements, projects, or other criteria. Supplementary compensation can
be variable and is usually not guaranteed unless specified in a contract or agreement. Examples
of supplementary compensation include:

- **Performance Bonuses:** One-time or periodic bonuses based on individual or team

performance.

- **Sales Commissions:** Payments to sales representatives based on the sales they generate.

- **Profit Sharing:** Sharing a portion of company profits with employees.

- **Stock Options or Grants:** Providing employees with the option to purchase company
stock or granting them actual shares based on performance.

- **Incentive Pay:** Additional pay for achieving certain goals or targets.

- **Retention Bonuses:** Payments made to employees to encourage them to stay with the
company for a specified period.

- **Purpose:** Supplementary compensation is typically used to incentivize employees to

perform at a high level, achieve specific objectives, or reward them for outstanding performance.
It can vary widely based on an employee's role and performance.

In summary, fringe benefits are non-monetary benefits that enhance an employee's compensation
package, while supplementary compensation refers to additional payments or bonuses that
employees receive based on performance or other criteria. Both play important roles in
attracting, retaining, and motivating employees, and their availability and types can vary
depending on the employer's policies and practices.

Bonuses-concept and methods of calculation

The term "bonus" typically refers to an extra amount of money or compensation provided to
employees or individuals as a reward for their performance, achievements, or contributions.
Bonuses can take various forms and are used by organizations to motivate employees,
acknowledge their efforts, and align their interests with the goals of the company. Below, I'll
explain the concept of bonuses and some common methods of calculation:
**Concept of Bonuses:**
Bonuses are a form of variable compensation that is typically in addition to an employee's
regular salary or wages. They are used to incentivize specific behaviors, such as achieving
performance targets, meeting project deadlines, or contributing to the company's overall success.
Bonuses can vary in size and structure, and they are often used in both corporate and non-
corporate settings.

**Methods of Bonus Calculation:**

The methods for calculating bonuses can vary widely depending on the organization's goals,
industry, and the specific performance metrics they want to reward. Here are some common
methods:

1. **Performance-Based Bonuses:**

- **Individual Performance:** This approach assesses an employee's individual performance

against predetermined goals and metrics. The bonus amount is usually tied to the achievement of
specific targets, such as sales quotas, project milestones, or customer satisfaction scores.

- **Team Performance:** In some cases, bonuses are based on the collective performance of a
team or department. This encourages collaboration and teamwork.

2. **Profit-Sharing Bonuses:**

- **Profit-Sharing:** Employees may receive a share of the company's profits as a bonus. This
can be calculated as a percentage of profits, with each employee's bonus determined based on
their role and contribution to the organization's success.

3. **Annual or Holiday Bonuses:**

- **Fixed Amount:** Some companies provide employees with a fixed bonus amount annually
or during holidays regardless of individual performance or profits. This type of bonus is often
used as a gesture of goodwill and can help boost employee morale.
4. **Discretionary Bonuses:**

- **Managerial Discretion:** In some cases, managers have the discretion to distribute

bonuses based on their judgment of an employee's contributions. This method is less formulaic
and relies on subjective assessments.

5. **Stock Options and Equity Bonuses:**

- **Stock Options:** Employees may receive stock options or equity as a form of bonus. The
value of these options can be tied to the company's stock performance.

6. **Retention Bonuses:**

- **Retention Incentives:** To retain key employees, companies may offer retention bonuses.
These are typically one-time payments made to employees who commit to staying with the
company for a specified period.

7. **Profit Margin Bonuses:**

- **Margin-Based:** In industries like sales, employees may receive bonuses based on the
profit margins of the products or services they sell. Higher-margin sales result in larger bonuses.

8. **Customer or Client Bonuses:**

- **Client Acquisition:** In client-facing roles, employees may receive bonuses based on the
acquisition of new clients or the retention of existing ones.

9. **Performance Scorecards:**

- **Balanced Scorecard:** Organizations may use balanced scorecards that consider various
performance metrics, such as financial, customer, internal processes, and learning and growth.
Bonuses can then be tied to achieving specific scorecard targets.
It's important to note that bonus programs should be designed carefully to align with the
organization's strategic objectives and encourage desired behaviors. They should also be
communicated transparently to employees to ensure clarity and fairness in the bonus calculation
process. Additionally, legal and tax considerations may come into play, especially when offering
equity-based or profit-sharing bonuses, so it's crucial to consult with financial and legal experts
when designing and implementing bonus plans.

The Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 is an Indian labor law that governs the payment of
bonuses to employees working in certain establishments. The Act was enacted to provide
for the payment of a bonus to employees based on profits or productivity and to ensure that
employees receive a share in the prosperity of the establishment. Here are some key
features and provisions of the Payment of Bonus Act, 1965:

1. **Applicability:** The Act applies to establishments employing 20 or more employees.

However, establishments in certain industries, such as railways and air transport services, are
covered regardless of the number of employees.

2. **Eligibility:** All employees, including temporary and contract workers, who have worked
for a minimum of 30 working days in an accounting year, are eligible for a bonus under the Act.

3. **Calculation of Bonus:** The Act prescribes a method for calculating the bonus payable to
eligible employees. The bonus is typically calculated as a percentage of an employee's salary or
wage, subject to a maximum limit. The percentage can vary from year to year based on the
available surplus and other factors.

4. **Allocable Surplus:** The Act defines the term "allocable surplus," which is the amount
available for distribution as a bonus. It includes profits, reserves, and certain other amounts, but
deducts certain specified items.

5. **Minimum and Maximum Bonus:** The Act specifies that the minimum bonus payable is
8.33% of an employee's salary or wage, and the maximum bonus is 20%. However, if the
allocable surplus is insufficient to pay the minimum bonus, the employer is still required to pay a
minimum bonus.
6. **Set-off and Set-on:** Employers are allowed to set-off against the amount of bonus payable
any amount paid as an interim bonus during the accounting year or any statutory bonus paid
under another law.

7. **Dispute Resolution:** The Act provides for the establishment of the Central Advisory
Board and State Advisory Boards to advise the appropriate government on various matters
related to the Act. It also establishes a mechanism for resolving disputes related to bonus
payments.

8. **Maintenance of Records:** Employers are required to maintain records and registers related
to bonus payments and to submit annual returns to the appropriate authority.

9. **Penalties:** The Act includes provisions for penalties in case of non-compliance with its
provisions. Penalties may include fines and imprisonment.

10. **Exemptions:** The appropriate government can exempt certain classes of employees or
establishments from the provisions of the Act under certain conditions.

It's important to note that the Payment of Bonus Act, 1965 is subject to amendments, and the
specific rules and regulations may vary from state to state in India. Employers and employees are
advised to refer to the latest version of the Act and consult with legal experts or government
authorities for precise information and compliance.
Incentive Schemes
Incentive schemes are programs or strategies implemented by organizations to motivate and
reward employees, teams, or individuals for achieving specific goals, improving performance, or
demonstrating desired behaviors. These schemes are designed to align the interests of employees
with those of the organization and can take various forms. Here are some common types of
incentive schemes:

1. **Financial Incentives:**

- **Bonuses:** One-time or periodic cash rewards based on individual or team performance.

- **Commission:** Salespeople often earn a percentage of the sales they generate.

- **Profit Sharing:** Employees receive a share of the company's profits, typically based on a
predetermined formula.

2. **Stock Options and Equity-Based Incentives:**

- **Stock Options:** Employees have the option to purchase company stock at a

predetermined price.

- **Restricted Stock Units (RSUs):** Employees are granted actual shares of the company's
stock, typically with restrictions on when they can sell them.

3. **Performance-Based Incentives:**

- **Merit Pay:** Salary increases based on individual performance assessments.

- **Sales Incentives:** Rewards for achieving sales targets or quotas.

- **Productivity Bonuses:** Rewards for meeting or exceeding productivity metrics.

4. **Recognition and Non-Financial Incentives:**

- **Employee of the Month/Quarter:** Recognizing outstanding employees with awards or

certificates.
 - **Employee Appreciation Events:** Organizing social events, outings, or team-building
activities.

- **Flexible Work Arrangements:** Offering flexible hours, remote work options, or extra
time off.

5. **Profit-Linked Incentives:**

- **Gainsharing:** Employees receive a share of cost savings or productivity improvements

they help generate.

- **Employee Stock Ownership Plans (ESOPs):** Employees become partial owners of the
company, and their performance affects the company's stock value.

6. **Long-Term Incentive Plans:**

- **Retirement Plans:** Contributions or matches to employees' retirement accounts (e.g.,

401(k) plans).

- **Pension Plans:** Defined benefit plans that provide retirement income based on years of
service and salary history.

7. **Team-Based Incentives:**

- **Group Bonuses:** Rewards are given to teams or departments for achieving collective
goals.

- **Team Competitions:** Encouraging friendly competition among teams with rewards for
the best performance.

8. **Employee Stock Purchase Plans (ESPPs):** Employees have the opportunity to buy
company stock at a discounted rate, often through payroll deductions.

9. **Safety and Wellness Incentives:** Encouraging safe and healthy behaviors through rewards
and bonuses for maintaining a safe work environment or participating in wellness programs.
Incentive schemes should be carefully designed to align with the organization's objectives and
values. They should also consider fairness, transparency, and the potential for unintended
consequences, such as employees focusing solely on the incentivized goals to the detriment of
other important aspects of their work. Additionally, the effectiveness of incentive schemes
should be regularly evaluated and adjusted as needed to ensure they continue to drive desired
behaviors and outcomes.

Incentive Plans: Individual and Group Incentive

Schemes
I) Individual Incentive Plan:

Reward systems tied to the performance of individual employees are known as individual

incentive plans. These plans depend on category of workers for which they are designed. Under

this plan mostly a certain pay rate is guaranteed and the rewards represent additional

compensation.

Under individual wage incentive plans three categories of personnel’s can be included. They are

Production workers or blue dollar workers, white collar workers such as salesman, and

managerial personnel’s. All these categories of employees have different needs, they differ in

qualification and type of work, and therefore separate plans are designed for them.

Incentive Plans for Production Workers or Blue Collar Workers:

There are three categories of these plans:

(1) Incentive is proportional to extra output.

(2) Incentive is proportionately at lower rate than increase in output.

(3) Incentive is higher proportionately to rate of increase in output.

Following are the time based incentive plans:

Halsey Premium Plan:
This method is invented by Mr. Halsey. Under this payment of time wages to the worker is

assured. He is given an option to work on premium. A standard time for standard output is fixed

on the basis of past experience. If a worker finishes the work earlier than the prescribed time, he

is rewarded by paying him premium or bonus. The premium or bonus is calculated on the basis

of time saved in performing a job. The payment of premium is in addition to the time wages for

which he is entitled even though time is not saved. This plan is a combination of time and piece

wages. A care should be taken that premium rate be moderately fixed.

The following example illustrates this:

Time rate – Re 1.00 per hour

Time allowed – 8 hours

Time taken to complete job – 6 hours

Premium for time saved – 50 percent

The formula for calculation is

Earnings = Time Taken x Time rate + 50 percent of time saved x Time rate

= 6 x 1 + 50/ 100 x 2x 1

=7

So worker’s earning will be Rs. 7/-

Merits:
(1) It assures time wages to the average workers and offers extra payments to the efficient and

hard workers.

(2) It is simple in calculations.

(3) It reduces labour cost due to increased production. Premium is shared by employer.

Demerits:

(1) The standard time for standard work is fixed on the basis of past performance and no new

standard are fixed.

(2) It creates dissatisfaction because employer also shares a part of incentive earned by the

worker.

(3) The management cannot force the worker to produce more after finishing the standard output.

(4) The standard time may not have been properly fixed.

Rowan Plan:
This system of wage incentive plan was invented by James Rowan of Scotland. It is a modified

form of Halsey plan. It is similar to Halsey plan except in the calculation of premium.

The premium is calculated as the ratio of the time saved to the standard time multiplied by the

time taken on the job.

It can be illustrated with the help of example given below:

Time rate – Re 1/- per hour

Time allowed – 8 hours

Time taken to complete the job – 6 hours

Formula for calculation is,

Earnings = Time taken x Time rate + Time Saved / Time Allowed x Time Taken c Time Rate

= 6 x 1 + 2/8 x 6 1

=8.5

So worker’s earnings is Rs. 8.5.

Merits:

(1) The minimum wages are assured in Rowan plan also.

(2) Employers are also benefitted when the efficient workers get bonus.

(3) The efficient workers get bonus at a diminishing rate if they save more than 50 percent of

standard time. This checks them to overstrain themselves and maintain quality.

Demerits:

(1) The worker is discouraged to achieve saving in time more than 50 percent of the standard

time.

(2) The calculation of premium is complex and hence cannot be easily understood by the

workers.

(3) It is not beneficial for the employees having high efficiency.

Emerson Efficiency Bonus Plan:

Under this plan minimum time wage is guaranteed to the workers. Conditions of work are

standardized and a standard output is fixed which is to be completed within a specified period of
time. A worker attaining 66.66 percent efficiency gets a minimum b6nus. The percentage of

bonus goes up with the increased efficiency up to 20 percent of the guaranteed wages.

Merits:

(1) The workers minimum wages are assured. If worker is unable to produce 66.66 of the

standard output, he is not deprived of his daily wage.

(2) There is enough scope for earning more and more for the efficient workers. The plan is

therefore very beneficial to extra ordinary workers.

Demerits:

(1) The drawback of this plan is that it offers bonus to the workers who have efficiency less than

100 percent.

