Compensation plan

Compensation as the Money received in the Performance of work, plus the many Kinds of benefits
and services that organisations provide their employees Money is included under direct
Compensation while benefits come under indirect Compensation and may consist of life, accidents,
and health insurance the employees contribution to retirement pay for vacation or illness and
employee required payments for employee welfare as social security.

Meaning of compensation
Compensation is a systematic approach to providing monetary value to employees in exchange of
work performed. Compensation management refers to the policies and procedures for managing an
forms of financial refers and tangible services a benefits that employee receive as a part of an
employment relationship. Better compensation management facilities to attract the employees
towards the organisation.

Consistency

A proper compensation play must be consistent and stable.

Reviewing

After the compensation plan is made the reviewing of compensation decision must be made from
time to time.

Solving problems

A good compensation plan must solve the problems of the workers.

Objectives of compensation.
The objective of Compensation as follows: are

1) To attract and retain competent and Productive staff.

2) To identify different levels of-responsibility and accountability, and to establish salaries

accordingly.

3) To base salary adjustments on individual Contributions and performance

4) To pay salaries that are Competitive, in the relevant labour market

5) To give the feeling that remuneration is fair.

6) It forms an effective motivator and increases

Principles of Good Compensation

Strategy

1) Simplicity:
A good compensation plan must be very easy to -understand and simple so that the Workers Can
Calculate their wages by themselves.

2) Flexibility:-

Adaptability adjustment must be there in proper compensation so that, according to the situation
the plan can be adjusted.

3) Equality: The Compensation plan must assure the employees of equitable Compensation for
Services rendered.

Importance of Compensation
The fair Compensation system will help in the following:-

1) An ideal Compensation system will have a Positive impact on the efficiency and results
produced by employees. It will encourage the employees to perform better.
2) It will enhance the process evaluation.
3) It will be applied to all the levels of the organisation.
4) The system should be Sample and flexible So that every employee would be able to
compute his own compensation receivable.
5) It should motivate and encourage those who perform better
6) Sound Compensation / Reward system
7) The system provides growth and advancement opportunity to the deserving employees

Benefits of Compensation.
Benefits are a form of Compensation paid by employers to employees -over and above of Pay
specified as a base salary hourly rate of pay. Benefits area Portion of a total compensation

Package for employees. A common Sub of benefits includes:-

1) Health insurance

2) Life insurance

3) Dental insurance

4) Vision insurance

5) Paid time off such as sick days

6) Retirement benefits and vacation days

7) Long term disability insurance

8) Short term disability insurance

Wage & salary Administration
Payment made to labour is generally referred to as wage. It is the money paid to a worker on an
hourly, daily, or weekly basis or by the piece. The term wage simply means reward to workers for
the services rendered by them for the organisation. It may be paid hourly, daily, monthly, weekly or
per unit basis. Payment made to employees at regular periodic intervals whose output cannot be
easily measured is generally referred to as salary. For example, payment to supervisory and
managerial staff.

Definitions

According to Benham, "wages are a sum of money paid under contract by an employer to a worker
for services rendered".

According to ILO, "wages refer to that payment which is made by the employer to the labourer for
his services hired on the conditions of payment per hour, per day, per week or per fortnight".

According to Joad, "wages are the income that an employee gets for his services".

According to Yoder and Henceman, "Wages are the compensation of wage earners, the numerous
employees who use the tools and equipment of their employers to produce goods and services that
are sold by their employers".

Wage and salary administration

The role of wage and salary administration in HRM is to ensure that employees are paid in an
equitable and fair manner. Wage and salary administration is the group of activities involved in the
development, implementation and maintenance of a pay system. It influences the level of employee
commitment in the organisation.

According to D.S.Beach, wage and salary administration refers to the "establishment and
implementation of sound policies and practices of employee compensation. It covers areas such as
job evaluation, surveys of wage and salaries, analysis of relevant organisational problems,
development and maintenance of wage structure, establishing rules for administrating wages, wage
payment incentives, profit sharing, wage changes and adjustments, supplementary payments,
control of compensation costs and other related items".

