Reward Management

Module 1

COMPENSATION AND COMPENSATION MANAGEMENT

Compensation is referred to as money and other benefits received by an employee for providing services
to his employer.

Compensation refers to all forms of financial returns: tangible services and benefits employees receive as
part an employment relationship, which may be associated with employee’s service to the employer like
provident fund, gratuity, insurance scheme and any other payment which the employee receives or
benefits he enjoys in lieu of such payment.

DEFINITION:
According to Dale Yoder, “Compensation is paying people for work.” “Compensation is what employees
receive in exchange for their contribution to the organization.” – Keith Davis

In the words of Edwin B. Flippo, “The function compensation is defining as adequate and equitable
remuneration of personnel for their contributions to the organizational objectives.” COMPENSATION
MANAGEMENT

Compensation management, also known as wage and salary administration, remuneration

management, or reward management, is concerned with designing and implementing total
compensation package.
 Compensation is the Human resource management function that deals with every type of reward
individuals receive in exchange for performing an organizational task.

The consideration for which labor is exchanged is called compensation.

 Objectives of Compensation Management
The basic objective of compensation management can be briefly termed as meeting the needs of both
employees and the organization.
Employers want to pay as little as possible to keep their costs low. Employees want to get as high as
possible.
Objectives of compensation management are;

1. Acquire qualified personnel.

2. Retain current employees.
3. Ensure equity.
4. Reward desired behavior.
5. Control costs.
6. Comply with legal regulations.
7. Facilitate understanding.
8. Further administrative efficiency.
9. Motivating Personnel.
10. Consistency in Compensation.
11. To be adequate.
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 labor market since employees compare for workers.
Premium wages are sometimes needed to attract applicants working for others.

Retain current employees

Employees may quit when compensation levels are not competitive, resulting in higher turnover.
Employees serve organizations in exchange for a reward. If pay levels are not competitive, some
employees quit the firm. To retain these employees, pay levels must be competitive with that of other
employers.

Ensure equity
To retain and motivate employees, employee compensation must be fair. Fairness requires wage and
salary administration to be directed to achieving 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.
External equity means paying workers what comparable workers are paid by other firms in the labor
market.
Reward desired behavior
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
behaviors. Good performance, experience, loyalty, new responsibilities, and other behaviors can be
rewarded through an effective compensation plan.

Control costs
A rational compensation system helps the organization obtain and retain workers’ reasonable costs.
Without effective compensation management, workers could be overpaid or underpaid.

Comply with legal regulations

A sound wage and salary system considers the legal challenges imposed by the government and ensures
employers comply.

Facilitate understanding
The compensation management system should be easily understood by human resource specialists,
operating managers, and employees.
Further administrative efficiency
Wage and salary programs should be designed to be managed efficiently, making optimal use of the
HRIS, although this objective should be a secondary consideration with other objectives.

Motivating Personnel
Compensation management aims at motivating personnel for higher productivity.
Monetary compensation has its own limitations in motivating people for superior performance.
Besides money, people also want praise, promotion, recognition, acceptance, status, etc. for
motivation.

Consistency in Compensation
Compensation management tries to achieve consistency-both internal and external in compensating
employees. Internal consistency involves payment on the basis of the criticality of jobs and
employees’ performance on jobs.
Thus, higher compensation is attached to higher-level jobs. Similarly, higher compensation is attached
to higher performers in the same job.

To be adequate
Compensation must be sufficient so that the needs of the employee are fulfilled substantially.
Salary is a fixed amount paid or transferred to the employees at regular intervals for their performance and
productivity, at the end of the month whereas wages are hourly or daily-based payment given to the labour
for the amount of work finished in a day.

The main difference between salary and wages lies in the fact that salary is fixed, i.e. it is predetermined and
agreed between the employer and employee, while wages are not fixed, as it varies depending on the
performance of the labour.
 Comparison Chart

BASIS FOR
COMPARISON SALARY WAGE

Meaning A fixed pay that an individual A variable pay that an individual

draws for the work done by him draws on the basis of hours spent
on an annual basis. in completing the certain amount
of work.

Skills Skilled personnel Semi-skilled or unskilled

Type of cost Fixed Variable

Rate of payment Fixed rate Wage rate
 Payment cycle Monthly Daily
Basis of payment Performance basis Hourly basis

Paid to whom Employees Labor

Nature of work Administrative-office work Manufacturing-process work

KRA Yes No
(Key resultant area)
Extra pay for extra hours No Yes

 MEANING AND DEFINITION OF WAGE

In the ordinary language the term wages implies 'reward' to the laborers for the services rendered by them.
It may be paid daily, weekly, fortnightly, monthly, per hour or per unit. Services rendered by the laborer
include both physical and mental services.
In the words of 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 employers to the labourer for his
services hired on the conditions of payment per hour, per day, per week or per fortnight."

Appropriate Definition: Wages refer to that reward which is received from the employer for the services
rendered by the labourer per week, per month, per fortnight or per unit It includes allowances also.
Based on the needs of the workers, capacity of the employer to pay and the general economic conditions
prevailing in a country, the committee on Fair Wages (1948) and the 15th session of the Indian Labour
Conference (1957) propounded certain wage concepts such as minimum wage, fair wage, living wage and
need based minimum wage. While the first three types (concepts) of wages were defined by the Committee
on Fair Wages, the last one was defined by the 15th session of the Indian Labour Conference.

 Concepts of Wages

A wage is monetary compensation (or remuneration, personnel expenses, labor) paid by an employer to an
employee in exchange for work done. Payment may be calculated as a fixed amount for each task completed
(a task wage or piece rate), or at an hourly or daily rate (wage labour), or based on an easily measured
quantity of work done.
Wages are part of the expenses that are involved in running a business. Payment by wage contrasts with
salaried work, in which the employer pays an arranged amount at steady intervals (such as a week or month)
regardless of hours worked, with commission which conditions pay on individual performance, and with
compensation based on the performance of the company as a whole. Waged employees may also receive
tips or gratuity paid directly by clients and employee benefits which are non-monetary forms of
compensation. Since wage labour is the predominant form of work, the term "wage" sometimes refers to all
forms (or all monetary forms) of employee compensation.
Wages are also a means of providing income for employees and as a cost of doing business to the employer.
In a wider sense, wages mean any economic premium paid by the employer under some contract to his
workers for the services delivered by them. In this way wages constitute of financial support, family
allowance, relief pay and other benefits. Whereas in the narrow sense, wages are the price paid for the
services of labour in the process of production and it count only the wages proper or performance wages.

 Types of wages

1. Minimum Wage:

A minimum wage is a compensation to be paid by an employer to his workers irrespective of his ability to
pay. The Committee on Fair Wage’ has defined minimum wage as “the wage must provide not only for the
bare sustenance of life, but for the preservation of the efficiency of the workers. For this purpose, minimum
wage must provide some measures of education, medical requirements and amenities”.

2. Living Wage:

A living wage is one which should enable the earner to provide for himself and his family not only the bare
essentials of food, clothing and shelter but a measure of frugal comfort including education for his children,
protection against ill-health, requirement of essential social’ needs and a measure of insurance against the
more important misfortunes, including old-age. Thus, a living wage represents a standard of living. A living
wage is fixed considering the general economic conditions of the country.

3. Fair Wage:
Fair wage, according to the committee on Fair Wage, is the wage which is above the minimum wage but
below the living wage. The lower limit of the fair wage is obviously the minimum wage; the upper limit is set
by the capacity of the industry to pay. The concept of fair wage is essentially linked with the capacity of the
industry to pay.
4. Need-Based Minimum Wage:
The Indian Labour Conference in its 15th session held in July 1957 suggested that minimum wage should be
need based and should ensure the minimum human needs of the industrial worker, irrespective of any other
consideration.

MONEY WAGES AND REAL WAGES TO LABOURER.

What the labourer earns by working in a factory or office is called wages. The labourers are generally paid a
certain sum of money per day or week, etc. The amount of money paid is called the money wages.
The worker, however, is more interested in the goods and services which he can get with his money wages
or otherwise. The amount of goods and services which the labourer actually gets is called his real wages. The
standard of living and the prosperity of a labourer depend not on his money wages but on his real wages.
Economists have differentiated between nominal wages and real wages. Nominal wages are the wages
received by a worker in the form of money.
Therefore, nominal wages are also called money wages. For example, a worker gets Rs. 200 from his/her
organization in exchange of services rendered by him/her.
In this case, the amount of Rs. 200 is regarded as a nominal wage. On the other hand, real wages can be

defined as the amount of goods and services that a worker purchases from his/her nominal wages.

Therefore, real wages are the purchasing power of nominal wages.

TAKE-HOME PAY

is the net amount of income received after the deduction of taxes, benefits, and voluntary contributions
from a paycheck. It is the difference between the gross income less all deductions. Deductions include
federal, state and local income tax, Social Security and Medicare contributions, retirement account
  Components of Wage

1. Basic Wage:
The term ‘basic wage’ is ordinarily understood to mean that part of the price of labour which the employer must pay to
all workmen belonging to all categories. The phrase is used ordinarily in contradistinction to allowances, the quantum
of which may vary in different contingencies. The revisions in the basic wage has become progressively less frequent
and insignificant because of the ever growing dearness allowance component.

2. Dearness Allowance:
The fixation of wage structure also includes within its compass the fixation of rates of dearness allowance. It is an
additional payment made by the employer to his employees to compensate them to a certain extent for the rise in the
cost of living. In the context of a changing pattern of prices and consumption, real wage of the workmen are likely to
fluctuate greatly.

3. Overtime Payment:
Working overtime in industry is possibly as old as the industrial revolution. In the early days, however, due to the then
existing social order, perhaps the concept of overtime did not exist as there were no defined hours of work. With the
passage of time, the government came out with legislation to restrict excessive working by the employees beyond
certain limited hours.
4. Annual Bonus:
Bonus is a unique component of India’s compensation system. Bonus is regarded as an incentive for regular
attendance; as an encouragement for good work or payment for some special or additional service by workers; as an
ex-gratia payment depending upon entirely on the goodwill of the employers which cannot be claimed as of right; as a
share in the profits which workers may claim as of legal right and also as a deferred wage. Bonus as a deferred wage
implies that it is to be paid, irrespective of profit or loss of the concern.
5. General Allowances:
The employers pay various sorts of allowances to their workmen depending upon
the nature of their duties and other incidents of the employment. Various allowances are also given
to the employees under different settlements. Tiffin Allowance ii. Overtime Allowance
Compensatory Allowance Special
Allowance House Rent Allowance 6.
Salary:
Salary, according to its ordinary meaning is a fixed payment made periodically to a person as compensation for regular
work or remuneration for services rendered.
7. Allowances:
All payments made by the employer by way of allowances to the employees for the personal benefit of the latter will
form part of the salary and hence will be chargeable to income tax.

8. Perquisites:
The another component of employee’s remuneration is perquisite. A perquisite is defined as a gain or profit
incidentally made from employment in addition to regular salary or wages, especially of a kind expected or promised.
It signifies such benefits in addition to the amount that may be legally due by way of contract for rendering service.
  THEORIES OF WAGES
Some of the most important theories of wages are as follows:

1. Wages Fund Theory

2. Subsistence Theory
3. The Surplus Value Theory of Wages
4. Residual Claimant Theory
5. Marginal Productivity Theory 6. The Bargaining Theory of Wages
7. Behavioural Theories of Wages.

How much and on which basis wages should be paid to the workers for services rendered by them has been a subject
matter of great concern and debate among economic thinkers for a long time This has given birth to several wage
theories, i.e. how wages are determined. Out of them, some important theories of wages are discussed here.
1. Subsistence Theory

David Ricardo developed this theory. It is also known as the iron law of wages. It says that workers are paid to enable
them to subsist and perpetuate the race without increase or diminution.
Low wage leads to decrease of labor due to death and malnutrition, while higher wages increase their number due to
better health, long life, and more marriage.
This theory was propounded by David Recardo (1772-1823). According to this theory, “The labourers are paid to
enable them to subsist and perpetuate the race without increase or diminution”. This payment is also called as
‘subsistence wages’. The basic assumption of this theory is that if workers are paid wages more than subsistence level,
workers’ number will increase and, as a result wages will come down to the subsistence level.
This theory has been criticized on the following grounds:

The relation between marriages and wages. It is incorrect to say that when the money income of a person increases
about the subsistence level, he marries and Demand-side ignored. This theory gives more importance to the supply
side and ignores the demand side of labor, for the determination of wages

The difference in wages. This theory fails to explain why wages differ from occupation to occupation and from person
to person.
Trade unions ignored. This theory ignores the role of trade unions. But in the present age, unions are playing a very
important role in the determination of wages.
On the contrary, if workers are paid less than subsistence wages, the number of workers will decrease as a result of
starvation death; malnutrition, disease etc. and many would not marry. Then, wage rates would again go up to
subsistence level. Since wage rate tends to be at, subsistence level at all cases, that is why this theory is also known
as ‘Iron Law of Wages’. The subsistence wages refers to minimum wages.
2. Wage Fund Theory

Adam Smith developed this theory. The wage level is a function of surplus fund available’ with the employer: the
higher the fund, the higher the wage. The focus is on the employer and his capacity to pay.
This theory was developed by Adam Smith (1723-1790). His theory was based on the basic assumption that workers
are paid wages out of a predetermined fund of wealth. This fund, he called, wages fund created as a result of savings.
According to Adam Smith, the demand for labour and rate of wages depend on the size of the wages fund. Accordingly,
if the wages fund is large, wages would be high and vice versa.

This theory has been criticized on the following grounds:

The difference in wages. According to this theory, all the workers receive equal wages, while wages differ from worker
to worker.
The demand factor ignored. In this theory, the supply of labor has given much importance, while the demand factor
has been ignored.
3. The Surplus Value Theory of Wages:

This theory was developed by Karl Marx (1849-1883). This theory is based on the basic assumption that like other
article, labour is also an article which could be purchased on payment of its price i e wages. This payment, according to
Karl Marx, is at subsistence level which is less than in proportion to time labour takes to produce items. The surplus,
according to him, goes to the owner. Karl Marx is well known for his advocation in the favour of labour.
Karl Marx developed it. Here labor is viewed as a commodity for trade.

Labor adds value to the product. The employer did not pay the full amount so collected from the customer, and
instead, only a part is paid to them as wage, retaining the remaining by the employer.
In Marx’s estimation, it was not the pressure of population that drove wages to the subsistence level, but rather the
existence of a large number of unemployed workers.
Marx blamed unemployment on capitalists. He renewed Ricardo’s belief that the exchange value of any product was
determined by the hours of labor necessary to create it.
Furthermore, Marx held that, in capitalism, labor was merely a commodity: in exchange for work, a laborer would
receive a subsistence wage.
Marx speculated, however, that the owner of capital could force the worker to spend more time on the job than was
necessary for earning this subsistence income, and the excess product-or surplus value-thus created would be
4. Residual Claimant Theory

Francis walker propounded this theory.

According to this theory, four factors add value to the product, which is manufactured. These are land, labor, capital,
and entrepreneurship. The revenue earned by selling products was first distributed among the three factors as
compensation against their contribution.
Whatever remained was paid to labor as wage against their value addition.

Thus labor is considered as a residual claimant.

This theory has been criticized on the following grounds:

Supply influence ignored. This theory ignores the influence of the supply side in the determination of wages.
Role of trade unions. It fails to explain as to how the trade unions raise their wages.
Entrepreneur right. A residual claimant is the right of the entrepreneur and not the labor. The labor receives its share
during the process of production. Case of loss. Suppose the firms suffer a loss, in that case, how labor will bear
This theory owes its development to Francis A. Walker (18401897). According to Walker, there are four factors of
production or business activity, viz., land, labour, capital, and entrepreneurship. He views that once all other three
factors are rewarded what remains left is paid as wages to workers. Thus, according to this theory, worker is the
residual claimant
5. Marginal Productivity Theory

This theory was developed by Phillips Henry Wicksteed and John Bates. Here demand and supply of labor in the labor
market determine wages.
Accordingly, workers are paid what they are economically worth as assessed by the employer.
The marginal concept says that the employer continues to employ labor as long as value addition by the marginal
worker is more than his cost. The result is that the employer has a larger share in the
6. Demand and Supply Theory

Just as the price of a commodity is determined by the interaction of the forces of demand and supply, the rate of

wages can also be determined in the same way with the help of demand and supply forces. The supply of labor

depends upon factors such as the size of the population, mobility of labor, and social structure. The wages will be

determined at the point where demand and supply both are equal to each other.

7. Bargaining Theory John Davidson developed this theory.

Here wage level is determined by the bargaining power of employers and their association vs. employees and their

trade unions. John Davidson was the propounder of this theory. According to this theory, the fixation of wages
depends on the bargaining power of workers/trade unions and of employers.

8. Behavioral Theory

Norms, traditions, customs, goodwill, and social pressure influence the wage structure. Wages are the best motivators

for workers.

The wage must satisfy a number of needs, as identified by Maslow, Herzberg, and others. Examples of needs are

physiological, security, food and shelter, etc.

9. Just Price Theory

This theory, developed by Plato and Aristotle, suggested that each person born into the world be foreordinated to

occupy the same status and to enjoy the same creative comforts as did his/her parents.

Therefore, society should provide these individuals with sufficient compensation to maintain the same position of life

into which they were born.

10. Investment Theory

H.M. Gitelman developed this theory. The individual workers’ investment consists of education, training, and

experience that a worker has invested in a lifetime of work.

Gitelman assumes that workers’ compensation is fixed by the rate of return on that workers’ investment. Workers can

control the level of their compensation.

For example, MBA graduates from Harvard University are likely to be paid more than those of less costly universities in

the USA.
  COMPENSATION MANAGEMENT- MEANING AND DEFINITION

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 non- monetary
perks like a company-paid car, company-paid housing and stock opportunities and so on.
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.

Generally the term compensation refers to compensating any damage, loss or mental harassments,
wages or salaries as reward for physical and/or mental efforts to perform any agreed task or job. But
the concept of equity in remunerating any work or task has forced us to perceive wages and salaries
as compensation, because people work efficiently only when they are paid according to their worth
or feel satisfied with the remunerations.
Besides basic salaries or wages, companies are forced to view the benefits and services to justify the
positional and esteem needs of employees and to provide adequate cushion for inflations. Though the
cost of human resources is estimated at between 2% to 20% of the operating cost (depending upon
the type of industry), to retain the employees or to avoid job-hopping, some of the industries are even
forced to adopt varying scales and benefits.

Today, the pay being competitive, it is logical for employers to look for employees with attributes
other than knowledge and skill attributes which can enrich their experience at work. They can find
out the potential in the employee and provide opportunities for learning and career growth. Thus
compensation designs and compensation programmes are being so designed so as to attract the
winning horses. Thus, the compensation management is gaining attention today.

Compensation management refers to the establishment and implementation of sound policies,

programmes and practices of employee compensation. Compensation management is concerned
with the compensation to employees for their work and contribution for attaining organizational
goals.
Therefore, the study of compensation management is of out most importance from both an
academic as well as practical point of view as wages and salaries are the major factors in socio-
economic analysis. From an economic point of view, compensation refers to the payments to the
efforts made by an individual. In a society, it is an occupational category and reflects the individual’s
status, while psychologically, compensation relates to the satisfaction of an individual’s needs and
aspirations. It is compensation which directly affects one’s standard of life, meets the needs of his/
her family, and enables him/her to save for future liabilities and justifying his/her worth for a job.
Wages/salaries, on the other hand, add to the cost of production and are a vulnerable part of a
company’s overhead, which affects the profit to the employers.

Both employers and the employees are concerned about the adequacy of the compensation.
Employers are interested to hire competent employees by offering attractive and bearable cost to the
company, while employees try to get maximum return on their skills, knowledge, expertise or
payment to justify their worth. Compensation is a vital part of human resource management decision
making as it helps in encouraging the employees and improves the organizational effectiveness.
Compensation packages with good pay and benefits help to attract and retain the best employees.
Employees consider pay package to be fair when the amount of wage covers basic living expenses,
keep up with inflation, leave some money for savings (perhaps for retirement) and leisure and there is
increment over time.

HRM is concerned with the determination of adequate and equitable remuneration of the employees
in the organization. HRM use techniques like job evaluation and performance appraisal for
determining remuneration. Factors that are considered for determining the remuneration of
personnel are their basic needs, requirements of jobs, legal provisions regarding minimum wages,
capacity of the organization to pay, wage level afforded by competitors, nature of job, skills required,
risk involved nature of working conditioning, bargaining power of the trade union, etc. Wages and
salaries form a substantial part of total costs in most of the organization. Hence a systematic
approach must be followed for determining wage and salary structure so as to ensure logical,
equitable and fair pay to the employees.

Compensation may be defined as money received in performance of work and many kinds of services
and benefits that an organization provides to their employees. 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.

It represents both, the intrinsic (psychological mind-sets resulting from job performance) and
extrinsic (including both monetary and non-monetary) rewards. The term, compensation refers to all
forms of financial returns and tangible benefits that an employee receives as a part of employment
relationship. In the globalization era, where the business environment has become increasingly
complex and challenging, designing an effective compensation program to attract and retain talent is
an important function of organizational effectiveness.

 CONCEPT OF COMPENSATION MANAGEMENT

Compensation management 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.
• 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.
The combinations of these attributes decide the worth of individual. This definition is a
perception of the employees.

• 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.

• 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.
  OBJECTIVES OF COMPENSATION

Objectives of compensation can be divided into two types; primary objectives and secondary
objectives.

Primary objectives

i. Equity:-The first category is equity, and may take several forms. Equity includes income distribution
through narrowing down of inequalities, increasing the wages of the lowest paid employees,
protecting real wages, and the concept of equal pay for work of equal value. Compensation
management strives for internal and external equity. Internal equity requires that pay should be
related to the relative worth of a job such that similar pay is assured for similar jobs. External equity
refers to making comparable payments, that is, paying workers what other firms in the labour market
pay comparable workers. Compensation differentials, based on differences in skills or contribution,
are all related to the concept of equity. Internal equity actually means employees and their
contribution are treated fairly with a pay programme in relation to other jobs in the organization.
ii. Efficiency:-Efficiency is often closely related to equity. These two concepts are not adverse. The
objectives of efficiency are evidenced in attempts to link a part of wages to productivity or profit,
group or individual performance, acquisition and application of skills, and so on. Preparations to
achieve efficiency are also seen as being equitable, provided they fairly reward performance. The
preparations are treated as inequitable if the reward is viewed as unfair.

iii. Macro-Economic Stability:- Companies try to achieve macro-economic stability through high
employment levels. Low inflation helps to achieve macro-economic stability. For instance, an
inordinately minimum wage would have an adverse impact on the levels of employment, though at
what level this consequence would occur is a matter of debate. Although compensation and
compensation policies are two of the many factors which influence macro-economic stability, they do
contribute to or hinder balanced and sustainable economic development.

iv. Efficient Allocation of Labour:- Employees consider the net gain. Efficient allocation of labour
refers to the concept of labour/employee moving out of a situation to another for a net gain. Such
movement may be from one geographical location to another, from one job to another, and within or
outside an enterprise. The provision or availability of financial incentives causes such movement.
Secondary objectives
From the standpoint of human resource management, a well-designed compensation package helps
an organization to achieve additional objectives which are the secondary objectives of compensation.
The secondary objectives include acquiring competent personnel, complying with regulations,
controlling costs, enhancing administrative efficiency, facilitating understanding, retaining employees,
and rewarding desired behaviour.

i. Acquiring competent personnel:-Good compensation helps an organization attract competent

applicants. As everyone has become aware of their value in the market, it is only wise for the
management to provide suitable compensation packages to the employees for their retention.

ii. Complying with regulations:- A sound wage and salary system considers the legal challenges
imposed by the government and ensures the employers compliance.

iii. Controlling costs:- A rational compensation system helps the organization obtain and retain
workers at a reasonable cost. Without effective compensation management, workers might be over-
paid (when product costs go up) or under-paid (which reduces employee motivation).
iv. Enhancing administrative efficiency:- Any organization desires and attempts to optimally use the
human resource information systems (HRIS). A well-designed sound wage and salary programme
helps to manage HRIS efficiently.

v. Facilitating understanding:- The compensation management system should have a high level of
clarity. In addition to the human resource specialists and operating managers, the employees also
should understand the compensation management system easily.

vi. Retaining employees:- Attrition may increase when compensation levels do not fulfil employees’
expectations. They quit due to the feeling that compensation is not competitive.

vii. Rewarding desired behaviour:- Companies expect certain types of behaviour from the
employees. Pay is likely to reinforce desired behaviours and acts as an incentive for the behavioural
modification, and for the behaviour to occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility, and other behaviours.
  TYPES OF COMPENSATION MANAGEMENT
There are mainly two types of compensation management such as financial compensation and non-
financial compensation.
1. FINANCIAL COMPENSATION

Financial compensation can again divided into two types such as direct financial compensation and
indirect financial compensation.

a) DIRECT FINANCIAL COMPENSATION

Financial compensation refers to financial benefits offered and provided to employees in return of
the service they provide to the organization. This includes basic pay, bonus, incentives, overtime
payment, commission and variable pay.

• Basic wage/ salary:- Salary is the amount received by the employee in lieu of the work done by
him/ her for a certain period say a day, a week, a month etc. It is the money an employee
receives from his/ her employer by rendering his/ her services. Basic wage/ salary is the cash
component of the wage structure based on which other elements of compensation may be
 structured. It is normally a fixed amount which is subject to changes based on annual
increments or subject to periodical pay hikes.

• Dearness allowance:- the payment of dearness allowance facilitates employees and workers to
face the price increase or inflation of prices of goods and services consumed by him. The
onslaught of price increase has major bearing on the living conditions of the labour.

• Incentives – incentives are paid in addition to wages and salaries and are also called ‘payment
by results. It is a plan that links pay to productivity, profitability, sales or cost reduction efforts.
It may be linked to the performance of an individual or a team or the entire organizational level
performance. Individual incentives are applicable to specific employee performance. Where a
given task demands group efforts for completion, incentives are paid to the group as a whole.
The amount is later divided among group members on an equitable basis.

• Bonus:-the bonus can be paid in different ways. It can be fixed percentage on the basic wage
paid annually or in proportion to the profitability. The government also prescribes a minimum
statutory bonus for all employees and workers. Bonus is paid to the employees during festive
 seasons to motivate them and provide them the social security. The bonus amount usually
amounts to one month’s salary of the employee.

• Commission:- commission to managers and employees may be based on the sales revenue or
profits of the company. It is always a fixed percentage on the target achieved. For taxation
purpose, commission is again a taxable component of compensation.

• Fringe benefits:- fringe benefits are those benefits which are provided by an employer to or for
the benefit of an employee and which are not in the form of wage, salaries and time related
payments. Fringe benefits are supplements to regular wages received by the workers at a cost
of employers. They include benefits such as paid vacation, pension, health and insurance plans
etc.

b) INDIRECT FINANCIAL COMPENSATION

It includes benefits like pensions, insurance, paid holidays. These benefit are available to all
employees. They are employer-provided other than wages, salaries, or incentives. They make up
indirect component of a financial compensation plan. These benefits are not performance-based and
are awarded to all employees by virtue of their membership in a given organization.

Indirect financial compensation also can be divided into two types such as statutory compensation
and voluntary compensation.

i. STATUTORY COMPENSATION

These benefits are legally binding on an employer to provide to the employees., viz., Provident fund,
gratuity scheme, health plan, maternity leave, medical leave, etc., are examples of these benefits.

a) Insurance benefits:- Under the provision of Employees State Insurance Act 1948. Employees
working in industrial establishment and drawing wages upto Rs 10000 per month shall be
provided insurance benefits. It is a contributory insurance plan under which the employee
contributes at 1.75 % of the wages and employer contributes at 4.75% of the wage. Benefits
enlisted by ESI corporation are:
• Sickness benefit:- Entitlement for a maximum of 91 days sickness benefit at standard benefit
rate corresponding to the condition that the employee has remitted contributions for not less
than 78 days.

• Medical benefit:- Regular medical treatment from qualified doctors of ESI dispensary and
hospital for the employee and his family.

• Disablement benefit:- For temporary disablement for not less than 3 consecutive days, an
employee is entitles claim cash benefit for period of such disablement at 40% more than the
standard benefit rate. However, for partial and total disablement, the employee shall be
entitled to claim cash benefit corresponding to the loss of earning capacity at full rates.

• Maternity benefit:- A woman employee who has remitted contributions for not less than 70
days is entitled for a maximum of 10 weeks of paid leaves, including 5 weeks in prenatal and 5
in post-natal period. For miscarriage, 6 weeks leave with pay has been granted. However, if the
woman employee expired during delivery, then her nominee shall entitled to claim cash
benefit for the full period.
 • Dependents benefit:- If an employee expired due to employment injury, then his wife, children
and widowed mother are entitled to claim pension as follows;

 For widow at 3/5th of full rate, throughout her life or till her remarriage.