Bedeaux Point Plan:

Like other wage incentive plans the time wage is guaranteed in this plan also. Under this plan the

amount of work done by a worker per minute is taken as standard work unit. This is known as

Bedeaux point ‘B’. The standard time for a job in the number of Bs allowed completing it. Let a

work gets completed in 60 Bs taken as a standard per hour. Now if a worker completes it earlier

or earns more than 60 Bs, gets a premium of 75 percent for the number of Bs i.e. time saved. The

standard work unit B includes the time of work as well as rest.

The example given below illustrates it:

Hourly wage rate ‘R’ = Re 1/-

Standard time allowed to complete the job ‘St’ = 8 hours. Standard number of points for that job

‘Ns’= 8 x 60 = 480

Actual time taken to complete the job T = 6 hours

Employee Benefits and Incentives

Number of B’s earned Nt = 60 x 6 = 360

The formula is,

So worker’s earning is Rs. 7.5

Merits:

(1) Minimum wages are guaranteed to the workers even though they fail to complete the job

within the standard time.

(2) Since one fourth of wages for time saved goes to the foreman, he is induced to get higher

productivity from his workers.

(3) The plan is most suited to the industrial units where worker is expected to perform more than

one jobs because under this plan jobs can be reduced to standard unit B.

Demerits:

(1) Calculations under this plan is complex and therefore is difficult for workers to understand.

(2) Foreman is also entitled for one fourth share of bonus which workers do not like. They feel

cheated.
Production based incentive plans:
Under these plans, a standard of output is determined on scientific basis. The payment of wages

is made on the basis of number of units are produced. Efficient workers are benefitted because

they get wages at higher rates. The following are the production based incentive plans.

Taylor’s Differential Piece Rate Plan:

This plan is devised by F.W. Taylor. Under this system day wages are not guaranteed. Taylor

believed that the standard of performance can be accurately fixed by means of time and motion

studies. After fixing a standard task two different piece rates are prescribed for payment of

wages. Low piece rate to less efficient and high piece rate to more efficient workers. A high

piece rate is payable to the workers whose performance is equal to or more than the standard

prescribed.

A low rate is meant for those who do not achieve the set standard. This system of wage payment

rewards efficient workers and penalize the slow workers by paying at low rate. This plan suits to

those units where direct expenses are more than the cost of labour. The wage plans proposed by

H. L. Gantt and Merrick are improvement over the Taylor’s differential piece rate of wages.

Merits:

(1) This incentive plan provides more earnings to efficient and penalize less efficient workers.

This differential in wage may enthuse less efficient workers to work more.

(2) Total output goes up because every worker wants to improve his efficiency thereby

increasing their own earnings and output.

(3) It is simple and easily understood by the workers.

Demerits:

(1) Minimum wages are not assured by this plan.

(2) The penalty for low efficiency is very high for those whose productivity in less than the set

standard.

(3) This may promote disunity among workers because of dual standards set for efficient and less

efficient workers. This will also lead to jealousy among workers.

Merrick’s Multiple Piece Rate Plan:

Under this plan the workers are paid according to their efficiency in performance of jobs. Three

different piece rates are offered to the workers with different efficiencies thus dividing them into

three different categories.

The workers having efficiency less than 80 percent of the standard are paid as per basic piece

rate prescribed. The workers having efficiency more than 80 percent but less than 100 percent of

the standard gets wages at higher rate by 10 percent. The workers having 100 percent efficiency

get wages at the highest rate of 20 percent in addition. These systems enable the less efficient lot

to improve their efficiency to increase their earning.

Merits:

It is a liberal plan giving further chance for workers to increase their efficiency and to enhance

their earnings. It is a morale booster for hard working and efficient workers.

Demerits:

(1) This plan does not guarantee any minimum wages to the workers.

(2) There is a wide gap between two slabs.

(3) Each worker working below 80 percent of performance gets wages at the same rate. This

creates dissatisfaction among comparatively efficient workers.

Gantt Task and Bonus Plan:
This plan is devised by H.L. Gantt, an associate of EW. Taylor. This plan guarantees the wages

as per fixed time rates to the workers. Standards for output and time for performance of each job

are fixed. If the workers complete the job within standard time or take less time receive wages

for the standard time. In addition to this he gets bonus at the rate ranging from 20 to 50 percent

of the time allowed.

The specialty of this system of wage payment is that the foreman also receives bonus for every

worker under him who receives bonus. So foreman of each department takes special interest to

see that every worker under him reach bonus standard.

Merits:

(1) The minimum wages of workers are guaranteed.

(2) The workers with less ability get minimum wages and with more ability benefit more.

(3) It leads to increase production and lowers costs.

Demerits:

(1) Every worker is assured of wages at the rate of time rate. So less efficient workers also get

wages at time rate. It discourages efficient workers.

(2) The workers unions are displeased with the scheme and they make demand for wages at high

rate of time wage. These are all short term plans meant for production workers. There is few

more incentive plans discussed below.

Halsey – Weir Premium Plan:

It is a modified version of Hasley premium plan introduced by G.J. Weir in England. The

modification is in the percentage of incentive or premium on time saved. This percentage is

33.33 while the rest is shared by the employer.

The 100 percent Premium Plan:

Under this plan the task standard are set on the basis of time study and work sampling. The rates

are expressed in terms of time rather than money e.g.:- 0.30 hour per piece. Workers are paid

according to hourly rate. The plan is similar to straight piece rate plan except for its higher

guaranteed hourly rate and the use of task time as a unit of payment instead price per piece. The

worker gets the full value of time saved. Incentive Plan for White Collar Workers.

Incentives for Sales Personnel:

Sales – pay plans featuring commissions or bonuses based on the number of items or rupee

volume sold can also be considered individual incentive plans. Most of the firms make payment

to their sales staff on the basis of salary cum commission.

Many stockbrokers and real estate agents are paid solely on a commission basis. Advantage of

commission payment is that they are tied to the revenues of the firm. Employees are motivated

towards increasing sales volume. During recession the firm reduces the commission.

The sales staffs are paid in three ways:

(1) Straight Salary method:

According to which they receive monthly salary only. Here there is no linkage of incentive for

hard work.

(2) Straight Commission Basis:

Sales personnel receive only commission on sales volume. Here the salesman will sell those

items which are of high value.

(3) Combination of Salary and Commission:

Under this scheme sales personnel are paid a fixed salary and commission as an incentive based

on sales volume.

Incentives for Managerial and Professional Employees:

Performance bonuses of some kind are the most frequently used incentive plans for management

and exempt employees. The rates and other details vary greatly from company to company.

Bonuses are allocated on the basis of manager’s contribution at the year end, on the basis of the

extent to which the person attains the objectives agreed on at the beginning of the year under

M.B.O. scheme, spot bonuses and cash awards are given to the managers and professionals for

extra ordinary performance, stock option is yet another incentive given to them.

(II) Group Incentive Schemes:

It is observed that under individual incentive plans bonus is paid to the worker on the basis of

individual’s performance. This is in the case where the payment of bonus is not affected by the

performance of others. But there are certain situations where it is difficult to measure individual

contribution. Here the performance each worker is affected by others. Under such situations

group incentive bonus schemes are introduced.

Under group incentive plan, bonus is calculated on the collective production of a group of

interdependent workers and distributed among members of group on some agreed terms and

conditions. As far as possible the bonus so earned is distributed equally among the members of

the group.

The basis for distribution is on the following:

(1) Group bonus is distributed equally if all the members of the group possess similar skills.
(2) If the base wage of members is different than bonus may be distributed in proportion to the

basic rates.

(3) Bonus may be paid to the members on a specified percentage depending on the basis of skill,

experience, basic rate of pay of each individual employee.

Following are the group incentive plans:

(1) Priestman’s Plan:

Under this, the starting point is productivity of the group. Standard output is laid for the group.

Minimum wage is assured to a group. The group members are entitled for a bonus if their output

exceeds the set standard. The payment of bonus is made in proportion to the excess of actual

output over the standard output. This plan encourages the feelings of team spirit among the

members of the group. The employees behave as a group and work together to increase output.

This scheme does not consider the individual efficiency of worker. Thus the inefficient member

of the group also get bonus.

(2) Scanlon Plan:

This plan was devised by Joseph Scanlon in 1937, a trade union leader. Under this plan workers

are involved in decision making. They are encouraged to make suggestions regarding cost

reduction and increasing productivity.

They are involved in the various screening committees in the plant to find out ways and means to

judge the cost reduction suggestions. In this way employees work with their supervisors,

managers and other fellow employees on various screening committees.

If the suggestions are successfully implemented, employees get share in the savings. To facilitate

workers’ participation, there are departmental committees consisting of representative of workers

and management.
Periodical meetings of these committees are held to discuss the problems faced by the workers.

They recommend measures to increase production. It promotes healthy labour relations,

minimizes supervision, increases efficiency and sense of partnership among workers.

This plan suffers from certain drawbacks such as the inefficient worker gets rewarded because of

better performance of the group. It is also true that the suggestions of the employees are not

given due consideration by the management.

(3) Profit Sharing:

Under the scheme of profit sharing a certain percentage of profit is distributed at fixed ratio

among some categories of employees annually. According to Henry R. Seager, “profit sharing is

an agreement freely entered into by which the employees receive a share, fixed in advance, of the

profits.”

The decision of sharing of profit to the employees is informed in advance. The basis of profit

sharing is decided on the length of service or the number of working days in a year or the wages

earned by a worker during a year.

It is direct incentive to a worker. The payment of profit can be made in cash or it can be

deposited in the account of provident fund of an employee. The advantage of this scheme is that

workers develop common concern for the development and progress of the undertaking.

Profit sharing is of two types:

(1) Current Profit Sharing:

It is the one directly paid to the employee annually or six monthly.

(2) Deferred Profit Sharing:

It is the one which is not paid directly to the employee but credited in his provident fund account

or to pension account or sometimes paid in the form of bonus shares.

Merits:

(1) Creation of industrial peace because workers are satisfied as they are getting an additional

amount besides their wages.

(3) The bonus is paid only when the amount of profit exceeds the set target. It means bonus is not

part of cost of production.

(4) Profit sharing scheme is based on the basic pay of the employees.

(5) Workers have share in profit and not losses incurred by the employer.

(6) It represents a reward for group effort and group efficiency.

(7) It brings about team spirit among the employees. They developed a sense of belonging to the

organization, reduces training time.

(8) Profit sharing results into equitable distribution of the profit.

Demerits:

(1) Employees are entitled to bonus when company earns profit. They do not get bonus when

company recur losses.

(2) It is not possible for newly established company to pay bonus.

(3) There is no distinction between efficient and inefficient employees of the company while

distribution of bonus.

(4) Bonus is paid to the employee once in a year. This does not motivate them for better

performance.
Payment by result
"Payment by results" (PBR) is a compensation or incentive system in which individuals or
organizations are paid based on the outcomes or results they achieve, rather than receiving fixed
salaries or fees. This approach is often used in various contexts, including healthcare, social
services, education, and public sector projects. Payment by results is designed to incentivize
better performance and efficiency by tying financial rewards directly to the achievement of
specific goals or objectives. Here are some key aspects of payment by results:

1. **Outcome-Based Payment:** Payment by results focuses on the actual outcomes or

achievements rather than inputs or efforts. This means that individuals or organizations are
compensated based on the measurable results they produce.

2. **Performance Metrics:** To implement PbR effectively, clear and quantifiable performance

metrics or Key Performance Indicators (KPIs) must be established. These metrics serve as the
basis for determining payments.

3. **Financial Incentives:** The payment structure typically includes financial rewards or

penalties tied to the achievement or non-achievement of specified outcomes. If the desired results
are met or exceeded, individuals or organizations receive higher payments. Conversely, if they
fall short, payments may be reduced or withheld.

4. **Risk-Sharing:** In some cases, PbR arrangements involve risk-sharing between the payer
and the service provider. This means that both parties have a stake in achieving the desired
outcomes, and financial risks and rewards are shared accordingly.

5. **Flexibility and Innovation:** Payment by results can encourage innovative approaches to

problem-solving and service delivery. Service providers may explore new strategies and methods
to improve outcomes and earn higher payments.

6. **Accountability:** PbR promotes accountability as individuals or organizations are held

responsible for achieving results. This can lead to a focus on efficiency and effectiveness in
service delivery.
Examples of Payment by Results in Different Sectors:

- **Healthcare:** In healthcare, PbR is often used to compensate hospitals and healthcare

providers based on patient outcomes and the quality of care provided rather than the number of
procedures performed.

- **Education:** Some education systems implement PbR for schools and teachers, linking
funding to student performance on standardized tests or other educational outcomes.

- **Social Services:** PbR can be used in social services to reward organizations or agencies for
achieving specific social and welfare goals, such as reducing recidivism rates among former
prisoners.

- **Development Projects:** In development and aid projects, donors may use PbR to ensure
that aid recipients meet predefined development targets before disbursing funds.

It's important to note that while payment by results can be a powerful incentive mechanism, it
also comes with challenges. These challenges may include defining appropriate and fair
performance metrics, avoiding unintended consequences, and ensuring that essential services are
not compromised in the pursuit of financial rewards. Effective implementation of PbR requires
careful planning, monitoring, and evaluation to strike the right balance between incentives and
the delivery of quality services.

Competency based compensation

Competency-based compensation, also known as skill-based pay or competency-based pay, is a
compensation system that links an employee's pay to the acquisition, development, and
application of specific competencies, skills, or knowledge. Instead of compensating employees
solely based on their job title, seniority, or other traditional factors, competency-based
compensation rewards individuals for the skills and abilities they possess and use in their roles.
Here are some key aspects of competency-based compensation:
1. **Competency Framework:** To implement competency-based compensation, organizations
typically establish a clear competency framework. This framework outlines the specific skills,
knowledge, and behaviors that are valued within the organization and provides a basis for
determining compensation.