Objectives of wage and salary administration

A sound plan of wage and salary administration seeks to achieve the following objectives;

1. To establish a fair and equitable compensation offering similar pay for similar work.

2. To attract competent and qualified personnel.

3. To retain the present employees by keeping wage levels in tune with competitive units.

4. To keep labour and administrative costs in line with the ability of the organisation to pay.

5. T improve motivation and morale of employees and to improve trade union management
relations.
B To project a good image of the company and to comply with legal needs relating to wages and
salaries.

1. To minimize the chances of favouritism and other anomalies while fixing the wage rates.

Principles of wage and salary administration

The following principles should be followed for an effective wage and salary administration;

1. Wage policy should be developed keeping in view of the interests of all concerned parties such as
employer, employees and the society.

2. Wage and salary plans should be sufficiently flexible or responsive to changes in internal and
external conditions of the organisation.

3. Efforts should be made to ensure that differences in pay for jobs are based on variations in job
requirements such as skill, responsibility, efforts and mental and physical requirements.

4. Wage and salary administration plans must always be consistent with overall organisational plans
and programmes.

5. Wage and Salary administration plans must always be in conformity with the social and economic
objectives of the country like attainment of equality in income distribution and controlling inflation,
etc.

6. Wage plans and programmes should be in accordance with the changing national conditions.

7. Workers should be associated as far as possible, in formulation and implementation of wage

policy.

8. Wages and salaries should be in accordance with the prevailing rates in the labour market.

9. There should be a clearly established procedure for hearing and adjusting wage complaints.

10. The workers should receive a guaranteed minimum wages.

11. Prompt and correct payments to the employees should be ensured.

12. Wage policy and programme should be reviewed and revised periodically in accordance with
changing needs.

Wage theories

There are various theories for the determination of wages. The following is a review of some of the
popular wage theories;

1. Subsistence theory of wage

The subsistence theory of wage is also known as iron law of wage. This theory was first put forward
by Quesnay, a member of physiocratic school of economists and developed by David Ricardo.
According to this theory, wages tend to remain at the subsistence level. It will provide the workers
only with bare subsistence. If wages rises above this level, this leads to an increase in the population.
Because, the increased prosperity will encourage the people to marry and increase population. This
will increase labour supply. The increased competition among workers for employment causes
wages to fall again to the subsistence level. Likewise, if the wages fall below the subsistence level
malnutrition raises the death rate. People do not have interest in marriage. Fewer children are born.
This will reduce the supply of labour. The competition for employment is reduced and wages tend to
rise to the subsistence level. Finally, the wages remain at the subsistence level.

2 Wages fund theory

This theory is associated with Adam Smith and J.S.Mill. Wage fund is that amount of floating capital
which is set a part by employer for paying wages to the labour. The average wage rate is determined
by dividing the wages fund by the total number of workers employed.

Wage rate Wage Fund / Total no. of workers.

For example if capital of fund is 10,000 and number of workers are 100 then rate of wages will be
10,000/100 = 100

3. Residual claimant theory

According to this theory labour receives what remains after the payment of rent, profits, taxes and
interest out of the national income. This theory is offered by American economist Mr. Walker.
According to him, "wages equal the whole product minus rent interest and profit."

4. Demand and supply theory

As the price of commodity is determined by the interaction of the forces of demand and supply, the
rate of wages is also determined in the same way by the demand and supply of the labourers.

5. Standard of living theory

This theory postulates that the wages of the workers are determined by the standard of living which
is determined by the mode of production in a country

Factors affecting wage policy

The following are some of the major factors that influence the wage policy of an organisation;

1. Ability of the organisation to pay

Wage increases are made by those organisations which can afford them. Organisations having good
sales and high profits tend to pay higher compared to those which are running at a loss or earning
low profits. All employers, irrespective of their profits or losses, have pay not less than their
competitors and need to pay more if they wish to attract and keep workers. In the long run, the
ability to pay is important. During the times of prosperity, wages are increased to carry on profitable
operations. But during the periods of depression, wages are cut because of lack of funds.

2. Supply and demand of labour

The labour market conditions or supply and demand forces operate at the national, regional and
local levels, and determine organisational wage policy. If the demand for certain skills is high and
supply is low, the result is a rise in the price to be paid to those skills. But if the demand for
manpower skill is minimal, the wages will be relatively low.
3. Prevailing market rate

This is known as the 'comparable wage' or 'going wage rate', and is the widely used criterion. The
wage policy of an organisation generally tends to conform to the wage rate payable by the industry
and the community. This is done for several reasons such as to face competition comply with
government laws and demands of the trade unions to maintain equal pay and work in an industry.