 For children at 2/5th of full rate till the age of 18 years or until marriage for daughters.

 For widowed mother at 2/5th of full rate, throughout her life.

• Funeral benefit:- If an employee expired and his family stays far then, funeral expenses at Rs.
3,000 (one time) is payable to person performing the last rites.

• Retirement benefit:- An employee having insured for not less than 5 years and superannuated
can claim medical benefits for himself and his spouse.

b) Maternity Benefit:- Under the provision of the Maternity Benefit Act, 1961, women employees
working in industrial establishment shall be provided maternity benefits. Woman employees whether
they are employed directly or through any agency, who has worked for minimum of 84 days is, entitle
to get maternity for a maximum of 3 months.
c) Gratuity Benefits:- Under the provision of the payment of Gratuity Act, 1972 employees working in
industrial establishment shall be provided gratuity benefits. Those employees who has worked more
than 5 years will be entitled for payment of gratuity on retirement, resignation, death and differently
abled due to disease or accident as per the following:

Gratuity= (wages last drawn* 15* service period)/ 26

d) Holiday and leave Benefit:- Employees working in the organization shall be entitled for holiday
and leave benefits are as follows:

• Holidays:- An employee is entitled to total of 8 paid leaves (holiday). Their bifurcation is as

follows: 3 leaves are for national holidays that are independence Day, republic day and Gandhi
Jayanthi rest 5 leaves will be on account of festivals and may vary from organization to
organization.

• Holiday Homes:- For the benefit of employees and their families welfare boards of labour
department’s provides free loading at various holiday places in India for free of cost.
 • Leaves:- An employee is entitled for one day leave with wage for every 20 days. He is also
entitled for the casual and sick leaves.

e) Compensation Benefits:- While working in the industry if any accident took place and results in
temporary, partial or totally differently abled or death, the employee or his legal heir (disable or
death, as the case may be) or an employee who has contacted.

• Death:- Deceased workers 50% of the monthly wages is multiplied with the relevant factor or
Rs. 80000, whichever is more.

• Permanent total disablement:- Deceased workers 60% of the monthly wages is multiplied with
the relevant factor or Rs. 90000 whichever is more.

f) Welfare Benefits:- Under the factories Act, 1948 employees working in factories shall be providing
welfare benefits. The act provides the following benefits:

• Washing facilities:- To provide the proper and suitable facility of washing clothes.
 • First aid appliances:- Readily accessible and properly maintained first aid boxes shall be
provided, duly manned by qualified personnel.

• Canteen:- An employer should provide healthy, nutrition’s and inexpensive food to his
employees where 250 and more employees are working. The canteen should maintain no loss
and no profit.

• Shelters, restrooms and lunch rooms:- Employer should provide the adequate shelters ,
restrooms and lunch rooms and drinking water facility if there are 150 more employees are
working.

• Welfare Officer:- A welfare officer is to be appointed to take care of health activities of the
employees, if 500 or more employees are employed in a organization.

g) PF Benefits:- According to provision employee’s provident fund and miscellaneous provisions act,
1952, employees who work in industrial establishments and gets wages upto Rs. 6500 are eligible to
get provident fund benefits. Under this scheme, both employer and employee contribute 12% of the
wages. Out of the contribution made by the employer, 8.33% goes to employee’s pension fund. If an
employer wants to contribute more than 12%, then he can contribute only if the employer is ready to
bear additional administrative charges on such voluntary contribution of an employee.

• Provident fund scheme, 1952:- An employee is eligible to draw advances for construction or
purchase of house, post-matriculation education of children, marriage of children and
permanent withdrawal.

• Employee’s pension scheme, 1995:- Employees who expired during service period, his widow-
children entitled to get pension. (pensionable salary* pensionable service)/ 70

• Employees deposit linked insurance Scheme, 1976:- the legal nominee of deceased employee
is entitled for benefits at equal to the average balance in the provident fund account, subject
to a maximum of Rs. 60000.

h) Pension Fund:- Pension funds are investment pools that pay for workers retirements. Funds are
paid for by either employees, employer or both. It ensures financial support in your retirement age. It
is a planning for secure future. Corporations and all levels of government provide pensions.
 ii. VOLUNTARY COMPENSATION

These are discretionary and provided by the employer voluntarily. These include compensation for’
time not worked, for example, paid holidays, family-friendly benefits, retirement benefits, etc.

• Leave policy:- It is the right of employee to get adequate number of leave while working with
the organization. The organizations provide for paid leaves such as casual leaves, medical
leaves (sick leave), and maternity leaves, statutory pay etc.

• Overtime policy:- Employees should be provided with the adequate allowances and facilities
during their overtime. If they happened to do so such as transport facilities, overtime pay etc.

• Medical assistance:- The employees should be provided allowances to get their regular check-
ups say at an interval of one year and insurance facility for securing their good health. Even
their dependents should be eligible for the medi- claims that provide them emotional and
social security. Some of the big organizations have fully equipped hospital of their own.
• Insurance:- Organisations also provide for accidental insurance and life insurance for
employees. This gives them the emotional security and they feel themselves valued in the
organization.

• Leave travel:- The employees are provided with leaves and travel allowances to go for holiday
with their families. Some organizations arrange for a tour for their employees of the
organization. This is usually done to make the employees stress free.

• Retirement benefits:- Organizations provide for pension plans and other benefits for their
employees which benefits them after they retire from the organization at the prescribed age.

• Holiday homes:- Organizations provide for holiday homes and guest house for their employees
at different locations. These holiday homes are usually located in hill station and other most
wanted holiday spots. The organisations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.

• Flexible timings:- Organizations provide for flexible timings to the employees who cannot
come to work during normal shifts due to their personal problems and valid reasons.
• Consumer societies:- Most of the big organizations provide the facility of consumer stores so
that necessary goods can be easily supplied at fair prices to the employees and their family.

• Thrift society:- Few of the organizations encourage building thrift society to extend loans to
the member employees at a reasonable cost that the members will voluntarily decide.

• Educational assistance:- Organizations provide educational facilities in the form of educational

loans, scholarships to children of employees, reimbursement of tuition fee etc.

• Transportation:- Organization provides the transportation facility to their employees, many of

the organization provides the free cab services for pick up and drop.

• Loans and advances:- Many organizations provides the facility of loans and advances to their
various needs such as personal, housing, car, education etc. Loans and advances are given at
nominal rate of interest.

• Housing:- Most of the organizations provide the housing facilities to their employees at a very
low rate.
 2. NON-FINANCIAL COMPENSATION
These are psychological rewards given to employees who entertain a feeling that their skills are
recognized. Employees at senior and middle levels who prefer to work on high end technology, desire
empowerment. Besides recognition awards and service awards there are also other important non-
financial compensations given to employees by contemporary employers.

• Awards:- Awards include cash, gift certificates, movie tickets, parties and dinner coupons for
family members, travel concessions to famous destinations, etc.

• Recognition awards:- Felicitation award for employee of the month and employee of the year
given at a colourful event have the potential to motivate the employees for better
performance. Individuals who make contribution to society, work beyond the call of duty or
whose ideas have impact on business are given suitable awards.

• Service awards:- Employees who have completed a certain number of years become eligible
for loyalty award.
• Appreciation:- When an employee performs the job to the full satisfaction of superiors,
appreciation of superior in the presence of colleagues is a sure-fire reward for the employees.

• Challenging task:- Assignment of a challenging task to the promising employees has the
potential to unlock latent talent in the employees concerned.

• Deputation for foreign assignment:- Selection of best performing employees for training and
for important overseas assignment would certainly trigger their motivation and it adds to their
value and prestige among their colleagues.

• Seeking consultation:- Consulting key employees on strategic issues and seeking their honest
opinion has a tremendous bearing on their morale and positive energy.

• Participatory opportunity:- Employees participation in decision-making, in the form of joint

decision-making autonomous work group, consultative committees, kaisen management,
collective bargaining, quality circles, suggestion committees and so on would indubitably
kindle their enthusiasm and impel them to contribute positively towards the goal of the
organization.
• Power delegation and decentralization:- Decentralization of power to employees, fixation of
accountability, delegation of authority have the power to enable the employees to unleash
their otherwise dormant potentials.

• Conducting of refresher training:- Conducting frequent training to freshen up the knowledge

skill, competency of employees has the potential to empower the employers and recharge
their energies.

• Provision of congenial work environment:- Provision of congenial work environment like

separate cubicles, latest electronic communication gadgets, air conditioned rooms, secretarial
facilities, comfortable desk & chair, pleasant interior decoration, clean drinking water,
relaxation facility, etc., can help the employees in sustaining pleasant mood and creates a
mind-set for churning out quality works.

• Alternate work schedule:- Alternate work schedule like past time work, job sharing, flexi time,
annulated work hours, work from home, option to work in day shift, etc., go a long way
towards sustaining the loyalty of employees.
• Provision of leadership development career development opportunities:- These
opportunities are sure to attract and retain challenge-loving employees.

• Liberal holidays:- Providing various type of holidays and sabbatical is one of the powerful
motivations for employees.

• Career counselling and mentoring Facilities:- Provision of career counselling and guidance
mentoring have power to inspire the contemporary employees to unearth their potential.

• Conducting events:- Conducting various events like founders day independence day, festivals,
new year’s day, sports events, literary events, carnival day, etc., ensure a feeling of oneness
among the employees.

• Transparency dealing:- Transparent performance appraisal reward system, award system,

transfer system, promotion on career advancement practice, etc., help in positive inclination
towards the employer.

• Well-developed communication system:- Conduct frequent town hall meetings, barrier free
flow of communication, fixation of deadlines, clear-cut rules, well defined policies, processes
 and strategies, in-house news enlightening the dynamics in the company and in the industry
stop spread of rumours, breed a conducible and healthy work environment and help
employees stay positive in the facility.

 ADVANTAGES OF COMPENSATION MANAGEMENT

Compensation is beneficial to both the employer and the employee.

1. With the Point of View of Employer:

(i) Workers compensation protection narrows an employer’s disability benefit planning for its
employees to the areas of accidents or illnesses that are not job related.

(ii) Employees are limited as to the amount of benefits they may recover.

(iii) Workers compensation is the exclusive remedy for on-the-job injuries, therefore employees may
not seek further damages through a separate suit against the employer.

2. With the Point of View of Employee:

(i) Payments are made to an employee’s spouse or dependent children in the event of death.
(ii) Medical expenses are compensated.

(iii) Prompt payment of claims following an injury.

(iv) Payments are based on the employee’s day-to-day earnings.

(v) Coverage is provided without direct cost to the employee.

DISADVANTAGES OF COMPENSATION MANAGEMENT

Compensation is disadvantageous to both the employer and the employee.

1. With the Point of View of Employer

(i) Premiums may be high due to the nature of the employer’s business as the cost of the premiums is
based on the accident record of the company;

(ii) An employer is required to file accident reports with the administering state authority, thus
increasing its paperwork burden.

(iii) In some cases, time is spent defending against spurious claims.

2. With the Point of View of Employee

(i) An employee’s retirement plan benefits may be reduced by the amount of worker’s compensation
benefits that he or she receives.

(ii) The employee is denied the opportunity to seek further damages such as pain and suffering or
punitive damages – through a separate tort action against the employer;

(iii) In some states, worker’s compensation benefits may be offset by social security disability
benefits.
Module 2 - Wage and Salary Administration

Administration of employee compensation is called wage and salary Administration.

Wage and salary administration is a collection of practices and procedures used for planning and
distributing company-wide compensation programs for employees. These practices include
employees at all levels and are usually handled by the accounting department of a company.
Wage and salary administration procedures usually involve activities such as calculating the
number of hours worked in order to determine Compensation, administering employment
benefits, and answering payroll Questions from employees.
 According to Indian labour Organisation (ILO) defined the term wage as “the remuneration
paid by the employer for the services of hourly, daily, weekly and fortnightly employees”
• It also means that remuneration paid to production and maintenance or blue collar employees.
  Objective of wages and salary administration
• To acquire qualified competent personnel - Candidates decide upon their career in a particular
organization mostly on the basis of the amount of remuneration the organization offers.
Qualified and competent people join the best-paid organization. As such, the organization should
aim at payment of salaries at the level, where they can attract competent and qualified people.
• Objectives of Salary at Model Xerox
• To Support skills need by the organization
• To pay for contribution and not time
• To reward for behavior built on organization values and leadership attributes.
• To provide flexibility for Individuals
• To mix between fixed and variable pay
• To recognize individuals and teams
• To attract and retain talent
• To retain the present employees - If the salary level does not compare favorably with that of
others similar organization, employees quit the present one and join other organizations. The
organization must keep the wage levels at the competitive level, in order to prevent such quits.
• To secure internal and external equity -Good rewards reinforce desired behavior like
performance, loyalty, accepting new responsibilities and change etc.
• To keep labour and Administrative Costs - In line with the ability of the organisation to pay.
• To protect in public as progressive Employers - And to comply with the wage legislation.
• To pay according to the content and difficulty of the job and in tune with the effort and merit
of the employees.
• To Facilitate Pay roll – administration of budgeting and wage and salary control.
• To simplify Collective Bargaining – Procedures and negotiations.
• To promote Organization – feasibility.
  Principles of wage and salary administration

1. The Principle of External Equity - The principle of external equity acknowledges that
factors/variables external to organization influence levels of compensation in an organization if
these variables are not consideration while fixing wage and salary levels, the salaries may be
insufficient to attract and retain employees in the organization. The principles of external equity
ensure that jobs are fairly compensated in comparison to similar jobs in the labour market.
2. The Principle of Internal Equity - Internal equity acknowledges that organisations have various
jobs which are relative in value term. In other words, the values of various jobs in an
organisation are comparative. This relative worth of jobs is ascertained by job evaluation. Thus,
an ideal compensation system should establish and maintain appropriate differentials based on
relative values of jobs i.e., the compensation system should ensure that more difficult jobs
should be paid more.
3. The principle of individual worth - According to the principle of individual worth, an individual
should be paid as per his/her performance. Thus, the compensation system, as far as possible,
 enables the individual to be rewarded according to his contribution to organization. This
principle ensures that each individual’s pay is fair in comparison to others doing the
same/similar jobs, i.e., ‘Equal pay for equal work’.

 Based on these three principles, Wage administration should be guided by the following basic
considerations (principles):
• Wage policies should be carefully developed having in mind the interests of management, the
employees, the consumers and the community.
• There should be a definite plan to ensure that differences in pay for jobs are based upon
variations in job requirements such as skill, effort, responsibility or job or working conditions,
mental and physical requirements.
• The general level of wages and salaries should be reasonably in line with that prevailing in the
labour market.
• The plan should carefully distinguish between jobs and employees. A job carries a certain
wage-rate and a person is assigned to fill it at that rate.
• Wage policies should be clearly expressed in writing to ensure uniformity and stability.
• Wage decisions should be checked against the carefully formulated policies.
• Management should see to it that employees know and understand the wage policies.
• Wage policies should be evaluated from time to time to make certain that they are adequate
for current need.
• Departmental performance should be checked periodical against the standards set in advance.
• Job descriptions and performance ratings should be periodically checked to keep them up-to-
date.
 Nature:
1. The basic purpose of wage and salary administration is to establish and maintain an equitable
wage and salary structure.
2. It is concerned with the establishment and maintenance of equitable labour cost structure i.e.
An optimal balancing of conflicting personnel interest so that the satisfaction of the employees and
employers is maximized and conflicts are minimized.
3. The wage and salary administration is concerned with the financial aspects of needs,
motivation and rewards.
4. Employees should be paid according to the requirements of their jobs i.E. Highly skilled jobs
are paid more compensation than low skilled jobs.
5. To minimize the chances of favoritism.
6. To establish the job sequences and lines of production wherever they are applicable.
7. To increase the employees’ morale and motivation because a wage programme can be
explained and is based upon facts.
 Characteristics:
1. Payment of wages is in accordance with the terms of contract between the employer and the
worker.
2. The wages are determined on the basis of time-rate system or piece-rate system.
3. Wages change with the change in the time spent by the labourer.
4. Wages create utility.
5. Wages may be paid weekly, fortnightly, hourly, or on monthly basis.
6. Wage is the reward paid to the workers for the services rendered by them.
7. Wages can be paid in cash or in kind.
8. All kinds of allowances are included in wages.
 Importance of wage and salary administration
• Attract and retain the employees: if an organization possesses good wage and salary structure,
it will attract and retain suitable, qualified, and experienced personnel.
• Builds high morale: the wage rates established for various categories of jobs should be
internally consistent; it will motivate the employees of the organization. It will build the high
morale of employees and act as an incentive to greater employee productivity and efficiency.
• Satisfied employees: a good wage and salary structure will keep the employees satisfied. There
will be lesser labor turnover, industrial disputes and employee grievances and exigencies.
• Labor cost equitable: a good wage and salary structure will maintain two types of equitabilities
viz., (A) labor cost equitable and, (b) equitable wage and salary structure. Pay according to the work
performed by an employee. If an employee is performing hazardous work pay him more.
• No favoritism/bias: if an organization has a definite wage and salary structure, favoritism bias
can be avoided.
• Clearly drawn the line of promotion: if a company has a good wage and salary structure, it can
have a definite sequence of jobs and clearly drawn the line of promotion.
• Image of progressive employer: a good and definite wage and salary structure would enable
the company to project in the public. All image of a progressive employer.
• Harmonious industrial relations: a good wage and salary structure will serve as a sound basis
for collective bargaining and enable the maintenance of satisfactory unionmanagement and
employee-management relations.
• Ensure minimum wages: a good wage and salary structure should also conform to the
minimum wage laws.
  Factors influencing wage and salary administration

1. External factors influencing wage and salary administration

• Demand and supply : The labor market conditions or demand and supply forces operate at the
national and local levels and determine organizational wage structure. When the demand of a
particular type of labor is more and supply is less then the wages will be more. On the other hand,
if supply of labor is more demand on the other hand, is less then persons will be available at lower
wage rates also.
• Cost of living : The wage rates are directly influenced by cost of living of a place. The workers
will accept a wage which may ensure them a minimum standard of living. Wages will also be
adjusted according to price index number. The increase in price index will erode the purchasing
power of workers and they will demand higher wages. When the prices are stable then frequent
wage increases may not be undertaken.
• Trade union bargaining power : the wage rates are also influenced by the bargaining power of
trade unions. Stronger the trade union higher well be the wage rates. The strength of a trade union
is judged by its membership, financial position and type of leadership.
• Government legislation : To improve the working conditions of workers, government may pass
a legislation for fixing minimum wages of workers. This may ensure them a minimum level of living.
In under developed countries bargaining power of labor is weak and employers try to exploit
workers by paying them low wages. In India, Minimum Wages Act, 1948 was passed to empower
government to fix minimum wages of workers.
• Psychological and social factors - Management should take into consideration the psychological
needs of the employees while fixing the wage rates so that the employees take pride in their work.
Sociologically and ethically, the employees want that the wage system should be equitable, just and
fair.
• Economy : Economy also has its impact on wage and salary fixation. While it may be possible
for some organizations to thrive in a recession, there is no doubt that economy affects
remuneration decisions. A depressed economy will probably increase the labor supply. This, in turn,
should lower the going wage rate.
• Technological development: With the rapid growth of industries, there is a shortage of skilled
resources. The technological developments have been affecting skills levels at faster rates. Thus,
the wage rates of skilled employees constantly change and an organization has to keep its level up-
to the mark to suit the market needs.
• Prevailing market rates: No enterprise can ignore prevailing or comparative wage rates. The
wage rates paid in the industry or other concerns at the same place will form a base for fixing wage
rates. If a concern pays low rates then workers leave their jobs whenever they get a job somewhere
else. It will not be possible to retain good workers for long.

2. Internal factors influencing wage and salary administration

• Ability to pay: The ability to pay of an enterprise will influence wage rates to be paid. If the
concerns is running into losses then it may not be able to pay higher wage rate. A profitable
concern may pay more to attract good workers. During the period of prosperity, workers are paid
higher wages because management wants to share the profits with labor.
• Job requirements: Basic wages depend largely on the difficulty level, and physical and mental
effort required in a particular job. The relative worth of a job can be estimated through job
evaluation. Simple, routine tasks that can be done by many people with minimum skills receive
relatively low pay. On the other hand, complex, challenging tasks that can be done by few people
with high skill levels generally receive high pay.
• Management strategy: The overall strategy which a company pursues should determine to
remuneration to its employees. Where the strategy of the organization is to achieve rapid growth,
remuneration should be higher than what competitors pay.
Where the strategy is to maintain and protect current earnings, because of the declining fortunes
of the company, remuneration level needs to be average or even below average.
• Employee: Several employee related factors interact to determine his remuneration.
Performance or productivity is always rewarded with a pay increase. Rewarding performance
motivates the employees to do better in future.
Seniority. Unions view seniority as the most objective criteria for pay increases whereas
management prefer performance to effect pay increases.
Experience. Makes an employee gain valuable insights and is generally rewarded.
Potential. Organization do pay some employees based on their potential. Young managers are paid
more because of their potential to perform even if they are short of experience.

 Job Evaluation
• Job Evaluation is the process of determining and quantifying the value of jobs. It is the
systematic scoring and comparison of jobs along organizationally determined dimensions of job
worth, such as, in the effort, responsibility, complexity, importance, skills and the working
conditions of a job.
• Definition - Edwin B. Flippo defines. “Job Evaluation is a systematic and orderly process of
determining the worth of a job in relation to other jobs.”
  Principles of Job Evaluation

• Definition: Jobs must be clearly defined such that they are identifiable and easily
distinguishable. These jobs must then be part of the job description.
• Evaluation: A job evaluation scheme must be arrived upon and used as a standard and all
jobs in the organization must be evaluated as per that scheme only.
• Job Understanding: Job evaluators need to have deep insights into the job design process.
They must have a methodical understanding of various tasks involved.
• Assessment: The assessment has to be carried out in an acceptable manner and by competent
people. Further, it is based on judgement and is not scientific but can however be used to make
objective judgements if used correctly.
• Concern: Job evaluation must be concerned with the job and not with the person. i.e. it is the
job that has to be evaluated and not the person.
• Rate the Job and Not Man - Job evaluation deals with the job and not with the employee
holding the position. Each job has certain definite and fixed elements. These elements should be
rated on the basis of what job itself requires.
• Elements of Job should be Definite -Each job, as stated already, should be divided into small
elements. These elements should be fixed, definite and easily explainable. Besides, these elements
should be very few in number. This will avoid any overlapping.
• Uniformity in Understanding - Success in job rating is absolutely dependent on uniformity of
understanding with regard to the definition of the elements and consistency in the selection of the
degrees of those elements.
• Explained to the employees - Any job evaluation plan if implemented should be clearly
explained to the foremen and employees. Clear-cut explanations and illustrations of the plan shall
avoid misunderstanding and frustration.
• Participation of the foremen - The foremen should participate in the rating of the job in their
own departments.
• Co-operation from employees - The co-operation from the employees is another condition
precedent for the success of any job evaluation plan. The broad features can be discussed with the
employees but the basic secrets should not be disclosed to them.
• Talk only in point values - The purpose of discussion with the foremen and employees is to
secure their confidence and to achieve this, avoid discussions of money value. Talk only point
values and degree of each element. Discussion on money values will lead to juggling.
• Avoid too many occupational wages -Too many occupational wages (or rate ranges for given
labour grades) should not be established. It would be unwise to adopt an occupational wage for
each in terms of point values.


1.
  Disadvantages:

1. Lack of complete accuracy - The accuracy claimed by it is not in fact accurate. The system
considers the key factors independent of others which is not so in reality. Consequently, the
weights assigned to the factors are also less accurate. This is particularly so if the factors are of
highly technical in nature.
2. Unrealistic assumptions - Job evaluation is based on the assumption that wage rates can be
related to the work of a given job. It completely ignores the fact that conditions in the labour
market exercise greater influence in the determination of wage rates.
3. Formation of the Committee - The formation of the job evaluation committee itself creates a
serious problem. Only persons who are capable of evaluating the jobs should be appointed as
committee members. Besides, there is also difference of opinion regarding the number of
members.
4. Selection of a Suitable Method - The selection of a suitable method also posses a serious
problem to the management. There are four methods and each method has its own merits and
demerits.
5. Number of factors - There is no clear-cut opinion amongst the scholars as to how many factors
should be used and what weightage should be assigned to each factor. In many cases, 100 factors
are used. This multiplicity of factors creates confusion and so precise results cannot be obtained.
6. Equal pay for equal job - This system presumes that job of equal content will be equally
attractive to the employees. But this presumption is unreal. For instance, a job offers little or no
prospects for a rise or promotion; while another job rated similar to it, has better prospects for the
workers; the latter will attract more than the former. Under such circumstances, the business firm
has to pay more wages for the former job so as to make it more attractive.
7. Unsuitable for small concerns - Installing and operating a job evaluation programme requires
much time and money. Hence, it is very difficult to introduce it in smaller concerns.
  FRINGE BENEFITS
Meaning of Fringe Benefits:
Fringe benefits refer to the extra benefits provided by the employer to an employee, in addition to
salary. Fringe benefits include the services and facilities provided to the employees which can be in
the form of monetary and non-monetary benefits during employment period. Example: cash,
goods or services, health insurance, retirement plans etc.
Definitions of Fringe Benefits
“Fringe Benefits embrace a range of benefits and services that employees receive as part of their
total compensation package. Benefits and services, however, are
indirect compensation because they are usually extended as a condition of employment and
not directly related to performance”.
(Werther and Davis)
“Fringe Benefits are those benefits which are provided by an employer to or for the benefit of an
employee and which are not in the form of wages, salaries and time related payments”. (Cockmar)
“Fringe Benefits are an employment benefits given in addition to one’s wage and salary”.
(The American Heritage Dictionary of the English Language)
Types of Fringe Benefits
Fringe Benefits are divided into two categories that are statutory benefits and voluntary benefits.
Statutory benefits are those fringe benefits which an organization is legally required to provide to
its employees.
Voluntary benefits are those fringe benefits which an organization prides of its own will and wish.