2. **Identifying Competencies:** Competencies can encompass a wide range of skills, including

technical skills, soft skills (e.g., communication, teamwork, leadership), problem-solving
abilities, and industry-specific knowledge. The organization identifies the competencies that are
most relevant to its business objectives and job roles.

3. **Assessment and Measurement:** Employees are assessed or evaluated based on their

proficiency in these competencies. This assessment can be done through performance appraisals,
skills assessments, peer reviews, or other methods. Competency levels are often defined, such as
"basic," "proficient," and "advanced."

4. **Compensation Tiers:** Competency-based compensation systems typically have multiple

compensation tiers or levels associated with different competency levels. As employees acquire
and demonstrate higher levels of competence, they progress through these tiers and receive
corresponding increases in pay.

5. **Training and Development:** Organizations often invest in training and development

programs to help employees acquire and enhance the required competencies. This encourages
employees to continuously improve their skills.

6. **Individualized Compensation:** Compensation is individualized and can vary from person

to person, even within the same job role. It rewards employees for their unique skill sets and
contributions.

7. **Alignment with Business Goals:** Competency-based compensation is closely aligned with

an organization's strategic goals and objectives. Compensation is tied to the competencies that
are most critical for achieving those goals.
Benefits of Competency-Based Compensation:

- **Enhanced Performance:** Employees are motivated to develop and apply relevant

competencies, which can lead to improved job performance and productivity.

- **Skills Development:** It encourages ongoing learning and skills development, benefiting

both employees and the organization.

- **Fairness and Transparency:** Compensation is tied to objective criteria (competencies)

rather than subjective factors, which can enhance fairness and transparency in pay decisions.

- **Retention and Engagement:** It can help retain top talent by rewarding employees for their
expertise and contributions.

Challenges of Competency-Based Compensation:

- **Complexity:** Implementing and managing a competency-based compensation system can

be complex, requiring a well-defined competency framework and assessment processes.

- **Resource Intensive:** Developing and delivering training and development programs can
require significant resources.

- **Subjectivity:** While competency-based compensation aims to be objective, there can still

be subjectivity in competency assessments and pay decisions.

- **Resistance to Change:** Employees may initially resist changes to their compensation

structure, especially if they are used to more traditional pay systems.
Competency-based compensation can be an effective strategy for organizations that value skills
and performance as key drivers of success. However, it should be implemented thoughtfully and
in a way that aligns with the organization's goals and culture. Regular reviews and adjustments to
the competency framework and compensation levels are often necessary to ensure the system
remains relevant and effective.

Equity based compensation

Equity-based compensation, often referred to as stock-based compensation or equity
compensation, is a compensation arrangement in which employees or other individuals receive
ownership shares or the right to acquire shares (equity) in a company as part of their overall
compensation package. Equity-based compensation is commonly used by startups, tech
companies, and publicly traded corporations to attract, retain, and motivate employees. This type
of compensation aligns the interests of employees with those of the company by making them
partial owners. Here are some key elements of equity-based compensation:

1. **Types of Equity-Based Compensation:**

- **Stock Options:** Employees are granted the option to purchase a specified number of
company shares at a predetermined price (the exercise price) within a specified period (the
vesting period).

- **Restricted Stock Units (RSUs):** Employees receive a promise to receive a specific

number of company shares at a future date, subject to vesting conditions. Once vested, the RSUs
convert into actual shares.

- **Stock Grants:** Employees are given outright ownership of company shares, often subject
to vesting conditions.

- **Employee Stock Purchase Plans (ESPPs):** Employees can purchase company shares at a
discount through payroll deductions.
 - **Phantom Stock:** Employees receive a cash bonus or a payout based on the company's
stock price performance without actual ownership of shares.

2. **Vesting:** Equity grants are typically subject to a vesting schedule. Vesting is the process
by which an employee earns the right to the equity over time. Common vesting schedules include
cliff vesting (all at once after a certain period) and graded vesting (gradually over time).

3. **Exercise Price:** For stock options, the exercise price is the amount an employee must pay
to purchase the company's stock. This price is often set at the current fair market value of the
stock at the time of grant.

4. **Performance Conditions:** Some equity-based compensation plans may have performance

conditions that must be met, such as achieving specific revenue targets or milestones, before the
equity can be fully vested or exercised.

5. **Tax Implications:** The tax treatment of equity-based compensation can vary depending on
the type of equity granted and the tax laws in the employee's jurisdiction. Stock options, RSUs,
and stock grants may have different tax consequences.

Benefits of Equity-Based Compensation:

- **Alignment of Interests:** Employees have a vested interest in the company's success, as

their financial rewards are tied to the company's stock performance.

- **Retention:** Equity grants can serve as a strong retention tool, as employees may be less
likely to leave the company if they have unvested equity.

- **Long-Term Perspective:** Equity compensation encourages employees to take a long-term

perspective, as the value of equity typically increases over time.
- **Attracting Talent:** Startups and high-growth companies often use equity-based
compensation to attract top talent, as it offers the potential for substantial future gains.

Challenges of Equity-Based Compensation:

- **Lack of Liquidity:** Until equity is exercised or vests, it may not provide immediate
liquidity to employees, which can be a drawback if they need cash.

- **Volatility:** The value of equity can fluctuate, and employees may face the risk of the value
decreasing, especially in the case of stock options.

- **Complexity:** Equity compensation plans can be complex, and employees may need to
understand the terms, tax implications, and risks associated with their grants.

- **Dilution:** Granting equity can lead to dilution of ownership for existing shareholders,
including founders and early investors.

Equity-based compensation is a powerful tool for motivating and retaining employees,

particularly in industries where stock ownership is common. However, it should be structured
carefully to balance the interests of both the company and its employees and should be
communicated clearly to ensure employees understand the value and terms of their equity grants.

TEAM REWARDS
Team rewards are incentives or recognition given to a group of individuals who have worked
together to achieve specific goals or objectives within an organization. These rewards are
designed to motivate and reinforce teamwork, collaboration, and collective achievement. Team
rewards can take various forms and serve different purposes, depending on the organization's
goals and culture. Here are some common types of team rewards:
1. **Financial Bonuses**: Teams may receive monetary bonuses or profit-sharing arrangements
based on their collective performance. This can include performance-based bonuses, profit-
sharing plans, or team-specific commission structures.

2. **Recognition and Awards**: Teams can be recognized through awards, certificates, or

public acknowledgments. These can range from simple thank-you notes and plaques to more
formal awards ceremonies.

3. **Team Building Activities**: Organizations may invest in team-building activities or retreats

as a reward for achieving certain milestones. These activities aim to strengthen team bonds and
improve collaboration.

4. **Extra Time Off**: Teams that meet or exceed their goals might be rewarded with additional
paid time off or flexible work arrangements, allowing team members to enjoy a better work-life
balance.

5. **Training and Development**: Some organizations offer team-specific training and

development opportunities, such as workshops or courses, to help team members grow and
enhance their skills.

6. **Special Perks**: Teams might receive special perks or privileges within the organization,
such as reserved parking spaces, access to premium facilities, or exclusive access to certain
resources.

7. **Team Celebrations**: Holding team celebrations, such as parties or dinners, can be a way to
reward and recognize team accomplishments in a social setting.

8. **Customized Incentives**: Organizations may offer personalized incentives based on the

preferences and needs of the team members. For example, some employees may prefer extra
vacation days, while others might value financial rewards more.
9. **Career Advancement Opportunities**: High-performing teams may be given priority when
it comes to promotions, raises, or opportunities for career advancement within the organization.

10. **Public Acknowledgment**: Some organizations celebrate team achievements by

highlighting them in internal newsletters, on the company website, or in public relations
materials to showcase their success to clients, partners, and stakeholders.

Effective team rewards should be aligned with the organization's goals, foster a positive team
culture, and be fair and transparent. They should also consider the preferences and motivations of
team members to ensure they are meaningful and motivating. Additionally, it's essential to
regularly review and adjust team rewards to maintain their effectiveness and relevance as team
goals and dynamics evolve.

Rewards Strategy and Psychological Contract

A rewards strategy is a systematic approach that an organization uses to design and implement
its compensation and benefits programs. This strategy is closely tied to an organization's overall
business strategy and aims to attract, retain, motivate, and engage employees while aligning their
efforts with the company's objectives. The psychological contract, on the other hand, is an
unwritten set of mutual expectations and obligations between employees and their employer.
Let's explore how these two concepts are interconnected.

1. **Alignment with Psychological Contract**:

- **Meeting Expectations**: A well-designed rewards strategy should align with the

psychological contract, ensuring that employees' expectations regarding compensation and
benefits are met. When employees perceive that their efforts are fairly compensated, it
strengthens the psychological contract and fosters trust.

2. **Communication and Transparency**:

- **Clear Communication**: An effective rewards strategy includes clear and transparent

communication about compensation and benefits. This communication helps in managing
employees' expectations and maintaining a positive psychological contract.
3. **Motivation and Engagement**:

- **Motivational Impact**: Rewards play a significant role in motivating employees. When

rewards are aligned with individual and team performance, it can enhance motivation, leading to
increased engagement. A positive psychological contract can result from employees feeling
valued and recognized through these rewards.

4. **Retention and Commitment**:

- **Retention Strategy**: A rewards strategy can be part of an organization's retention

strategy. When employees perceive that their contributions are fairly rewarded, they are more
likely to remain committed to the organization and stay longer, reinforcing a positive
psychological contract.

5. **Flexibility and Customization**:

- **Tailored Rewards**: A strategic approach to rewards allows for flexibility and

customization. By recognizing the diverse needs and preferences of employees, organizations
can reinforce a positive psychological contract by providing rewards that are meaningful to each
individual.

6. **Performance Management**:

- **Performance Feedback**: A well-designed rewards strategy is often linked to performance

management systems. Regular performance feedback and the connection between performance
and rewards contribute to a clear and balanced psychological contract.

7. **Ethical Considerations**:

- **Ethical Rewards**: Organizations should consider the ethical implications of their rewards
strategy. Unethical or unfair reward practices can lead to breaches of the psychological contract,
damaging trust and morale.

In summary, a rewards strategy and the psychological contract are closely intertwined. An
effective rewards strategy should take into account employees' expectations, motivations, and
their perception of fairness. When employees believe that their contributions are adequately
recognized and rewarded, it can lead to a positive psychological contract, which, in turn,
enhances employee satisfaction, commitment, and overall organizational success. It's crucial for
organizations to continually assess and adjust their rewards strategy to ensure that it remains in
harmony with the evolving psychological contract of their workforce.

Psychological contract
The psychological contract is a concept in organizational psychology and human resource
management that refers to the unwritten, implicit expectations and perceptions that exist between
employees and employers in a workplace. It is an informal understanding of the mutual
obligations and expectations that govern the employment relationship.

Key points about the psychological contract include:

1. **Implicit Nature**: Unlike formal employment contracts that outline specific terms and
conditions of employment, the psychological contract is often implicit and unwritten. It is based
on the beliefs, perceptions, and assumptions that employees and employers have about each
other's roles, responsibilities, and contributions.

2. **Mutual Expectations**: The psychological contract involves mutual expectations.

Employees expect certain things from their employers, such as fair compensation, opportunities
for growth and development, job security, and a supportive work environment. Employers, in
turn, expect employees to perform their job responsibilities, be loyal and committed, and
contribute to the organization's success.

3. **Dynamic and Evolving**: The psychological contract is not static; it can evolve over time
and may be influenced by changes in the work environment, economic conditions, and individual
experiences. For example, an organization that previously offered a high level of job security
may reduce it due to economic pressures, which can affect employees' perceptions of the
contract.

4. **Trust and Fairness**: Trust and perceived fairness are essential elements of the
psychological contract. When employees believe that their employer is treating them fairly and
keeping promises, trust in the employment relationship is strengthened. Conversely, breaches of
trust or perceived unfairness can lead to dissatisfaction and a breakdown in the psychological
contract.

5. **Communication and Transparency**: Effective communication between employers and

employees is crucial in managing the psychological contract. Open and transparent
communication about organizational changes, expectations, and opportunities can help align
perceptions and reduce misunderstandings.

6. **Impact on Employee Behavior**: The psychological contract can significantly influence

employee behavior, motivation, and engagement. When employees believe their employer is
meeting their expectations, they are more likely to be committed, perform well, and remain with
the organization. Conversely, unmet expectations can lead to disengagement and turnover.

It's important for organizations to be aware of the psychological contract and strive to maintain a
positive and mutually beneficial employment relationship. When the psychological contract is
well-managed and aligned with the organization's values and goals, it can contribute to higher
employee satisfaction, productivity, and retention. However, when there is a disconnect between
employees' expectations and their actual experiences, it can lead to problems and challenges in
the workplace.

Compensation of chief executive

The compensation of a Chief Executive Officer (CEO) can vary significantly based on several
factors, including the size and type of the organization, industry, company performance, and
individual negotiations. CEO compensation typically consists of various components, which may
include:

1. **Base Salary**: This is the fixed amount of money a CEO receives on a regular basis,
usually annually, as a part of their compensation package. Base salaries can range from a few
hundred thousand dollars to several million dollars, depending on the company's size and
industry.
2. **Bonuses**: CEOs may be eligible for annual or performance-based bonuses, which are
typically tied to specific targets and goals, such as financial performance, revenue growth, or
stock price. These bonuses can be a significant portion of a CEO's compensation and can
sometimes exceed their base salary.

3. **Stock Options**: Many CEOs are granted stock options, which allow them to purchase
company shares at a predetermined price over a specified period. Stock options are often used to
align the CEO's interests with shareholders, as the value of the options increases with the
company's stock price.