4. Cost of living

This criterion demands for pay adjustments based on increases or decreases in an acceptable cost of
living index. When the cost of living increases, workers and trade unions demand adjusted wages to
offset the erosion of real wages.

5. Living wage

This criterion means that wages paid should be adequate to enable an employee to maintain himself
and his family at a reasonable level of existence.

6. Psychological and Social factors

Psychologically, persons perceive the level of wages as a measure of success in life. Sociologically,
people want equal wages for equal work. They visualise a work environment which is free from
exploitation and discrimination based on caste, colour, sex and religion.

All these psychological and sociological factors greatly influence the wage policy of an organisation

Methods of wage payment

Wage payment methods are the different systems adopted by organisations to reward the
workforce. Basically there are three methods of wage payment;

1. Time wage system

2. Piece wage system and

3. Balance or debt payment system

Time wage system

Under this system, wages are paid on the basis of time spent on the job irrespective of the amount
of work done. The unit of time may be a day, a week, a fortnight or a month.

Time wage system is suitable under following conditions;

1. Units of output are non-measurable.

2. Quality of work is highly important.
3. When workers are new and learning the job.
4. A When collective efforts of a group of persons are essential for completing the job.

Advantages

Time wage system has the following advantages:

 1. It is the simplest and the oldest method. It is easy to understand and workers can easily
compute their own remuneration.

2. Earnings of workers are regular and fixed and they do not suffer from temporary loss of
efficiency.

3. As there is no pressure to speed up production, the quality of work can be kept high. A worker
can show his skill.

4. Learners can concentrate on learning the best methods of work as their earning s are not
dependent on the amount of work.

5. It is an objective method.

Disadvantages

The time wage system suffers from the following disadvantages:

1. The method provides no incentive for better performance as reward is not proportionate to
effort.
2. Calculation of labour cost per unit is difficult as the total wage bill does not change with the
volume of production.
3. In the absence of an incentive to hard work, productivity of labour becomes low.
4. High cost of supervision.

2. Piece wage system

Under this system, remuneration is based on the amount of work done or output of a worker. One
unit of output is considered as one piece and a specific rate of wage is paid per piece. Greater id the
number of pieces produced by a worker, higher is his remuneration. Thus, a workman is paid in
direct proportion to his output. It is called payment by results.

Piece wage system is suitable under the following conditions;

1. When work done by an individual worker can be measured accurately

2. When the quantity of output depends directly upon the skill and efforts of the worker.
3. In large scale productions.
4. When methods of production are standardised and the job is of a repetitive nature.

Advantages

Piece wage system has the following advantages;

1. Workers who work hard and produce more get more wages. This provides an incentive to
increase productivity.
2. Ambitious and efficient workers are provided ample opportunity to utilize their talent and
increase their earnings and thereby improve their standard of living and morale.
3. The method is just and fair to all. Efficient workers get ample reward, while shirkers are
penalised.
4. Management can distinguish between efficient and inefficient workers for the purpose of
promotion.
 5. Increase in productivity results in higher output and lower costs of production per unit.
6. The cost of labour per unit of output can be easily calculated as the wage bill varies in direct
proportion to the output.
7. Cost of supervision is low.

Disadvantages

Piece wage system is however, subject to the following drawbacks;

1. The earnings of workers are not stable and they may suffer due to temporary delays or
difficulties. They feel insecure and dissatisfied.
2. A Employees may not stress quality so that rigid quality control becomes necessary.
3. This system may create jealousy between efficient and inefficient workers.
4. Detailed records of production have to be kept so that the clerical work is increased. The
method is not practicable when contribution of individual workers cannot be calculated.