Voluntary benefits:
1) Consumer societies: - Most of the big organizations provide the facility of consumer stores so
that necessary goods can be easily supplied at fair prices to the employees and their family.
2) Thrift Society: - Few of the organizations encourage building thrift society to extend loans to
the member employees at a reasonable cost that the members will voluntarily decide.
3) Retirement Benefits: - Other than the legal benefits few of the organizations provides cash and
employment opportunity to the children of retired employees.
4) Housing: - Most of the organizations provide the housing facilities to their employees at a very
low rate. 5) Educational Assistance: - Organizations provide educational facilities in the form of
educational loans, scholarships to children of employees, reimbursement of tuition fee etc.
6) Transportation: - Organization provides the transportation facility to their employees, many of
the organization provides the free cab services for pick up and drop.
7) Loans and Advances:- Many organizations provides the facility of loans and advances to their
employees for accomplishing their various needs such as personal, housing , car, education etc.
loans and advances are given at nominal rate of interest.
8) Medical Assistance:- Employees are provided free medical checkup and insurance facility for
securing their good health. Some of the big organizations have fully equipped hospital of their own
for the benefit of their employees and their family.
Statutory benefits:
1) Insurance Benefits: Under the provision of Employees State Insurance Act, 1948,
employees working in industrial establishment and drawing wages upto Rs 10000 per month shall
be provided insurance benefits. It is a contributory insurance plan under which the employee
contributes @1.75% of the wages and employer contributes @4.75% of the wage. Benefits enlisted
by ESI corporation are:
Sickness Benefit: entitlement for a maximum of 91 days sickness benefit at standard benefit rate
corresponding to the condition that the employee has remitted contributions for not less than 78
days.
Medical Benefit: regular medical treatment from qualified doctors of ESI dispensary and hospital
for the employee and his family.
Disablement Benefit: For temporary disablement for not less than 3 consecutive days, an employee
is entitles claim cash benefit for period of such disablement @40%more than the standard benefit
rate. However, for partial and total disablement, the employee shall be entitled to claim cash
benefit corresponding to the loss of earning capacity at full rates.
Maternity Benefit: A woman employee who has remitted contributions for not less than 70 days is
entitled for a maximum of 10 weeks of paid leaves, including 5 weeks in prenatal and 5 in post-
natal period. For miscarriage, 6 weeks leave with pay has been granted. However, if the woman
employee expired during delivery, then her nominee shall be entitled to claim cash benefit for the
full period.
Dependents Benefit: If an employee expired due to employment injury, then his wife, children and
widowed mother are entitled to claim pension as follows:
• For widow @3/5th of full rate, throughout her life or till her remarriage.
• For children @2/5th of full rate till the age of 18years or until marriage for daughters.
• For widowed mother @2/5th of full rate, throughout he life.
Funeral Benefit: If an employee expired and his family stays far then, funeral expenses @ Rs 3,000
(one time) is payable to person performing the last rites.
Retirement Benefit: An employee having insured for not less than 5 years and superannuated can
claim medical benefits for himself and his spouse.
2) Maternity Benefits: Under the provision of the Maternity Benefit Act, 1961, women employees
working in industrial establishment shall be provided maternity benefits. Woman employees
whether they are employed directly or through any agency, who has worked for minimum of 84
days is, entitle to get maternity for a maximum of 3 months.
3) Gratuity Benefits: Under the provision of the payment of Gratuity Act, 1972 employees
working in industrial establishment shall be provided gratuity benefits. Those employees who has
worked more than 5 years will be entitled for payment of gratuity on retirement, resignation, death
and differently abled due to disease or accident as per the following
calculation: Gratuity = (wages last drawn x 15 x service period)/26
4) Holiday and Leave Benefit: Employees working in the organization shall be entitled for holiday
and leave benefits are as follows:
a) Holidays: An employee is entitled to total of 8 paid leaves (holiday). Their bifurcation is as
follows: 3 leaves are for national holidays that are Independence Day, republic day and Gandhi
Jayanti rest 5 leaves will be on account of festivals and may vary from organization to organization.
b) Holiday Homes: For the benefit of employees and their families welfare boards of labour
department’s provides free loading at various holiday places in India for free of cost.
c) Leaves: an employee is entitled for one day leave with wage for every 20 days. He is also
entitled for the casual and sick leaves
5) Compensation Benefits: While working in the industry if any accident took place and results in
temporary, partial or totally differently abled or death, the employee or his legal heir (disable or
death, as the case may be) or an employee who has contacted.
 Death: Deceased workers 50% of the monthly wages is multiplied with the relevant factor or Rs
80000, whichever is more.
 Permanent Total Disablement: Deceased workers 60% of the monthly wages is multiplied with
the relevant factor or Rs 90000 whichever is more.
a) Welfare Benefits: Under the factories Act, 1948 employees working in factories shall be
providing welfare benefits. The act provides the following benefits:
• Washing Facilities: To provide the proper and suitable facility of washing clothes.
• First Aid Appliances: Readily accessible and properly maintained first aid boxes shall be
provided, duly manned by qualified personnel.
• Canteen : An employer should provide healthy, nutrition’s and inexpensive food to his
employees where 250 and more employees are working. The canteen should maintain no loss and
no profit.
• Shelters, Rest Rooms and Lunch Rooms: Employer should provide the adequate shelters, rest
rooms, lunch rooms and drinking water facility if there are 150 more employees are working.
• Welfare officer: A welfare officer is to be appointed to take care of wealth activities of the
employees if 500 or more employees are employed in an organization.
b) PF Benefits: According to provision of employee’s provident fund and
miscellaneous provisions act, 1952, employees who work in industrial establishments and gets
wages up to rs.6500 are eligible to get provident fund benefits. Under this scheme, both employer
and employee contribute 12% of the wages. Out of the contribution made by the employer, 8.33%
goes to employee’s pension fund. If an employer wants to contribute more than 12% then he can
contribute only if the employer is ready to bear additional administrative charges on such voluntary
contribution of an employee.
• Provident Fund Scheme, 1952: An employee is eligible to draw advances for construction or
purchase of house, post matriculation education of children, marriage of children and permanent
withdrawal.
• Employee’s Pension Scheme, 1995: Employees who expired during service period, his widow/
children entitled to get pension. (pensionable salary x pensionable service)/70
• Employees Deposit Linked Insurance Scheme,1976: the legal nominee of diseased employee is
entitled for benefits at equal to the average balance in the provident fund account, subject to a
maximum of Rs. 60,000.
  SYSTEMS OF PAYMENT/WAGE PAYMENT METHODS Methods of Remunerating Labor:
People working in the organization perform different task. Some are involved in production and
distribution, where physical exercise is more while some are involved in administrative work where
mental exercise is more. Therefore, one remuneration plan will not suits to all type of person
working in the organization. Labours are directly involved in the production.
The two basic methods of labour remuneration are:
1. Time Rate System
2. Piece Rate System

1. Time Rate System: One of the oldest methods of wage payment is Time rate system, in which
Time spends by the worker is the basis of wage determination. Under this method, workers are
paid according to the time for which they work in the organization irrespective of the output of
work done.
For example, if wage rate of Rs. 10 per hour is fixed in an organization and two workers A and B
attend work for 10 and 8 hours respectively. The wage for the day as per time wage system will be
Rs. 100 and 80 for A and B respectively.
In this system, no consideration is given to the quantity or quality of work done by the worker. The
factory supervisor has to ensure that there is no wastage of time on the part of worker and the
quality of goods is also maintained.
Under this method Wages are calculated as follows:
Total Wages = T × Rs Where, T stands for time spent and Rs is standard rate of pay.
Suitability:
1. Time wage system is suitable under organizations in which productivity of an employee cannot
be measured accurately.
2. Quality of products is more important than the quantity of product produced.
3. Individual employees do not have any control over units produced.
4. Close supervision of work is possible.
5. Work delays are frequent and beyond the control of workers.
Advantages of Time Rate System:
a) Simplicity: This method of wage payments is very simple. The workers can easily calculate the
wages earned by them. The time spent by a person multiplied by the standard rate will determine
his/her wages.
b) Security: Another benefit of this method is that the workers have guarantee of getting
minimum wages for the time spent by them as there is no link between wages and output. They
are not bound to complete particular task for getting their wages. They are sure to get certain
wages at the end of a specified period of time spent in working.
c) Qualitative Products: One of the greatest benefits of time rate system is that it helps in
improvement of the quality of output. If wages are related to output, then workers may think of
increasing production so as to increase their earnings without bothering about quality of goods. In
this method, workers will concentrate on producing better quality of goods because their wages is
directly related to the time and not to output. In organizations where some artistic nature products
are produced, then this method will be most suitable.
d) Support of Unions: Another advantage of this method is that it is supported by the trade
unions because it does not distinguish between workers on the basis of their performance. Any
method which gives different wage rates or wages based on output is generally opposed by trade
unions.
e) Beneficial for Beginners: This wage rate system is good for the beginners because they may not
be able to reach particular level of production on entering employment.
f) Less Wastage: As the wages are not related to the output, workers will not be in a hurry to
push through production. This will lead to proper handling of materials and equipment and hence
less wastage of organizational resources.

Limitations:
Time wage system of payment to workers suffers from the following drawbacks:
a) No Incentive for Efficiency: One of the major limitations of this method is that it does not
distinguish between efficient and inefficient workers. The payment of wages is related to time and
not to the output. Thus, the method gives no incentive for more production by the efficient worker.
Moreover the rate fixed under this method is quite low as it is based on the output of dullest
employee.
b) Wastage of Time: As the wages are related to the time, workers may waste their time because
they will not be following a target of production. Competent workers may also follow slow workers
because there is no difference between them regarding wage determination.
c) Low Production: Since wages are not related to output, production in the organization is low.
Because of low production, total cost per unit will go up, leading to higher total production cost
and lower profit margin to the organization.
d) Difficulty to Determine Labour Cost per Unit: As wages are not related to output under this
method, management finds it difficult to calculate labour cost per unit. The output will go on
varying from time to time while wages will remain almost same. Management finds it difficult to
plan production and control it as there no relationship between wages and output.
e) Higher Supervision Cost: Under this system, workers are not offered incentives for higher
production. To get more work from them, there is always a need for greater supervision. More
supervision is also required to maintain proper quality of goods.
Therefore, in this wage system supervision cost goes up to a great extent.
Piece Rate System:
Under piece system of payment, wages are based on output and not on time. There is no
consideration for time taken in completing a task. A fixed rate is paid for each unit produced, job
completed or an operation performed. Workers are not guaranteed minimum wages under this
system of wage payment.
A standard rate is fixed per unit of production and wages are calculated by multiplying the units
produced by the worker with the standard rate per unit. The following formula for calculating total
wages is:
Wages = Rate per Unit × number of units produced
Suitability: Piece rate system is suitable when:
1. Production quantity is more important than the quality of the product.
2. Work is of repetitive nature.
3. Mass manufacturing system of production is followed and the work is standardized and
suitable for continuous manufacturing.
4. It is possible to measure the production output of worker separately.
5. Strict supervision is not required and difficult.
Advantages of piece Rate System:
a. Wages linked to Efforts: One of the biggest advantages of piece rate system is that wages are
linked to the output of a worker. The higher the output, higher will be the wages. Workers will
always try to put in more and more effort for increasing output because their wages will go up.
b. Increase in Production: Total production of the organization goes up when wages are paid
according to piece rate system. Workers are encouraged to increase output because their wages
are directly related to the output. This system is fair to both employees and employers Efficient
workers will try to use maximum effort in order to raise their production and hence wages.
c. Better Utilization of Equipment and Machines: The machines and other equipment’s are used
to the maximum extent if piece rate system is followed. Workers may not like to keep the machines
idle. The use of machines is also systematic because any breakdown in these may affect the
workers adversely. Thus, better utilization of machine gives better output to the organization.
d. Distinction between Efficient and Inefficient Worker: Another advantage of this method is that
it differentiates between efficient and inefficient worker. Efficient workers will get more wages as
compare to inefficient workers as the output produced by them are more. This method thus,
provides sufficient encouragement to efficient workers.
e. Less Supervision Required: Since the wages are on the basis of output, workers will not waste
time. They will continue to work irrespective of supervision. There are more and more voluntary
efforts on the part of workers and need for supervision is reduced to a minimum.
f. Decrease in Total Cost: The increase in output results in reduction of total cost per unit. In total
cost some of the costs are fixed; increase in production reduces per unit cost. Reduction in cost
may benefit both organization and consumers. For organization, the profit margin will increase
while for customer product price will decrease.
Limitations:
a. No Guarantee of Minimum Wage: Uncertainty of wages is one of the biggest drawbacks of this
method. As there is a direct relationship between output and wages, if a worker does not ensure
certain productions, then wages may also be uncertain. Any type of interruption in work will also
reduce earnings of workers. So workers are not sure about their wages.
b. Poor Quality of Goods: As there is a direct relationship between output and wages, the
workers will bother more about the number of units than the quality of products being produced.
The quality of goods under this method is quite low as compare to time rate system. Moreover, to
ensure better quality product the organization has to put extra effort in the form of increase in
supervision expenses.
c. Harmful for Health: Due to direct relationship between output and wages, workers may try to
work more than their capacity. This may adversely affect their health.
They may try to work even when they are not keeping good health.
d. Cause of Dissatisfaction: There is difference in earning of various workers in the same
organization. Some may earn less and others may earn more. Those who get low wages feel so
jealous of others who earn more and this becomes a cause of dissatisfaction among workers.
  CTC –
It means Cost to Company. The total cost that a company would incur, on an employee, in a
year. Per month salary and other benefits that the company pays an employee, are actually
cost to the company. CTC package is a term often used by private sector Indian companies
while making an offer of employment.
CTC contains all monetary and non-monetary amounts spent on an employee. All the below
mentioned are a part of the in-hand salary, and therefore, are a part of the CTC pay as well. They
are:
Basic
Dearness allowance (DA)
Incentives or bonuses
Conveyance allowance
House rent allowance (HRA)
Medical allowance
Leave Travel Allowance or Concession (LTA / LTC)
Vehicle Allowance
Telephone / Mobile Phone Allowance
Special Allowance
A major part of CTC comprises of compulsory deductibles. These include deductions for provident
fund, medical insurance, etc. They form a part of the compensation structure but doesn’t get them
as a part of an in-hand salary. But it definitely increases the CTC.
CTC = Direct Benefits + Indirect Benefits + Savings Contributions
Direct Benefits refer to the amount paid to the employee monthly by the employer which forms
part of his/her take-home or net salary and is subject to government taxes.
Indirect Benefits refer to the benefits that employees enjoy without paying for them. The company
pays them on behalf of the employee but adds these expenses to the employee’s CTC as it is an
expense from the company’s point of view.
Savings contribution refers to the monetary value added to the employee’s CTC example EPF.
• Direct benefits refer to the amount paid to the employee monthly by the employer which
forms part of his/her take-home or net salary and is subject to government taxes.
• Indirect benefits refer to the benefits that employees enjoy without paying for them. The
company pays them on behalf of the employee but adds these expenses to the employee’s CTC as
it is an expense from the company’s point of view.
• Savings contribution refers to the monetary value added to the employee’s etc

Direct benefits:
1. Basic salary
2. Dearness allowance
3. Conveyance allowance
4. House rent allowance (HRA)
5. Medical allowance
Indirect benefits:
1. Health care costs
2. Taxis/buses for commute
3. Low-interest loans
4. Meals and snacks
5. Office space rent 6. Company leased accommodation Savings contributions:
1. Gratuity amount
2.Employer provident fund contribution
3. Superannuation
• Direct benefits - these are the monetary benefits.
1.Basic salary- this is a part of the salary which forms the basis for the calculation of other
allowances. This is fully taxable. This is like the foundation on which the entire building is built.
Whenever you see an advertisement for a job the salary mentioned in it is always basic salary. All
the other parts are dependent on it, as its percentage. Normally it forms 40% – 50% of the CTC.
2.Dearness allowance- it is a percentage of basic salary. Its percentage is decided on the basis of
inflation ( consumer price index ). it is also fully taxable. Whenever there is a hike in basic salary, it
is also increased accordingly.
3.Incentives or bonuses – these are performance based emoluments. They are paid to the
employees for their good efforts and to incentivize them for working more efficiently and
producing better results. They are fully taxable.
4.House rent allowance – if you are living in a rented accommodation, then you should take some
amount under this head, as the least of the three is exempt.
• Actual HRA received
• 40% / 50% of salary (depending upon the city)
• Rent paid- 10% of salary
5. Leave travel allowance or concession (LTA / LTC)
• If you travel with your family during vacations, then you can avail of this exemption, under
leave travel allowance. This exemption is available only on the actual fare of rail, aeroplane or bus
incurred by the employee. Any other expense made on local conveyance, sightseeing, hotel
accommodation, food, etc., Are not eligible for this exemption. The lower of the two shall be
exempt;
• 1) LTA provided by the employer.
• 2) according to the actual expenses incurred for travel by the employee or through the
applicable amounts explained in the table below according to the mode of transport.
• For availing of this exemption, some conditions have to be fulfilled.
6. Transport allowance or conveyance allowance- This allowance is provided to the employee to
meet the expense of commuting to and fro between his residence and place of duty/ office. This is
fully taxable from the financial year 2018-19. Its annual amount of exemption (19200/-) has been
subsumed under the standard deduction available under the head salary.
7. Mobile/telephone allowance
• It is an allowance given to meet the expenses on the residential landline phone, broadband
connection, and the mobile phone used by the employee
• The amount of exemption will be lower of the two;
• Amount actually spent
• Amount of allowance received
8. Books and periodicals allowance
• This allowance is received for having any subscriptions of books and periodicals
• The amount of exemption will be lower of the two;
• Amount actually spent
• Amount of allowance received
9. Medical allowance
• It is just like a dearness allowance and is a part of the salary. It is fully taxable.
10. uniform allowance
• This allowance is given for the expenses incurred in purchasing and maintaining the uniform to
be worn to the office. The amount of exemption will be lower of the two;
• Amount actually spent
• Amount of allowance received
11. Hostel allowance
• An exemption of up to rs.300 per month per child for two children.
• Note- some allowances like medical allowance, city compensatory allowance, special
allowance, incentives and bonus, overtime allowance are fully taxable like basic salary and d.A.
12. Children education allowance
• This allowance is provided for the education of children of the employee.
• The amount of exemption will be lower of the two;
• Rs 100/- per month per child. Restricted to two children i.E. Rs 1200/- per child per year
• Amount of allowance received

 How to calculate CTC from basic salary

• Description component of salary (per annum) amount
• Basic salary basic salary 480,000
• Allowances dearness allowance 48,000 House rent allowance 96,000
Conveyance allowance 12,000
Entertainment allowance 12,000
Overtime allowance 12,000
Medical reimbursements 15,000
• Gross salary 6,75,000
• Benefits varies from company to company
Medical insurance 2000
• Provident fund (12% of basic) 57,600 (12% of 4,80,000)
• Laptop 50,000
• Total benefits 109600
• Cost to company = gross salary + benefits 6,75,000 + 109600 = 7,84,600
have a higher amount of basic salary compared to senior-level employees. If an employee has a
high basic salary, he or she will have to pay tax on it.

• Net salary is the salary that an employee receives in-hand or in their bank account after the tax
deduction.
• Net salary = CTC - provident fund contribution - gratuity - income tax (TDS)
• So, the difference between CTC and in-hand salary lies in the PF contribution, gratuity, and
income tax deductions. Gross Salary
• Gross salary is often confused with CTC. However, there's a difference between the two.
• Gross salary is the amount that is payable to the employee before the deduction of taxes and
after the deduction of the Employee Provident Fund (EPF) contribution and gratuity subtracted
from the CTC.
• Direct and indirect benefits, overtime salary, and other differentials are included in gross
salary.

• GROSS SALARY - Gross salary is the amount after the EPF and gratuity are subtracted from the
CTC. Basically, the remuneration paid before deducting the income tax, professional tax, and other
deductions. It is inclusive of bonuses, overtime pay, paid holiday amount, and other differentials.
• GRATUITY - This is the part of the employee's salary that is paid by the company as a token of
appreciation for the services of the company offered during the tenure of employment. It is mainly
defined as the benefit provided to the employee at the time of their retirement. Under the income
tax act, an employee is eligible to receive the gratuity amount after the completion of 5 or more
years of full-time employment at an organisation.
• NET SALARY OR IN-HAND SALARY - Take-home salary or the in-hand salary is the amount which
the employee receives after the tax, and other deductions are carried over. The difference between
gross and net salary is that the salary that includes the income tax, professional tax, and other
company policy deductions subtracted from the gross salary.
In-hand salary = gross salary - income tax -professional tax

 Incentive payments
• A type of compensation given in addition to base wages that can help motivate employees to
perform their best. in turn, the company boosts profit because employees have an extra incentive
to work harder.
• Incentive pay can be cash or non-cash payments to your employees. and, you can choose to
give incentive pay individually or based on the company’s performance as a whole.
There are two structures for incentives: casual and structured.
• Casual incentive pay is a payment type that you can give to an employee at any time to reward
them for their work performance or to help retain an employee. for example, you have a member
of your team who performs exceptionally well, so you decide to give the employee a gift card. the
gift card is a casual incentive payment type.
• Structured incentive pay is set by specific sales or production goals and paid to employees at a
percentage or flat rate. for example, you set a goal for $50,000 in sales for the fiscal year. if you
reach that goal, you give each employee a bonus equaling 2% of their annual salary. when you
achieve the sales goal, the payments you give to your employees are structured incentive
payments.
 Incentive pay examples that are cash-based include:
• Quarterly or yearly bonuses
• Commission for a sales role
• Sign-on bonuses or performance bonuses
• Company stock shares
• Company branded debit card rewards (commonly used for rebates) Incentive pay options that
are not cash-based include:
• Larger scale incentive travel or excursions
• Company lunches
• Merchandise rewards as part of an online, point-based system
• Gift card reward options to top retailers and name brands
• Membership to a health and fitness club

 When should companies consider offering incentive pay?

• An employee reward and recognition program for all employee types as a means to boost
morale, decrease turnover, and increase performance at any business. Different departments can
have different goals with the help of organizational structure software.
• A sales incentive program for businesses looking to offer both commissions as well as added
bonuses to a small portion of top performers. These programs can engage team members in
healthy competition with automated tracking and an online leaderboard.
• A channel incentive program for businesses with a product that is sold through a variety of
different distributors, wholesalers, and resellers, or who’s product can come recommended to the
consumer by dealers and contractors
1. Cash incentives - Cash incentives include a variety of payments to employees based on their job
performance, including commissions and bonuses.
Commission pay is a lump-sum payment made to employees when they complete a task. Typically,
the task is selling a certain amount of goods or services. Employers may choose to have a
commission-only payment system for employees. But generally, commissions are payments made
in addition to hourly or salary wages.
Cash bonuses are lump sums of money given to employees occasionally or periodically for good
performance. You may also choose to give bonuses to employees for joining or remaining with your
company. Bonuses are typically not tied to sales.
• Types of bonuses include:
• Signing
• Referral
• Performance
• Holiday
• Retention
• Annual
• Milestone (e.x., Five years with the company)
2. Profit sharing- Profit sharing is the sharing of the company’s annual profits with employees.
Most profit-sharing plans have yearly payouts to employees, and employees receive payments in
the form of cash or stocks.
Typically, this type of incentive pay has a detailed plan and formula for how much of the profits the
business will set aside and distribute. And, the plans are designed to assist employees with saving
and investing for retirement.
3. Stock options - employee stock options allow employees to purchase shares of the company’s
stock at a discount and see possible tax breaks on profits.
Employers also benefit with stock options because it gives employees a true stake in the future of
the company. Employees have the incentive to see the company succeed when they have a
financial stake in the business beyond a paycheck.
4. Career development incentives - Do you offer your employees opportunities to learn and grow
to further develop their career? If so, you probably offer a career development incentive. Examples
of career development incentives include:
Tuition reimbursement
Networking opportunities (e.g., conference attendance)
Training courses
Job shadowing/mentorship opportunities Skill advancement certification training
5. Non-cash incentives
When looking at incentive pay, you might be looking at all of the big things your company can do to
incentivize employees to join or stay with your company. But, not all incentives have to be large
undertakings, like stock options or profit sharing. Enter non-cash incentives. With non-cash
incentives, employees do not receive money for their work, but they do receive some type of
reward.
Non-cash incentives can be things like personal use of company car , gifts, vouchers, or
memberships to clubs (e.g., Health clubs). In other words, non-cash incentives can be rewards
employees would not purchase for themselves. Employees may have to pay income taxes on some
non-cash incentives .
Other non-cash incentives that can help you recruit and retain employees can be things like:
• Periodic company lunches, A snack bar, Employee recognition programs (e.g., Employee of the
month)
• Flexible work arrangements
• Non-cash incentives are unique because they can be physical items or experiences employees
receive. And, this type of incentive can encompass other types of incentives. For example, career
development opportunities are also a non-cash incentive for employees.
Module III
 Criteria for wage fixation:

1. Ability to Pay:
The ability of an industry to pay will influence wage rate to be paid, if the concern is running into
losses, then it may not be able to pay higher wage rates. A profitable enterprise may pay more to
attract good workers. During the period of prosperity, workers are paid higher wages because
management wants to share the profits with labour.

2. Demand and Supply:

The labour market conditions or demand and supply forces to operate at the national and local
levels and determine the wage rates. When the demand for a particular type of skilled labour is
more and supply is less than the wages will be more. One the other hand, if supply is more demand
on the other hand, is less then persons will be available at lower wage rates also.
According to Mescon,” the supply and demand compensation criterion is very closely related to the
prevailing pay comparable wage and on-going wage concepts since, in essence to all these
remuneration standards are determined by immediate market forces and factors.

3. Prevailing Market Rates:

No enterprise can ignore prevailing wage rates. The wage rates paid in the industry or other
concerns at the same place will form a base for fixing wage rates. If a unit or concern pays low rates
then workers leave their jobs whenever they get a job somewhere else. It will not be possible to
retain good workers for long periods.

4. Cost of Living:
In many industries wages are linked to enterprise cost of living which ensures a fair wages to
workers. The wage rates are directly influenced by cost of living of a place. The workers will accept
a wage which may ensure them a minimum standard of living.
Wages will also be adjusted according to price index number. The increase in price index will erode
the purchasing power of workers and they will demand higher wages. When the prices are stable,
then frequent wage increases may not be required
5. Bargaining of Trade Unions:
The wage rates are also influenced by the bargaining power of trade unions. Stronger the trade
union, higher will be the wage rates. The strength of a trade union is judged by its membership,
financial position and type of leadership.
6. Productivity:
Productivity is the contribution of the workers in order to increase output. It also measures the
contribution of other factors of production like machines, materials, and management .Wage
increase is sometimes associated with increase in productivity. Workers may also be offered
additional bonus, etc., if productivity increases beyond a certain level. It is common practice to
issue productivity bonus in industrial units.
7. Government Regulations:
To improve the working conditions of workers, government may pass a legislation for fixing
minimum wages of workers. This may ensure them, a minimum level of living. In under developed
countries bargaining power of labour is weak and employers try to exploit workers by paying them
low wages. In India, Minimum Wages Act, 1948 was passed empower government to fix minimum
wages of workers. Similarly, many other important legislation passed by government help to
improve the wage structure.
8. Cost of Training:
In determining, the wages of the workers, in different occupations, allowances must be made for all
the exercises incurred on training and time devoted for it.
  Methods of Payment

1. Broadbanding

Broad banding is defined as a strategy for salary structures that consolidate a large number of pay
grades into a few "broad bands."In a broadband pay structure, the numbers of salary grades are
consolidated into fewer, but broader, pay ranges.
Broadbanding is a method for evaluation and construction of job grading structure that exchanges
a large number of narrow salary ranges for a smaller number of broader salary ranges.
Broadbanding aids in establishing what is required to pay for a specific position.
This type of pay structure encourages the development of broad employee skills and growth while
reducing the opportunity for promotion.
Broad banding evolved because organizations want to flatten their hierarchies and move decision-
making closer to the point where necessity and knowledge exist in organizations. In flattened
organizations, fewer promotional opportunities exist so the broad banding structure allows more
latitude for pay increases and career growth without promotion.

Broadband pay structures encourage the development of broad employee skills, because non-
managerial jobs are appropriately valued and skill development is rewarded. Additionally, a
broadband pay structure is not as sensitive to changing market pricing conditions, so they cost less
to administer and manage over time. They also provide serious non-promotional income
opportunities for employees.
Happens to be in grade 1, it's difficult to reassign that person without lowering his or her salary.
Similarly, if you want the person to learn about a job that happens to be in grade 3, the employee
might object to the reassignment without a corresponding raise to grade 3 pay. Traditional grade
pay plans thus breed inflexibility. That is why some firms are broad banding their pay plans.
Broadbanding means collapsing salary grades and ranges into just a few wide ranges, or bands,
each of which contains a relatively wide range of jobs and salary levels. Figure 8.5 illustrates this. In
this figure, the company's previous six pay grades are consolidated into two broadband.
Broadbanding has been successfully implemented in large, hierarchical organizations which
attempted to flatten their organizations and remove levels of management. For example,
organizations that had eight levels of management could eliminate four levels, widen the salary
ranges of the remaining four levels, and simply slot each manager into one of those ranges.

With broadbanding, a manager can more easily encourage his/her employees to broaden their
skills and abilities. This is valuable to organizations because employees with broad skills and
abilities are critical for the success in a total quality/continuous improvement environment. In
contrast, the jobs in traditional organizations are narrow and specialized. In order for employees to
advance in pay and responsibility, they have to further develop their specialized skill. Thus a bias
exists against the broadening of skills.
Advantages of broadbanding
• It streamlines hierarchy structure within the organization
• It promotes and facilitates internal movement within the organization and emphasizes other
attributes of a position, other than the pay grade which is already disclosed
• Gives more transparency and added trust in management

Disadvantages of broadbanding
• Reduces awareness of external market salary rates.
• Broadbanding leads to lack of promotions within the organization; it allows organizations to
increase pay and offer opportunities for training without promoting employees.
• Broadband pay structures aren’t sensitive to changing market conditions.
2. Performance Pay Systems
In contrast with set salaries, performance pay is based on compensating the employee per their
individual contribution, not the value of the position itself. Performance-based pay systems provide
financial compensation based on either focus on individual or group performance .There is
individual performance pay, which is often associated with sales personnel who depend on
commissions, and skill-based pay, in which compensation is connected to competency. Some
companies engage in profit-sharing, which means that employees will receive a certain percentage
of the company’s financial gains.

Skill-Based Overview
Many manual labor and manufacturing companies favor skill-based pay systems that link aptitude
and expertise to pay grades. This promotes productivity, better workforce skills and product quality.
There are two types of skill-based payment systems. First, there are general skill systems that
increase the employee’s ability to perform more tasks and positions. Second, there are specialized
skill systems that compensate employees for master’s highly difficult tasks. An employee who
learns how to operate similar machinery would be rewarded through the general skill system; an
employee who learns an entirely new machine would be incentivized through a specialized skill
system.

The Benefits
Performance pay offers a variety of benefits. Management enjoys better employee performance
and employee engagement. As long as there is a fair and effective performance review system that
is accurately aligned with local salary levels, employees will strive to work hard. Executives will
enjoy increased revenue and working capital. Management can use performance pay systems to
transition model employees into supervisors. HR administrators can use performance pay to attract
potential job applicants and improve employee retention. In the beginning, turnover rates may be
slightly higher as low performers leave, but qualified and motivated employees will remain.
The Disadvantages
Some companies struggle to implement performance pay systems because it is hard to define
performance levels and objectively evaluate employees. The performance criteria and
measurements may be vague and inadequate. As a result, supervisors favor certain employees over
others, which increase collective employee dissatisfaction. When employees cannot understand
the performance measures, they may still blame management when they fail to receive wage
increases. Sometimes, the objective of performance appraisal systems is to merely identify training
needs or promotion suitability. The biggest challenge of performance pay systems is that
management must continually observe and document employee performance while also providing
feedback, which is very time consuming.