4. **Stock Awards**: CEOs may also receive restricted stock or other equity awards as part of
their compensation package. These awards grant the CEO ownership of company stock, typically
subject to vesting conditions. The value of these awards can be substantial and is tied to the
company's stock performance.

5. **Long-Term Incentive Plans (LTIPs)**: LTIPs are designed to reward CEOs for achieving
long-term strategic goals and objectives. They often include a mix of stock options, stock
awards, and performance-based cash incentives.

6. **Benefits and Perquisites**: CEOs may receive various benefits and perks, such as health
and retirement benefits, life insurance, use of a company car or private jet, and reimbursement
for expenses related to their job.

7. **Severance Packages**: Some CEOs have severance agreements in place that outline the
compensation they would receive if they are terminated or if there is a change in control of the
company.

8. **Performance Metrics**: CEO compensation is often tied to performance metrics, which can
include financial targets, operational goals, and shareholder return. These metrics are intended to
incentivize CEOs to drive the company's success.
It's important to note that CEO compensation has been a topic of public and shareholder scrutiny,
especially in cases where it appears excessive relative to company performance or industry
norms. Shareholders, boards of directors, and regulatory bodies often play a role in determining
CEO compensation, and there is increasing emphasis on aligning CEO pay with long-term value
creation for shareholders.

Many publicly traded companies in the United States are also required to disclose CEO
compensation details in their annual proxy statements, allowing shareholders and the public to
evaluate the appropriateness of CEO pay packages.

Overall, CEO compensation is a complex issue influenced by a range of factors, including

market dynamics, corporate governance practices, and perceptions of fairness and alignment
with shareholder interests. It continues to be a subject of debate and scrutiny in the business
world and the broader public sphere.

Compensation of sales executive

The Role Of A Sales Executive: Responsibilities And Skills

A business's sales department contains both team and individual goals to help sell
enough products and services to make a profit. The sales executive oversees this area,
ensuring the team stays educated and motivated so they can reach their goals.
Knowing their roles and responsibilities helps you decide if this is the right career for
you. In this article, we will discuss what sales executives do, and what skills and
qualities they need and examine a sample job description.

What Is A Sales Executive?

Sales executives, or sales managers, lead offices of sales associates who offer goods
and services to customers. Their primary function is to manage this team to create
profits for their company. Sales executives identify prospects, maintain customer
relationships and identify ways to grow their sales figures.

The Role Of A Sales Executive

The role of a sales executive varies based on the industry, but most share similar
responsibilities. Because they often manage a team of sales associates, sales
executives might combine leadership responsibilities with sales expertise to excel at
their jobs. If you are considering a career as a sales executive, you might expect to
perform some of these duties:

Managing a team

Some sales managers may work independently in a sales department, but often they
manage a team of sales associates. The sales executive sets department goals for the
team, individual quotas, and timelines for achieving these. It is important to provide
frequent feedback, communicate any updates or changes and be available to your team
to answer questions.

Creating goals

Sales executives may receive department goals from their superiors or they may create
goals themselves. Often these are units to sell or dollar amounts. Each sales
representative is responsible for achieving their own goals, and the sales executive
tracks the progress towards meeting these. You might also create professional
development goals for how people on the team can develop their skills. For example,
you may require everyone on the team to take one workshop a year on current best
practices in sale.

lGenerating reports

Sales executives generate several reports. Depending on the industry, they might
create conversion reports, sales data, trends, length of sales cycles, or lead aging. They
might use these reports to encourage or educate their teams or to share with sales
directors or other high-ranking employees. Generating reports requires basic computer
skills and the ability to interpret data to make adjustments for reaching your goals.

Researching markets

Market research is the sales executive's way to learn more about target markets,
consumers, and their competition. In this role, you gather and interpret market data and
might identify prospects for each member of the team to cold-call. Research might also
include consumer trends. This helps you forecast goals and see what adjustments your
company might make in response. For example, if the market primarily purchases email
software with video capabilities but your company does not have that yet, you might
communicate this need to the relevant teams.

Reviewing processes

More than monitoring the markets and sales departments, sales executives ensure their
teams work efficiently within their organization. This includes identifying clear roles for
team members, communicating with other departments for needs, and reviewing tools
and systems to ensure the teams have the resources they need to complete their job.
You might also evaluate the sale process for individual associates from prospecting to
managing customer relationships to see if every step achieves the desired results.

Building relationships

Selling products to a customer is only the first step in maintaining a relationship. Sales
managers call customers to ensure their products matched their expectations, offer
products that complement their previous purchases, and update them on product and
company updates. You can create standard durations for associates to connect with
their customers to ensure the relationship is current.

For example, sales representatives might contact their customers two weeks after a
purchase, then every six months with a personal note. Consider asking for feedback,
responding quickly, and addressing their concerns to build trust and maintain positive
relationships.

Top Five Skills For A Sales Executive

Here are some of the top skills that successful sales managers have and that you may
want to include in your job description:

1. Analytical skills

Analytical skills are those required to collect and analyze information and problem-solve
to make decisions. Sales managers use their analytical skills to review data, identify the
key pieces of information that are most relevant, draw meaningful conclusions and
identify actionable takeaways. For example, if a sales executive notices fewer
purchases from new customers in December, they may increase their up-selling goals
to recover any potential lost income.

2. Communication skills

Communication skills refer to someone's ability to give and receive information.

Communication skills include active listening, speaking clearly and concisely, and
observing body language and other nonverbal cues. Sales managers communicate with
the right people at the right time, effectively and accurately delivering information using
whatever medium they choose.

3. Interpersonal skills

Interpersonal skills are the soft skills that people rely on for interacting with others. They
include a range of behaviors and tactics, from communication and listening to attitude
and collaboration. These skills are critical for working as part of a sales team, keeping
sales professionals on track and motivated, and showing a genuine passion for the
team's goals. Sales managers must be able to work well with peers, leadership, and
direct reports.
4. Strategic planning

Strategic planning is the process of setting goals and identifying actions that a company
can take to achieve those goals. Sales managers must be able to gather evidence
related to products and historical sales, determine objectives necessary to achieve
organization-wide goals, and identify the steps necessary to achieve those objectives.
Following these steps can help create an actionable plan that can help you achieve your
revenue goals and develop your strategic planning skills:

• Assess your current situation

• Identify your customers
• Identify any strengths, weaknesses, opportunities, and threats in the market
• Determine your strategy
• Define revenue targets
• Position your brand, products, and services
• Define roles to execute

Following these steps can help create an actionable plan that can help you achieve your
revenue goals and develop your strategic planning skills.

5. Leadership skills

Leadership skills are critical for a sales manager to organize, manage and motivate a
sales team. Leadership includes several skills, including mentoring, team-building,
delegating, trustworthiness, and creativity. Leadership skills also include the ability to
give clear and constructive feedback to improve the skills of individual sales
professionals.

Other skills a sales executive might need include:

• Negotiation
• Basic math and business knowledge
• Computer and software skills
• Prospecting
• Storytelling
• Active listening
• Public speaking

Essential Qualities For A Sales Executive

More than skills, qualities are traits and behaviors that can help you excel in a role.
Some of the most important qualities include:

• Dedicated: sales executives dedicate themselves to excelling in their role,

achieving their goals, and supporting their team. Even if results differ from
 planned targets, the sales manager focuses on larger goals and continuous
improvement.
• Persuasive: Persuasion is important in sales because the primary goal is to sell
enough products and services for a company to earn a profit. In competitive
markets, sales executives convince consumers why their products are better
than others and they educate sales associates on effective persuasion methods.
• Motivating: Once the sales manager sets their team's goals, they motivate the
sales associates until they reach or exceed them. This can mean celebrating
individual sales, rewarding outstanding results, and possibly introducing a low-
stakes competition among the team.
• Patient: Patience means both listening to your customer's needs and
understanding that sometimes customers want to wait to make a purchase. It is
important to judge the situation and work patiently as building a lasting
relationship can be more productive than a one-time sale.
• Resilient: Sales managers might face rejection, often in the early stages of
prospecting. It is important for you to understand that this is not necessarily a
reflection on your character or your abilities as a professional and that you must
continue to motivate yourself.

The compensation of a sales executive, , can vary widely based on factors such as the industry,
company size, location, level of responsibility, and individual performance. Sales executives are
typically compensated in ways that align with their role's performance-based nature, aiming to
incentivize them to achieve sales targets and drive revenue growth.

Some common components of sales executive compensation:

1. **Base Salary**: Sales executives typically receive a base salary, which is a fixed amount of
money paid regularly (e.g., monthly or bi-weekly). The base salary provides financial stability
and is often supplemented by variable components based on performance.

2. **Sales Commission**: Commissions are a significant part of a sales executive's

compensation and are directly tied to their sales performance. Salespeople earn a percentage of
the revenue or profit generated from their sales. The commission rate can vary depending on the
company's policies and industry standards. Commission structures may also include tiered rates,
where higher sales volumes result in higher commission percentages.

3. **Bonuses**: In addition to commissions, sales executives may be eligible for performance-

based bonuses. These bonuses are typically tied to specific sales goals, targets, or key
performance indicators (KPIs). For example, a sales executive may receive a bonus for
exceeding quarterly or annual sales quotas.
4. **Sales Incentives and Contests**: Some companies offer additional incentives, such as
prizes, trips, or recognition for top-performing sales executives. These incentives can be used to
motivate and reward outstanding performance.

5. **Stock Options or Equity Awards**: In some organizations, particularly in technology

startups and larger corporations, sales executives may be granted stock options or equity awards
as part of their compensation package. These awards provide an opportunity for sales executives
to share in the company's long-term success and value creation.

6. **Benefits and Perquisites**: Sales executives may receive standard employee benefits such
as health insurance, retirement plans, and paid time off. Additionally, they may be entitled to
certain perks or allowances, such as a car allowance, expense reimbursement, or a mobile phone
stipend.

7. **Profit Sharing**: In some cases, companies may have profit-sharing programs in which a
portion of the company's profits is distributed among employees, including sales executives.

8. **Performance Metrics**: Sales executives' compensation is often linked to specific

performance metrics, such as sales revenue, new customer acquisition, customer retention, and
gross margin. The attainment of these metrics can determine the size of commissions, bonuses,
and other performance-related rewards.

9. **Territory or Account Management**: Sales executives responsible for specific territories or

major accounts may have compensation structures tailored to their responsibilities. For example,
they may receive bonuses or commissions based on the growth and profitability of their assigned
territory or accounts.

10. **Sales Quotas and Targets**: Meeting or exceeding sales quotas and targets is a
fundamental driver of sales executive compensation. Quotas are typically set for specific time
periods (e.g., monthly, quarterly, or annually) and vary based on factors like market conditions
and historical performance.
Sales executive compensation packages can be highly competitive and are designed to attract and
retain top talent in sales roles. These packages often include a mix of fixed and variable
components to motivate sales professionals to perform at their best while providing financial
stability through base salaries and benefits. The specific structure and components of
compensation can vary significantly from one organization to another.

Compensation Structure in India

Personnel in an organization are paid a salary in return for the services they provide to the
enterprise, it consists of different components such as CTC, Net Pay, Gross Salary,
Allowances, Prerequisites, Deductions, and Payslip, all these are different parts of the salary
structure in India.
While processing payroll, it is important to understand the salary breakup and the various
elements associated with it. Salary structure is defined as the specified framework to work
out the compensation of an employee.
Structuring salaries is one of the inescapable tasks for every HR and payroll professional,
however most of the professionals do not know the technical processes and best practices for
generating a perfect salary structure, which is why we are bringing you a detailed guide
on pay structure in India

Compensation Structure in India

The Compensation structure is determined by the components, as decided by the
companies or their management that are paid out every month. Here are some factors
that must be considered while deciding the salary structure of an employee.

What are the factors that determine the salary structure of an employee?

Deciding on the right pay can be a tedious task for HR professionals. There are so
many factors that determine the right salary structure for an employee. Some of the most
influential ones are:

1. Education and Years of Experience

The more experienced and educated the employee is, the higher will be his/her pay. Also, the
employee’s expectation in terms of the earning components changes.
So when you plan to hire a post-graduate with 5 or more years of experience, or a seasoned
industry veteran, you will need to compensate them accordingly.

2. Industry
Sometimes, two people with the same job title can also have different pay, depending upon
the industry they are in.
There are certain reasons for this variance – sometimes one industry is considerably larger
than another and in other cases, their job function may be far more critical to a particular
industry.

3. Location
Cost of living (mainly housing expenses) is also a major determinant of the difference in
salary, and this is based on the location where the employee works. Most of the time there is
higher compensation for the same job in urban areas compared to rural areas.
But in recent times, when remote work has surged tremendously, employers have shifted
from location-based compensation to role-based compensation.

4. In-demand skill sets

In deciding an employee’s compensation, his/her skill-set becomes another one of the key
determinants.
Some skill sets can be applied to a much wider variety of roles within the organization, and
hence command not just the higher value but also say higher variable components.

5. Demand and Supply

As per the laws of Economics, we know it is the demand and supply of an entity that
determines the price for it.
In a geographical area where there is some gap between the supply of talent and the demand
for those skill sets and experience, you may have to pay a higher price to recruit better talent.
Employers use a salary structure with pay grades to determine the expected salary for an
employee so that employees can know about their expected salary. These grades are divided
into three categories – high grade, mid-point, and low grade.
When an employee with lesser experience and seniority joins a company for the same job
title, he may start at a low grade as compared to the more experienced one.

Salary Structure Breakup

Now we will dissect each component of the salary and see how it is calculated. But before
that, it is important to understand the meaning of the term CTC.

Salary Breakup Calculator

What is CTC in salary with an example?