Difference between time wage system & piece wage system

The following are the major points of difference between time and piece wage systems;

Basis of comparison Time wage system Piece wage system

Payment basis Time spend on the job Number of units produced
Nature of payment Minimum payment to every No guarantee of minimum
worker payment.
Link with productivity Wages not directly linked with Wages directly linked with
productivity productivity.
Quality of work High Low
Need for super-vision High Low

3. Balance or debt method

This is a combination of time and piece rates. The worker is guaranteed an hourly or a day rate with
an alternative piece rate. If the earning of a worker calculated at the piece rate exceeds the amount
which he would have earned if paid on time basis, he gets credit for the balance. Where piece rate
earnings are less than time rate earnings, he is paid on the basis of the time rate; but the excess
which he is paid is carried forward as a debt against him to be recovered from any future balance of
piece work earnings over time work earnings. This system accepts the fixation of time and piece
rates on a scientific basis.

For example, if a rate of time wage 200 per week and a worker produces units worth Rs. 220 on
piece-wage rate per week, he will be paid minimum wage of Rs. 200 and the balance amount of Rs.
20 will be credited to his account. On the contrary, if he produces units worth Rs. 150 on piece-wage
system, he will be paid the minimum wage of Rs. 200 but Rs.50 debited to his account which will be
deducted from his future earnings.

Incentive system

An incentive is something that motivates an individual to perform an action. Incentive system refers
to all the plans that provide extra pay for extra performance in addition to regular wages for a job. It
links pay and performance by rewarding employees for performance not for seniority or hours
worked. Thus incentive systems offer extra payments for efficiency and increased output. The
inventive system is also known as Payment by Result (PBR).

Definitions

According to Milton L. Rock, "incentives are variable rewards granted according to variations in the
achievement of specific results".

According to E.H.Burack, "an inventive scheme is a plan or programmes to motivate individual or

group performance. An incentive programme is most frequently built on monetary rewards
(incentive pay or a monetary bonus), but may also include a variety of non-monetary rewards or
prizes".

According to French, the term "incentive system has a limited meaning that excludes many kinds of
inducements offered to people to perform work, or to work up to or beyond acceptable standards. It
does not include;

1. Wage and salary payments and merit pay

2. Over-time payments

3. pay for holiday work or differential according to shifts

4. All payments which could be considered incentives to perform work at undesirable times and

5. Premium pay for performing danger tasks.

It is related with wage payment plans which tie wages directly or indirectly to standards of
productivity or to the profitability of the organisation or to both".

Features

The salient features of incentive system are as follows;

1. Incentive system is based on employee productivity.

2. An incentive plan may consist of both monetary and non-monetary elements. Mixed elements can
address the diverse needs of individual employees.

3. The objective of an incentive system is to lead an employee first to a minimum acceptable level of
performance and then to the optimum achievable performance.

4. It is a method which clearly links employee earnings with employee performance

It is useful both for the employees and the organisation. Employees get the opportunity to increase
their earnings through better performance, Organisation can increase productivity and motivation of
the workforce.

Advantages

Following are some of the important advantages of incentive system;

1. Increase in volume of output: Output of the firm increases as the workers are motivated to
increase their efficiency to get more wages.
2. Increases motivation: Incentive systems are used to motivate employees by offering
compensation for exceptional performance.

3. Reduction of cost of production per unit: Cost of production per unit of output declines due to
decrease in labour cost and overheads per unit.

4. Reduction of labour turnover: Workers is rewarded properly for their efficiency which results in
reduction of labour turnover.

5. Reduction of idle time: Since the payment of wages is linked with efficiency, the idle time costs are
reduced to the minimum.

6. Benefit to consumers: Reduction of cost of production per unit is passed on to the consumers by
reduced price.

Disadvantages

In spite of the above advantages, the incentive systems are not free from disadvantages. The
following are some of the important disadvantages

 More supervision required: As the workers want to speed up the work to get more wages,
more supervision is necessary to avoid decline in the quality of work and wastage of raw
materials.
 Union opposition: Labour unions may oppose the incentive plan because it weakens them
and creates jealousies and greed among workers.
 Poor quality: Workers tend to sacrifice quality for the sake of quantity. This results in the
production of sub-standard goods.

Types of incentives

Clark and Wilson) differentiate between three types of incentives;

1. Material incentives: Tangible rewards which include wages, fringe benefits, and other aids.
2. Solidary incentives: Intangible rewards from the act of association sociability, status and
identification.
3. Purposive incentives: Intangible rewards related to the goals of the organisation. For
example, working with the employees or group for attaining the mission (targets).