The Performance Criteria

The actual pay scheme will determine the performance criteria, which may be based on individuals,
groups, the organization or a customized mixture. Some individual-based criteria focus on the
achievement of personal goals and the supervisor’s feedback. Individual training goals may be
based on specific skills and knowledge needed to perform work duties. Individual performance
systems are not recommended when the company’s objective is to increase teamwork
performance and information sharing. Other systems utilize peer reviews, which are often
considered to be highly subjective.

3. Knowledge Based Pay

Knowledge-based pay is a term that relies on an individual’s desire to enhance their knowledge to
raise their income or other benefits. When an employee’s knowledge base grows, he or she will be
able to take on more difficult and profitable assignments on behalf of the organization.
Once in operation, a knowledge-based compensation system will enable employees to develop
their job skills. When an individual advance to the next stage of schooling, he or she is often given a
specific pay raise. The method could be one-tiered or have several steps to complete.
Knowledge-based compensation schemes can motivate people to become lifelong learners, which
can help a business stay competitive. As a result of the high-quality workmanship, this will lead to
more creativity, longer tenure of professional workers, and higher sales.
Job-Based Pay vs. Knowledge-Based Pay
Job-Based Pay Models
Job-based pay models are familiar to most people. In this model, management identifies a job by a
name that identifies the primary tasks to be performed ("floor supervisor," "clerk-typist," "machine
operator") and assigns a pay scale to that job, which reflects the estimated education and
experience needed to perform the job. The wages of supervisory jobs might also take into account
the number of employees being supervised. Raises based on time spent on the job are another
characteristic of job-based pay models.

Knowledge-Based Pay Models

Knowledge-based pay models, also frequently identified as "performance-based," or "competency-
based," establish pay levels on the basis of the skills and knowledge required to perform the work.
At first glance, the distinction may seem formalistic. When you identify a job that requires certain
skills, then hire someone because they have the necessary skills and knowledge to do the job,
aren't you effectively using both models?
The Practical Difference Between the Two Models
There isn't a firm line that separates the two models, but they differ in emphasis. The job-based
model identifies workers by job titles and links compensation rather tightly to the title (and to
seniority). The performance-based model also has job titles, but compensation isn't tied to the title
but to the worker's specific abilities. In general, knowledge-based pay models work best in
organizations that have fluid organizational structures or where work assignments aren't fixed –
where, for example, an engineer may be asked to head up a small team assigned to a specific
project, then on completion of that project, that engineer will become part of a larger engineering
team working on an assignment in progress.
Combinations of Both Models
"Merit pay," is a pay-model that combines both jobs and knowledge (or performance) models. A
fixed-pay jobs-based model is augmented by bonus payments that are based on performance
which exceeds the expected performance level for the job title.
A related model is sometimes called "practice effectiveness," and is designed to overcome a
frequently encountered drawback of merit pay, which is that what started out as merit pay
becomes institutionalized – another jobs-based model by another name. The practice-effectiveness
model avoids this by identifying each of the skills or accomplishments that earn pay beyond the
basic salary that's part of the job description, basing increased pay on the basis of the skills
acquired or on the accomplishments achieved. These are not necessarily permanent aims, but they
reflect the organization's current need.
Pros and cons
Some people argue in favor of knowledge-based pay while others are strongly against it.
Pros
Proponents of the system say that it encourages personal growth and development among
employees. This can subsequently lead to improved performance across the entire company.
Proponents also argue that the system rewards ambitions staff who strive to perform at a higher
level.
Cons
Critics of knowledge-based pay say that the system does not reflect what the employee is doing.
They also argue that the system is more likely to lead to discriminatory pay practices.

4. Market-based structure
Market-based structures are based on what other employers pay employees. Under a market-
based salary structure, conduct an external pay audit to determine your salary ranges for each
position.
To find out what workers are earning outside your business, do some research. Use resources like
the U.S. Bureau of Labour Statistics or Glassdoor to see what employees in similar positions earn.
Put together a list of positions and their descriptions before collecting market data. That way, you
can better compare positions.
In some ways, market-based structures are a combination of traditional and broadband salary
structures. The salary ranges can be high like broadband structures, but the ranges are generally
narrow and consistent.
Market-based pay structures determine salary ranges and pay grades based on a current market
analysis of comparable positions and salaries. Salary ranges are designated for specific jobs as
opposed to job type. For instance, an organization using a market-based pay structure may analyze
data for average salaries of a hotel restaurant manager and create a salary range in line with these
figures.
Salary ranges may be larger using a market-based pay structure, like in broadband structures, but
the pay grades are often narrower, as in traditional pay structures.
Market-based compensation structures are built solely on what the market is paying for similar
jobs. Larger organizations who use these compensation structures tend to have wider salary ranges
within each grade, whereas smaller organizations have smaller salary ranges. The salaries for
market-based structures are influenced by data sources such as salary surveys, ensuring precise job
pricing within each grade.

Market based compensation structures are best when:

You prefer to rely on the market for salary information.
You don’t have a performance-based pay philosophy.
You have a well-defined organization, but want to be flexible with pay determinations.
4. Incentive based pay system - Incentive pay is performance-based compensation that rewards an
employee for meeting set goals or objectives. This compensation can come in the form of
money, stocks, additional paid leave, gifts, etc. Although incentives are often created for
individual employees, you can also create incentive pay plans for teams or the entire company.

Advantages of Incentive Pay

Happier employees - Incentive pay plans are a great way to keep employees motivated and
increase both morale and job satisfaction.
Better employee performance and retention - Studies show that happy employees consistently
perform better for longer periods of time. By rewarding employees for high performance, incentive
pay helps increase employee performance and retention.
Better organizational performance - High-performing employees are good for business. If your
employees are performing well, your business is likely to do better as well.
Helps execute business strategy - Incentive pay is flexible and can be structured to promote the
company’s current business strategy.
Disadvantages of Incentive Pay
Uncertainty for employees or candidates - Not every employee is attracted to incentive pay.
Because it’s not guaranteed, more risk-averse employees may see it as a negative thing, and opt
instead for higher guaranteed compensation plans.
May not align with business objectives - Incentive pay may not always lead to increased revenues.
If this is the case, the incentive plan may only be increasing costs.
Some plans cause distrust - Not all incentives are as easy to measure as sales goals. Some incentive
plan metrics may be less clear, which can cause an employee to distrust the process or think it
unfair. For example, how do you create an incentive for a customer service representative or a tech
support employee? What if you base the incentive off reviews, and that employee receives biased
customer reviews?
Incentives can create conflicts - Incentive pay can create conflicts between employees, particularly
if one employee believes that another employee doesn’t deserve the incentive. Some employers
try to prevent this by asking employees to keep their incentives confidential, but this violates the
National Labour Relations Act (NLRA), and its bad HR practice.
 Types of Incentive Plans

1. Individual Incentive Plans:

Under individual incentive plan, individual employee is paid incentive on the basis of individual
performance or output. The employers are liable to pay incentives to those employees who are
producing more than the standard output. Individual incentive plans can be either time based or
production based.
In case of time based incentive plans, a standard time is determined for doing a job and this
standard time served as a basis for giving incentive. A worker is considered as efficient, if he
completes his job in less than standard time. The worker is awarded for his efficiency by giving
incentive under some incentive plans.
Some of the time based incentive plans are:
I. Halsey Incentive Plan.
II. Rowan Incentive Plan.
III. Emerson Efficiency Plan.
IV. Bedeaux Incentive Plan.
In case of production based incentive plans, a standard of output is determined and wages are paid
on the basis of number of units produced.
Some of the production based incentive plans are:
I. Taylor’s differential piece rate system.
II. II. Merrick’s multiple piece rate plan.
III. III. Gantt’s task and bonus wage plan.

Time-Based Plans:
I. Halsey Incentive Plan:
In this method a standard time is fixed for the completion of the job. A minimum base-wage is
guaranteed to every worker. If a worker completes his job in just the standard time, he will not be
given any incentive. If a worker performs his job in less than standard time, he is given incentive.
The incentive will be equal to 50% of the time saved by the worker.
W=TR+(S-T) R%
Where W=Total Wages
S=Standard time
T=Time taken to complete the job
%=Percentage of wages of time saved to be given as incentive
R=Rate;
For example, if rate hour is Rs.3 standard time for completion of job is 10 hours.
A worker completes the job in 8 hours, his total wages will be:
W= 8x 3+ (10-8)3×1/2 = Rs.27

Advantages:
a. It is simple.
b. Each worker is guaranteed a minimum wage.
c. This is beneficial to efficient worker.
d. Causes no harm to new worker, trainee, or slow worker.
e. Management shares benefits of over-achievement by workers.

Disadvantages:
a. Workers get only a percentage of return on their over-achievement.
b. The quality of production may suffer as workers may do work in hurry,
c. There may be difficulties in setting standard time for different jobs.

II. Rowan Plan:

This plan is quite similar to Halsey plan. It differs only in terms of calculation of incentive for time
saved. The worker gets the guaranteed minimum wages. The incentive for completing the job in
time lesser than standard time is paid on the basis of a ratio, which is time saved over standard
time per unit standard time.
Incentive is calculated as:
Incentive or Bonus=S-1/SX T x R
Total wages=T x R+ incentive
=T x R(S-T)/S x T x R
Where, W=Total wages
S=Standard time
T=Time taken to complete the job
R=Rate;
For example, if rate per hour is Rs.3and standard time for completion of job is 10 hours.
A worker completes the job in 8 hours, his total wages will be:
W=8×3+ (10-8)/10x 8x 3=Rs.28.4

Advantages:
a. This system checks over-speeding and overstrain by worker.
b. Each worker is guaranteed a minimum wage.
c. Efficiency is rewarded.

Disadvantages:
a. The workers find it difficult to understand.
b. Discourages workers to over-achieve.
c. Workers may not like sharing of profit for over-achievement.

III. Emerson’s Efficiency Plan:

In this plan, a minimum wage is guaranteed to every worker on time basis and incentive is given on
the basis of efficiency. Efficiency is determined by the ratio of time taken to standard time.
Payment of bonus/incentive is related to efficiency of the workers. Incentive will be given to those
workers who attains more than 2/3rd i.e. 66.67% of efficiency. No incentive will be given at 66.67%
efficiency. At 100% efficiency incentive is 20% of the hourly rate. For efficiency exceeding 100%, 1%
incentive/bonus is paid for every 1% increase in efficiency.
For example, if standard time for a job is 6 hours and hourly rate is Rs.3. If a worker completes a job
in 6 hours, the efficiency of worker is 100%. His wages will be 6 x 3 + bonus @20% i.e. Rs.18 + 20%
of 18 = Rs.21.6

Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.

Disadvantages:
i. Incentive after attaining standard is very low.

IV. Bedeaux Point Plan:

Under Bedeaux point premium plan, every operation or job is expressed in terms of so many
standard minutes, which are called “Bedeaux Points” or “B’s” ; each B representing one minute
through time and motion study.
Up to 100% performance i.e., up to standard B’s, a worker is paid time wages without any premium
for efficiency. If the actual performance exceeds the standard performance in terms of B’s, then
75% of the wages of the time saved is paid to the worker as bonus and 25% is earned by the
foreman.
For example, standard time required for a job is 20 hours i.e., 1,200 B’s in terms of minutes (20 x
60) whereas a worker has taken 16 hours i.e., 960 B’s (16 x 60) instead of 1,200 B’s. The worker has
saved 240 B’s or 4 hours (4 x 60). Suppose time wage rate is Rs 2 per hour; the time saved will be
equal to Rs 8 (4 hours @ T 2). The worker will get 75% of Rs 8 as bonus.
So, his total earnings will be as follows:
This method ensures time wages to the workers and has the novel feature of distributing the wages
of time saved among workers and foremen. It serves as a strong incentive for workers for improving
their performance above 100% of the standard.
But workers criticise this method as foremen are given a share of wages of the time saved. It is a
complicated method as the determination of standard time in terms of B’s is not easily understood
by workers.

Advantages:
a. Minimum wages are guaranteed.
b. Management also shares some percentage of bonus.
Disadvantages:
a. Incentive after attaining standard is very low.
b. Workers do not like their bonus to be shared by management.

Output-Based Plans:
I. Taylor’s Differential Piece Rate System:
This system was introduced by Taylor, the father of scientific management. The main characteristics
of this system are that two rates of wage one lower and one higher are fixed. A lower rate for those
workers who are not able to attain the standard output within the standard time; and a higher rate
for those who are in a position to produce the standard output within or less than the standard
time.
For example, if standard production in 8 hours is fixed at 10 units. The lower piece rate is Rs.3 and
higher piece rate is Rs.3.5. If a worker produces 9 units, his wages = 9 x 3 = Rs.27. In case a worker
produces 10 units, his wages = 10 x 3.5 = Rs.35.
Advantages:
a. Provides incentives to efficient worker.
b. Inefficient worker is penalized.
c. This system is simple and easy to implement.
Disadvantages:
a. Minimum wage is not assured,
b. There are chances that quality of work may suffer,
c. This system is not liked by below average workers, as they do not get any incentive.

II. Merrick’s Multiple Piece Rate Plan:

To overcome the limitations of Taylor’s differential piece rate system, Merrick suggested a modified
plan in which, three-piece rates are applied for workers with different levels of performance.
These are:
a. Workers producing less than 83% of the standard output are paid at basic rate.
b. Workers producing between 83% and 100% of standard output will be paid 110% of basic piece
rate.
c. Those producing more than 100% of the standard output will be paid 120% of basic piece rate.
Advantages:
a. Efficient workers are rewarded handsomely.
b. Minimum wages are guaranteed.
Disadvantages:
a. There is wide gap in slabs of differential wage rate.
b. Over emphasis on high production rate.
III. Gantt’s Task and Bonus Plan:
This plan is based on careful study of a job. The main feature of this plan is that it combines time
rate, piece rate and bonus. A standard time is fixed for doing a particular job. Worker’s actual
performance is compared with the standard time and his efficiency is determined.
If a worker does not complete the job within standard time i.e. he takes more time than the
standard time (efficiency below 100%), he will not receive any bonus but he is given wages for the
time taken by him.
If a worker completes the job within standard time (100% efficiency), he is given wages for the
standard time and bonus of 20% of wages earned.
If the worker completes the job in less than the standard time (i.e. efficiency more than 100%),
wages are paid according to piece rate.
Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
c. Efficient workers can earn more money.

Disadvantage:
a. Emphasis on over speed or high production rate.

Type # 2. Group Incentive Plans:

A group incentive plan scheme is designed to promote effective teamwork, as the bonus is
dependent on the performance and output of the team as a whole. Under group incentive plan,
each employee is paid incentive on the basis of collective performance of his group to which he
belongs. Within the group, each employee gets an equal share of the incentive.
Some of the group incentive plans are:
I. Priest man’s Plan.
II. Scanlon’s Plan.

I. Priest man’s Plan:

In this plan workers are not considered individually but collectively. This system considers the
productivity of all workers as a whole. Bonus is paid in proportion in excess of standard output per
week. If in a year, the output increases either above the standard output or the output of the
previous year, the wages are increased in the same ratio.
For example, if in 2009 the output per worker per unit time is 10 units and in year 2010 the output
per worker per unit time comes out to be 12 units, the wages in 2010 will be 20% more than in
2009. The drawback of this system is that individual efficiency is not considered.

II. Scanlon’s Plan:

A Scanlon plan is a type of gain sharing plan that pays a bonus to employees when they improve
their performance or productivity by a certain amount as measured against a previously
established standard. A typical Scanlon plan includes an employee suggestion program, a
committee system, and a formula-based bonus system. A Scanlon plan focuses attention on the
variables over which the organization and its employees have some control.

 Executive compensation, also known as executive pay, refers to remuneration packages

specifically designed for business leaders, senior management and executive-level
employees of a company
The pay packages given to the senior executives of corporations often consist of six components:
1. Base salary - The base salary for executive pay is normally stated as an annual salary, although
it is typically paid monthly or bi-weekly, similar to other salaried staff.

2. Performance based annual incentive (bonus) - Short-Term Incentives

The purpose of the annual incentive is to compensate executives for achieving the company’s
short-term business strategy. Thus, it is based on achieving a number of goals specified for the
company by the company's Board of Directors. The nature of these goals varies depending on the
business, company strategy and other conditions.

Annual objectives can include such items as:

Increasing revenue or market share
Improving profit margins
Implementing a new corporate strategy
Development of new products
Expanding to a new market, and completion of a critical project
3. Performance based long term incentive - Long-Term Incentives
By far the largest potential component of executive pay is the long term-incentive. The purpose of
the long-term incentive is to reward executives for achievement of the company’s strategic
objectives that will maximize shareholder value.
Typically these have been provided in the form of stock-based compensation, such as:
Stock
Stock options
Restricted stock
Performance-vested stock, options, or similar devices
The performance period for a long-term incentive typically runs between three and five years, with
the executive not receiving any pay from the incentive until the end of the performance period.
Long-term incentive goals vary by company but the most prevalent are focused on total return to
shareholders, earnings per share and other return measures, such as return on assets. Like annual
incentives, long-term incentives typically have a target and a stretch component to encourage
executives to achieve superior performance.
4. Benefits - Employee Benefits
Benefit programs run the normal range familiar to salaried employees. They include statutory
benefits such as Social Security, Medicare, Workers Compensation, and Unemployment Insurance.
Executives also participate in other company benefits such as vacation, holidays, sick days,
severance pay, life insurance, and medical insurance.
In addition to the benefits provided salaried employees, executives are often eligible to participate
in special retirement plans. These plans, unlike those that apply to all employees, are not protected
by federal tax and pension rules and are not typically secured by a trust. Instead, the amounts in
these plans are at risk, and if the company is unable to pay them, such as in insolvency or
bankruptcy, the executive would be at risk to lose such benefits.
These special plans include the following:
Nonqualified deferred compensation plans which allow executives to voluntarily defer salary and
bonus amounts until a date certain, death or retirement.
Supplemental Employee Retirement Plans (SERPs) which are meant to supplement traditional
pension plans, but are at risk.
Many nonqualified deferred compensation plans and SERPs are "restoration plans" designed to
allow executives to save the same percentage of income as other employees may save in tax-
favored plans.
5. Executive perquisites - Perquisites
Executive perquisites or "perks" constitute additional compensation for senior executives which are
not available to other salaried employees. These extra benefits are normally structured to
recognize the value of the executive to the company, extraordinary demands on his or her time and
other unique conditions.
Some perks are structured to maximize executive work time including drivers to and from work,
convenient parking, and installation of home communications systems, financial planning, and even
the use of company airplanes for personal travel. Others recognize the unique positions of
executives, especially CEOs, by providing security both at home and when traveling. Typically,
executive perks constitute a modest component of executive.
6. Contingent Payments
Many executives are also covered by severance which provide for payments to executives in the
case of involuntary termination except in the event of termination for cause. They are often
included in agreements for executives hired from outside the company to encourage him or her to
leave a prior employer in case the new arrangement sours.
Change-in-Control agreements, also known as "golden parachutes," compensate executives for loss
of job due to mergers or sale. They are structured to provide additional protection to executives in
the event of a change-in-control thereby allowing executives to focus on sale or merger
opportunities that are in the best interests of shareholders without being overly concerned as to
the potential impact on their career.

 METHODS OF WAGE DETERMINATION IN INDIA:

Fixation of wages in India is a recent phenomenon. There was no effective machinery till 2ns world
war for settlement of disputes for fixation of wages. After independence of India, industrial
relations become a major issue and there was a massive increase in industrial dispute mostly over
wages leading to substantial loss of production. Realizing that industrial peace is essential for
progress on industrial as well as the economic front, the central government convened in 1947 a
tripartite conference consisting of representatives of employers, labour and government.
Government of India formulated industrial policy resolution in 1948 where the government has
mentioned two items which have bearing on wages:

1. Statutory fixation of minimum wages

2. Promotion of fair wages
To achieve the 1st objective, the minimum wages act of 1948 was passed to lay down certain
norms and procedures for determination and fixation of wages by central and state government.
To achieve the second objective, GOI appointed in 1949 a tripartite committee on fair wages to
determine principles on which fair wages should be fixed.
As of now, India does not have a formal national wage policy, though the issue has been discussed
several times. The government has direct and indirect control over wage levels, which has been
exercised through different institutions. Wages and salary incomes in India are fixed through
several institutions:
Collective bargaining
Industrial wage boards
Government appointed pay commissions
Adjudication by courts and tribunals

1. Collective Bargaining:
Collective bargaining relates to those arrangements under which wages and conditions of
employments are generally decided by agreements negotiated between the parties. Broadly
speaking the following factors affect the wage determination by collective bargaining process:
Alternate choices and demands
Institutional necessities
The right and capacity to strike

In a modern democratic society wages are determined by collective bargaining in contrast to

individual bargaining by working. In the matter of wage bargaining, unions are primarily concerned
with:
General level of wages
Structure of wage rates (differential among occupations)
Bonus, incentives and fringe benefits, administration of wages
1. Wage determination in the unorganized sector:
Wage determination in India has been achieved by various instruments. For the unorganized sector
the most useful instrument is the Minimum Wages Act 1948.
This law governs the methods to fix minimum wages in scheduled industries (which may vary from
state to state) by using either a committee method or a notification method.
A tripartite Advisory Committee with an independent Chairman advises the Government on the
minimum wage. In practice unfortunately, the minimum wage is so low that in many industries
there is erosion of real wage despite revision of the minimum wage occasionally.
A feeble indexation system has now been introduced in a few states only.
Collective bargaining in the organized sector:
An important factor that is not much recognized, but which still prevails in many organized sector
units is fixing and revising wages through collective bargaining.
The course of collective bargaining was influenced in 1948 by the recommendations of the Fair
Wage Committee that reported that three levels of wages exist – minimum, fair, and living.
These three wage levels were defined and it was pointed out that all industries must pay the
minimum wage and that the capacity to pay would apply only to the fair wage, which could be
linked to productivity.

In addition to this the fifteenth Indian Labour Conference, a tripartite body, met in 1954 and
defined precisely what the needs-based minimum wage was and how it could be quantified using a
balanced diet chart.
This gave a great boost to collective bargaining; many organized sector trade unions were able to
achieve reasonably satisfactory indexation and a system of paying an annual bonus.
It is now the law, that a thirteenth month of wage must be paid as a deferred wage to all those
covered by the Payment of Bonus Act.
2. Industrial Wage Boards:
Concept of wage board was first enunciated by committee on fair wages. It was commended by
first five year plan and second five year plan also considered wage board as an acceptable
machinery for settling wage disputes. Wage boards in India are two types:
a. Statutory wage board
b. Tripartite board
Statutory wage board is a body set up by law or with legal authority to establish minimum wages
and other standards of employment which are then legally enforceable in particular trade or
industry to which the board’s decisions relate.
Tripartite wage board is a voluntary negotiating body set up by discussions between organized
employers, workers and government to regulate wages, working hours and related conditions of
employment.
Wage board decisions are not final and are subjected to either executive or judicious review or
reconsideration by other authority or tribunals. The powers and procedure of wage boards are
same as industrial tribunals instituted under the ID act 1947

3. Pay Commissions:
First pay commission was appointed by GOI in 1946 to enquire in to the conditions of service of
central government employees. This commission in its report said that in no case should they pay
less than a living wage.
The 2nd pay commission was appointed in August 1957; it examined the norms for fixing a need
based minimum wage setup.
GOI appointed the 3rd pay commission in the 1970’s which in its report expressed support for a
system in which adjustments of pay will occur automatically with upward movement in consumer
price index.
The 4th pay commission came in 1983 to examine the structure of all central government
employees, including those of union territories, officers belonging to the armed forces and all India
service. Commission submitted a report that recommended drastic changes in pay scale.
The 5thpay commission 1996 made certain recommendation regarding restricting of pay scales.
The 6th pay commission was established in 2006 which submitted a report suggesting revision of
Pay scales of employees of Autonomous bodies.

4. Adjudication:
This instrument is used for settlement of any wage related disputes through courts and tribunals.
Supreme Court has also adjudicated upon such disputes.

 Wage Boards in Compensation Management –

Wage boards are set up by the Government, but in selection of members of wages boards, the
government cannot appoint members arbitrarily. Members to wage boards can be appointed only
with the consent of employers and employees. The representatives of employers on the wage
boards are the nominees of employers’ organization and the workers’ representatives are the
nominees of the national center of trade unions of the industry concerned.

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

 The main objectives of wage boards are;

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

 COMPOSITION AND FUNCTIONS OF WAGE BOARDS

Wage boards are required to:

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

In addition to these common items, some wage boards may be asked to deal with the question of
Bonus (like that of the wage boards for cement, sugar and jute industries); gratuity (like that of the
wage boards for iron ore mining, limestone and dolomite mining industries) and the second wage
board on cotton textile industry; demands for payments other than wages (wage boards for jute
and iron and steel industry); hours of work (rubber plantation industry); interim relief (wage boards
for jute industry and post and dock workers).
Some wage boards (Wage boards for sugar, jute, iron ore, rubber, tea and coffee plantations,
limestone and dolomite mining industries) have been required to take into account the ‘special
features of the industry’.
Thus, wage boards have had to deal with a large number of subjects. Of these, the fixation of wage
– scales on an industry – wise basis constitutes the biggest of all the issues before them.
In evolving a wage structure, the board takes into account:
(a)The needs of the industry in a developing economy including the need for maintaining and
promoting exports:
(b) The requirements of social justice, which ensures that the workman who produces the goods
has a fair deal, is paid sufficiently well to be able at least to sustain himself and his family in a
reasonable degree of comfort, and that he is not exploited;
(c) The need for adjusting wage differentials (which is in relation to occupational differentials; inter-
firm differentials; regional or inter-area differentials; inter-industry differentials and differentials
based on sex) in such a manner as to provide incentives to workers for improving their skills.
For the determination of fair wages, the board has to take into consideration such factors as the
degree of skill required for his work, the fatigue involved, the training and experience of the
worker, the responsibility under-taken, the mental and physical requirements for work, the
disagreeableness or otherwise of the work and the hazards involved in it. The board is required to
make due allowances for a fair return on capital, remuneration to management and fair allocation
to reserve and depreciation.
  WORKING OF THE WAGE BOARDS
Although wage boards are set up by the government, the basic reason for their establishment is
the pressure brought to bear on the government, by the trade unions, industrial federations and
national organizations on the one hand after the employers’ formal or informal consent on the
other. Pressure has been used for the appointment of wage boards for the jute industry by the jute
workers association and for the coal mining industry by their trade union. The formation of wage
boards in other industries has been the result of similar demands and pressures on the part of
trade unions – such as plantations, iron and steel, engineer, sugar electricity.

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

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

The board functions in three steps:

1. The first step is to prepare a comprehensive questionnaires designed to collect information on
the prevailing wage rates and skill differentials, means of assessing an industry’s paying capacity
and workloads, prospects for industry in the immediate future, and regional variations in the prices
of widely consumed consumer goods. The questionnaire is sent out to labour unions, employers
associations, interested individuals, academic organisations and government agencies.
2. The second step is to give a public hearing at which leaders of labour unions and employers
associations, not represented on the board, as well as others interested in the industry in question,
are given a verbal or oral bearing on issues dealing with wages, working conditions and other
items.

3. The third step is to convene secret sessions at which members of the board make proposals and
counter – proposals regarding the items covered under the terms of reference.

In the case of failure to reach a unanimous decision on the issues, each party has the right to veto
the others decision.
The role of independent members on the board is limited to conciliation and mediation; they try to
prevent deadlocks by promoting communication between labour and management
representatives. They also offer advice and suggestions to the parties, but the final decision must
result from the parties give – and – take attitudes and compromises.
• The structure of a wage boards
The structure of a wage boards constitutes Chairperson, an equal number of representatives of
employers and employees (two members each) and two other independent members (an
economist and a consumer's representative) nominated by the Board.

 What is a Pay Commission?

A pay commission examines and reviews the existing pay structure recommends changes in the
salary, allowances, and other facilities for civil employees as well as for the military forces. In
addition, it reviews the norms of bonuses, keeping in view the performance and productivity of the
employees. Furthermore, a pay commission also examines the existing pension scheme and other
retirement benefits.
The recommendations by the pay commission are made considering the economic conditions and
accessible resources of the country and also the likely impact on the state governments.
The focus of the Pay Commission primarily remains on personnel serving the Central Government.
At least seven pay commissions have been constituted since 1947. After every ten years, the
central government forms a pay commission to revise the salary structure of the government
employees.
The first Pay Commission in India was established in January 1946 under the chairmanship of
Srinivasa Varadachariar. The constitutional framework of the Pay Commission comes under the
Department of Expenditure (Ministry of Finance).
The second Pay Commission was set up in August 1957 and gave its report in two years. The third
Pay Commission, set up in April 1970, submitted its report in March 1973.

The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996.
The Fifth Pay Commission covered the period between 1996 and this year.
The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the
setting up of the 6th Pay Commission to revise the payscales of central government employees in
July 2006.