Cost to Company (CTC) or CTC in salary is the yearly expenditure that a company
incurs on an employee. This depends on the salary and other variable components that
we will discuss further.
CTC in salary is calculated by adding Basic Salary and other additional benefits that
employees receive such as Gratuity, EPF, HRA, Travel Allowance, Food coupons, and so on.
As an informal definition, CTC is the cost of hiring and sustaining an employee in the
organization. However, keep in mind that it is not the amount that an employee takes home
each month.

CTC in salary is calculated as:

CTC = Gross Salary + Benefits

Common salary components in salary breakup

What is Basic in salary structure?

It is the primary or the core element of a salary that makes about 40-45% of the total CTC.
It plays an important role in defining some of the other components, such as Provident Fund,
Gratuity, and ESI.
Things to remember while setting up your employee’s basic salary
• Keeping it too high – As the basic component is fully taxable, keeping it too high will
increase the tax liability of your employees. This will also increase the employee’s
liability as he will need to contribute more towards PF and ESI.
• Keeping it too low – will increase the risk of salaries not falling under minimum wage
norms set by the respective state government.

Gross salary
Gross salary is calculated by adding an employee’s basic salary and allowances before
deductions of any taxes. This includes bonuses, overtime, holiday pay, and other
components.
Gross salary is calculated as follows.
Gross salary = Basic salary + HRA + Other Allowances

Net salary or take-home salary

Take-home salary is calculated as the salary after tax deduction at source (TDS) and other
tax deductions as per the company’s policy.
Calculation of Net salary:
Net salary = Gross Salary – Professional Tax – Employee Provident Fund – Income Tax
Now here are some of the most important components of a salary break-up:

Allowances
1. Dearness Allowance
Dearness Allowance was started as a part of salary to reduce the burden of inflation on
salaried employees.
The government uses this component to compensate public sector employees and pensioners
for the overall price rise. It is normally set at 5% of the CTC and it also affects components
such as ESI and PF.

2. House Rent Allowance

For salaried employees living in rented accommodation, HRA is one of the most effective
tax saving tools.
The amount you can claim as a tax deduction for HRA cannot be over 50% of your basic
salary in metro cities and 40% of your basic salary in non-metro cities. Hence it makes up
40-50% of the basic salary.

3. Leave Travel Allowance

LTA reimburses employees for travel within the country. This is another component widely
used because of the tax benefits it provides. An employee can claim tax benefits on the Fare
Expenses paid to his/her family during the holiday.
 However, there are certain restrictions on what you can claim as a tax exemption under
LTA:
• Only Fare Expenses are covered (i.e., stay and food expenses are not covered)
• Travel must be within India
• This is applicable only to immediate family members who depend on the employee

4. Conveyance Allowance
Introducing the standard deduction has removed the conveyance allowance as an exemption
from tax starting April 2018. Employees now do not need to collect or submit any
conveyance expense proof.

5. Medical Allowance
Similarly, the medical allowance is removed as an exemption from April 2018 onwards.

6. Child Education Allowance

This component is paid out towards the tuition fees of an employee’s children, which can be
tax deductible up to Rs. 100 per month for a maximum of two children. So this amount is
usually set at Rs 2400 per annum.

7. Special Allowance
It makes up for the rest of the salary. It is mostly smaller than the Basic salary and is fully
taxable. Note that this was not taken into consideration while calculating the Provident Fund
amount for the employee.

Gratuity
Lump-sum of the amount paid by employers to employees who leave the organization. This
is only paid to employees who have completed 5 years of service with the company.
According to the Payment of Gratuity Act, 1972 gratuity is calculated as 4.81% of the basic
pay. Organizations with over 10 employees come under this act.
Deductions

Employee Provident Fund

EPF is an employee welfare scheme in which both the employee and the employer make
investments every month. It is a platform that provides an opportunity for employees to save
a part of their salary as a long-term investment. Approximately 12% of the basic salary is
automatically deducted from employees’ salaries each month.
This amount can be withdrawn following a month of cessation of service or upon retirement.

Professional Tax
Taxes levied by the state on income earned by salaried employees include doctors, lawyers,
chartered accountants, etc. by the state government. Each state government has a unique
method to calculate professional tax.
The maximum amount of tax payable is equal to Rs. 2,500. Employers calculate and deduct
professional tax according to the prescribed rates from employees’ salaries and pay the
collected amount on behalf of them to the government.

PERQUISITES
These are the non-cash benefits provided to employees, depending upon the position that
they hold in the organization. This includes providing a company car, phone, internet
services, etc.
Bonus
Bonuses are a taxable part of an employee’s salary, usually provided as a lump sum once a
year based on the individual performance of an employee or the overall performance of the
organization.

Reimbursements
Sometimes, employees are also provided reimbursements, such as phone bills, medical
treatments, office stationery, and newspaper bills. This amount is compensated after the
employee provides bills against these up to a specific acceptable limit.

ESIC
If an organization has 10 or more employees whose gross salary is less than Rs. 21,000, then
for such employees the company should avail of the ESIC scheme. The employer’s
contribution towards ESI should be 3.25% of the gross salary while the employee
contribution must be 0.75%.
• Employee stock options
ESOPs and employee stock options are free/discounted shares given to the employee
primarily to increase employee retention.
• Labour welfare fund
As the name suggests, these are contributions made towards funds for the labour class. Just
like professional taxes, this also varies from state to state. Both employers and employees
make contributions towards these funds, and employers contribute twice as much as
employees.
Contributions towards labour welfare funds are made semi-annually.
These are the most common components that make up a salary structure.

Difference between Take-Home Salary and Cost to Company

Take-home salary, as the name suggests, is the final amount given to the employee by the
employer every month after tax deductions and investments.
While CTC is a variable payment that includes direct benefits, indirect benefits, and
savings contributions.

What are the types of Compensation structure in India?

There are 2 types of salary structures that decide how to break up the salary and also define
CTC:
Two types of Salary Structure:
• Top-down
In this type, you define the amounts for different salary components and then add up their
total as Gross Salary. For example, the, Basic of Rs. 5,000 and DA as Rs. 5,000 = Gross of
Rs. 10,000.
• Bottom-up
In this type, you define total gross and then divide the amount between different components.
For example, Gross = Rs. 10,000; Basic is 40% of gross and DA is 60% of the same.

Importance of salary structure

Human resources are the driving factor for an organization’s success. It is important for
businesses to attract and keep the right talent to drive their performance. Right remuneration
is one of the biggest factors in attracting top talent.
A well-designed pay structure is key to the growth and success of any company. It is not just
an engagement factor but also an attracting factor for sure. If it is unfair/poor or not managed
correctly, it can lead to disastrous results.
Structuring the salary is hence very important, as it determines the in-hand pay, gross salary,
net salary, allowances, etc. If an employee does not have the details of the components of his
salary, then he/she cannot calculate the final in-hand pay and also see investments made in
EPF.
It helps employees better manage their salary and thus proves to be very critical.

Business benefits of salary structure

• Fairness
Creating a logical pay structure also ensures that you are treating all your employees fairly.
Employees can then understand that a fair process exists to determine both the job level and
pay.
• Transparency
Sharing your pay structure determining compensation with existing employees increases trust
and confidence amongst current and also future employees
• Motivation
 When employees know alleys are open to progress their career and salaries, there is a sense
of motivation amongst the employees. This also ensures that productive discussions can be
carried out with them.
• Engagement
Employees feel far more engaged within the organization when these key components are
structured properly. They will feel fairly treated and will understand how progress in their
career will lead to change in compensation. This is highly motivating for employees when
they know what their role compensation is in their organization, and a good salary structure
affected this.
• Support Management
While hiring a new employee, one of the most challenging parts for managers is to discuss
the salary structure with the employee. A great salary framework builds confidence and
supports management in making better decisions.
• Pay Budgets
Knowing how your employees fit into different pay structures also allows for a smooth
distribution of your pay budget and getting the maximum out of it.

UNIT 3
JOB EVALUATION
Job evaluation plays a crucial role in compensation and benefit management within
organizations. It is the process of determining the relative value or worth of different jobs within
the organization. This information is used as a foundation for establishing fair and competitive
compensation structures and benefits packages. Here's how job evaluation contributes to
compensation and benefit management:

1. **Ensuring Internal Equity:** Job evaluation helps organizations ensure internal equity,
which means that jobs of similar value or complexity are compensated at a similar level. By
evaluating jobs and assigning them relative values, employers can establish a structured pay
scale that reflects the organization's hierarchy and ensures that employees are compensated fairly
in relation to their job responsibilities and contributions.

2. **Salary Structures:** The results of job evaluations are used to create salary structures. Each
job is assigned a specific pay grade or range based on its evaluation score. This enables
organizations to determine the appropriate salary and pay bands for each job. Salary structures
help maintain consistency in compensation practices and assist in recruiting and retaining talent.

3. **Compensation Decision-Making:** Job evaluation results guide compensation decisions,

including salary increases, promotions, and bonuses. Employees' movement within the
organization, pay adjustments, and reward systems are influenced by the job's evaluation within
the established structure.

4. **Incentive and Bonus Programs:** Job evaluation helps determine which positions are
eligible for incentive and bonus programs. Jobs with higher evaluation scores may be eligible for
more significant performance-based rewards, aligning with the employees' contributions and the
value of their roles.

5. **Benefits and Perks:** Job evaluation can influence benefit packages. Jobs with higher
evaluations may be associated with more comprehensive benefit plans, such as health insurance,
retirement plans, and other perks. Job evaluations ensure that employees with greater
responsibilities receive better benefit packages.

6. **Market Competitiveness:** By comparing the job evaluation results with external market
data, organizations can ensure that their compensation and benefits packages are competitive.
This information helps in attracting and retaining talent in a competitive labor market.

7. **Pay Equity and Compliance:** Job evaluation also supports organizations in achieving pay
equity and compliance with labor laws and regulations. It ensures that compensation practices do
not discriminate based on factors such as gender, race, or other protected characteristics.

8. **Fairness and Employee Morale:** A transparent and fair job evaluation process can
enhance employee morale and satisfaction. When employees perceive that their compensation is
based on a structured and objective process, it can lead to increased motivation and a positive
work environment.
9. **Retention and Turnover Management:** Well-designed compensation and benefits
packages resulting from job evaluations can help reduce employee turnover by offering
competitive and equitable compensation. High turnover can be costly, and addressing
compensation concerns through job evaluation can mitigate this issue.

10. **Recruitment and Talent Acquisition:** Job evaluation results can be used in job postings
and descriptions to attract candidates who understand the value and compensation associated
with the position.

In summary, job evaluation is a fundamental component of compensation and benefit

management. It provides a systematic approach to determining the relative worth of jobs,
ensuring fair and competitive compensation practices, attracting and retaining talent, and
achieving compliance with labor laws and regulations. This process helps organizations align
their compensation and benefits strategies with their overall human resource and business
objectives.

JOB EVAUATION CONCEPT

Job evaluation is a systematic process used by organizations to assess and determine the relative
value or worth of various jobs within the company. It helps establish a fair and internally
equitable structure for compensation, which is essential for human resource management, pay
scale development, and making informed decisions about salary and benefits. Job evaluation
methods provide a framework for comparing jobs based on specific criteria and factors.

The primary objectives of job evaluation are:

1. **Internal Equity:** Ensure that jobs within the organization are compensated fairly relative
to one another based on their responsibilities, requirements, and contributions.

2. **Pay Structure:** Establish a structured and consistent pay scale that reflects the relative
worth of each job, facilitating competitive and fair compensation practices.
3. **Compliance:** Ensure that compensation practices comply with legal requirements and do
not discriminate based on factors like gender, race, or other protected characteristics.

Here are some common job evaluation methods:

1. **Job Ranking:** In this method, jobs are listed in order of their perceived value or
importance within the organization. A committee or group of experts assesses and ranks jobs
based on overall contribution, complexity, and other factors. This method is simple but can lack
precision and can be difficult to manage with a large number of jobs.

2. **Job Grading or Classification:** Jobs are categorized into predetermined grade levels based
on factors such as skill, responsibility, and qualifications. These grades are established through
discussions and consensus among experts or a committee. Each grade corresponds to a specific
salary range.

3. **Point Factor System:** This is one of the more quantitative methods of job evaluation. It
involves breaking down jobs into key factors or elements (e.g., skill, effort, responsibility) and
assigning point values to these factors based on their importance. The total points for each job
determine its relative value and placement on the pay scale.

4. **Market Pricing:** In this method, organizations evaluate jobs by comparing them to market
pay rates. Jobs are matched to external market salary data to determine appropriate pay levels.
This method is often used when an organization wants to ensure its compensation is competitive
with the external labor market.

5. **Factor Comparison:** Factor comparison is a more complex and detailed job evaluation
method. It involves identifying specific job factors (e.g., education, experience, responsibility)
and assigning a monetary value to each factor. Jobs are then evaluated by comparing them
against these factor values.
6. **Hay Method:** The Hay Method is a point factor system that uses three main factors:
know-how, problem-solving, and accountability. Sub-factors are used to further break down
these categories. Jobs are evaluated based on these factors, and point values are assigned to
determine the relative worth.

7. **Paired Comparison:** In this method, jobs are evaluated in pairs, and a decision is made
about which job is more valuable or complex. Over multiple pairings, a ranking is established.
This method is labor-intensive and is often used for smaller organizations.

It's essential to select a job evaluation method that aligns with the organization's goals, size, and
industry. The method chosen should provide a clear and transparent process that ensures fairness
in compensation decisions. Moreover, regular reviews and updates to job evaluations may be
necessary to adapt to changing business needs and market conditions.