Basically organisations offer the following two categories of incentives to motivate employees;

1. Monetary incentives

Monetary incentives are those incentives which satisfy the employees by providing rewards in terms
of rupees. In many organisations, various wage plans and bonus schemes are introduced to motivate
and stimulate the people to work.
2. Non-monetary incentives

Besides the monetary incentives, there are certain non-financial incentives which can satisfy the ego
and self- actualisation needs of employees. The incentives which cannot be measured in terms of
money are under the category of non- monetary incentives. Whenever a manager has to satisfy the
psychological needs of the subordinates, he makes use of non-financial incentives. Non- financial
incentives can be of the following types;

Security of service:

Job security is an incentive which provides great motivation to employees. If his job is secured,
people will put maximum efforts to achieve the objectives of the enterprise.

Praise or recognition

The praise or recognition is another non- financial incentive which satisfies the ego needs of the
employees. Sometimes praise becomes more effective than any other incentive. The employees will
respond more to praise and try to give the best of their abilities to a concern.

Suggestion scheme

The organisation should look forward to taking suggestions and inviting suggestion schemes from
the employees. This inculcates a feeling of participation in the employees.

Job enrichment

Job enrichment is another non-monetary incentive in which the job of a worker can be enriched.
This can be done by increasing his responsibilities, giving important designation, increasing the
content and nature of the work.

Promotion opportunities

Promotion is an effective tool to motivate people to work in a concern. If the employees are
provided opportunities for the advancement and growth, they feel satisfied and contented and they
become more committed to the organisation.

Positive and Negative incentives

Positive incentives are those incentives which provide a positive assurance for fulfilling the needs
and wants. Positive incentives generally have an optimistic attitude behind and they are generally
given to satisfy the psychological requirements of employees. For example, promotion, praise,
recognition, perks and allowances, etc. It is positive by nature.

Negative incentives are those whose purpose is to correct the mistakes or defaults of employees.
The purpose is to rectify mistakes in order to get effective results. Negative incentive is generally
resorted to when positive incentive does not work and a psychological set back has to be given to
employees. It is negative by nature. For example, demotion, transfer, fines, penalties.

Types of incentive plans

Incentive plans may be classified into two broad categories as follows:

1. Individual incentive plans and

2. Group incentive plans.

1. Individual incentive plans

Under individual incentive plans, earnings are related directly to the performance of the individual
worker. Individual incentive plans can be categorised under two heads such as time based and
output based.

Time based plans: Under time based plans, a standard time is determined and incentives are given if
a worker completes the job in less than standard time. The following are some of the important time
based incentive plans;

1. Halsey or Weir plan

This plan was developed by F.A. Halsey and was first introduced in the Weir Engineering Works,
England. Under this plan, a standard time is fixed on the basis of past performance records. A worker
who completes his job within or more than the standard time is paid a guaranteed time wage. A
bonus (usually 50 per cent) of the time saved is paid to a worker who completes his job in less than
the standard time. The bonus is calculated o the basis of time rate.

Merits

1. The plan is simple to understand. A worker can easily calculate his earnings.

2. Both the employer and the workers get equal benefit of time saved.

3. A guaranteed minimum wage to every worker provides a sense of security.

4. The plan encourages the workers to be efficient because bonus is based on time saved.

Demerits

1. Standards based on past performance may not be scientific and fair.

2. Efficient workers are discouraged to save more than half of the standard time.

3. Emerson efficiency plan

This plan was developed by Harrington Emerson. Under this plan, standard time for the job is
determined scientifically and a minimum time wage is guaranteed to all workers. Bonus is given at
an increasing percentage beyond the prescribed level of efficiency (usually 66.67 per cent). Efficiency
is measured by comparing the actual time taken with the standard time.

Merits
1. Guaranteed time wage provides a sense of security to all workers.
2. It encourages healthy competition among workers.
3. Bonus begins at 66.67 per cent efficiency which is within the reach of many workers.

Demerits
1. There is little incentive after 100 per cent efficiency level.
2. Employer may fix the standard time at a low level making it impossible for most of the
worker s to earn bonus.
3. The plan is not very flexible or selective.