The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra
Dholakia, J S Mathur and Sushama Nath as its other members.

7th Pay Commission

In India, employees and staffers of the central government receive their wages according to the 7th
Pay Commission's composition. To begin with, the Seventh Central Pay Commission (CPC) was set
up by the Government of India on February 28, 2014.
Chaired by Justice Ashok Kumar Mathur, the commission submitted its report on November 19,
2015. Among other things, the report covered matters relating to the structure of emoluments,
allowances and conditions of service of Armed Forces personnel.

Objectives of the 7th Pay Commission

The 7th Pay Commission emphasises the need to hire, motivate and retain skilled staff and it is also
concerned with human resource management reforms and long-term fiscal sustainability.
The Commission highlights the need to deliberate on factors such as intangible benefits to facilitate
fair comparison with the private sector along with the role of the government as a model employer.
The purpose of the Seventh CPC is to examine, review and recommend changes in the principles
that determine the earnings structure for several employees’ categories including:

— Central government employees

— Those associated with All India Services
— Members of Regulatory Bodies
— Personnel of Union Territories
— Officers and employees of the Indian Audit and Accounts Department
— Officers and employees of the Supreme Court
— Personnel affiliated to Defence Forces

Highlights of 7th Pay Commission

Minimum Pay: According to the Aykroyd formula, the minimum pay for the central government
staff is recommended to be fixed at Rs 18,000 per month
Maximum Pay: Rs 225,000 per month for Apex Scale and Rs 250,000 per month for Cabinet
Secretary and others presently at the same pay level
Annual Increment: The rate of annual increment retained at 3 per cent
7th Pay Commission allowance
According to the 7th CPC allowance framework, the central government pensioners and employees
get the dearness allowance (DA) at the rate of 21 per cent of basic pay from the earlier 17 per cent
of the basic pay with effect from January 1, 2020.
  New Wage Code 2021
The New wage code is an attempt by the government of India to simplify the various regulations
related to wages. According to the new definition outlined in the New wage code, Bill 2021, 'wages'
or an employee's monthly basic salary cannot be less than 50% of the net CTC (Cost To Company).

• The central government has created 4 new codes by combining 29 central labor laws. These
include the
1. Industrial Relations Code,
2. Code on Occupational Safety,
3. Health and Working Conditions Code
4. Social Security Code and Code on Wages.
Some new concepts have been introduced in labor codes. But, the biggest change is the expansion
of the definition of 'wage'. The new labor code is aimed at consolidation i.e. 50% of the salary will
be directly included in the wages.

• For example, consider an employee receiving a monthly salary of Rs 20,000 with minimum pay
of Rs 8000 and the rest protected by allowances before April 1, 2021. Allowances will be reduced to
Rs 10,000 from Rs 12,000. However, in this situation, the employee's PF contribution would
increase from Rs 960 to Rs 1200.

 What does the new wage code entail?

As per the Wage Code Act, the basic salary of an employee cannot be less than 50% of the cost to
the company (CTC). At present, many companies reduce the basic salary and give more allowances
additionally so that the burden on the company is reduced.
The New Wage Code is about to reach its stage of completion by the Central government and will
be implemented in this financial year. Many changes have been made under this bill regarding
holidays, salary and working hours of the employees.

1. The decision on EPF, Salary, Pension likely - According to EPFO board member and General
Secretary some important changes are to be made in the new labor laws. Notably, the rules are to
be applied on important issues like working hours of employees, annual holidays, pension, PF, take-
home salary, retirement. The consent of the states is also necessary to implement the new rules
which are the main reason behind its delay. However, before the new wage code is implemented,
the draft line and notification of the same will be issued.
2. There is a demand to increase the limit on holidays - On a condition of anonymity, an official of
the Labor Reform Cell of the Labor Ministry has revealed that the labor union has put forth a
demand regarding PF and annual holidays.

The union wants that the limit of earned leave to increase from 240 days to 300 days. Separate
rules may be made for the building and construction sector, beedi workers, journalists, and people
associated with the field of cinema.

3. Changes in EPF rules - According to Virjesh Upadhyay, demand has been made from the
government that the eligibility of the Employees' Provident Fund Scheme (EPF) should be increased
from Rs 15,000 to Rs 25,000 or at least Rs 21,000 like the Employees' State Insurance Scheme. The
final round of discussions on the laws is going on.
  What changes in payroll processing are expected to occur due to the introduction of the new
wage code?
Following are the primary changes in payroll processing due to the new wage code Act 2021:

1. Increased contribution for the PF or Provident Fund

According to Daily Tax Analysis, contribution in PF was 12% of the basic salary. But given the
modifications of the New wage code, the contribution to the Provident Fund is bound to increase
significantly.

2. Change in Gratuity Rule

Gratuity is a monetary amount paid by an employer to an employee as a token of appreciation,
abiding by the Payment of the Gratuity Act 1972. Gratuity payment is one of the several
components that are included in the gross salary of the employee.

As mentioned above, as per the Act, employees are entitled to receive gratuity after 5 years of
continuous work in the same entity. Still, as per the New wage code 2021, employees will be
entitled to receive gratuity even if they are employed for just one year.

3. Changes in Salary Structure

With the implementation of the New wage code Bill 2021, CTC will get affected by the increase in
the basic salary and if the basic salary of an employee has been less than 50%, it should be
increased. Allowances such as leave travel, overtime and conveyance will be capped to the
remaining per cent of the CTC.

 How does the New wage code 2021 Impact The Take-Home Salary?
Due to the change in the definition of wages, and also the fact that social security elements like PF
have now been secured as a percentage of the ‘wages’, there will be a change in the total payouts.
Experts say that the PF of the employees will be deducted more. Hence, the take-home salary will
be less, but the future of the employees will be secured.

Depending upon the employment letters and the salary breakup of the current employees, the
take-home salary will be significantly affected. Even the TDS Calculations based on the revisions in
the take-home will be seriously considered by the employers.

 Corporates are dwelling on the idea of a reduced take-home salary. Why? - Dr. K.R. Shyam
Sundar, Economist and Professor, says that “ The New wage code 2021 changes the
conventional perspective that take-home pay is the most important one.
He further adds, “Employees can now know the fixed component in the pay and can do financial
planning. The result will be in the form of a decent sum at the time of retirement.” Therefore, the
new reforms can affect the amount of money the employer gets in hand at the end of the month,
but it has a positive impact on the future.

Grant Thornton Bharat’s Industry Expectation Survey released in March says that half of the Indian
companies are ready to apply the new labour codes.

As experts put it, terminal benefits of the employer will go up due to the higher contribution for
social security. To state simply, the new wage codes will provide enhanced social security benefits
to employees, thus securing their life after retirement- through their current salaries will reduce
marginally.
  How the new wage code will affect the taxes paid by employees?

Experts note that due to a salary restructure, the tax liability of employees who are earning a
greater salary will likely increase. Why? As the tax capping options will be limited to only 50% of
the CTC. However, an additional tax burden is not expected for employees belonging to the low and
medium salary bracket.

 How does the New wage code Impact the Business community?

Consider the following important ways how the New wage code Act will affect the business
community.

1. Consistency in tech definition of wages

The current labour laws state at least 12 definitions for ‘wages’. The introduction of the new codes
has allowed for a unified definition of the term ‘wages’ and therefore it is expected to reduce the
confusion surrounding what should be included under ‘wages’.

2. ‘Inclusion’ and ‘Exclusions’ are clearly explained and have to be understood by businesses
The code of wages specifically explains inclusions and exclusions under the definition of wages. All
companies and firms will have to understand the definition, analyse the components of the
employees’ CTC, and revisit the allocation of components in case they do not comply with the
definition of wages and specified inclusions and exclusions.

3. Much wider coverage

Businesses don’t have to look out for what aspects of the law are applicable to their employees.
Unlike the current labour laws which are restricted to workers or employees that draw a certain
remuneration, the new wage code has much wider coverage.
The new wage code Act 2021 has a new age working model and apply to all employees. The new
code gives protection and legal remedies to 21st-century employees and hence the code seems to
be very forward-looking and inclusive.

4. Faster Full and Final Settlement(F&F Settlement)

The New wage code states that wages payable to an employee should be paid within two days of
removal, dismissal, resignation, or retrenchment. “Businesses should note this and should speed up
the or internal processes to ensure that dues are settled in the prescribed time”, says Siddharth
Surana, Business Strategy and Transformation Advisor, RSM India.
  New Wage Code: Salary Slips To Change From FY 2022-23.

1. Fall In Allowances And Variables - According to new rules, the basic salary cannot be less than
50 per cent of the CTC. Currently, this ranges anywhere from 30 to 40 per cent of the gross salary.
The rest is covered by allowances like HRA, Telephone charges, Newspapers etc. Now, since the
Basic Salary is increasing, the allowances will go down. Also Read - Bank Alert: Major Banking Rules
Change For SBI, PNB, BoB And ICICI Customers From February.
For example, if a person has a salary of Rs 1 lakh per month, earlier Basic Salary was Rs 30,000-
40,000 and rest were the allowances. Now basic salary will be at least Rs 50,000 and allowances
will have to come down in order to not exceed the 50 per cent limit.

2. Rise in Provident Fund, Fall In Take Home Salary - The PF is calculated as a percentage of the
basic salary. Now with the rise in Basic Salary, the PF will also go up. This will secure the future of
the employees but out of the total, more PF will be deducted. This might impact the take-home
salary in a negative way.
The Tax Deducted at Source (TDS) calculations will also be impacted due to changes in the salary
slip structure.
3. Increase In Taxes - The allowances, apart from Basic Salary, Bonus and some part of HRA, is
non-taxable under the current rules. With the rise in the Basic Salary (the taxable part) the taxes
are also bound to go up. The non-taxable part will shrink significantly with the new changes. It will
range from 20-25 per cent, from earlier 50 or more per cent.
Under the new rules, the tax on HRA is also expected to rise significantly. Due to the rise in Basic
Salary, HRA will also rise. This will increase the taxable part of HRA.
This change will, however, impact people with high income more. People will low income will not
see a significant rise in their taxable income.
  On-going Trends of Compensation in IT Sector

Even though the IT (Information Technology) sector has been since the late 1980s, it is still
considered a young industry with plenty of room for innovation, entrepreneurship, and growth.
COVID-19 significantly influenced how people work, where they work, and what they value.
Nothing could be more true for IT firms. The industry experienced a variety of changes and
expansions. Some businesses have witnessed massive revenue and market value increases, while
others have seen significant declines.

Compensation trends reflect the company's efforts to accelerate the speed by which it achieves its
objectives and strike a long-term balance between the organization and its personnel. Some of the
current compensation trends in the information technology industry are:

Trend 1: Work from Home/ Remote work option - Working from home or telecommuting has
become more in use because of COVID-19. Many organizations have adapted perks to suit the
work-from-home lifestyle, as most employees have been working from home since the pandemic
began. Benefits from the company and festival presents have also been tailored to fit a work-from-
home situation. Employers offer a variety of WFH enablers, including internet reimbursement,
workplace desks and chairs, ergonomics consultations, and other perks. When the pandemic
struck, 80% of office workers started working from home. Many of them and their bosses claim
that they are just as productive - if not more so - than they were in the office. Most employees
choose to work from home two to three days per week. Working from home regularly is now a
reality.

Trend 2: Cybersecurity - Protecting data is incredibly vital in various fields, and with technology
evolving at a breakneck pace, user data privacy has become critical. In terms of confidentiality,
regulations are tightening worldwide - confidential employee information needed to be protected
in the digital workspace, which necessitated increased security. In today's market, the average
compensation rise for a cyber security role is roughly 26 per cent.
Trend 3: Benefits of Health and Well-Being
Corporations started wellness programs to encourage employees to live a healthy lifestyle.
Provisions and policies for mental health and well-being are being adopted as per the current
scenario and demand, such as- On-site health check-ups, vaccinations and complementary leave
and packages for COVID-19 impacted employees and dependents.
Tech-based healthcare support through artificial-intelligence-based symptoms identification,
healthcare apps, and virtual care.
Various counselling sessions for employees related to parenting, relationships, child psychology,
self-defence, etc. These sessions are critical for employees' mental health, and firms take proactive
measures to meet these needs. Furthermore, different health initiatives are planned for
employees, particularly women employees, such as breast and cervical cancer screenings, thyroid
testing, and other medical check-ups. Healthy Pregnancy/Mother programs are available to assist
pregnant moms in maintaining their health during pregnancy.
Employees can participate in various recreational activities, such as Zumba classes.
Employees have access to amenities such as a yoga room and a meditation room to assist
employees in attaining the rest, they require.
Indoor and outdoor sporting facilities are standard, including a gym, table tennis, and
pool/billiards.

Trend 4: In-house clubs

When it comes to this section of the employee benefits package, there are many options. Clubs
and the opportunity to engage in hobbies during working hours employees can join various in-
office clubs and follow their passions and other life goals at workplace also. Companies are now
encouraging the formation of similar interest groups within their organizations by forming groups,
clubs, and societies for their staff. These small groups appear to be making significant progress
toward reaching the diversity and inclusion goals. There are numerous advantages to such staff
groups. Work is understood across functional lines, forming partnerships, and reducing
bureaucracy and red-tapism. The overall level of productivity has increased. Employees can form
bonds with individuals who share similar interests in these groups. They also contribute to a sense
of belonging among employees. Furthermore, these groupings result in higher employee retention,
productivity, and general happiness among current employees.

Trend 5: Flexible working arrangements

Working hours, location, type of work, and intensity (the amount of work to be completed) are all
experiments to accommodate a workforce that wants and requires the flexibility to perform other
duties, such as child and parental care. They're becoming increasingly popular in today's workplace,
and they're showing up in various businesses. When it comes to perks, the chance to work a more
flexible schedule is frequently at the top of many people's wish lists. A flexible work schedule has
several advantages in the workplace. Here are a few benefits to a more flexible working
arrangement:
Improves the ability to attract, retain, and encourage high-performing and experienced people.
Decrease in absenteeism.
It helps in reducing the overhead cost of the office.
Employees can use this tool to handle their responsibilities outside of work.
Improves job happiness, vitality, creativity, and stress handling abilities.
Improves workplace culture.

Trend 6: ESOPs
Employee Stock Option Plans, or ESOPs, were pioneered in the IT sector and are still considered
one of the best practices in employee compensation to ensure that the employees are taking more
ownership and responsibility for their respective work by making them partners in the company's
growth. The logic behind offering stock options to employees is that once they have a feeling of
ownership in the company where they work, their performance levels rise due to the increased
motivation and happiness that such a practice instils in them. Given that most IT equities skyrocket
in value once the IPO (Initial Public Offering) is announced and maintain their valuations for the
rest of the company's life, IT companies that provide ESOPs are in high demand.
Trend 7: Transparency
The pandemic has changed the workplace, affecting how companies make decisions and
employees view their jobs and pay. Transparency in compensation is a hot topic these days. Most
workers/job seekers cited wage and benefit transparency as critical information for determining a
company's long-term potential. It is totally up to each employer to decide how transparent their
company should be. Compensation transparency's ultimate goal is to help workers understand why
they're paid, what they are and what they need to do to advance up the corporate ladder.
Employees can also negotiate better compensation if they know how much their co-workers are
paid. Employers can make the necessary adjustments as a result of this procedure to bring their
company closer to pay equity. Practices for embracing compensation transparency:
Conduct an audit to find compensation inconsistencies.
Set compensation based on data.
Prepare managers for compensation discussions.
Provide compensation training.
Trend 8: Flexi-basket
A Flexi basket is a set of options given to an employee to choose or take advantage of the various
benefits provided by the employer. A Flexi basket limit is established for each CTC. Different
employees would choose additional benefits based on their needs and financial well-being
component desired. Organizations of all sizes, large and small, have experimented with the concept
of flexible benefit plans for years. Employees can have more control over their benefits package
with a flexible benefits plan (FBP). They can reorganize components as needed. Every employee is
different, as are their requirements. Flexible Benefit Plans give both the administrator and the
employee a better experience when dispatching and structuring compensation. Both parties are
entitled to easy working and hassle-free customization with a decent FBP.

Trend 9: Skills development

Skills development is becoming more vital due to rapid technological advancements and the fact
that people are changing occupations more frequently. On the other hand, skills development is
not only beneficial to (younger) employees; it is also necessary for businesses to remain
competitive. The market recognizes the need to continue training beyond initial certifications to
retain, improve, and update skills throughout one's working life, in addition to the basic training
required for a trade, occupation, or profession. Individuals may pursue skill development for a
variety of reasons, including a desire to learn for the rest of their lives, a sense of moral obligation,
the desire to maintain and improve professional competence, advance their careers, keep up with
new technology and practice, or the need to comply with professional regulatory organizations.
Many occupations have annual skill development requirements to renew a license or certification.
Online skill development has grown significantly in the twenty-first century. Content creators also
have better understood how to use technology in novel ways, combining collaborative platforms to
enhance their output and participant interaction.
An efficient compensation and benefits strategy increases the likelihood of attracting the best
employees. It also incentivizes excellent performance and increases talent retention
MODULE 4
 Expatriates
An Expatriate is an employee who is working and temporarily residing in a foreign country
These employees are often referred to as international assignees
 Definition
An individual living in a country other than their country of citizenship, often temporarily and for
work reasons. An expatriate can also be an individual who has relinquished citizenship in their
home country to become a citizen of another. If your employer sends you from your job in its New
York office to work for an extended period in its London office, once you are in London, you would
be considered an expatriate or "expat."
 Expatriates Assignment Approach
Market demands for multinational management structures in the parent company demand the
firms to send their best people to forge international relationships and to create international
Corporate presence
The expatriate though perceive the foreign assignments as an instrument towards career
progression and financial benefit.
1. Home-Based Approach - The home-based, or balance sheet approach, is the most popular of
these approaches and used by more than 85% of U.S. multinational companies. The balance sheet
approach provides international employees with an expatriate compensation package that
equalizes cost differences between the international assignment and the same assignment in the
home country of the individual or the organization. The balance sheet approach is based on some
key assumptions and is designed to protect expatriations from cost differences between their
home and host countries.
2. Host-Based Approach - The host-based approach means the assignee transfers to the host
country payroll and receives base and incentive pay based on host country compensation practices
and regulations. There are limited, if any, assignment related allowances. The host payroll typically
delivers base pay and incentive pay and above-base allowances. With organizations looking for
cost-cutting opportunities, they have looked to localize assignees. The host-based approach may be
a cost-effective option to the traditional home-based approach, including local plus policy
components.
Difficulties can occur in repatriating assignees, if applying this approach, because it integrates
employees into the local host salary structure. It can make it very difficult to move the assignees to
another destination or back to their home country.
3. Global Market Approach - Unlike the balance-sheet approach, a global market approach to
expatriate compensation requires the international assignment be viewed as continuous, even
though the assignment may be for various periods of time and the employee may be in various
countries. All assignees are on the equivalent compensation scale, regardless of their home
country. This approach is much more inclusive. Regardless of which country the assignee is
assigned, the main benefits are provided.
Approaches :
1. The Going Rate or Market Rate paradigm and
2. The Balance Sheet or Build-up approach
1. The Balance Sheet Approach
This is the most widely used approach by organizations and it main idea is to maintain expatriate's
standard of living throughout the assignment at the same level as it was in his/her home
Additionally, expatriate's salary is matched with home-country peers and not with the host-country
colleagues The philosophy behind this approach is that expatriates should not suffer material loss
due to their new assignment
Conversely, this is unfair on MNCs as expatriate compensation is adjusted upward for higher cost of
living and not adjusted downward if the cost of living in the host country is less than that of the
parent country Additionally, balance sheet approach has four elements inter alia,
Goods and Services: The balance sheet caters for home-country expenses incurred by the expats
such items include food, personal care, clothing, household furnishings, recreation, transportation
and health or medical care
Housing: This is the cost associated with housing in the host country such cost as renting of
apartment, billing and electricity
Income Taxes: These include all tax payable by the expatriates to the parent –country and host-
country government
Reserve: The balance sheet also includes such items related to savings, payments for benefits,
pension contributions and social security taxes Therefore, „where cost associated with host-country
assignment exceeds equivalent cost in the parent-county, the costs would be shared by the
multinational corporation
The Going Rate Approach
This is the second approach to expatriate reward management otherwise called „localization’,
‘destination’, and ‘host country-based ’or ‘going rate approach Expatriates are paid a salary equal
that of the host country, taking into account local market rates and compensation levels of local
employees Similarly, this approach links the base salary for the international transfer with the host
country salary structure Expatriates are therefore treated as citizens of the host country
Additionally, the going rate approach is based on local market rate, relies on survey comparisons
among local nationals expatriates of the same nationality and all other nationalities, and a
supplemented base pay and benefits for low-pay countries
On the contrary, going rate approach can result in disparity in reward for expatriates of different
nationalities since different amounts are paid to employees performing the same tasks .
Conversely, the going rate approach is more cost effective since „going local‟ may reduce host-
country market adjustment costs, which may be tempting for Western multinationals sending
people to countries with lower standard of living .

 Major focus of most international compensation programme

1. Base salary For expatriates - The term base salary means the primary component of a package
of allowances which are: (a) Foreign service premium, (b) Cost-of-living allowance, (c) Housing and
utility allowance, (d) Basis for in-service benefits and pension contributions
2. Foreign Service inducement/hardship premium - Parent-country nationals often receive a
salary premium as an inducement to accept a foreign assignment or as compensation for any
hardship caused by the transfer. Such payments vary depending upon the assignment, actual
hardship, tax paid to foreign governments and length of the assignment.
3. Allowances - Various allowances are paid to expatriates depending upon the assignment. They
include:
(a) The cost-of-living allowance (COLA): It involves a payment to compensate the differences in
expenditures between the home country and the foreign country.
(b) Housing allowance: Implies that employees should be entitled to maintain their home-country
living standards (or, in some cases, receive accommodations)
(c) Home leaves and travel allowances: Is given to cover the expense of trips (usually once in a
year) back home. These trips allow the expatriates the opportunity to renew family and business
ties, thereby helping them to avoid adjustment problems when they are repatriated.
4. Education Allowances for Children - Education allowances are given towards fees for the
education of expatriates’ children. Education allowances include items such as tuition, language
class tuition, books, transportation and uniforms.
5. Relocation Allowances and Moving Relocation - Allowances usually cover moving, shipping;
temporary living expenses, and down payments or lease-related charges.
6. Tax Equalization Payments - Many international compensation plans attempt to protect the
expatriate from negative tax consequences by using a tax equalization plan. Under this plan, the
company adjusts an employee’s base income so that the expatriates will not pay any more or less
tax than if they had stayed in the home country.
7. Spouse Assistance - To help guard against or offset income lost by an expatriate’s spouse as a
result of relocating abroad. Multinationals generally pay allowances in order to encourage
employees to take up international assignments

 Fringe benefits
Any non wage payments or benefit granted to employees by employers
Increased salary
Language training
Family benefits
Accommodation benefits
Fringe Benefits of Expats
Base salary
The term base salary means the primary component of a package of allowances which are:
- Foreign service premium
- Cost of living allowance
- Housing and utility allowances

1. Cost of living allowances

It involves a payment to compensate the differences in expenditures between the home country
and the foreign country
2. Housing allowance
It is an amount which is paid by employers to employees as a part of their salaries. This is basically
done as it provide employees with Tax benefits towards the payment for accommodations every
year.
3. Home leaves and travel allowances it is given to cover the expense of trips back home
4. Education allowances for children
It is given towards fees for the education of Expatriates children. It also includes items such as
tuition, language class, books, transportation, uniform etc
5. Relocation allowances and moving it usually cover moving, shipping, temporary living expenses
and down
payments or lease related charges.
6. Tax equilization payments
Many international compensation attempt to protect the expatriate from negative tax
consequences by using a tax equilizations plan. Under this plan, the company adjust a employee’s
base income so that the expatriates will not pay anymore or less tax than if they have stayed in the
home country

 Preparation, Adaptation, Repatriation

To be prepared for accepting new culture
Adaptability opens up to new ideas and adaptable people aren’t scared of change
Repatriate is the process of returning back from a international assignment
to a home country after completing the assignment.

 The role of expatriate’s spouse

Companies are beginning to recognize the importance of providing support for spouses and
children
Knowledge transfer
To bring knowledge from corporate headquarters to subsidiaries customer
preference
Managing transnational team
To manage a transnational team a team which consist of members with multiple nationalities
Job pricing
Full expat package
There is no definitive list as to what a full expat benefits package should contain where much will
depend on the nature of the overseas assignment, the host destination and the assignee’s personal
circumstances, including whether the assignee’s family are relocating with them.
However, a typical expat package should fully compensate an assignee for working overseas, from
cost of living and relocation costs to repatriation costs at the end of the assignment. It is available
to employees with highly specialized skills in their field and will often include many benefits
ensuring a comfortable life in most of any country.
Expat lite package
Expat Lite Packages
Similar to a traditional Long Term package, expat lite packages are home based – the employee
remains tied to the home compensation and benefits structure, and the intent is for the employee
to return to the home location after one to three years in the assignment location (with an option
to extend up to five years maximum).
Components of Expat Lite Packages
These packages are derived from the full long term package, with adjustments made in either the
nature or level of support provided at the provision level. For example, a long term package may
include a reimbursement for spouse/partner support, which is removed for the expat lite package.
Another option is an adjustment to how the support is calculated. When calculating the cost of
living allowance, the long term package may use a higher base salary for the calculation than the
expat lite package. The allowance is provided in both scenarios, albeit at a different level for each
move type.It will consist of a part of benefits offered with the full expat package

Local hire package

It does not offer any benefit other than what a local national employee in the host country would
receive
A local hire does not qualify for any of the above benefits. A local hire gets precisely what a local
national would receive in the host country. The individual will pay all expenses to the host country
all housing costs and arrange for their own work and residence permits. There probably will not be
a work contract or health coverage unless here is a national health insurance plan. These are often
positions for young adults teaching a foreign language in the host country – not usually
executivelevel positions.
As a local hire it is important is to ensure the work and residence permits are properly completed.
Some countries have severe penalties, including jail for foreign nationals caught working without a
permit.

 REWARD MODEL –
Policies to rewarding expatriate employees must be “fit for purpose” and must reflect economic,
social and cultural factors, the business purpose and the desired reward value.
Before establishing a remuneration policy for expatriate employees, ascertain why employees are
being posted overseas, how this fits with the overall business and human resources strategy and
the value added to the business as a result of the process.
It is necessary to consider policies both in relation to employees going abroad to work and those
coming from abroad to work in the UK.
The nature of the assignment will impact on the reward policy.
Traditionally, assignments based on a transfer of skills command a higher level of reward than
those undertaken for personal development reasons (however, in practice, assignments will be
undertaken for a variety of reasons).
Historically, the approach adopted to paying employees sent overseas to work has depended on
the level of the assignment.
The main method for working out the reward levels of employees sent overseas for less than three
years is the “expatriate balance sheet” approach, which is based on the UK salary, with
supplements to cover any additional cost of living, housing costs, additional tax and social security,
etc.
Setting the reward level requires knowledge of the host country, including exchange rates, housing
costs, tax policies, etc.
Efficient purchaser indices can be used in setting cost of living allowances.
For short-term assignments, employees may be provided with hotel accommodation.
Social security and National Insurance implications depend on whether the country to which the
employee is posted is in the EU, a country with which the UK has a reciprocal agreement or a
country that is neither within the EU or with which the UK has a relevant agreement (referred to as
“Rest of the world” (ROW)) countries. It is important that the social security and National Insurance
implications are fully understood. Where it is possible to remain within the UK, this may not always
be the best option as other countries may offer better benefits for a lower contribution.
Tax equalisation policies are frequently implemented whereby the employee’s salary is adjusted to
take account of local tax rates so that the employee receives the equivalent post-tax salary to that
which they would have received in the UK.
Where a tax equalisation policy is adopted, the salary is adjusted so that the employee does not
pay more tax than would have been payable in the UK, but benefits from working in a lower tax
rate jurisdiction.
Most policies for rewarding expatriate employees include a foreign service premium, typically
between 5 and 15% of salary
A head office system of remuneration, whereby pay is linked to the country in which the company
has its head office rather than to the employee’s home country, is common in sectors with a highly
mobile workforce, such as oil and gas.
Reward may be linked to local conditions in the host country rather than to the home country pay.
This is known as the host country salary or destination-focused approach. Under this approach the
posted employee is treated in the same way as a local employee from a pay and benefits
perspective.
It is usual to provide expatriate employees with housing in the host country. The provision of other
benefits will usually vary depending on what is the norm in the host country.
Benefits commonly provided as part of an expatriate remuneration policy include payment of
utilities, payment of school fees,
membership of a social club, entertainment allowances, air fares home and language tuition for the
employee and his or her family.
The package will also include help for employees in settling in the new country and dealing with
cultural and social differences.
Reward model
Variable pay - It is the portion of sales compensation determined by employee performance
Long term incentives - LTI encourage executives to take risk with firm asset leading to shareholder
gain that they might otherwise avoid.
Recognition award - It is in the form of non negotiable gift cards, certificates or plaques.
The cost of living allowance (COLA) –
The cost of living allowance (COLA) is an allowance that is often awarded to expats who move
overseas as part of a job offer and is based upon the need to ensure that the lifestyle that they
enjoy in their home country can, at a very minimum, be retained if they are relocated elsewhere.
A cost of living allowance is paid to cover the additional living costs incurred by employees who are
living away from home
  Cost of living
Cost of living is the amount of money required to cover necessary expenses to maintain a certain
lifestyle standard in a particular place and time. Necessary expenses can include housing, food,
taxes, health care, clothing, education, entertainment and transportation.
Cost of living is linked to income and is used to compare the livability of different cities. Because
prices vary from one city to the next, cost of living helps you determine how affordable it is to live
in a specific city or region.