Institutions related to compensation management

Compensation management involves the design, implementation, and administration of an
organization's compensation and benefits programs. Several institutions, organizations, and
professional associations are relevant to compensation management. They provide resources,
guidelines, and support to both employers and compensation professionals. Here are some of the
key institutions related to compensation management:

1. **WorldatWork:** WorldatWork is a global professional association focused on

compensation and benefits, total rewards, and work-life effectiveness. They provide research,
education, certifications, and networking opportunities for compensation and benefits
professionals.

2. **Society for Human Resource Management (SHRM):** SHRM is one of the largest HR
associations globally, and it covers various aspects of human resources management, including
compensation and benefits. They offer resources, conferences, and certification programs for HR
professionals.
3. **U.S. Bureau of Labor Statistics (BLS):** The BLS provides data and reports on wages,
salaries, and benefits in the United States. Their data is a valuable resource for benchmarking
and understanding compensation trends.

4. **Compensation and Benefits Institute (CBI):** CBI is a provider of training and education in
the field of compensation and benefits. They offer courses and resources to help professionals
gain expertise in this area.

5. **International Foundation of Employee Benefit Plans (IFEBP):** IFEBP offers resources

and education related to employee benefits and compensation. They provide research,
conferences, and publications on various compensation and benefits topics.

6. **American Compensation Association (ACA):** ACA offers a range of resources and

training related to compensation management, including webinars, conferences, and
publications.

7. **European Compensation Association (ECA):** ECA focuses on compensation and benefits

management in Europe. They offer resources, training, and events for compensation
professionals in the European region.

8. **Canadian Compensation and Benefits Institute (CCBI):** CCBI is dedicated to the

compensation and benefits field in Canada, providing education, resources, and networking
opportunities for professionals in the region.

9. **Institute of Directors (IOD):** IOD provides governance and leadership training. While not
exclusively focused on compensation, they offer resources and education related to executive
compensation and governance issues.

10. **Chartered Institute of Personnel and Development (CIPD):** CIPD is a UK-based HR

professional association that covers various HR disciplines, including compensation and benefits.
They offer research, publications, and training for HR professionals.
11. **Local HR and Compensation Associations:** Many countries and regions have local HR
and compensation associations that provide resources, events, and networking opportunities.
Examples include the Australian HR Institute (AHRI), South African Reward Association
(SARA), and many others.

These institutions and organizations play a crucial role in advancing the field of compensation
management by providing knowledge, best practices, networking opportunities, and professional
development for individuals and companies. Professionals in the field can benefit from engaging
with these institutions to stay up-to-date with industry trends and enhance their skills and
knowledge in compensation and benefits management.

Wage Boards
Wage boards are institutional mechanisms or government bodies established to determine and
regulate wage rates, working conditions, and other employment-related matters for specific
industries or sectors. The primary purpose of wage boards is to ensure fairness in compensation,
standardize labor practices, and address labor-related issues within a particular industry. The
specific functions and scope of wage boards can vary by country and region, but their core
objectives often include:

1. **Setting Minimum Wages:** One of the primary functions of wage boards is to establish
minimum wage rates that employers in a specific industry must pay to their workers. These
minimum wages are intended to provide a basic level of income to employees and protect them
from exploitation or excessively low pay.

2. **Determining Working Conditions:** Wage boards may also determine and regulate
working conditions, such as working hours, overtime, rest periods, and safety standards, within
the industry. This helps maintain safe and fair working environments.

3. **Reviewing Compensation and Benefits:** These boards can periodically review and adjust
compensation and benefit structures within the industry to keep them in line with economic
conditions, inflation rates, and changes in industry norms.
4. **Arbitrating Disputes:** When conflicts arise between employers and employees or labor
unions within the industry, wage boards can serve as a neutral arbitration body to resolve
disputes related to wages, working conditions, and other employment-related matters.

5. **Collecting Data and Research:** Wage boards often collect data and conduct research to
monitor industry trends and provide recommendations for improving labor conditions, wage
scales, and other employment practices.

6. **Advising on Policy:** They may provide advice to government agencies and policymakers
on labor-related policy matters and regulations affecting the industry.

Wage boards are typically composed of representatives from various stakeholders, including
government officials, employers' organizations, trade unions, and independent experts. The
composition and decision-making processes of wage boards can vary depending on local labor
laws and regulations.

Wage boards are more common in some countries and regions than in others. They are often
established in industries where workers may be vulnerable to exploitation or where labor
conditions and compensation standards need specific attention and regulation. These boards can
help balance the interests of both workers and employers, ensuring that labor standards are
maintained and fair wages are paid while considering the economic realities of the industry.

It's important to note that the existence and functions of wage boards are subject to the labor laws
and regulations of individual countries, and they can vary significantly from one place to
another.

Pay Commissions
Pay commissions, also known as wage boards or salary commissions, are independent
government bodies or committees established to review, recommend, and implement changes in
the pay structure and compensation of public sector employees, including civil servants, military
personnel, and other government officials. The primary goal of pay commissions is to assess the
compensation structure to ensure that it remains fair, competitive, and in line with the economic
conditions and inflation rates of the country. Pay commissions are common in many countries,
and their decisions can significantly impact the salaries and benefits of government employees.

Key features and functions of pay commissions include:

1. **Compensation Review:** Pay commissions review and evaluate the existing compensation
structure for public sector employees. This includes basic pay, allowances, benefits, and other
components of remuneration.

2. **Recommendations:** Based on their evaluation, pay commissions make recommendations

for changes in pay scales, allowances, and other benefits. These recommendations are typically
intended to ensure that government employees receive competitive and fair compensation.

3. **Adjusting for Inflation:** Pay commissions often consider the impact of inflation and
economic conditions when making recommendations. They may propose periodic salary
revisions to keep pace with the rising cost of living.

4. **Fairness and Equity:** Ensuring fairness and equity in compensation is a fundamental goal
of pay commissions. They aim to rectify any disparities or anomalies in pay between different
categories of government employees.

5. **Special Allowances:** Pay commissions may recommend special allowances for

employees working in difficult or remote areas, hardship postings, or other challenging
circumstances.

6. **Pension and Retirement Benefits:** They also assess pension and retirement benefits,
including gratuity, provident fund, and other post-employment benefits, and recommend
adjustments as needed.
7. **Implementation:** Once the recommendations are accepted by the government, they are
implemented, and the revised pay scales and benefits become effective. This may require
legislative approval or executive orders.

8. **Regular Review:** Pay commissions are typically constituted at regular intervals (e.g.,
every five years) to ensure that compensation remains competitive and equitable. This periodic
review helps maintain a responsive and fair compensation system.

9. **Negotiation and Consultation:** Pay commissions often engage in consultation and

negotiation with various stakeholders, including government employee unions and associations,
to gather input and build consensus.

10. **Transparency and Accountability:** The processes and decisions of pay commissions are
expected to be transparent and based on objective analysis. This accountability is important to
maintain public trust.

Different countries have their own pay commission systems, and the names and specific
functions of these commissions may vary. For example, in India, the Pay Commission is known
as the Central Pay Commission (CPC), and it plays a significant role in determining the salaries
and benefits of central government employees.

Overall, pay commissions play a crucial role in shaping the compensation structure of public
sector employees, and their decisions have far-reaching implications for government employees
and the overall labor market.
Tax implications of employee compensation package to the
employees

Employee compensation packages can have various tax implications for the employees. Taxes
can significantly impact the take-home pay and financial planning of individuals. It's essential
for both employees and employers to understand the tax consequences of different elements of
compensation packages. Here are some key tax implications:

1. **Salary/Wages:**

- Income Tax: The most straightforward component of compensation, salaries and wages are
generally subject to income tax. Employers withhold income tax from employees' paychecks
based on their tax filing status and the information provided on Form W-4 (in the United States).

- Social Security and Medicare Taxes (U.S.): Employees and employers each pay a portion of
Social Security and Medicare taxes. These payroll taxes fund programs like Social Security
retirement benefits and Medicare healthcare coverage.

2. **Bonuses:**

- Bonus payments are typically subject to income tax at the same rate as regular income.
However, they may be taxed at a higher withholding rate by employers.

3. **Stock Options and Equity Awards:**

- Stock options and equity awards can have complex tax implications, which vary depending
on the type of award, the timing of exercise or vesting, and the employee's individual tax
situation. Gains from stock options may be subject to capital gains tax upon exercise.
4. **Benefits:**

- Health Insurance: In many countries, employer-sponsored health insurance is often tax-

exempt for employees, meaning that employees do not pay income tax on the value of the
coverage.

- Retirement Contributions: Contributions to retirement plans, such as 401(k)s in the United

States or pension schemes in other countries, may be tax-deductible. However, withdrawals in
retirement are usually subject to income tax.

- Other Benefits: Certain other benefits, such as educational assistance, may also be tax-exempt
up to a certain limit.

5. **Perquisites (Perks):**

- The value of certain fringe benefits or perks provided by employers can be considered taxable
income to employees. Common examples include company cars, housing allowances, and club
memberships.

6. **Deferred Compensation:**

- Deferred compensation plans, such as nonqualified deferred compensation (NQDC) or

retirement plans, can have specific tax rules. These plans may allow employees to defer taxation
on some of their compensation until a later date.

7. **Employee Stock Purchase Plans (ESPP):**

- ESPPs offer employees the opportunity to purchase company stock at a discounted price. The
tax treatment depends on the plan's structure, including whether it's qualified or nonqualified.

8. **Relocation Packages:**

- Certain relocation expenses paid by employers may be considered taxable income to

employees. The tax implications can vary, so it's essential to understand the specific tax rules in
the relevant jurisdiction.
9. **Severance Packages:**

- Severance pay may be subject to income tax, and the tax treatment can depend on the terms
of the severance agreement and local tax laws.

10. **International Assignments:**

- For employees working abroad or international assignees, there may be tax implications both
in the home country and the host country. Tax treaties and local tax laws can affect the taxation
of income earned abroad.

Employees should be aware of these tax implications and consider consulting with tax
professionals to optimize their financial planning. Employers also play a role in ensuring
accurate withholding and providing employees with necessary tax-related information.

Tax laws and regulations vary by country and are subject to change, so it's important for
employees to stay informed about the latest tax rules and for employers to keep up with their tax
compliance responsibilities.

Recommendations of 2nd National Commission on

Labour relating to compensation

The 2nd National Commission on Labor (2002) in India made several recommendations related
to compensation. This commission was established to review and suggest reforms to labor laws,
policies, and practices. Its recommendations aimed to modernize labor regulations and improve
labor welfare. Some of the key recommendations pertaining to compensation include:

1. **Minimum Wages:**

- The commission recommended the introduction of a comprehensive and realistic system of

minimum wages for various categories of workers, covering both skilled and unskilled labor
across different industries.
 - It suggested that minimum wage rates should be revised periodically, at least once every five
years, to account for inflation and changes in living costs.

2. **Fair Wages:**

- The commission emphasized the concept of "fair wages" and recommended that wages
should be determined based on job evaluation, taking into account factors such as skill,
responsibility, and working conditions.

- It suggested that wages should be linked to productivity and performance, ensuring equitable
compensation for all workers.

3. **Compensation for Occupational Injuries:**

- The commission recommended the enhancement of compensation for occupational injuries

and diseases. It proposed that employees should be entitled to receive reasonable compensation
for accidents and work-related illnesses, with increased rates for severe injuries or fatalities.

4. **Social Security Benefits:**

- The commission proposed the extension and improvement of social security benefits,
including health insurance, disability benefits, and pensions, for all workers, particularly those in
the unorganized sector.

- It recommended that the government should establish a comprehensive social security system
to cover various contingencies that workers may face during their employment and retirement.

5. **Equal Pay for Equal Work:**

- The commission stressed the principle of "equal pay for equal work" and recommended that
all workers, including contract and temporary workers, should receive the same remuneration for
the same type of work, irrespective of their employment status.

6. **Inclusion of Atypical Workers:**

 - The commission recommended that atypical workers, such as contract, temporary, and part-
time workers, should receive fair and equitable compensation. It suggested measures to regulate
their employment conditions and ensure social protection.

7. **Gender Pay Equity:**

- The commission emphasized the need for gender pay equity and recommended that women
workers should receive equal pay for work of equal value. It encouraged the elimination of wage
disparities based on gender.

8. **Informal and Unorganized Sector Workers:**

- The commission recognized the significant portion of the workforce in the informal and
unorganized sector and recommended measures to improve their compensation, social security,
and working conditions.

- It suggested the formation of workers' cooperatives and other collective mechanisms to

enhance their bargaining power and access to benefits.

9. **Consultative Processes:**

- The commission recommended the establishment of tripartite bodies and consultative

mechanisms involving employers, employees, and the government to decide on wage-related
matters, minimum wage fixation, and other labor-related issues.

10. **Codification of Labor Laws:**

- The commission proposed the rationalization and consolidation of labor laws to simplify
compliance and make labor regulations more user-friendly for both employers and workers.

It's important to note that these recommendations were intended to bring about significant
reforms in labor laws and compensation practices in India. Implementation of these
recommendations would require changes to legislation, government policies, and industry
practices. The actual adoption and implementation of these recommendations may vary and
evolve over time based on government initiatives and labor market dynamics.
 UNIT 4
Statutory provisions governing compensation linked to
employee welfare
Statutory provisions governing compensation linked to employee welfare can vary significantly
from one country to another, as employment laws and regulations are specific to each
jurisdiction. These provisions are aimed at ensuring fair and equitable compensation, benefits,
and working conditions for employees. Below are some common statutory provisions and laws
related to employee compensation and welfare in many countries, with a focus on the United
States as an example:

1. **Minimum Wage Laws:**

- Many countries have minimum wage laws that require employers to pay employees at or
above a specified minimum hourly or monthly wage rate. In the United States, for instance, the
Fair Labor Standards Act (FLSA) sets the federal minimum wage, while states may have their
own minimum wage rates that exceed the federal standard.