4. Bedeaux point plan

This plan was developed by Charles E. Bedeaux in 1911. Under it, standard time for the job is
set scientifically and it is expressed in terms of B. For instance, a standard time of 240 B
means the job should be completed within 240 minutes. In determining the Bs, the time of
operation and the rest time both are taken into account, minimum time wage is guaranteed
to all workers. The workers who complete the job within or more than the standard time are
paid at the normal time rate. Those who complete the job in less than the standard time are
paid bonus for the time saved. Generally, 75% of the wages for the time saved are paid as
bonus to the worker and 25% of the foreman.

Merits
1. Minimum wages are guaranteed to all workers.
2. This plan is suitable in factories wherein a worker is expected to perform different types
of jobs.
3. Efficiency of different section/workers in the factory can be compared.

Demerits
1. Workers may dislike sharing the bonus with foreman.
2. Calculations involved are complicated and workers may not be able to understand them.
3. Much clerical work is involved.

Output based plans: Under output based plans, a standard of output is determined and
workers producing more than the standard output are given bonus. The following are some
of the important output based incentive plans;

1. Taylor's Differential Piece Rate Plan

F.W. Taylor, the Father of Scientific Management devised this plan. Under this system,
standard task is established through time and motion study. Two piece rates are laid down.
The lower rate for those workers who fail to complete the standard task within the allotted
time and the hither rate for those who complete the task within or less than the allotted
time. The objective is to provide sufficient incentive to workers to work hard and achieve the
standard.

Merits
1. It provides sufficient incentives to efficient workers to put forth their best efforts.
2. Inefficient workers are penalised by low rates, but encouraged to reach the standard.
3. Use of time and motion study help to improve and standardize work methods.

Demerits
1. There is no guarantee of minimum wage to workers.
2. The plan is unsympathetic to workers who are just below the standard.
3. It treats the workers as machines rather than as human beings.
4. The employer may fix a very high standard which workers may find difficult to achieve.
 2. Merrick's multiple piece rate plan
This plan was developed to overcome the drawbacks in Taylor's plan. Under this plan, three
graded piece rates are prescribed. Workers' producing less than 83% of the standard output
are paid at a basic piece rate. Those producing from 83% to 100% of the standard output
Paid 110% of the basic piece rate. Workers producing more than the standard output are
paid at 120% of the basic piece rate.

Merits
1. This plan reduces the drawbacks of the Taylor's plan.
2. It is less harsh to beginners or learners.
3. It is more flexible.
4. It is useful where the performance level is to be increased to 100 per cent.

Demerits
1. Minimum wage is not guaranteed to workers.
2. It is liberal for the efficient workers. But all workers. Producing from 1% to 82.9% of the
standard output are classified as sub-standard and are paid at the same piece rate.

3. Gantt's Task and Bonus Plan

This plan was developed by Henry L. Gantt, a close associate of F.W. Taylor. Under it,
standard time for every task is fixed through time and motion study. Minimum time wage is
guaranteed to all workers. A worker who fails to complete the task within the standard time
receives wage for actual time spent at the specified rate. Workers who achieve or exceed
the standard get extra bonus varying between 20% to 50% of the hourly rate for the time
allowed for the task.

Merits
1. Minimum wage is assured to all workers.
2. Wage increase progressively with increase in efficiency, Therefore, there is sufficient
incentive for efficient workers.
3. Inefficient workers are not penalized severally.

2. Group incentive plans

In group incentive schemes, earnings of a group are related to the performance of the group
as a whole. Various types of group incentive schemes are as follows;

1. Priestman plan
This system of wage payment was first used by Priestman in 1917. It is applied to
workers who work in groups. It provides for payment of group bonus in addition to the
ordinary time rate to the individual workers. Thus if during a year, an enterprise is able
to reach the predetermined standard output or exceed the previous year's output,
workers are paid increased wages in the same ratio in which output has increased. An
advantage of the system is that it brings about team-spirit among the workers of a
group. If the group as a whole works well, this is bound to add to overall output of the
enterprise and in that case all the workers would stand to benefit. But the disadvantage
is that it may be insufficient to motivate individual workers, particularly these who
possess greater skills and experience.
2. Scanlon plan

The Scanlon plan is a gain sharing programme in which employees share in specific cost
savings that are due to employee effort. The plan was developed in 1937 by Joseph Scanlon
and designed to encourage cooperation involvement and sharing of benefits. The plan
encourages workers to contribute valuable suggestions for reducing costs and improving
productivity. If a suggestion is implemented and successful, all employees usually share in
75% of the savings.