 How cost of living is calculated

Typically, cost of living is calculated by comparing the prices of a range of goods and services on
which consumers spend their money. Costs are broken down by category, like health care, food and
housing, and weighted based on spending patterns and individual budgets. As prices are gathered
by location, you can determine the cost of living of one area compared to another.
  What is a cost of living adjustment?
As the cost of living changes, wages and benefits also need to change to maintain the same
standard of living. The Social Security
Administration (SSA) sometimes adjusts benefits to keep up with the increased cost of living. This is
known as a cost of living adjustment (COLA) and is assessed annually.

 What is the cost of living index?

A cost of living index lets you compare how much it costs in one area compared to another. By
comparing the cost of living in different cities and regions, you can better understand how far your
salary can go in different parts of the country.
Some of the most used cost of living indexes include:
1.The Council for Community and Economic Research (C2ER) Cost of Living Index
2.Economic Policy Institute (EPI) Family Budget Calculator
3.Missouri Economic Research and Information Center (MERIC) Cost of Living Index
With most cost of living indexes, the number 100 represents the national average. Then, cities or
regions are assigned a number, either above or below 100, based on how they compare to the
national average. Different indexes track different areas.
 Cost of Living in India Summary:
Family of four estimated monthly costs are 84,350.45₹ without rent.
A single person estimated monthly costs are 24,134.47₹ without rent.
Cost of living in India is, on average, 65.46% lower than in United States.
Rent in India is, on average, 87.62% lower than in United States.

 Repatriation
Repatriation refers to the process where a service assists the survivor, and any dependents, to
return to the survivor’s place of origin. Ideally, the survivor will have family at their place of origin
able to provide supportive care once the repatriation has occurred. Additional support should be
provided by the service provider, so the survivor is not completely dependent upon family
Some of the reasons why repatriated employees are important:
There are a many successful international assignments which are very important to the employee
career as well as for the company’s growth. So many companies send expatriate to other countries
for doing business internationally.
The employees who are send to abroad for international assignment are expatriates those
employees who learned many things that would be useful to those who will be sent to that same
country if some means could be identified as to how they might be mentors to future expatriate
employees.
Expatriates can bring new and unusual approaches to cultural environment, information gathering,
analysis of data, and problem-solving as a result of having work cross-culturally in an effective
manner.
Expatriates may have been more flexible, or less rigid, in changing circumstances. In that different
approaches have been tried in other contexts, they may be able to bring insights and innovation to
the planning process that may not have been considered previously.
The repatriate who have performed at a high level in a HCN may bring a dimension of confidence
and competence that will enhance his or her value to the company as it competes in a changing
world market.
Expatriates who are work outside the culture of the company and the country, the repatriated
employee may well have insights that can effect needed change. That perspective ought to be
valued and given a voice within the company.
The repatriated employees would likely to bring motivated by some factors to encourage them for
the sharing of their experience.
The effective international employees may well have gained insights in how to affect a more
coordinated group effort than encouraging individual achievement.
  Most commonly mentioned reasons for companies for not having any repatriation program
are:
1. Lack of expertise in establishing programs.
2. Costs of programs to train repatriates.
3. No perceived need for repatriation training by top management.
 Eleven different parts that have to be considered in order to achieve a successful and
effective repatriation:
1.Define and analyze the strategic functions that the repatriate can accomplish when returning
home, i.e. form the main purpose for sending the individual abroad, and then follow up that
purpose when the person is returning home again.
2.After the purpose is established, a repatriation team consisting of human resource department
and the expatriate’s mentor should be formed.
3.The company should target high-risk repatriates, and put more effort, resources, and support on
those who will encounter most problems when returning home again
4.Since there probably have been a number of changes in the home country and home
organization, the perceptions of the repatriate could therefore be inaccurate. It is therefore
important to manage and shape these inaccurate expectations before the repatriate returns home
with accurate and constant information and communication during the whole international
assignment.
5.By having constant communication during the whole international assignment and establish
home country information sources, like sponsors, home country visits, pre- return training, and
provide access to newspapers/magazines are further steps towards a successful repatriation.
6.The repatriation team together with the repatriate must prepare the home country job
environment and explore the repatriates career path and opportunities after repatriation.
7.Many repatriates experience a decrease in compensation after returning home. During the
international assignment the company often rewards the expatriate with benefits and incentives,
often in monetary form.
8.Locating and finding adequate housing can be a major challenge for the repatriate and spouse.
9.The company should also provide support groups or informal meetings to meet and socialize with
other repatriates and their families.
10.When returning home there are many things to deal with for the repatriates and spouses, and
consequently the company should allow repatriates some time off and thus plan for “downtime”
and now letting the repatriate start to work at once, in order to arrange the necessary alterations
needed.
11.Finally, the company must show interest, appreciation and care about the work that the
repatriate has done, and the international experiences he/she has gained. This also includes caring
about the spouses.

 Factors affecting repatriation

1. Individual variables are age, length of assignment, keeping up on events, willingness to
relocate internationally, and expatriation adjustment problems or satisfaction.
2. Organizational and work variables are stated to be role discretion, role conflict, role
negotiations and role decisions, and skill utilization, and where these factors will foremost
influence the readjustment to work.
3. Non-work variable is a decrease in social status. During the international assignment, the
expatriates generally have higher social status and thereby achieve higher standards of living. But
when returning home this social status is most likely to decrease and that creates uncertainty since
new social behavioral adjustments are needed after returning home. Repatriation is thereby
affected negatively by a downward shift in social status.
Feldman & Tompson outlined in their study five major factors that mostly have an impact on the
work adjustment for the repatriate. These five factors are presented below.
1. Demographic variables consist of age and gender.
2. International characteristics of the job change
3. Job characteristics variables
4. Degree of differences between job assignments, where a higher degree of differences between
role autonomy, co-workers and job duties, generates more uncertainty and loss of daily routines for
the employee, and greater difficulties for the employee when readjusting.
5. Coping strategies. This factor deals with how the repatriate itself manages his or her
organizational re-entry, i.e. self-management. Depending on how proactive the repatriate is and
can bring situational problems under own control by being more goaloriented and responsible for
achieving the tasks will positively influence repatriation.

 Expatriate Tax:
The term ‘Expatriate Tax’ is not defined under the Income Tax Act, 1961. However, in general
terms, expatriate means a person who is living outside the country of his origin or where a
country of which he does not hold citizenship. He may be residing in another country
temporarily or permanently which is generally dependent upon the conditions of the
 deputation where the word “deputation” means deputing or transferring an employee to a
post outside his cadre on a temporary basis.
Under the Income Tax Act, 1961 the incidence of tax depends on the following:
The residential status of taxpayer
Provisions prevailing in the Assessment Year to which the incomes relate
Whether the accrual/ receipt of such income has a nexus with India.
Kinds of Expatriates There are two kinds of expatriate:
1. Inbound Expatriate, where the citizen of a foreign country lives and works in India.
2. Outbound Expatriate where a person of Indian Origin lives and works in a foreign country.
The work requirement for expatriates is dependant on whether the assignment is a:
Business Visit
Consultation
Term Assignment (Short term/ Mid term/ Long term) Permanent relocation
  Compliance for Inbound Expatriates while entering or exiting India:
All inbound expatriates (including minors above the age of 16) visiting India on a long-term visa for
more than 180 days, are required to get Foreign Regional Registration Office (FRRO) registration,
which must be done within 14 days of their arrival in India, if such requirement has been raised as
per their visa endorsement.
 Taxability of Inbound Expatriates in India: The first step in calculating income associated with
an inbound expatriate is to find out his residential status and the extent to which their
income is taxable in India where the nexus of income is defined.
1. Resident and Ordinarily Resident(ROR) - Global Income is taxable in India
2. Resident but Nor Ordinarily Resident(RNOR) - Income accrued/ received in India , Income
earned through business controlled in India
3. Non-Resident (NR) - Any income accrued/ received in India is taxable in India
However, it is important to note that the residential status for an expatriate will be determined
keeping the Income Tax Act in mind as well as the Double Taxation Avoidance Agreement (DTAA).
At times, an inbound expatriate may be considered a resident of both the countries as per the
relevant taxation laws and the DTAA. In this case, the residential status will be determined
according to the ‘Tie Breaker Rules’.
 Salary income in case of inbound expatriates Remittance of Salary:
The expatriates can enjoy receipt of salary in bank accounts maintained in home countries by
maintaining a foreign currency account with a bank outside India. However, they have to ensure
that income tax as per the Income Tax Act has been duly paid. Where perquisites are received in
foreign currency by an expatriate from the parent company located in the home country,
compliance in Form 15CA is mandatory while establishing such reimbursement by the subsidiary
company located in India.
Taxability of Salary Income in India: An inbound expatriate is liable to bear taxes in India for the
income received on rendering his services in India, subject to exemptions provided under the
Income Tax Act and the Double Taxation Avoidance Agreement (DTAA). Components of salary
income in case of expatriates (Perquisites & Allowances):
1. Daily Allowance: These allowances are paid in addition to their salary in order to meet their
living expenses and are subject to tax in India. However, exemption is also available in some cases
especially in case of allowances related to short-term business travels.
2. Relocation Allowance: These allowances are related to expenses incurred on relocation
including shipment, baggage etc. These expenses are exempt from tax as long as these expenses
can be substantiated with proper documentation.
3. Contribution to Social Security (Provident Fund): If an expatriate is employed in an organisation
covered by the provisions of the EPF Act, wherein contributions under the Provident Fund are
mandatory, such inbound expatriates are not required to contribute to any schemes in India
provided they enjoy the status of a “detached worker” for the period and terms in the social
security agreement (SSA) entered with the home countries.
3. Employee stock based incentives: If an expatriate is based in India only for a part of the vesting
period, then only the proportionate amount related to the period of service in India will be liable to
tax in India.
4. Perquisites associated with home leaves: Any reimbursement of expenses incurred by the
employee on the home leave travel for journey outside India for an expatriate along with his family
is fully taxable in India.
5. Reimbursement of expenses related to shipment and storage: In case of expatriates,
expenditure is incurred on storage of household goods in the home country, after the expatriate
has moved to India and while carrying out assignment in India.
6. Short Stay Exemption: All such incomes earned by an expatriate in India are not taxable under
the Income Tax Act, if the following conditions are met: The expatriate is not a citizen of India. The
foreign company is not engaged in any trade or business in India. The expatriate’s stay in India is
not more than 90 days. The employer in India cannot claim such income paid to the expatriate as a
deduction under the Income Tax Act.
7. Other perquisites and allowances including House Rent Allowance, vehicle, accommodation:
All such allowances are taxable/ exempt as per the provisions contained under the Income Tax Act.
Concept of Tax Equalization - To ensure that expatriates do not end up paying more taxes, the
concept of tax equalization has been introduced wherein a hypothetical tax is deducted from the
salary in the home country and the actual tax in respect of income from employment in the home
country and India is borne by the employer.
 Other important compliances that an expatriate must keep in mind: All expatriates must
obtain a Permanent Account Number (PAN) to avoid deduction under higher rate for
withholding tax rates.
The income of an expatriate is chargeable at Maximum Marginal Rate (MMR) if his income during
the year exceeds Rs.5 crores.
All expatriates must inform the FRO in case of change in accommodation and obtain a certificate of
change in address.
 Reintegration
Common thinking about the reintegration after an assignment abroad was like ‘coming home’ to
the home company as well as in private matters. Therefore repatriation has not been in scope of
both management and academics until the early 1980s. Albeit most firms provide today a wide
variety of trainings to prepare the assignee for the host country, the measures to finish the
expatriation process, viz. the repatriation, remain rather modest.
  What is an international assignment?
An international assignment is when an organization or company sends an employee from their
home country to a different host country for work purposes overseas. An employee on an
international assignment is also referred to as an expatriate or expat.

What is International Assignment Management?

International assignment management is the process of managing an international assignment.
This is typically the responsbility of the organization or company, Human Resources Department,
and includes the calculation of the appropriate salary and benefits. The most common approach is
the build-up / balance sheet / home based approach. This typically includes aspects such as home
and host, tax, cost of living, hardship / quality of life differences, exchange rate, expatriation
premium, housing, and transport, taking into account the level / grade of the employee and their
family status.
  International Assignment Management (IAM) Report Calculator?
The International Assignment Management report sets out clear guidelines to make an
international assignee/expatriate transfer fair and financially viable, taking cognisance of the
reward structure and market dynamics of the home and host country. The calculations use the
build-up / balance sheet / home based approach and include hypothetical tax, cost of living index,
hardship premium, exchange rate, expatriation premium, benchmark housing allowance and
benchmark transport allowance. The objective is to ensure consistent equitable treatment and
benefits for all expatriate assignees and have a user friendly reward structure to provide seamless
coverage for different family scenarios. This is recommended for the calculation of the
compensation and benefits for a typical expatriate assignment of 6 months up to 5 years duration
using your choice of home and host location.
How do I run an International Assignment Management (IAM) Report?
1) Login using your username and password.
2) Check that you have subscribed to 2 or more locations.
3) Select Report Calculators from the menu.
4) Choose the International Assignment Management Report Calculator.
The calculator will prompt you for the following inputs:
5) Reference Information: Give your report a reference and the name of the individual for whom
you are running the report. This will help you identify your reports for future reference.
6) Home Locations: Include your Current Home Company here, select the location that is your
home location and your home currency.
7) Host Locations: Include your Future Host Company here, select the host location, the host
currency, your job level and family size.
8) Enter the Home Base Salary - this is the Basic Salary plus the cash value of all allowances and
benefits. The Base Salary excludes all variable payments and payments related to performance.
9) Enter the Hypothetical Tax - this is the typical/average (Hypothetical) Tax to be deducted from
Home Base Salary, if applicable, in terms of home location prevailing tax rates.
10) Automatically entered for you the Home Net Salary - this is Base Salary less Hypothetical Tax.
Automatically entered for you the Host Essential Spending - this is the percentage of Home Net
Salary to be used for spending in the Host Location. The international benchmark is 40%, however
this can be increased or decreased.
11) Automatically entered for you 40% Essential Spending - this is the amount of Home Net Salary
to be used in the Host Location. The international benchmark is 40%, however this can be
increased or decreased.
12) Automatically entered for you 60% Home Net Balance - this is the balance of Home Net Salary
to be kept in the Home Location.
13) Automatically entered for you Expatriation Premium - this is the percentage of Home Net Salary
to encourage international mobility. The international benchmark is 15%, however this can be
increased or decreased.
14) Select which cost of living index basket/s you require.
15) Run Report: When you are sure that all your selection criteria is correct, click on run report.
Reports can be re-run for the period that you have purchased your subscription for.
Module 5
The Social Security Code, 2020 (“SS Code“)
The Social Security Code, 2020 (“SS Code“) has been passed by both houses of the Parliament and
received Presidential assent on September 28, 2020. The SS Code has been enacted to amend and
consolidate the laws relating to social security with the goal to extend social security to all
employees and workers either in the organised or unorganised or any other sectors. The SS Code
has vital provisions with respect to social security benefits to workers including gig workers and this
article aims to summarize some of the important provisions introduced by the SS Code.
Key Definitions under the SS Code
Aggregator:
“Aggregator” has been defined as a digital intermediary or a market place for a buyer or user of a
service to connect with the seller or the service provider.
Employee:
“Employee” has been defined as any person (other than an apprentice engaged under the
Apprentices Act, 1961) employed on wages by an establishment, either directly or through a
contractor, to do any skilled, semi-skilled or unskilled, manual, operational, supervisory,
managerial, administrative, technical, clerical or any other work, whether the terms of employment
be express or implied. The employee of definition may vary for different chapters under the SS
Code based on the quantum of wages such an employee earns.
Gig Worker:
“Gig Worker” under the SS Code has been defined as a person who performs work or participates
in a work arrangement and earns from such activities outside of traditional employer-employee
relationship.
Platform Work:
“Platform work” has been defined as a work arrangement outside of a traditional employer
employee relationship in which organisations or individuals use an online platform to access other
organisations or individuals to solve specific problems or to provide specific services or any such
other activities which may be notified by the Central Government, in exchange for payment and a
“platform worker” has been defined as a person engaged in or undertaking Platform Work.
Social Security:
“Social Security” under the SS Code means the measures of protection afforded to employees,
unorganised workers, gig workers and platform workers to ensure access to health care and to
provide income security, particularly in cases of old age, unemployment, sickness, invalidity, work
injury, maternity or loss of a breadwinner by means of rights conferred on them and schemes
framed, under the SS Code.
Unorganised Sector:
“Unorganised Sector” means an enterprise owned by individuals or self-employed workers and
engaged in the production or sale of goods or providing service of any kind whatsoever, and where
the enterprise employs workers, the number of such workers is less than ten (10).
Unorganised Worker:
“Unorganised Worker” means a home-based worker, self-employed worker or a wage worker in
the Unorganised Sector.
1. INTRODUCTION The Second National Commission on Labour (2002) suggested the
amalgamation of central labour laws into broader groups such as:
(i) Wages,
(ii) Industrial Relations,
(iii) Social Security, and
(iv) Occupational Safety, Health and Working Conditions.
The Code on Social Security 2020 (“SS Code”) is enacted to amend and consolidate the laws
relating to social security with the goal to extend social security to all employees and workers
either in the organised or unorganised sector.
 The Social Security Code (SS Code) has replaced the following enactments,
The Employee’s Compensation Act, 1923;
The Employees’ State Insurance Act, 1948;
The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952;
The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959;
The Maternity Benefit Act, 1961;
The Payment of Gratuity Act, 1972;
The Cine-Workers Welfare Fund Act, 1981;
The Building and Other Construction Workers’ Welfare Cess Act, 1996;
 The Unorganised Workers Social Security Act, 2008.
The SS code defines various terms such as, aggregator, gig worker, platform worker, unorganised
worker (home based worker and self based workers). Further, the definition of the employee has
been widened to include maximum number of employees and workers.
  The SS code provides the social security and protection to the workers in the
unorganized sector to ensure access to health care and to provide income security,
particularly in cases of old age, unemployment, sickness, invalidity, work injury, maternity or
loss of a breadwinner by means of rights conferred on them and schemes framed, under this
Code. This article aims to summarize some of the important provisions introduced by the SS
code
   SALIENT FEATURES OF THE CODE

1. GIG WORKERS - Gig worker is the new concept introduced in the code. The code defines gig
worker as ‘a person who performs work or participates in a work arrangement and earns from such
activities outside of traditional employer-employee relationship’[2]. Normally a gig worker means a
person who performs a job temporarily or someone who takes up part time jobs on hourly basis.
The concept of gig workers has been introduced for the first time under the ambit of labour laws. It
was the need of the hour to define such category of workers that consists of a large number of
freelancers which work on temporary basis.

2. PLATFORM WORKERS The code define platform worker as “a person engaged in or undertaking
platform work”[3]. Most commonly platform based work is where workers earn money by
providing specific services or to solve specific problems through online platform [4]such as amazon,
flipkart etc.
3. UNORGANISED WORKER Generally unorganized workers means a home-based worker, self-
employed worker or a wage worker in the unorganised sector.

 BENEFITS TO UNORGANISED WORKER, GIG WORKERS AND PLATFORM WORKERS

4. As there were no specific legislation for the unorganised workers, they cannot claim significant
benefits like minimum wages, hours of work, overtime, leave etc. The new code introduced the
same opportunities and protections which is given to the other employees (government employees
and private sector employees) under various labour laws in India.

5. The Code provides right to the Central Government and State Government to frame and notify
the social security schemes for such workers on the matters related to life and disability cover,
accident insurance, health and maternity benefits, old age protection, crèche. The schemes may be
funded by the combination of Central Government, State Government, aggregators, beneficiaries
of the scheme, or funded from corporate social responsibility
6. The code places an obligation on the Central Government to constitute the National Social
Security Board for the welfare of the unorganised worker as well as for the gig workers and
platform workers and can recommend and monitor the schemes for such worker. The Central
Government will setup and administer the social security fund for the welfare of such workers

7. The code also gives the right to the government to setup helpline and such facilitation centre
etc. for such workers. This will encourage the youth to participate in such jobs and can avail the
given benefits.

  REGISTRATION
The code provides the compulsory registration of the every unorganised worker, gig worker and
platform workers to avail the benefit of the concerned scheme framed under this code, subject to
the fulfilment of the following conditions:
(a) he has completed sixteen years of age or such age as may be prescribed by the Central
Government;
(b) he has submitted a self-declaration containing information prescribed by the Central
Government.
Every eligible worker is to make an application for registration in such form along with such
documents including Aadhaar number as may be prescribed by the Central Government.

  EMPLOYEE PROVIDENT FUND

The code has revised the applicability of the Employees Provident Fund Scheme (“EPF”). The EPF
will apply to the establishment employing 20 or more employees. The Central Government may
establish the Provident fund where the contribution paid by the employer to the fund shall be 10%
of the wages for the time being payable to each of the employees (whether employed by him
directly or by or through a contactor), and the employee’s contribution shall be equal to the
contribution payable by the employer.
An employee can contribute more than 10 %, subject to the condition that the employer is not be
under an obligation to pay more than 10 %, Provided that the Central Government may by
notification, modify the rate from 10% to 12%

  EMPLOYEES STATE INSURANCE (ESI)

ESI scheme will apply to establishment employing 10 or more employs. It is also be applicable to
an establishment, which carries on such hazardous or life threatening occupation as notified by the
Central Government, even a single employee is employed. The code covers the gig workers and
platform workers under the ESI scheme.

If the employer fails to pay ESI contributions, the ESIC (employees state insurance corporation)
may pay the benefits to the employee and recover it from the employer the capitalized value of the
benefit, including the contribution amount, interest and damages, as an arrear of land revenue or
otherwise.
  GRATUITY
Gratuity is applicable to every factory, mine, oilfield, plantation, port and railway company; and
every establishment in which 10 or more employees are employed, or were employed, on any day
of the preceding 12 months, shall pay gratuity to their eligible employees.
Gratuity shall be payable to an employee on the termination of his employment after he has
rendered continuous service for not less than five years, Provided further that the completion of
continuous service of five years shall not be necessary where the termination of the employment
of any employee is due to death or disablement or expiration of fixed term employment.
In case of working journalist, the gratuity shall be payable on the termination of employment after
continuous service of three years.
The SS code entitled the fixed term employees (i.e. employed for a fixed duration) to receive
gratuity on pro rata basis, based on the term of their contract.
  MATERNITY BENEFIT
No woman shall work in any establishment during the six weeks immediately following the day of
her delivery, miscarriage or medical termination of pregnancy.

Every woman shall be entitled to the payment of maternity benefit at the rate of the average daily
wage for the period of her actual absence.

Every woman shall be entitled to maternity benefit if she has actually worked in an establishment
of the employer from whom she claims maternity benefit, for a period of not less than eighty days
in the twelve months immediately preceding the date of her expected delivery.

The maximum period for which any woman shall be entitled to maternity benefit shall be twenty-
six weeks of which not more than eight weeks shall precede the expected date of her delivery.
 In addition to maternity benefit in terms of paid leaves, every woman is entitled to medical bonus
of up to INR 3,500 (if pre-natal confinement and post-natal care is not provided by employer)

In case of miscarriage, or medical termination of pregnancy, a woman shall, be entitled to leave

with wages at the rate of maternity benefit, for a period of six weeks immediately following the day
of her miscarriage.

 HISTORY OF SOCIALSECURITY
• Germany was the first country to introduce social security scheme. (1883)
•Each member of a particular trade (blacksmiths, painters, weavers etc.) was required to contribute at
regular intervals.
• Money from this fund was used for food, lodging, hospital and funeral expenses of aged and
disabled members.
•In USA, social security act came into existence in 1935.

 DEFINITION OF SOCIAL SECURITY

According to I.L.O( INTERNATIONAL LABOUR ORGANISATION), “social security is the
protection which society provides for its members through a series of public measure, against the
economic and social distress that otherwise would be caused by the substantial stoppage of earning
resulting from :- sickness, maternity, injury ,unemployment, old age and death.

 CONCEPT OF SOCIALSECURITY
a. Social security systems ensure the minimum level of living to the needy by public assistance,
and they also promote public health and social welfare.
b. Social security has a powerful impact at all levels of society. It provides workers and their
families with access to health care and with protection against loss of income.
c. It provides older people with income security in their retirement years.
d. For employers and enterprises, social security helps maintain stable labor relations anda
productive workforce.

 APPROACHES OF SOCIAL SECURITY

Social Assistance : A method to provide benefits to persons usually for the vulnerable groups of
community ( children, mothers, disabled, old age people etc.) From general revenues of the state, it is
non- contributory.
Social Insurance: a method to provide benefits to person through contributions of beneficiaries with
contribution/subsidies from employer and state.
  EPF ACT1952

The employee’s provident fund act was passed in 1952.

3 schemes comes under this:
1. Employee’s provident fund scheme,1952.
2. Employees deposit linked insurance scheme,1976.
3. Employees pension scheme,1995.
The act came into immediate effect from 14-3-1952.
1) Employee’s Provident Fund Scheme, 1952
• Salary consist of two parts i.e. earnings and deductions.
• It is one of the statutory deduction done by the employer at the time of payment of salary
• It is implemented by the Employees Providend Fund Organization (EPFO) of India.
• EPF is one of the main platforms of saving in India for nearly all people working in
Government , Public Or Private Sector Organization.
• The employees provident fund is compulsory contributory fund for the future of the employee
after his retirement or for his dependents on the case of his early death. •This act is applicable to all
state exceptJ&K Contribution:
A contribution is the amount of money paid to the EPF which is calculated based onthe monthly
wages of an employee and then credited in the employee EPF account.
• 12% contribution by employee directly transferred to his PF a/c
Eligibility

1. Whole of India expect the state of Jammu and Kashmir.

2. Every establishment ( factory or industry) which 20 or more persons are employed,.
3.Any other establishment employing 20 or more persons which the central government may notify
from time to time. Interest:
1. Interest is credited to member PF a/c on monthly running balance.
2.Interest rate is fixed by the central govt. in consultation with the central boardof trustees of EEPF
every year of march/April.
3. Interest rate is fixed i.e.8.6%

BENEFITS:
• Employees can take advances/withdraw the PF in case of retirement, medical care, housing, for
the education of children, etc.…
• Up to 90% of amount can be withdrawn at the age of 54 years or before one year of actual
retirement.
• PF amount of deceased person is payable to his nominees/legal heirs.
• Equal contribution by the employer.
• Present interest rate 8.6%.
• PF a/c can be transferred if employee changed from one establishment to other where pf
facility is available.
2) Employee’s Deposit Linked Insurance Scheme,1976

• Central government had formulated the deposit linked insurance scheme.

•The main purpose behind this scheme is to provide life insurance benefits to the employees of any
establishment or class of establishment to which the EPF act applies.
• This scheme is meant to provide relief to the family members of the employee in case of
sudden death.

Calculation
• It is calculated on EDLI slab- RS. 6500.
• 0.50% EDLI is calculated on total EDLI slab (rs. 6500) wages and payable by employer
towards EDLI fund.
Eligible:
Person who is eligible to receive PF dues of deceased member who died while in service is only
eligible to receive EDLI fund.

Exemption:
Employer can seek exemption from the scheme if similar/better benefits are provided other than the
scheme with the consent of majority of employee.
3) Employee’s Pension Scheme,1995
• It is a central government scheme for providing :
• Widow pension
• Children pension
• Retiring pension
• The purpose of this scheme is to providing family pension and life assurance benefits to the
employees of any establishment to which this act applicable.
• If member is alive, pension to member
• If member is not alive, pension to spouse and 2 children below 25 years of age
• This scheme is applicable to all members who joined EPF after 15.11.1995

Contribution :
• It is financed by diverting 8.33% of employer’s monthly contribution from the EPF and govt.
Contribution of 1.17% of the worker’s monthly wages.

Applicable :
•It is compulsory for all the member who has become the member of EPF scheme.