2. **Overtime Pay Laws:**

- Statutory provisions often govern overtime pay, requiring employers to pay a higher rate for
hours worked beyond a certain threshold. In the U.S., the FLSA mandates that eligible
employees receive overtime pay at one and a half times their regular rate for hours worked
beyond 40 hours in a workweek.

3. **Equal Pay Laws:**

- These laws require that employees be paid equally for performing substantially similar work,
regardless of their gender, race, or other protected characteristics. In the U.S., the Equal Pay Act
and Title VII of the Civil Rights Act address pay equity and discrimination issues.

4. **Labor Standards Laws:**

- Various labor standards laws exist to ensure that employees are provided with safe and fair
working conditions. These laws can address issues such as child labor, workplace safety, and
breaks and rest periods.
5. **Social Security and Retirement Benefits:**

- Statutory provisions mandate the payment of social security taxes and contributions to
retirement benefit programs. In the U.S., the Social Security Act governs social security benefits,
while the Employee Retirement Income Security Act (ERISA) regulates employee retirement
plans.

6. **Health Insurance Laws:**

- In some countries, there are legal requirements for employers to provide health insurance or
contribute to employee health coverage. In the U.S., the Affordable Care Act (ACA) includes
provisions related to employer-sponsored health insurance.

7. **Unemployment Compensation:**

- Laws often provide for unemployment compensation to support employees who become
unemployed through no fault of their own. In the U.S., state and federal laws address
unemployment benefits.

8. **Family and Medical Leave Laws:**

- Statutory provisions may require employers to offer job-protected leave for eligible
employees for family or medical reasons. In the U.S., the Family and Medical Leave Act
(FMLA) provides such provisions.

9. **Paid Leave Laws:**

- Some countries have laws mandating paid leave for purposes such as sick leave, vacation, and
parental leave. The specific laws and requirements can vary widely.

10. **Worker's Compensation:**

- Statutory provisions dictate the availability of worker's compensation benefits for employees
who suffer work-related injuries or illnesses. In the U.S., state laws generally govern worker's
compensation.
It's important to note that the specific laws and regulations governing employee compensation
and welfare can differ significantly depending on the country or region. Employers must comply
with these statutory provisions to ensure that their compensation and benefits packages are in
alignment with the law and provide for the welfare and well-being of their employees.
Additionally, employees should be aware of their rights and protections under these laws to
ensure fair and equitable treatment in the workplace.

Minimum Wage Act, 1948

The Minimum Wages Act 1948 is an essential piece of legislation in India. It sets the minimum
wages for all employees. The Act states that the government must fix the minimum wage for
each category.

The minimum wages act, 1948, is the minimum amount that an organisation has to pay a
particular employee (skilled or unskilled) for a specific job at a particular time that any contract
agreement or collective agreement cannot reduce. The Minimum Wage Act was first
implemented in 1948 and took effect on 15 March. The Act also created the Tripartite
Committee of Fair Wage. This committee was formed to set the minimum wage guidelines in
India. It defined the minimum wage and the criteria for its calculation. It set the foundation for
the wage fixation process in India. The salary levels are determined based on the number of
employees.

Purpose of Minimum Wage Act, 1948

The importance of the Minimum wage act 1948 is to prevent employee exploitation and ensure a
decent living for a worker. The Act provides that the government will fix the minimum wage rate
and revise it every five years. It appoints advisory committees to consider the proposals. The
government must follow the guidelines and implement them as soon as possible. In many cases,
this means announcing the changes to the law before the public.

• The Act was introduced in 1948, and it was amended in 2000

• The changes included a change in the floor level for minimum wages

• Currently, the minimum wage floor in India is 115, but the law also gives exceptions for
certain employees

• The lowest floors are in Andhra Pradesh, Kerala, and Gujarat

 • In addition to this, the new law provides for higher minimum wages for workers with
disabilities

The act requires the government to consult with the committee and the representatives of the
people affected by the minimum wage.

• The committee determines the minimum rate of the act

• The government must publish it in the official newspapers and enforce it within three
months

• The government must inform the affected parties of the proposed minimum wage by
publishing the decision in a national daily

• In case of non-payment of wages, the authority must pay ten times the difference

The Objective of the Minimum Wages Act

The Minimum wage Act 1948 accommodates fixing wage rates (time, piece, ensured time,
additional time) for any industry.

1) While fixing hours for an ordinary working day according to the demonstration, ought to
ensure the accompanying:

• The number of hours to be fixed for an ordinary working day should have at least one
stretch/break

• One three-day weekend from a whole week ought to be given to the representative for
rest

• Installation for the day chosen to be given for rest ought to be paid at a rate at the very
least the additional time rate

2) If a representative is engaged with work that classifies his service in at least two booked
vocations, the worker’s pay will incorporate a particular compensation pace of all work for the
number of hours devoted at each undertaking.

3) The business must keep records of all workers’ work, wages, and receipts.

4) Appropriate legislatures will characterise and dole out the errand of review and choose
examiners for the equivalent.
Fixation and Revision of Minimum rates
The Minimum Wages Act, 1948, for the most part, indicates the lowest pay permitted by law
rates on an everyday basis and stretches out to the whole nation. It is overhauled every five
years, but there is an arrangement to increment the dearness allowance every two years. ILC first
suggested the standards for fixing and amending minimum wages.

Update of the lowest pay permitted by law rates depends on a ‘typical cost for many everyday
items list’, and wages can be fixed for a whole state, some portion of the state, class or classes,
and occupations relating to these classifications. The obsession with wages depends on the
standards referenced and a compensation board (different for various industries).

Under the Minimum Wages Act, State and Central Governments can fix and reexamine the least
wages.

• The demonstration determines that the “suitable” government ought to improve the
wages; for example, if the wages to be fixed are according to any power of the Central
Government or Railway organisation, then the Central government fixes it

• Assuming that the compensation rate is to be fixed or amended for planned work, the
separate state legislatures set it

• The Centre fixes the National floor level Minimum Wage that is lower than most states’
individual least wages

• The vagueness and cross-over in the locale of government levels have caused discussions
and contentions

• One of such discussions spins around fixing wage paces of MGNREGA plot and a
business ensure drive by the Central Government

The Minimum Wages Act, 1948 is a labor law in India that was enacted to safeguard the interests
of workers and ensure that they are paid a minimum wage that is essential to maintain a decent
standard of living. The act sets the framework for fixing and revising the minimum rates of
wages in various scheduled employments, which include both skilled and unskilled labor.
Here are some key provisions and features of the Minimum Wages
Act, 1948:

1. Scheduled Employments: The act categorizes different employments into "scheduled

employments," and for each scheduled employment, the appropriate government (central or
state) is responsible for fixing and revising the minimum rates of wages.

2. Components of Minimum Wages: The minimum rates of wages are usually fixed based on the
type of work, skill level, and the location of employment. The rates may include a basic rate of
wages, a special allowance at a rate to be adjusted at such intervals and in such manner as the
appropriate government may prescribe, and the cash value of concessions in respect of supplies
of essential commodities.

3. Revision of Wages: The appropriate government is required to review and revise the minimum
rates of wages at regular intervals, which are usually not more than five years. This is done to
ensure that the minimum wages keep pace with the changing cost of living.

4. Advisory Boards: To assist in the fixation and revision of minimum wages, advisory boards
are established at both the central and state levels. These boards consist of representatives of
employees, employers, and independent persons with knowledge and experience in labor
matters.

5. Fixing Hours of Work: The act also empowers the appropriate government to fix the number
of hours of work which shall constitute a normal working day. This helps in regulating working
hours to prevent exploitation.

6. Payment Frequency: The act stipulates the frequency of wage payments, which should
generally be on a weekly, bi-weekly, or monthly basis.
7. Maintenance of Records: Employers are required to maintain records and registers of
employees, the work performed, and the wages paid. These records should be kept for inspection
by labor inspectors.

8. Penalties: The act includes provisions for penalties to be imposed on employers who do not
adhere to the prescribed minimum rates of wages or violate other provisions of the act.

The Minimum Wages Act, 1948, is a significant piece of legislation aimed at protecting the
economic well-being of workers by ensuring they receive a fair wage for their labor. The specific
rates and rules may vary between states in India as the act allows individual states to determine
minimum wages based on their local conditions.

Conclusion

The minimum wage act 1948 is significant for employers and employees. It will help reduce the
chances of exploitation and help the worker provide for his family. In addition to this, the act
specifies that the government has the power to fix the minimum rate. Its regulations also require
the government to review the rates every five years. This process is very complicated, but the
legislation outlines the critical points. The law is necessary to reduce the risk of exploitation, and
each citizen must know about this act to have the perfect position in the company.

The Payment of wage act 1936

The Payment of Wages Act, 1936 is a labor law in India that governs the payment of wages to
employees. Its primary purpose is to ensure that workers receive their wages on time and in full,
without any unauthorized deductions. This act applies to individuals employed in specific types
of establishments and industries.

Key provisions and features of the Payment of Wages Act, 1936, include:

1. Applicability: The act applies to all employees in specific industries, factories, and
establishments whose monthly wage does not exceed a certain amount (as specified by the
appropriate government).
2. Time and Mode of Payment: The act prescribes that wages should be paid regularly and on
specific dates. In general, wages should be paid at least once a month, but the appropriate
government can specify more frequent payment periods, such as weekly or bi-weekly, for certain
categories of employees.

3. Authorized Deductions: The act allows for specific authorized deductions from an employee's
wages, including contributions to provident funds, income tax, and other deductions mandated
by law. These deductions should be made with the employee's consent or as per legal
requirements.

4. Prohibition of Unauthorized Deductions: Employers are not allowed to make unauthorized

deductions from an employee's wages. Deductions can only be made for the specified reasons
mentioned in the act.

5. Fixation of Wage Period: The act defines the "wage period" as the period for which wages are
payable, and this cannot exceed one month. The wage period must be clearly defined, and the
payment should be made within seven to ten days of the end of the wage period, depending on
the mode of payment.

6. Obligation to Provide Wage Slip: Employers are required to provide a wage slip to employees,
which should detail the various components of the employee's wage, including basic wages,
allowances, and deductions.

7. Maintenance of Records: Employers must maintain and preserve records and registers that
include particulars of employees, the work performed, and the wages paid. These records should
be available for inspection by labor inspectors.

8. Penalties: The act includes provisions for penalties to be imposed on employers who do not
comply with its provisions, including the timely payment of wages and the prohibition of
unauthorized deductions.
The Payment of Wages Act, 1936, is designed to protect the rights of employees by ensuring that
they receive their wages promptly and in full, and that deductions are made only for authorized
reasons. This act contributes to labor welfare and helps prevent wage-related disputes between
employers and employees. It provides a legal framework for addressing wage-related issues and
disputes in India.

The objective of the Payment of Wages Act, 1936

Wages and several other essential terms are defined in Section 2 of the Payment of Wages Act,
1936, as follows:

• Appropriate Administration

• Appropriate government, according to section 2(i) of the Act, means:

• Railways, air transportation, mines, and oilfields are all under the federal government’s
control.

• In all other circumstances, the State Government is in charge.

The Act’s principal goal is to prohibit improper wage deductions and eliminate unnecessary
wage delays. Everyone who works in a factory, on a railway, or as a subcontractor on a railway,
and everyone who works in industrial or other facilities needs to follow the payment of wages
Act. The State Government may extend the provisions to any class of employees in any
establishment or class of establishments by issuing a notification. The Act provides for the
regular and timely payment of wages (on or before the 7th day or the 10th day once the wage
period has exceeded 1000 workers) and the prevention of improper deductions from wages and
arbitrary fines.

Importance of Payment of Wages Act, 1936

The policy primarily targets individuals in the industry who earn less than INR 24000 per month.
The Act further stipulates that a worker cannot contract out of any privilege or right conferred
upon him by the Act. The major goal of the Act is to control the timely payment of a few types
of employees who operate in the industry. If there is a problem or a grievance, prompt and
effective action may be taken to resolve the claims and difficulties with the help of this act.
There are provisions in the statute for a remedy for wages earned while working in the office.
Still, it does not include any procedures for any form of investigation into the office if there is a
dispute.

What does the legislation mean by wage period fixation?

The Payment of Wages Act, 1936 is applicable to each individual who works in the industry.
The act ensures the salary of the employees will be done within one month only. The salary term
cannot exceed one month under any circumstances. As a result, it is obvious that payment of
wages under the act can be chosen on a day-to-day, week-to-week, month-to-month, or
fortnightly basis. It indicates that wages should be paid on time and without delay, and if they
aren’t, the employer or their representatives will be held responsible.

What is the definition of deduction? What are the advantages to the employee?

A deduction is made for the employee’s loss, which would be applied to his salary. The
government permits these deductions for acts performed by employees in various industries.
Deductions are used to subtract a specified amount from an employee’s salary. As a result, when
the employer pays his employee’s salary, he deducts only what is required by law, not what is
convenient for him. The deductions are imperative based on the law and are beneficial to the
employee. To get a better understanding of the notion, consider what cannot be referred to as a
deduction under the Payment of Wages Act of 1936:

• If the company has halted the employee’s increment,

• If the employee has been placed on leave,

• If the person was demoted because of poor performance.

• Only when the organisation has reasonable grounds, can the grounds mentioned above be
used.

What does it mean to be fined? What are the different types of deductions that are allowed
under the act?

With the authorisation of the proper authority, fines can be imposed on both the employee and
the employer. The employer may impose a fine on the employee following the act’s rules and
regulations, and is done for the benefit of both the employer and the employee.