3. Profit sharing

In profit sharing, employer distributes a set percentage of the company's profits to its
employees. Employers may distribute the portion of its profits immediately or it may set up
a series of accounts for employees and defer the profit sharing until employees retire. The
idea behind profit sharing is to give employees an incentive to work for the company's
profitability. A well-designed profit sharing plan can help attract and keep talented
employees.

Merits

1. The employees being interested in profits, there is likely to be less wastage of material,
power etc. and greater care in the use of materials, machinery and tools.
2. No need for intensive supervision.
3. It improves efficiency and productivity of the workforce.
4. Greater co-operation between the management and the employees.

Demerits

1. It will be difficult to implement the scheme, when there is lack of profit.

2. A Worker is excessively concerned for the productivity of his own group and may neglect
the productivity of other groups.
3. The benefits of profit sharing may not reach the workers if the management is not fair
in calculation of productivity and profits.

Incentive Plans

Group Incentive
Individual
Incentives
 Time based Output based
1. Priest man plan
2. Scanion plan
3. Profit sharing
1.Halsey plan 1. Taylor plan
2. Rowan plan 2. Merrick plan
3. Remerson plan 3. Gantt plan
4. Bedeaux plan

Figure (4.1)

Incentive plans

Bonus

The primary meaning of the word bonus is a boon or gift over and above what is normally due as
remuneration to the receiver. Webster's international dictionary defines bonus as "something given
in addition to what is ordinarily received by or strictly due to the recipient". The bonus was originally
regarded as a gratuitous payment by an employer to employees. Bonus pay is used to improve
employee morale, motivation, and productivity. Bonus is a concept of profit sharing which is paid at
the end of a financial year to the employees. The Payment of Bonus

Act, 1965 in India made bonus statutory. The Act made it compulsory, the payment of bonus to
persons employed in certain establishments on the basis of profits or on the basis of production or
productivity

Fringe benefits

Fringe benefits are additional benefits that are provided by the organisation to its employees in
addition to wages or salary. The term Fringe benefits refer to various extra benefits provided to the
employees, in addition to the compensation paid in the form of wage or salary. According to Belcher,
"fringe benefits are any wage cost not directly connected with the employee's productive effort,
Performance, service or sacrifice".

Features

The salient features of fringe benefits are as follows;

1. Wages are directly related to the work done and are paid regularly while fringe benefits are those
payments or benefits which a worker enjoys in addition to the wages or salary he receives.

2. Fringe benefits are not given to workers for any specific jobs they have performed but are offered
to them to stimulate their interest in their work. They boost the earnings of the employees.

3. Fringe benefit represents a labour cost for the employer. Everything which a company spends
over and above wages is fringe benefit.
4. A fringe is never a direct reward geared to the output, merit or effort of an employee.

A fringe benefit is enjoyed by all employees.

Objectives

The important objectives of fringe benefits are;

1. To create and improve sound industrial relations.

2. To boost up employee morale.

3. To motivate the employees by identifying and satisfying their unsatisfied needs.

4. To provide qualitative work environment and work life.

5. To provide security to the employees against social risks.

Types of fringe benefits

Organisations provide a variety of fringe benefits. The fringe benefits are classified under four heads
as given here under;

1. Employment security

Benefits under this head include insurance, leave travel pay, overtime pay, leave for maternity, cost
of living bonus, jobs to dependence etc.

2. Health protection

Benefits under this head include accident insurance, disability insurance, health insurance,
hospitalisation, life insurance, medical care, sick benefits, sick leave, etc.

3. Old age and retirement

Benefits under this category include deferred income plans, pension, gratuity, provident fund, old
age assistance, old age counselling, medical benefits for retired employees, travelling concession to
employees, jobs to sons/daughters of the deceased employee and the like.

4. Personnel identification

This category covers benefits such as anniversary awards, attendance bonus etc.

5. Participation and stimulation

Benefits under this category include canteen, cooperative credit societies, educational facilities,
clubs, recreational programmes etc.