Eligibility:
• A employee can start receiving the pension under EPS only after rendering aminimum service
of 10 yrs. And attaining the age of 58/ 50yrs.
• After 50 yrs. And before 58 yrs. Early pension is payable subject to discounting factor@ 3%
for every year falling short of 58 years.
• In case of death/disablement, the above restrictions doesn’t apply.
  PENSION FUND

• Pension funds are investment pools that pay for workers retirements.
• Funds are paid for by either employees, employer, or both.
• Corporations and all levels of government provide pensions.

Importance
• It ensures a financial support in your post retirement age.
• It ensures your independency for money, even in those days when there will be no income and
job in your life.
• It is a planning for secure future.

Types of pension funds

• Closed funds – they are reserved exclusively for certain categories of workers or firms. They
are legal entities of association promoted by trade associations, trade unions, business organizations.
(eg: doctors, lawyers)
• Open funds – they do not refer to particular categories of workers, in fact you can join all those
are not eligible to enter a closed pension fund.
CONTRIBUTORY PENSION
• A pension where the pensioner or employee must make contributions.
• Participating employees are required to support the plan with contributions.
• The employer often makes matching contributions to increase the value of the pension plan.
• Most pensions are contributory pension plans.

PAYMENT OF GRATUITY
Gratuity means a lump sum payment made by an employer as the retrial reward for his past service
when his employment is terminated.

Gratuity is payable when there is :-

• Continuous service of 5 years ( not necessary of death or disablement)
• On retirement or termination
• Incase of death, the amount shall be paid to nominee or legal heir
• Time limit – within 30 days of gratuity becoming payable
• Maximum amount – shall not exceed 10,00,000

Extent and application :-

• It extends to the whole of India
• Applicable to :
✔ every factory, mine, oilfield, plantation, port and railway company
✔ every shop establishment in which 10 or more persons are employed
  EMPLOYEE STATE INSURANCE CORPORATION Scheme (ESIC)
Is designed to complete the task of protecting employees as defined in ESI Act – 1948, against the
hazards of sickness, maternity, disablement or death due to employment injury and to provide full
medical care to insured persons and their families.
• All factories
• Shops employing 20 or more persons
• Such other Govt. specified establishments

 PAY STRUCTURE
Pay structure is a system that determines how much an employee is to be paid as a wage or salary,
based on the factors such as employees level, rank, status, length of time the employee has been
employed and the difficulty of the specific work performed. It is a hierarchal group of jobs and salary
ranges within an organization.

Designing of pay structure

The process of establishing pay structure consists of five steps:-

1. Conduct a salary survey of what other employees are paying for comparable jobs.
2. Determine worth of each job based on job evaluation.
3.Create pay grades by grouping similar jobs to particular pay grades.
4.Assign pay rate to each pay grade.
5.Create a pay structure through generating pay ranges.

 Types of pay structure

1) Traditional Structure
• Second most commonly used system
• 24% business uses
• Divided into numerous pay grades with relatively small distance between each range • Set the
minimum and maximum salary range for each employee or group then, determine the number of pay
grades within the structure.

2) Broadband Structure
• Flexible than traditional structure
• Only 5% of companies use
• Uses fewer pay grades
• Each pay grade has a wider salary range than traditional structures
• Leads to greater pay inequalities between employees.
3) Market – based Structure
• Most popular system
• 55% of businesses use
• Based on what other employers pay to employees.
• Conduct an external pay audit to determine your salary ranges for each position.

  Code on Social Security, 2020

 Code on Social Security, 2020 was initiated in the Lok Sabha on 19th September 2020 vide Bill
No. 121 of 2020 to propose a fresh Bill, namely, the Code on Social Security, 2020. This new code is
expected to amend and combine the laws relating to social security for all the employees either in the
organized or unorganized sector.

List of the Repealed Acts

• Introducing The Code on Social Security, 2020, the following Acts were repealed-
• The Unorganized Workers Social Security Act, 2008.
• The Payment of Gratuity Act, 1972[1];
• The Maternity Benefit Act, 1961;
• The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959;
• The Employees State Insurance Act, 1948;
• The Employees Provident Funds and Miscellaneous Provisions Act, 1952;
• The Employees Compensation Act, 1923;
• The Cine-Workers Welfare Fund Act, 1981;
• The Building and Other Construction Workers’ Welfare Cess Act, 1996.

 Objective of the Code on Social Security, 2020

The objective of the Code on Social Security, 2020 is to amend and consolidate the existing labour
laws relating to social security with the wider goal of extending social security benefits to all
employees and workers irrespective of belonging to the organized or unorganized sector.

 Features of the Code on Social Security, 2020

To provide for the medical education institutions and training institutes of the ESIC. It may be run by
the corporation itself or on the request by the central government or any state government or any PSU
of the central government;
To authorize the central government to outline any schemes for gig workers, unorganized workers, or
platform workers and for the members of their family & providing benefits related to ESIC;
Requirements for maternity benefits such as prohibition from work during such periods, claim for
maternity benefits, provision for nursing breaks etc;
To authorize the central government, to outline the proposal for the purpose of providing social
security benefits to all the self-employed workers or any other class of workers.
• To amend and combine the laws related to social security with the goal to widen the scope of
social security to all the employees of the sectors;
• To provide for an establishment under chapter III related to Employees’ Provident Fund and
under chapter IV related to Employees State Insurance Corporation on controlled basis even if the
number of employees in the organization is less than the threshold;
• To define a variety of expressions used in the bills like “aggregator”, “career centre”,
“platform worker”, “gig worker”, “wage ceiling”, and more. Additionally, the definition of
“employee” has been broadly defined to cover maximum number of employees as well as workers;
• To provide for E-Registration for every organization to which the bill will apply, within time
and manner as the central government determines. It also provides for an option for cancellation of
registration by any organization whose business activities are in the process of closure.
• Constitution of various social security establishment for the management of the bill, they are as
follows-

  Pension Plans
Pension or retirement plans offer the dual benefit of investment and insurance cover. By investing a
certain amount regularly towards your pension plan, you will accumulate a considerable sum in a
phase-by-phase manner. This will ensure a steady flow of funds once you retire.
Public Provident Fund is one of the most popular retirement planning schemes in India. When you
start contributing to your retirement early, the funds build a secure golden year money-wise over the
years. A well-chosen retirement plan can help you rise above inflation, thanks to the power of
compounding.
   Features & Benefits of Pension Plans

1. Guaranteed Pension/Income
You can get a fixed and steady income after retiring (deferred plan) or immediately after investing
(immediate plan), based on how you invest. This ensures a financially independent life after retiring.
You can use a retirement calculator to have a rough estimate of how much you might require after
retiring.

2. Tax-Efficiency
Some pension plans provide tax exemption specified under Section 80C. If you wish to invest in a
pension plan, then the Income Tax Act, 1961, offers significant tax respite under Chapter VI-A.
Section 80C, 80CCC and 80CCD specify them in detail. For instance, Atal Pension Yojana (APY) and
National Pension Scheme (NPS) are subject to tax deductions under Section 80CCD.

3. Liquidity
Retirement plans are essentially a product of low liquidity. However, some plans allow withdrawal
even during the accumulation stage. This will ensure funds to fall back on during emergencies without
having to rely on bank loans or others for financial requirements.
4. Vesting Age
This is the age when you begin to receive the monthly pension. For instance, most pension plans keep
their minimum vesting age at 45 years or 50 years. It is flexible up to the age of 70 years, though some
companies allow the vesting age to be up to 90 years.

5. Accumulation Duration
An investor can either choose to pay the premium in periodic intervals or at once as a lump sum
investment. The wealth will simultaneously accumulate over time to build up a sizable corpus
(investment+gains). For instance, if you start investing at the age of 30 and continues investing until
you turn 60, the accumulation period will be 30 years. Your pension for the chosen period primarily
comes from this corpus.

6. Payment Period
Investors often confuse this with the accumulation period. This is the period in which you receive the
pension post-retirement. For example, if one receives a pension from the age of 60 years to 75 years,
then the payment period will be 15 years. Most plans keep this separate from accumulation period,
though some plans allow partial/full withdrawals during accumulation periods too.
7. Surrender value
Surrendering one’s pension plan before maturity is not a smart move even after paying the required
minimum premium. This results in the investor losing every benefit of the plan, including the assured
sum and life insurance cover.

  Types of Pension Plans:

1. Pension Schemes Based on Timing of Pension

Immediate Annuity:
In this type of scheme, the pension or annuity begins right away. This is suitable for those who have
started their retirement plan.
Deferred Annuity:
In a deferred annuity, pension payments start after the payment term is over. The payment term may
involve a single premium or a series of regular premiums through the policy term.
2. Pension Schemes Based on Policy Term
Life Annuity:
This annuity offers regular income to the annuitant throughout his/her lifetime. No payment is made to
the beneficiaries after the annuitants’ death.
Guaranteed period annuity:
Annuities are payable for a guaranteed period such as 5,10, or 15 years. The annuity payment stops
upon the death of the annuitant. If the annuitant passes away before the guaranteed period expires, the
beneficiary receives the annuity.

Annuity Certain:
An annuity certain guarantees an annuity for a fixed term of years say 5, 10, or 15 years. If the
annuitant survives the term, then no further payments are made. If the annuitant passes away before
the expiry of the term – payments are made to the beneficiaries.

3. Pension Schemes Based on Insurance Cover

4.
With Cover:
A pension plan can be bought with an insurance cover or return of purchase price. In such a plan, the
purchase price/insurance cover is paid back at the end of the policy term/ or upon the death of the
policyholder. During the policy term, the annuitant receives a pension.

Without Cover:
A without cover pension plan only pays a regular pension through the policy term.
4. Pension Schemes Based on Mode of Holding
Joint Holder Annuity:
In a joint pension plan, the annuity is first paid to the primary annuitant. After the death of the primary
annuitant, the second annuitant continues to receive the annuity. The payouts cease after the death of
the second annuitant. This is suitable for those with dependent spouses.
Single Holder Annuity:
A single holder annuity pays a pension to the policyholder for the defined policy term.

 Pension funds are investment pools that pay for workers' retirements. Funds are paid for by
either employees, employers, or both. Corporations and all levels of government provide
pensions.

Types
There are two types of pension funds. The first, the defined benefit pension fund, is what most people
think of when they say "pensions." The retiree receives the same guaranteed amount. The second, the
defined contribution plan, is the familiar 401(k) plan. The payout depends on how well the fund does.

1. Defined Benefit Fund

A defined benefit fund pays a fixed income to the beneficiary, regardless of how well the fund does.
The employee pays a fixed amount into the fund. The fund managers invest these contributions
conservatively. They must beat inflation without losing the principal. The fund manager must earn
enough of a return on the investment to pay for the benefits.

The employer must pay for any shortfall. It's like an annuity provided by an insurance company. In
this case, the employer functions as the insurance company and sustains all the risk if the market
drops. That risk is why many companies have stopped offering these plans.

2. Defined Contribution Plan

In a defined contribution plan, the employee's benefits depend on how well the fund does. The most
common of these are 401(k)s. The employer doesn't have to pay out defined benefits if the fund drops
in value. All the risk is transferred to the employee. The shift in risk is the most important difference
between the defined benefit and the defined contribution plan.

 Gratuity
Gratuity is a benefit that is payable under the Payment of Gratuity Act 1972. Gratuity is a sum of
money paid by an employer to an employee for services rendered in the company. But, gratuity is paid
only to employees who complete five or more years with the company.

What Is Gratuity in Salary?

Gratuity is a financial component offered by an employer to an employee in recognition of his/her
service rendered to an organisation. It is a part of the salary an employee receives and can be viewed
as a benefit plan designed to aid an individual in his/her retirement.
Gratuity is paid by an employer when an employee leaves the job after serving the same organisation
for a minimum period of 5 years. One can consider it to be a financial “Thank you” to an employee for
rendering continuous service to an employer.

 Gratuity Eligibility Criteria

Following are the few instances when you will be eligible to receive gratuity.

An employee should be eligible for superannuation

An employee retires
An employee resigns after working for 5 years with a single employer
An employee passes away or suffers disability due to illness or accident

 Gratuity Calculation Formula

Listed below are the components that go into the calculation of the gratuity amount. The amount is
also dependent upon the number of years served in the company and the last drawn salary.
Gratuity = N*B*15/26

N = number of years of service in a company

B = last drawn basic salary plus DA

 How to Calculate Gratuity?

For example, Amit has worked with a company for 20 years and had Rs.25,000 as his last drawn basic
plus DA amount, then,

Gratuity Amount for Amit = 20*25,000*15/26 = Rs.2,88,461.54

However, an employer can choose to pay more gratuity to an employee. Also, for the number of
months in the last year of employment, anything above 6 months is rounded off to the next number
while anything below 6 months in the last year of employment is rounded off to the previous lower
number.

 Calculation of Gratuity for the Employees Who Are Not Covered under the Gratuity Act

Even if the organisation is not part of the Act, they can pay gratuity. However, the calculation of
gratuity is based on an individual’s half month’s salary for every year that has been completed. The
salary includes commission (sales-based), dearness allowance, and basic salary.
The following formula is considered for the calculation of gratuity amount for employees who are not
covered under the Gratuity Act:

Gratuity Amount = (15 * Last drawn salary amount * period of service) / 30

For Example:

For example, if you have at a company for 10 years and 8 months and your salary is Rs.50,000, the
calculation of the gratuity amount is done as follows:

Gratuity Amount: (15 * 50,000 * 11) / 30 = Rs.2.75 lakh.

The period of service of an employee is taken as a whole year for the calculation. In case the number
of months worked in the last year is less than 6 months, the previous number of completed years is
considered. However, if the number of months completed in the last year of service is more than 6
months, the year is considered to be a full year for the purpose of calculation. Thus, the working
tenure has been considered as 11 years. If the service period had been 10 years and 4 months (or
anything less than 6 months), the number of years of service would have been considered as 10 years
only.
As per the rules recorded on the pensioner’s portal of the government, the amount of gratuity at the
time of retirement is calculated as follows:

Gratuity Amount is equal to one-fourth of the last-drawn basic salary of an employee for each
completed six-month period. The retirement gratuity amount which is payable is 16 times the basic
salary. However, it is subject to a cap of Rs.20 lakh.

 Gratuity Rules

Forfeiture of Gratuity
According to the Payment of Gratuity Act of 1972, an employer holds the right to forfeit their gratuity
payment, either wholly or partially despite the employee having completed 5 and more years of
service in a company. The only situation where this works is when the employee has been terminated
due to disorderly conduct wherein, he/she tries to physically harm individuals during his/her
employment.

 Timeline for Gratuity payment

There are three steps involved regarding gratuity payment. These include:

Initiation: An individual or a person authorized must send in an application to an employer regarding

the gratuity he/she is owed by a company.
Acknowledgement and calculation: As soon as the application is received, the company which owes
gratuity will calculate the amount and also provides a notice of the same to the individual and the
controlling authority with the amount specified.

Disbursal: The employer, having sent the acknowledgement, has a time period of 30 days to pay the
gratuity amount to the individual.

 Tax on Gratuity
The taxation process for gratuity depends upon the employee who is receiving the gratuity amount.
Two standard cases arise for the calculation of tax on gratuity:

1. Government Employee Receiving Gratuity Amount:

In case any employee under the state government, central government or local authority receives
gratuity amount than the amount is fully exempt from Income Tax.

2. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is Covered
by Payment of Gratuity Act:
In case of gratuity received by any employee whose employer is covered under the Gratuity Act, the
following amount is exempt from tax.
15 days salary as per the last drawn salary of the individual
3. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not
Covered by Payment of Gratuity Act:
In such a case the least of the following three amounts is exempt from tax.

• Rs.10 lakh
• Gratuity actually received by employee
• Half month's salary for every year of service that the employee has completed with the
employer

 Tax Exemptions on Gratuity

1. According to Article 10 (10) in the Income Tax Act, any gratuity received by government
employees, apart from statutory corporations, is fully exempt of tax.
2. According to Article 10 (10) ii of the Income Tax Act, death and retirement gratuity receivable by
an employee covered under Gratuity Act 1972 is the least amount of the following that is exempt from
tax:
• (*15/26) X Last drawn salary** X completed year of service or part thereof in excess of 6
months.
• Rs.20 lakh.
• Gratuity amount that is actually received.
* 7 days in case an individual is an employee of a seasonal establishment.

** Salary amounts to the total salary received by an employee including Dearness Allowance and
excluding any other benefits like bonus, HRA, commission, and any other such perquisites.
2. According to Article 10 (10) iii of the Income Tax Act, exemption for gratuity amount received
by individuals who are not covered under Gratuity Act of 1974 are as follows:
Half month’s Average Salary* X Completed years of service
• Rs. 10 lakhs
• Gratuity actually received.
• *Average salary = Average Salary of last 10 months immediately preceding the month of
retirement ** Salary = Basic Pay + Dearness Allowance (to the extent it forms part of retirement
benefits) + turnover based commission

 Calculation of Gratuity in Case of Death of an Employee

In case of the death of an employee, the gratuity benefits are calculated based on the tenure of service
of the employee. The amount is, however, subject to a maximum of Rs.20 lakh. The following table
shows the rates at which the gratuity will be payable in case of death of an employee:
Tenure of service Amount payable towards gratuity

Less than a year 2* basis salary

1 year or more but less than 5 years 6 * basic salary

5 years or more but less than 11 years 12 * basic salary

11 years or more but less than 20 years 20 * basic salary

20 years or more Half of the basic salary for each completed six
monthly period. However, it is subject to a maximum of 33 times of the basic salary.

 Employees' State Insurance Corporation (ESIC) - is a government organisation that manages the
Employees' State Insurance (ESI) scheme. The scheme basically provides medical and financial
assistance to the employees and their families. The assistance is provided when an employee is unable
to perform his duties due to sickness, employment injury, or maternity.

 ESI – Which are the organizations it applies to.

ESI is applicable when any organization employs 10 or more persons. This is regardless of the legal
form of the entity. Be it a Limited Liability Company, LLP, Partnership Firm, Proprietorship, Trust,
Society, etc.

 ESI – Healthcare and Insurance for lower wage level Employees

The intent of the ESI law is to ensure that organizations extend healthcare benefits to the lower wage
group employees and their dependents as they are economically vulnerable to health issues. Lower
income group employees are defined under the Act as those who earn less than Rs 21,000/- Gross
Salary. Gross Salary comprises of Basic Salary, Dearness Allowance, House Rent Allowance, and all
other Allowances.

 ESI – What about higher wage level Employees

A popular belief is that an organization which employs only higher wage level employees, where all
earn above Rs 21,000/- a month does not need to be registered or covered under ESI as they have their
own resources or private Group Health Insurance packages to take care of their employee healthcare
needs. This is partially correct that ESI contribution is not expected for such higher wage level
employees, but the organization yet is mandated to be registered under the ESI Scheme and is
expected to file a NIL monthly return before the ESI Department. However, if such an organization
has even ONE employee who earns less than Rs 21,000/- say a Security Guard or a House Keeping
person then ESI contribution is required even for that ONE person.

 ESI – Employee and family

Family means all or any of the following relatives of the insured person under ESI:

Spouse
Minor child
Adopted child
A child who is receiving education till he attains the age of 21 years
An unmarried daughter
A child who is infirm by reason of any physical/mental disability
Dependent parents
Where the Employee is unmarried and his or her parents are not alive, a minor brother or sister wholly
dependent upon the earnings of the Employee would also be considered as a family member.

 Rate of Contribution Under ESI

The latest revision is w.e.f. 01.07. 2019 and the rates are as follows:
Employer's Contribution – 3.25% of the wages paid/payable.
Employee Contribution – 0.75% of the wages paid/payable

 Recent Amendment to ESIC rules

After twenty-four months from the date of implementation of the Act, the rate of contribution shall be
reinstated to 4.75% by the employer and 1.75% by the employee according to Section 51 of the Rule.

 Who is eligible for ESI Benefits?

To be eligible for the ESI scheme, the employee or the worker's monthly salary should not exceed Rs.
21,000 and Rs. 25,000 for people with disability.

 What is the ESI cover limit?

ESI provides primarily sickness benefits and some other benefits to approximately thirteen
crores (130 millions) Indians that include Insured Employees and their dependents. The existing wage
limit for coverage under the ESIC scheme is Rs 21,000 per month and Rs 25,000 per month in the
case of persons with disability
 Difference between ESI and ESIC
ESI is a self-financing social security and health insurance scheme for Indian workers managed
by ESIC under the ESI Act 1948.
However, ESIC extends coverage to firms with 10 or more employees while EPFO covers
firms with 20 or more employees. The government sees two benefits of the scheme.
Benefits
The section 46 of the Act envisages following six social security benefits:-

1. Medical Benefit: Full medical care is provided to an Insured person and his family members
from the day he enters insurable employment. There is no ceiling on expenditure on the treatment of
an Insured Person or his family member. Medical care is also provided to retired and permanently
disabled insured persons and their spouses on payment of a token annual premium of Rs.120/- .
2. Sickness Benefit (SB): Sickness Benefit in the form of cash compensation at the rate of 70 per
cent of wages is payable to insured workers during the periods of certified sickness for a maximum of
91 days in a year. In order to qualify for sickness benefit the insured worker is required to contribute
for 78 days in a contribution period of 6 months.
Extended Sickness Benefit (ESB): SB extendable up to two years in the case of 34 malignant
and long-term diseases at an enhanced rate of 80 per cent of wages.
Enhanced Sickness Benefit: Enhanced Sickness Benefit equal to full wage is payable to insured
persons undergoing sterilization for 7 days/14 days for male and female workers respectively.
3. Maternity Benefit (MB) : Maternity Benefit for confinement/pregnancy is payable for Twenty
Six (26) weeks, which is extendable by further one month on medical advice at the rate of full wage
subject to contribution for 70 days in the preceding Two Contribution Periods.
4. Disablement Benefit
Temporary disablement benefit (TDB): From day one of entering insurable employment &
irrespective of having paid any contribution in case of employment injury. Temporary Disablement
Benefit at the rate of 90% of wage is payable so long as disability continues.
Permanent disablement benefit (PDB): The benefit is paid at the rate of 90% of wage in the
form of monthly payment depending upon the extent of loss of earning capacity as certified by a
Medical Board
5. Dependants Benefit (DB): DB paid at the rate of 90% of wage in the form of monthly payment
to the dependants of a deceased Insured person in cases where death occurs due to employment injury
or occupational hazards.
6. Other Benefits :
Funeral Expenses: An amount of Rs.15, 000/- is payable to the dependents or to the person who
performs last rites from day one of entering insurable employment.
Confinement Expenses: An Insured Women or an I.P. in respect of his wife in case confinement
occurs at a place where necessary medical facilities under ESI Scheme are not available.
In addition, the scheme also provides some other need based benefits to insured workers.

1. Vocational Rehabilitation: To permanently disabled Insured Person for undergoing VR Training

at VRS.
2. Physical Rehabilitation: In case of physical disablement due to employment injury.
3. Old Age Medical Care : For Insured Person retiring on attaining the age of superannuation or
under VRS/ERS and person having to leave service due to permanent disability insured person &
spouse on payment of Rs. 120/- per annum.
4. Rajiv Gandhi Shramik Kalyan Yojana : This scheme of Unemployment allowance was
introduced w.e.f. 01-04-2005. An Insured Person who become unemployed after being insured three
or more years, due to closure of factory/establishment, retrenchment or permanent invalidity are
entitled to :-
Unemployment Allowance equal to 50% of wage for a maximum period of up to Two Years.
Medical care for self and family from ESI Hospitals/Dispensaries during the period IP receives
unemployment allowance.
Vocational Training provided for upgrading skills - Expenditure on fee/travelling allowance
borne by ESIC.
5. Incentive to employers in the Private Sector for providing regular employment to the persons
with disability :
Minimum wage limit for Physically Disabled Persons for availing ESIC Benefits is Rs 25,000/-.
Employers' contribution is paid by the Central Government for 3 years.
 Period of Contribution
The following table illustrates the window period for Contribution and for obtaining cash benefit:
Contribution Cash Benefit
1st April to 30th Sept 1st Jan of the following year to 30th June.
1st Oct to 31st March of the year following. 1st July to 31st December.
 Applicability of the ESI Scheme

 5 Noteworthy Changes made in the ESI Act.

1. COMPULSORY ESI REGISTRATION OF EMPLOYEES

As per the new provision, the employees of the organized sector are now compulsorily required to
obtain ESIC registration online within 10 days from the date of their appointment. Henceforth, the
ESIC online portal shall now allow a maximum 10 days only to the employers for providing ESI
registration to their new joinee.

2. COMPULSORY ESI REGISTRATION CARD

Another new provision of the ESI Act states that the employees who have already obtained the esic
registration will now have to collect their Biometric scanned ESI registration Permanent Card from
the nearest ESIC Branch Office. The employers are now required to provide the ESI registration Card
to all their employees, which will serve as the evidence of ESI registration.

3. TIMELY DEPOSIT OF ESI CONTRIBUTION

As per the ESI Act, a certain contribution has to be deposited against employees as well as employers
within the due date. Now a new rule suggests that ESI contribution against employees has to be
deposited within 42 days from the end of the month of the ESI contribution. The employer shall not be
able to deposit the employee’s ESI contribution after 42 days, and shall have to bear the penalty of
₹10,000/-.

4. THRESHOLD LIMIT FOR EMPLOYEE’S ESI CONTRIBUTION

Another new provision has now introduced a threshold limit for employee’s ESI contribution.
Accordingly, the employees whose salary is ₹176/- per day or less need not to pay ESI contribution.
Their share of ESI contribution shall be born by the Government. Nevertheless, the Employer shall
still have to bear their share of ESI contribution.

5. SPECIAL ESI REGISTRATION PROGRAMME

The Government with a view to widening the ESI Social Security Coverage to more individuals has
also begun an initiative for ESI registration. Within this Programme, special ESI registration will be
conducted of the employers as well as employees from December 2016 to June 2017. Moreover, the
coverage of the ESI scheme shall be extended to all the districts of India, but in a phased manner.

Along these lines, the government has planned to enhance the coverage of the ESI scheme to provide
financial assistance to more & more employees of the organized sector in India.
 A pay structure is a system that defines what each individual and job role is paid based upon
their value to the business and effectiveness in their role. For each type of pay structure, there are a
variety of different methods for deciding upon and separating employee pay, each with its own
advantages and disadvantages.

 Why do pay structures matter?

First things first, it’s essential to recognise the importance of pay structures.

There are two central reasons why pay structures matter. The first is that businesses need to ensure
they are consistently paying staff appropriately for what they do and what they are worth to the
business. Each pay structure can take different factors into account to calculate appropriate pay
rewards, from utilising market averages to measuring performance within different functions of the
business. The right choice for your business will depend largely on your sector and situation. Selecting
the right pay structure that supports your culture and organisational model is incredibly important.

The second reason is how pay impacts employees. Employee engagement and satisfaction is a
challenging topic filled with fine nuances and details, but payment and remuneration play a large part.
All employees want a clear, understandable path to both career and pay progression. Defined goals
and the knowledge that achieving them will result in employees receiving monetary rewards for their
efforts provide a framework for motivating the entire workforce. The presence of this clarity is a direct
outcome of a business’ transparent pay structure.