Fines should not be imposed on the worker until he clarifies and explains the demonstration or
omission he made. The total amount of the fine should not exceed 3% of his annual salary. This
increases the importance of the Payment of Wages Act, 1936.

Conclusion

The act has established various rules and regulations for the betterment and effective operation of
the industry. The legislation allows workers to work freely without fear of being hampered by
pay or salary delays. The code has paved the road for employees to work with dignity, and the
necessary mechanisms have been established. The act’s provisions aid in the development of
trust between the employer and the employee, allowing for optimum production to be attained
through employee motivation. The notion of wage payment and deductions under the code is
critical to the industry’s operating and producing intended output and ensuring that the benefit is
supplied
The Workmen's compensation act 1923
The Workmen's Compensation Act, 1923, is an Indian labor law that provides for the payment of
compensation to workers or their dependents in the event of work-related injuries, occupational
diseases, or death. The primary objective of this act is to provide financial protection to
employees and their families in case of injuries or fatalities arising out of and during the course
of employment.

Key provisions and features of the Workmen's Compensation Act, 1923, include:

1. Applicability: The act applies to employees (workmen) who are engaged in certain
employment categories as specified in the schedule to the act. These employment categories
typically include manual labor, hazardous work, and employment in specific industries or
sectors.

2. Employer's Liability: Under this act, employers are liable to pay compensation to employees
for injuries, disability, or death that occur in the course of their employment. This liability is
irrespective of any fault on the part of the employer, making it a no-fault compensation system.

3. Compensation for Injury: The act specifies the schedule of compensation for various types of
injuries, including temporary and permanent disabilities. Compensation is calculated based on
the employee's wages and the nature of the injury.

4. Compensation for Occupational Diseases: Compensation is also provided for occupational

diseases arising out of employment. These diseases should be listed in the schedule to the act or
can be proven to be directly related to the employment.

5. Fatal Accidents: In cases of fatal accidents that occur during the course of employment, the act
provides compensation to the dependents of the deceased worker.
6. Limitation Period: Claims for compensation must be made within a specific time frame from
the date of the injury or death, typically within two years. Failure to do so can result in the
forfeiture of the right to claim compensation.

7. Employer's Liability Insurance: Employers are required to obtain and maintain an insurance
policy covering their liability under the act. This insurance is intended to ensure that
compensation can be paid to employees or their dependents when needed.

8. Dispute Resolution: The act provides for the establishment of a Commissioner for Workmen's
Compensation, who has the authority to adjudicate on compensation claims. Disputes regarding
compensation amounts or other related matters can be resolved through this mechanism.

9. Penalties: The act includes provisions for penalties to be imposed on employers who fail to
provide compensation or maintain the necessary insurance coverage.

The Workmen's Compensation Act, 1923, is an important piece of labor legislation in India
aimed at providing financial support and relief to workers and their families in the event of
workplace accidents or injuries. It helps ensure that employees are not left financially vulnerable
in cases of work-related disabilities or fatalities and promotes workplace safety and prevention of
accidents.

Front-line workers in the following industries are liable to protection under this law:

• Non-permanent employees of the Railways who do not fall under the sub-divisional,
district or administrative offices.

• Captains and crew members on an aircraft.

• Labours employed abroad as per Schedule II of the Workmen Compensation Act 1923.

• Individuals working in construction sites, mines, docks, factories and specific places as
per Schedule II of the above mentioned Act.

• Drivers, mechanics, helpers and any other person associated with working with
vehicles.

According to this Act, any company or establishment operating in the sector highlighted above
and having more than 10 employees are liable to abide by its rules.
Coverage receivable under the Workmen Compensation Act 1923
The type and extent of financial coverage as well as its applicable terms and conditions fully
depend on the insurance company that is affiliated with the employer. Here are some basic things
which all insurers cover:

• Bodily or other injuries during an accident while on duty

• Temporary disablement

• Permanent disablement (complete or partial)

• Death due to an accident at work

• Injury, disease or death resulting from working conditions

• All legal or any other expenses incurred by an employee in the above circumstances

Workmen's Compensation Act 1923 - Amount of compensation

According to Section 4 of the Workmen's Compensation Act 1923, the amount of compensation
workers are liable to receive is as follows:

• Temporary disabilities

For temporary disabilities, the Workmen's Compensation Act 1923 provides financial
compensation of up to 25% of the concerned employee’s monthly wages.

• Permanent total disabilities

In an unfortunate event when an employee suffers from permanent disablement, that individual
has the right to receive 60% of his/her monthly wage or Rs.1,20,000, whichever is higher.

• Permanent partial disabilities

Injuries that fall under permanent partial disabilities are stated in Part II Schedule I of the Act.
The payable corpus is a certain percentage of earnings loss by the employee due to his/her
injury.

• Death

When an employee dies due to an accident at his/her workplace, their family is liable to receive
50% of the deceased’s monthly wages or Rs.1,20,000, whichever is higher.

Note – Individuals who are liable to receive compensation under the Employees' State Insurance
Scheme of India (ESIC) cannot get financial benefits from the above mentioned Act.
Updates in the Workmen Compensation Act 1923
Since its inception in 1923, there have been two major changes in the Workmen Compensation
Act. They are as follows:

• In 2010, this law’s name was changed to Employee’s Compensation Act.

• On January 3, 2020, the Ministry of Labour and Employment raised the amount on which
compensation was calculated as per the Act from Rs. 8,000 to Rs. 15,000.

Features of the Workmen Compensation Act 1923

Employers are under the obligation to provide financial compensation as per the Workmen
Compensation Act 1923 in the following circumstances:

• An accident or injury occurs at the workplace while carrying out a task.

• If the applicant provides proof that the injury or accident that has occurred at the
workplace is aggravating his/her medical condition.

• In case a worker becomes disabled or dies while on duty.

When is the employer not liable to pay compensation?

As per the Act, employers are not liable to financially compensate their employees under the
following circumstances:

• Employee suffers from an injury or accident by disregarding the safety norms.

• Injury resulting in partial or total disablement for less than three days.

• For accidents or injuries under the influence of alcohol or drugs.

International Compensation-objectives and

methods
International compensation refers to the process of rewarding and compensating employees who
work for multinational companies or in an international context. The objectives and methods of
international compensation are influenced by various factors, including the organization's global
strategy, the competitive labor market, and the legal and cultural aspects of the host countries.
Here are the objectives and methods of international compensation:
Objectives of International Compensation:

1. Attract and Retain Talent: One of the primary objectives of international compensation is to
attract and retain top talent in different parts of the world. To compete for skilled professionals,
organizations need to offer competitive compensation packages.

2. Equity and Fairness: International compensation should ensure equity and fairness among
employees working in different countries. Employees with similar skills and responsibilities
should receive comparable compensation regardless of their location.

3. Cost Control: Organizations aim to control labor costs while ensuring that employees are
fairly compensated. This involves striking a balance between competitive compensation and cost
containment.

4. Compliance with Local Laws: International compensation should comply with local labor
laws and regulations in each country of operation. This includes adhering to minimum wage
laws, taxation requirements, and other statutory obligations.

5. Motivation and Productivity: Compensation packages should motivate employees to perform

at their best and contribute to the organization's success. Incentives, bonuses, and other forms of
compensation can be used to drive employee productivity.

Methods of International Compensation:

1. Home Country-Based Compensation: In this method, expatriate employees are compensated

based on the pay structure and benefits they would receive if they were working in their home
country. This approach can provide a sense of continuity and is common for short-term
assignments.
2. Host Country-Based Compensation: This method involves compensating employees based on
the pay structures and practices of the host country where they are working. It helps in adapting
to local labor markets and cost considerations.

3. Balance Sheet Approach: The balance sheet approach attempts to strike a balance between
home and host country compensation by providing allowances and benefits to bridge the gap.
These allowances can include cost-of-living adjustments, hardship allowances, and other
expatriate benefits.

4. Localization: For long-term international assignments, localization involves transitioning

expatriate employees to the local payroll and compensation structure of the host country. This
approach aligns compensation more closely with local standards.

5. Global Grading and Job Evaluation: Organizations can use a global grading system to evaluate
and classify jobs on a global scale, allowing for consistent and standardized compensation
structures worldwide.

6. Incentives and Bonuses: International compensation packages often include performance-

based incentives, bonuses, and profit-sharing schemes to motivate employees to achieve specific
objectives and enhance productivity.

7. Tax Equalization: International employees may face complex tax situations due to working in
different countries. Tax equalization methods are used to ensure that employees do not
experience a significant increase or decrease in their tax liabilities.

8. Special Allowances: Special allowances, such as housing, education, or expatriation

allowances, are often provided to employees to cover additional expenses associated with living
and working in a foreign country.
9. Benchmarking: Organizations often benchmark their international compensation packages
against industry standards and competitors to ensure that they remain competitive in the global
talent market.

The choice of compensation method and the specific components of international compensation
packages will depend on the organization's goals, the nature of international assignments, and the
local market conditions in the host countries. Balancing the objectives of attracting and retaining
talent, ensuring fairness, controlling costs, and complying with legal requirements is crucial in
designing effective international compensation strategies.

Objectives:
1. The compensation policy should be in line with the structure, business needs and overall
strategy of the organization.

2. The policy should aim at attracting and retaining the best talent.

3. It should enhance employee satisfaction.

4. It should be clear in terms of understanding of the employees and also convenient to

administer.

Major Components in an International

Compensation Package
International Compensation is an internal rate of return (monetary or non monetary rewards /
package) including base salary, benefits, perquisites and long term & short term incentives that
valued by employee’s in accordance with their relative contributions to performance towards
achieving the desired goal of an organization.

The following are the major components of an international compensation package.

1. Base Salary

This term has a slightly different meaning in an international context than in a domestic one. In
the latter case, it denotes the amount of cash compensation that serves as a benchmark for other
 compensation elements like bonus, social benefits. For the expatriate, it denotes the main
component of a package of allowances directly related to the base salary and the basis for in-
service benefits and pension contributions. Base salary actually forms the foundation block of the
international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to
take up foreign assignments. This is with the aim to compensate them for the possible hardships
they may face while being overseas. In this context, the definition of hardship, the eligibility
criteria for premium and the amount and timing of this payment are to be carefully considered.
Such payments are normally made in the form of a percentage of the salary and they vary
depending upon the tenure and content of the assignment. In addition, sometimes other
differentials may be considered. For instance: if a host country’s work week is longer that of the
home country, a differential payment may be made in lieu of overtime.

3. Allowances

One of the most common kinds of allowance internationally is the Cost of Living Allowance
(COLA). It typically involves a payment to compensate for the differences in the cost of living
between the two countries resulting in an eventual difference in the expenditure made. A typical
example is to compensate for the inflation differential. COLA also includes payments for
housing and other utilities, and also personal income tax. Other major allowances that are often
made are:

• Home leave allowance

• Education allowance
• Relocation allowance
• Spouse assistance (compensates for the loss of income due to spouse losing their job)

Thus, multinationals normally pay these allowances to encourage employees to take up

international assignments to make sure that they are comfortable in the host country in
comparison to the parent country.

4. Benefits

The aspect of benefits is often very complicated to deal with. For instance, pension plans
normally differ from country to country due to difference in national practices. Thus all these and
other benefits (medical coverage, social security) are difficult to imitate across countries.

Thus, firms need to address a number of issues when considering what benefits to give and how
to give them. However, the crucial issue that remains to be dealt with is whether the expatriates
should be covered under the home country benefit programmes or the ones of the host country.
As a matter of fact, most US officials are covered by their home country benefit programmes.
Other kinds of benefits that are offered are:
• Vacation and special leaves
• Rest and rehabilitation leaves
• Emergency provisions like death or illness in the family

These benefits, however, depend on the host country regulations.

5. Incentives

In recent years some MNC have been designing special incentives programmes for keeping
expatriate motivated. In the process a growing number of firms have dropped the ongoing
premium for overseas assignment and replaced it with on time lump-sum premium. The lump-
sum payment has at least three advantages. First expatriates realize that they are paid this only
once and that too when they accept an overseas assignment. So the payment tends to retain its
motivational value. Second, costs to the company are less because there is only one payment and
no future financial commitment. This is so because incentive is separate payment,
distinguishable for a regular pay and it is more readily for saving or spending.

6. Taxes

The final component of the expatriate’s compensation relates to taxes. MNCs generally select
one of the following approaches to handle international taxation.

1. Tax equalization: – Firm withhold an amount equal to the home country tax obligation of the expatriate
and pay all taxes in the host country.
2. Tax Protection :- The employee pays up to the amount of taxes he or she would pay on remuneration in
the home country. In such a situation, The employee is entitled to any windfall received if total taxes are
less in the foreign country then in the home country.

7. Long Term Benefits or Stock Benefits

The most common long term benefits offered to employees of MNCs are Employee Stock
Option Schemes (ESOS). Traditionally ESOS were used as means to reward top management or
key people of the MNCs. Some of the commonly used stock option schemes are:

• Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and issuance to
key employees. Such shares serve as incentive for employees to build long term value for the company.
• Restricted Stock Unit (RSU) — This is a plan established by a company, wherein units of stocks are
provided with restrictions on when they can be exercised. It is usually issued as partial compensation for
employees. The restrictions generally lifts in 3-5 years when the stock vests.
• Employee Stock Purchase Plan (ESPP) — This is a plan wherein the company sells shares to its employees
usually, at a discount. Importantly, the company deducts the purchase price of these shares every
month from the employee’s salary.

Hence, the primary objective for providing stock options is to reward and improve employee’s
performance and /or attract / retain critical talent in the Organization.