 Ten steps to develop a salary structure for your organization, with some special
considerations for international developing markets:

1. Establish your compensation philosophy. Each employer needs a policy which outlines their
desired market position. What percentile of the market is your target? Which comparators are
appropriate? Is the target the same for all grades? A well-articulated compensation policy provides
valuable guidance for the development of a salary structure. In large organizations, there is often a
corporate policy which forms the basis for local policies.
2. Gather market data. Identify surveys with your desired comparators (as specified in your comp
policy). Most employers prefer at least two survey sources. In international markets this can be
challenging, especially in developing countries and smaller markets. Consider sector-specific surveys
as well as multi-sector options – certain jobs are found across many employers, not just your sector.In
smaller international markets, leading employers often provide a better proxy for the most competitive
market than do sector surveys with many less sophisticated employers. Don’t overlook international
organizations like the World Bank and the UN; they pay very competitively and are often well-
established in the smallest of countries.
3. Identify benchmark jobs. Benchmark jobs are those that are representative of roles found across
many organizations – standard roles such as Manager, Accountant, Payroll Administrator, Secretary,
Clerk and Driver. Benchmark jobs are easy to understand and match to, and will appear in multiple
surveys, enabling the use of multiple sources.For professional roles specific to your sector, sector
surveys could be a good source. In other cases, and with multi-sector survey sources, look for those
that utilize well-developed career ladders, enabling easy cross-occupational job matching. As an
example, such an approach would examine Analyst positions across different functional areas (e.g.,
finance, HR, procurement, marketing, etc.).
4. Measure your market position. There are several ways to do this. If you have a lot of benchmark
jobs, tabulate the average of all of the roles in the same internal level or grade. Weighted averages
incorporating number of incumbents associated with each survey data point is a common approach.
Select the market reference from the survey most appropriate under your policy.In developing
countries market data is more volatile. A good approach is to use minimum and maximum values to
“bookend” the data in these markets. This helps eliminate outliers and capture more realistic market
survey values.
5. Calculate the compa-ratio. This is the ratio of your data to the market — 100 means fully
comparable, while a ratio under 100 indicates a below market position, and over 100, above market.
There are different approaches to summarizing the data — by position, by grade, etc.Whatever
approach you use, the compa-ratio analysis will illustrate which parts of the organization are
competitive against the market and which ones require some attention!
6. Check your budget. This is a critical step. In Step 5 you can calculate the average difference
between your current scale and the market. This indicates about how much of an increase would be
required to make your scales fully comparable to the market. Your internal budget constraints,
though, will dictate how close to this ideal you can achieve. In addition to internal budgets, consider
the average market movement in your surveys, and the general inflation rates (never use inflation to
determine how much more to pay staff – this is determined by cost of labor, not cost of living).
7. Start allocating. This is the start of an exercise which will repeat many times, until you get the
desired result. Build a model of your organization, ideally with the number of incumbents in each
grade. Using your overall percentage of market (Step 5) and budget number (Step 6), start increasing
your scale (use midpoints, or the mins and maxs). See how close you can get to fully comparable to
the market, and how much it will cost. Does it jive? If not, tweak the data a bit. You can adjust the
percentage each grade is increased, as well as examine the spans (range from min to max) and inter-
grade differentials, in order to gain better market alignment. Obviously, the incumbent count of each
grade will impact the overall costing model.
8. Final adjustments. Once you have built your new scale and matched it to the market as closely
as possible, and within your budget, give it a once over. Does it make sense? Are the increase
amounts distributed in a pattern which will cause unrest amongst your staff? Strive to achieve a scale
which will reflect your comp policy and enhance internal cohesion in the organization. This step is
the art of compensation, not the science.
9. Management approval. Review your proposed scale with management, presenting your
rationale, budget and overall market comparisons. Discuss concerns you may have uncovered about
specific positions or grades, and educate your management about the process used. Outline your
implementation plans.
10. Communicate. Develop appropriate communications for managers and staff. Let them know
all of the work that went in to the exercise, and how the organization compares to the market. Be
careful here — you need to obviously put on a positive spin — that’s why statistics are so flexible!
  The most common types of pay structure
Pay structures and systems are vast and varied, with some businesses combining structures to create
bespoke solutions. Regardless of the approach that organisations opt for, they can usually be
categorised into one of the following four types of pay structure.

1. Individual pay rates/ranges

Firmly positioned as the most recognisable type of pay structure, individual pay rates involve a fixed
salary based on each employee’s job role within the organisation. This salary can be paid annually or
hourly and offers a rigid payment system. If you’ve ever heard the term ‘spot salary’ and wondered
what it is, this is it.

2. Broadbanding
Broadbanding offers a very different approach to the individually-focused systems discussed so far. It
involves grouping broadly comparable jobs into a handful of pay grades.
Pay spine

3. A pay spine is a company-wide pay structure that is especially effective due to its simplicity and
clarity. Pay spines cover all wages within the organisation, from the lowest entry-level salary through
to senior managerial or even executive pay levels. The spine is made up of individual pay points, each
associated with a predefined salary and incremental increases. Each job role is then assigned a range
of pay points which can be reached by staff within that position, usually based on loyalty.

The major advantage of this system is that the path to payment increases is far clearer for employees,
ensuring that they know exactly where they are going and how to get there. However, progression is
often loyalty-based rather than representative of skill, meaning that staff can become resentful of
higher-paid colleagues if they feel they work harder.
Job families

4. Job families are a pay structure that strikes a balance between many of the other common pay
systems. Job families operate by grouping similar roles together and separating each individual role
based on knowledge and seniority.Organisations utilising this structure usually create multiple job
families for different departments. Transitioning from one role to the next would usually be achieved
through a combination of experience, knowledge, and loyalty, depending on the business’ choice of
focus.
Job families work extremely well because they enable tight control of salary whilst still making
progression attainable and clear. Management can easily review and refine the payment systems
within each family without affecting the rest of the company, and staff members can see exactly what
they will get for going above and beyond, as well as how to reach an increased pay packet.
Job families are versatile and, once implemented, they provide organisations with freedom and control
whilst still enabling transparency and progression for staff.
  Benefits of introducing pay structure

1. Fairness: creating an appropriate pay structure will help to ensure that you treat your workforce
fairly. Employees will understand exactly where their role fits into the organisation and that
a fair process exists to determine both their job grade and pay, free from unlawful bias. This
is especially important in the context of eliminating discriminatory pay practices between
men and women, where an employer is under a duty to ensure equal pay for equal work.

2. Transparency: having a rational, fair and transparent pay structure in place will enable staff to
understand how pay is managed within the organisation. It will also inspire confidence in
employees and potential recruits that you’re committed to fair working practices, including
equality of pay based on objective factors like fair job evaluations.

3. Motivation: understanding the avenues open to career and pay progression is hugely motivating
for employees. It allows for open dialogue about what’s required to progress pay or grade
within the business and, as such, prevents less productive discussions between employees
and line managers with no real focus.

4. Engagement: key components to creating employee engagement is an employee feeling fairly

treated, understanding what steps can be taken to progress their career, knowing where they
 sit within the organisation and how their contribution adds to the overall effort. A clearly
communicated pay structure supports all these things.

5. Supporting management: pay discussions can be difficult conversations for managers to have
with with their team or potential new hires. A clear pay structure provides clarity in how to
manage pay, supporting better decision-making around pay progression etc.

6. Pay budgets: a pay structure creates a basis for pay decisions and affordability. By
understanding where your employees fit against the pay structure – within, above or below the band –
informs your pay decisions and allows for effective allocation of pay budgets. If not always saving
you money, it will ensure you get the most value from it.

 The process of establishing pay structure consists of five steps:-

1. Conduct a salary survey of what other employees are paying for comparable jobs.
2. Determine worth of each job based on job evaluation.
3. Create pay grades by grouping similar jobs to particular pay grades.
4. Assign pay rate to each pay grade.
5. Create a pay structure through generating pay ranges.
  Options For Handling Outliers
You’ve just finished benchmarking all your jobs. You’ve established some ranges for your positions.
Maybe you even have a structure, with grades, to which you’ve assigned each position. You’re ahead
of the game, with most of your work is behind you, right? Well, yes and no. Inevitably some
employees will fall below your range, and some may fall above. Now it’s time to manage employee
pay based on the ranges you’ve developed.

1. Employees Within Range

The best scenario is that your employees fall within range. When this happens, you still have a number
of choices to make, but they tend to be among good options. Ideally, in a work culture that
increasingly favors pay-for-performance options, your ongoing compensation management will
account for both the market value of jobs and employee performance. What else does your company
want to reward with its not-limitless compensation budget?

2. Employees Below the Range

When your employees fall below the range, or are what we call “green circled,” you have a number of
options for managing their pay. Generally, green-circle employees are a challenge to manage because
they have a high budgetary impact.

Option 1: Outlier Minimization – Bring all employees who are not at minimum to the minimum of the
pay range. No discretion is given to managers. Choose this method when your organization has a
strong commitment to correcting outliers in your compensation plan. In the long term, employees will
get raises when the market shifts.

Option 2: Market-based Pay – Allocate increases based solely on where employees are in their range
(which is alignment with the market). For example if you are farther behind the market you may get a
6% increase, but if you are above the market rate you get a 2% increase. Little discretion is given to
managers. Select this method when your organization has a strong commitment to compensating staff
based on the going market rate for their positions. In the long term, employees will get raises when the
market shifts.

Option 3: Market & Performance-based Pay – Allocate increases based on both employees’ placement
within the range and performance. For example, a star performer who is lower in the range may get an
8% increase, while a star performer who is high in the range may get a 6% increase. Pick this method
if your organization has both a commitment to paying relative to the market and also to rewarding top
performers. In the long term, high performers have higher salaries and moderate performers’ salaries
will shift as the market shifts.

3. Employees Above the Range

Employees whose pay falls above the range, or what we call “red-circled,” present their own set of
challenges for the organization. Often, managing red-circled employees requires setting very clear
expectations and having the hard conversations with employees. Again, you have a number of options
for managing red-circle pay.

Option A: Do Nothing – Continue to give increases to employees, even if they fall over the top of the
pay range. This method is best in situations where it is acceptable for outliers to fall above the range,
and if the risk that they will leave the organization outweighs the cost.

Option B: Set Increases by Position in Range – Continue to allocate increases to outliers falling above
the range, but give a smaller percentage than to those in or below the range. This is similar to option 2
above. This approach has less risk of turnover of red outliers than the following options.

Option C: Freeze Base Pay and Offer Performance-based Bonuses – Discontinue base-pay increases
for red outliers, until the market catches up. Offer clear incentives for a lump-sum performance-based
bonus to be delivered at appropriate intervals. Reward only the top performers among the red outliers.
This method is for organizations which have a commitment to paying relative to the market and to
rewarding top performers. This option carries some risk of turnover among red outliers, especially
among underperformers – which may be ok.

Option D: Freeze Base Pay – Discontinue base pay increases for red outliers until the market catches
up. This more restrictive version of Option C brings a moderate to high risk of turnover among red
outliers – including the top performers.
Option E: Decrease Base Pay – Decrease base pay for red outliers to the maximum of the range.
Increases will happen only when the market moves. This option is for organizations with a strong
commitment to internal equity and market-based pay. This option entails a very high risk of turnover
among red outliers, especially top performers. As such, this is the option that isn’t really an option.

Whichever implementation option you select for your organization, remember that it is essential to
apply it fairly and consistently across the organization. It would be unfortunate to do all this work only
to open yourself up to litigation in the 11th hour. Make a policy decision and stick to it.

 Updating Salary Structure: When, Why and How?

Maintaining a strong salary structure is imperative for any organization. If the salary structure gets out
of sync with the overall labor market, a company may find itself paying employees too much and
needlessly increasing operating costs, or paying employees too little and having difficulty attracting
and retaining talent. “Most companies try to be good about keeping it up-to-date, but they tend not to
do it as quickly as they should,” said Steven Slutsky, a director at PricewaterhouseCoopers Human
Resource Services in Philadelphia.
Here are pointers to keep in mind for maintaining a competitive salary structure.

1. Conduct a review on a regular schedule or tied to specific events. As a general rule, employers
should examine the overall salary structure at least every three to five years. The review should
determine whether the structure is still aligned with the company’s needs and the labor market.

Some HR executives favor conducting an analysis every 18 to 24 months. The rationale is to catch
issues before they become large enough to affect employee engagement and the organization’s ability
to attract and retain talent. Moreover, salary-structure issues are less expensive to address early on.
Once things have gotten to the point where the business must make significant upward adjustments,
the cost of doing so can be considerable.

There are other situations, changes and events that also demand a review of the salary structure, such
as the company’s undertaking a merger or acquisition, a significant change in the labor market, and a
competitor’s opening a new facility or closing one near the company’s operations. In the last example
a plant opening could increase competition for talent, while a plant closing could significantly increase
the labor pool and lower the cost of hiring new people.

2. Listen to managers … up to a point. In some cases front-line managers will bring salary-
structure issues to HR’s attention. These managers’ insight can be important in determining if salary-
structure issues exist. After all, front-line managers are more likely to hear from employees who think
they can earn more elsewhere—before these individuals leave the company. They are also likely to
more readily recognize difficulties in filling positions in their department. This insight can indicate
that specific areas of the salary structure are out of alignment.

While HR should certainly consider managers’ perspectives when determining whether a salary-
structure review is warranted, keep in mind that this is just one side of the story. Managers may not
realize that employee feedback is to be expected because the organization has made a strategic
decision to set pay levels at a specific point relative to the market, such as at the median or slightly
above or below, said Slutsky.

3. Link the salary structure back to HR strategy and the market. If the salary structure does get out
of alignment, it may not be tied closely enough to the company’s total rewards and HR strategy. When
that happens, the organization “loses the strategic connection to how the organization competes and
drives value through its people,” said Gary Kushner, SPHR, CEO of Kushner & Co. in Portage, Mich.
To bring the structure back in line with the company’s goals, link the HR strategy to a clear
compensation philosophy that will provide a framework based on competitive positioning in the
market and other factors, including regional economic conditions. Moreover, a business in a declining
industry, like paper manufacturing, faces different requirements when it comes to maintaining a salary
structure than one in a fast-growth industry, like mobile technology or health care.

At the same time, it is important to consider the nuts and bolts that hold up the salary structure. For
example:
Has the organization established appropriate pay grades and maintained updated job descriptions with
required skills?

Does the company have a clear idea of whether it is paying for the position or for the skills that people
bring to it and to the organization?
“Companies are organic and change over time,” said Slutsky. “People in certain jobs may now be
doing much more than what is in their job description. It is important to make sure job descriptions are
still accurate and reflect the core duties of each position. Don’t fall into the trap of doing the same
analysis time after time.”

4. Look broadly when necessary. Depending on the organization and its talent requirements, the
salary structure may need to reflect broader market forces. Particularly in a global economy,
businesses may be competing for talent with entities anywhere in the world. However, the level of
competition may vary by position. For example, Kushner noted that a company that hires nuclear
physicists needs to use national or international market data, while for administrative positions it may
base salaries on the local market.

In this type of situation, the company could find that only parts of its salary structure are not in line
with the market. So although a more robust approach to keeping the structure in line with the market
may be required to attract and keep nuclear physicists, technology workers, engineers and other
professionals in high demand, a less aggressive strategy (and fewer updates) may be needed for
positions filled by workers less in demand.
5. Communicate the results. Once the company is ready to adjust the salary structure, it is
important to educate and communicate with employees about the changes. Whether salary-structure
adjustments go up or down, “make sure employees understand why this is happening,” said Kushner.
“Explain why pay for these positions is changing and the process the company went through to come
to that conclusion, and identify the necessary adjustment.”

When an analysis reveals that a position is overpaid, a company may “red-line” that position by
keeping base pay the same for incumbents and adjusting the pay level downward when filling the job
after those incumbents leave.

 Reviewing the Salary Structure

The first step to review the salary structure of your company is conduct a job analysis, for that is
important to gather information about:

A job’s context and/or its purpose, its work environment, and its place in the company.
A job’s content or duties and responsibilities.
The specifications and qualifications, which are usually referred to as KSAs:
* Knowledge, the information demanded for task performance.
* Skills, the level of competency or proficiency.
* Abilities, traits, or capabilities needed.
Behavior—how people are expected to act in accomplishing the job.
There are a lot of renewed methods to conduct a job analysis, my preferred is the Closed-Ended
Method, where a well-designed questionnaire is developed and distributed to collect a wide array of
job data in a short period from both employees and managers. The two common tools used in this case
are the Position Analysis Questionnaire (PAQ) and the Common Metric Questionnaire (CMQ). The
PAQ is composed by 195 job elements describing such human work behaviors as interpersonal
activities, job context, mental processes, and work output. The CMQ has 5 sections of questions:
Background, Physical and Mechanical Activities, Work Setting, Contacts with People, and Decision
Making; and can include a matrix to respond on frequency, criticality, and consequence of error too.

Of course, that these methods of questionnaires are best used when a large number of jobs must be
analyzed and there are insufficient resources, very common in current days within HR, increasingly
smaller. These methods are less time-consuming and are usually replicable on a second
administration, a very good choice.

The second step to consider in a salary structure review is the job evaluation. This procedure is more
art than science, but objective judgments can be made.

In general, the following factors compose the most evaluation systems. Of course, this is not an all-
inclusive list, and not all of these factors should be part of the system, anyhow, in my humble opinion
these are the main ones:

Training, education, or qualifications;

Complexity of work being done;
Knowledge and skills demanded;
Interactions within and outside of the company;
Problem-solving;
Independent judgment;
Accountability and responsibility;
Degree of supervision necessary;
Cross-training requirements;
Decision-making authority;
Supervision of others;
Working conditions; and
Degree of difficulty filling the position.
There are many job evaluation systems, the common ones are: Ranking; Classification; Point
Evaluation; Factor Comparison; and Market Comparison.

Regardless the time-consuming and the subjective process, I consider the quantitative evaluation
methods, the Factor Comparison and the Point Evaluation as the best choices, basically because they
provide clarity and simplicity creating a scaling system to evaluate the value of one job as compared
to another and assigning a score.

The Factor Comparison involves ranking jobs that have analogous responsibilities and tasks according
to the points assigned to compensable factors, such as skill, responsibility, effort, working conditions,
and supervision. Jobs are then analyzed in the outside labor market to constitute a market rate. Finally,
jobs are compared to benchmark positions according to the market rate of each job’s compensable
factors to determine the wage rate.

In the Point Evaluation method, the value of a particular job is expressed in monetary terms. First,
compensable factors must be identified – it reflects the dimensions along which a job is perceived to
add value to the company, then the assignation of the points that numerically represent the description
and range of the job must be done. Examples of compensable factors include: skills required, level of
decision-making, quantity of reporting employees, and working conditions. The Guide Chart-Profile
or Hay Plan is a best-known method.

Once the value of each job has been established within the company, it’s time to look externally and
gather information from wage surveys. Basically, wage surveys should answer four main questions:

What is the labor market for your jobs?

How will the data be used?
How frequently will you update the data?
How will you communicate the results?
Depending on the pay philosophy the company has selected, wage ranges or pay grades may be
established. Wage ranges may be unique to each position or grouped into salary grades. If salary
grades will be used, the right number of grades will have to be selected and developed.
Keep in mind that there is no magic form to establish the number of grades, they need to fit each
companies’ needs, they also need to distinguish between different levels of jobs and provide room for
wage growth, and there should not be so many that the distinction between them becomes
insignificant.

Developing a wage structure is an often-overlooked activity that plays a key role in a company’s
success when done with care and attention to the organization’s objectives. Many surveys have shown
that employees leave companies when they feel they have not been paid fairly for what they do.
Time and resources spent developing a salary structure and communicating the process to staff will
result in fewer departures and higher motivation.
Though not easily done, it is effort well spent and will lead your company to success!

 What Does Pay Frequency Mean?

Pay frequency is the amount of time between an employee’s paydays. It determines how often you pay
employees. There are four pay frequency options: weekly, biweekly, semimonthly, and monthly.
What does salary frequency mean to employees? The pay frequency you choose will determine the
number of paychecks an employee receives.
Now that you know the payment frequency definition, it’s important to know that it will not impact an
employee’s tax liability or net pay. Over time, the employee takes home the same amount of pay.
Your industry might dictate which pay frequency you use. Certain jobs pay weekly while others tend
to pay monthly. For example, according to the Bureau of Labor Statistics, 70.6% of construction
workers are paid weekly while only 12.6% of education and health services employees are paid
weekly.
The number of employees you employ might also impact your pay frequencies. For example, 72.9%
of companies with 1,000 and more employees use a biweekly pay frequency while only 31.5% of
businesses with 1-9 employees pay biweekly, according to the BLS.

The type of workers you employ can also play a part in your business’s pay frequency. You might be
wondering, is salary paid weekly or monthly? The answer isn’t so cut and dry—it depends. In some
cases, hourly workers are the ones who are paid weekly because they do not follow a set schedule like
salary employees. You can establish different pay frequencies for salary vs. hourly employees,
although this might get confusing if you run payroll by hand.

 Types of pay frequency options

Now that we’ve answered “What is pay frequency?”, you might want to learn more about each of the
four options— weekly, biweekly, semimonthly, and monthly— to help you pick the right one for your
small business.
1. Weekly
Under a weekly pay frequency, employees receive their wages each week. Their paychecks are less
money and more frequent. You will need to run payroll more often than with any of the other
frequencies.

Weekly pay frequencies are the second most common option with 32.4% of employees falling under
this category. Different industries and company sizes differ from this statistic, however. Businesses
with fewer employees might choose to use weekly pay frequencies more than companies with many
employees.

An employee paid weekly receives 52 paychecks per year.

2. Biweekly
With a biweekly pay frequency, you pay employees every other week. Employees will receive their
wages the same day each pay period, like on a Friday of each week. Employees receive two paychecks
each month, although some months differ. There are two months in the year where employees receive
three paychecks instead of two.

According to the BLS, 36.5% of employees are paid biweekly, making it the most popular pay
frequency. Again, keep in mind that different industries and company sizes can impact this statistic.
A biweekly pay frequency is a happy medium between weekly and monthly pay frequencies. If you
pay employees biweekly, they will receive 26 paychecks over the course of one year.

3. Semimonthly
It can be easy to confuse semimonthly pay frequencies with biweekly schedules because employees
receive wages twice per month with both (for the most part). But with a semimonthly pay frequency,
you pay employees on specific dates, but the days might differ. For example, you can pay an
employee on the 15th and 30th of each month. These dates can fall on any of the seven days of the
week.

A semimonthly pay frequency can be difficult for employers and employees to keep track of.
Employees can receive their wages on a Sunday or a Friday, all depending on the day the date falls.

Semimonthly pay frequencies are the third most popular payment option. The BLS reports that 19.8%
of employees are paid semimonthly.

With a semimonthly pay frequency, you will give employees 24 paychecks each year, compared to 26
with biweekly pay frequencies.
4. Monthly
If you pay employees monthly, they will receive one pay check per month. Their pay checks are more
money but less frequent. Monthly pay checks can make financial planning difficult for some
employees.

Only 11.3% of employees are paid monthly, making it the least common pay frequency. Under a
monthly pay frequency schedule, you give employees 12 paychecks per year.

 Pay frequency laws

Before you create a pay frequency schedule, you need to understand the laws that surround paying
employees.

1. Federal pay frequency law

Although no federal law says what pay frequency you must choose, you are required to keep the same
pay frequency throughout the year for each employee. You cannot change up an employee’s pay
frequency when you feel like it.

2. Pay frequency requirements by state

There might not be a federal law regarding pay frequency, but there are state requirements. Each state
regulates employee pay differently, so it’s no surprise that there are rules on pay frequencies.
For example, employers in Maine must pay employees at regular intervals that do not exceed 16 days
while Nebraska employers get to choose pay frequencies.

The Department of Labor offers an easy-to-use table that outlines pay frequency requirements
by state. Before deciding on frequency, check with your state laws.

 Things to keep in mind when choosing a pay frequency

Before selecting a pay frequency, remember to take the following into account:

Industry
Number of employees
Hourly vs. salary workers
State laws
These four factors aren’t the only things you should consider, however. You also need to keep
in mind things like how long payroll will take you and hidden fees associated with some
frequencies. For example, you might pay more money when you run payroll more frequently.

If you have a weekly pay frequency, you will be running more payrolls than with any of the
other pay frequencies, which takes up more time and energy. With payroll software, you can
significantly cut back the time it takes you to run payroll. And, you get to choose the frequency
that works for your business.
Keep in mind that some payroll software companies charge you based on the number of
payrolls you run each month. You could end up paying more to run weekly payrolls than
running biweekly, semimonthly, or monthly payrolls. However, some software options, like
Patriot Software, charge you the same amount regardless of which payroll frequency you
choose.

FACTORS AFFECTING EMPLOYEE COMPENSATION

The Compensation is the monetary and non-monetary rewards given to the employees in return for
their work done for the organization. Basically, the compensation is in the form of salaries and wages.
There are several internal and external factors affecting employee compensation
1. Internal factors

The internal factors exist within the organization and influence the pay structure of the company.
These are as follows:

(i) Ability to Pay- The prosperous or big companies can pay higher compensation as compared
to the competing firms whereas the smaller companies can afford to maintain their pay scale up
to the level of competing firm or sometimes even below the industry standards.

(ii) Business Strategy- The organization’s strategy also influences the employee compensation.
In case the company wants the skilled workers, so as to outshine the competitor, will offer more
pay as compared to the others. Whereas, if the company wants to go smooth and is managing
with the available workers, will give relatively less pay or equivalent to what others are paying.

(iii) Job Evaluation and Performance Appraisal- The job evaluation helps to have a
satisfactory differential pays for the different jobs. The performance Appraisal helps an
employee to earn extra on the basis of his performance.

(iv) Employee- The employee or a worker himself influences the compensation in one of the
following ways.
 Performance- The better performance fetches more pay to the employee, and thus with
the increased compensation, they get motivated and perform their job more efficiently.
 Experience- As the employee devotes his years in the organization, expects to get an
increased pay for his experience.
 Potential- The potential is worthless if it gets unnoticed. Therefore, companies do pay
extra to the employees having better potential as compared to others.

2. External Factors
The factors that exist out of the organization but do affect the employee compensation in one or
the other way. These factors are as follows:

(i) Labor Market- The demand for and supply of labor also influences the employee
compensation. The low wage is given, in case, the demand is less than the supply of labor. On
the other hand, high pay is fixed, in case, the demand is more than the supply of labor.

(ii) Going Rate- The compensation is decided on the basis of the rate that is prevailing in the
industry, i.e. the amount the other firms are paying for the same kind of work.

(iii) Productivity- The compensation increases with the increase in the production. Thus, to earn
more, the workers need to work on their efficiencies, that can be improved by way of factors
which are beyond their control. The introduction of new technology, new methods, better
management techniques are some of the factors that may result in the better employee
performance, thereby resulting in the enhanced productivity.

(iv) Cost of Living- The cost of living index also influences the employee compensation, in a
way, that with the increase or fall in the general price level and the consumer price index, the
wage or salary is to be varied accordingly.

(v) Labor Unions- The powerful labor unions influence the compensation plan of the company.
The labor unions are generally formed in the case, where the demand is more, and the labor
supply is less or is involved in the dangerous work and, therefore, demands more money for
endangering their lives. The non-unionized companies or factories enjoy more freedom with
respect to the fixation of the compensation plan.

(vi) Labor laws- There are several laws passed by the Government to safeguard the workers
from the exploitation of employers. The payment of wages Act 1936, The Minimum wages act
1948, The payment of Bonus Act 1965, Equal Remuneration Act 1976, Payment of Gratuity Act
1972 are some of the acts passed in the welfare of the labor, and all the employers must abide by
these.

Thus, there are several internal and external factors that decide the amount of compensation to be
given to the workers for the amount of work done by them.

 How Inflation Affects Employee Compensation

If you’ve been looking at your gas or grocery bill and thinking, “Well, this seems higher than usual,”
you’re not imagining things. The United States is currently experiencing a period of inflation — and
the rising prices that go along with it.

Inflation is challenging for a variety of reasons. But for employers, it poses a serious question: As
inflation continues, what impact does it have on employee wages?

Below, we’ll take a closer look at how inflation impacts wages, what you need to keep in mind when
adjusting compensation for inflation, and why it’s important to take the rising cost of living into
consideration and make changes to your pay plan accordingly.

What Is Inflation — and How Is It Affecting Today’s Economy?

While it can seem like a complicated economic concept, “inflation is simply the sustained increase of
prices throughout the economy,” explained Timothy F. Kearney, PhD, economist, market strategist,
and Assistant Professor of Business at Centenary University in Hackettstown, NJ.

More specifically, the International Monetary Fund (IMF), a global organization focused on
promoting sustained economic growth and reducing worldwide poverty, defines inflation as:

Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad
measure, such as the overall increase in prices or the increase in the cost of living in a country. But it
can also be more narrowly calculated — for certain goods, such as food, or for services, such as a
haircut, for example. Whatever the context, inflation represents how much more expensive the
relevant set of goods and/or services has become over a certain period, most commonly a year.
A certain amount of inflation is part of a normal economy. “Inflation under 2.0% annually is generally
healthy for the economy as it shows growth,” said Kyle Asman, Managing Partner of Orlando-based
private investment fund Backswing Ventures.

It’s when inflation starts to cross over the 2% threshold that things can get challenging. “Over 2.0%, it
becomes a drag on the economy as prices increase too rapidly for consumers to absorb,” Asman said.

At this rate, we’re well past that threshold. “Currently, consumer price inflation is 5.4%,” said
Kearney. And high inflation rates are expected to last through the rest of the year; the United States
Office of Management and Budget (OMB) recently changed its inflation outlook forecast for Q4
2021 — from 2.1% (the forecast in May) to 4.8%.

The current inflation is being driven by a variety of factors (including disruptions in supply chains and
continued COVID-related challenges), but the impact is felt by businesses and consumers alike.

“With inflation, businesses lose profits if they cannot pass on their input prices to their customers,”
said Kearney. “Longer term, inflation makes it difficult for firms to plan for the future.”

The good news is most experts expect this wave of inflation to be temporary, and that the economy
will be in a much better position in the coming years (OMB forecasted that inflation will drop to 2.5%
by Q4 2022 and 2.3% by 2023).

The Impact Inflation Has on Wages

Generally, you consider giving your employees a raise because of tenure or performance, but inflation
can also play a role.

Inflation has a direct impact on the purchasing power of the dollar — which, in turn, has a direct
impact on the value of your employees’ compensation packages. “When inflation rises, the purchasing
power of compensation does fall,” Kearney noted.

And when you combine the declined value of the dollar with the labor shortages the US is currently
experiencing (and the corresponding demand for workers), it’s clear that employees’ expectations
around compensation are changing. According to data from the Federal Reserve Bank of New York,
in March 2021, the mean annual salary job seekers expected from their job offers was $60,610 — up
from $53,676 in March 2020, an increase of nearly 13%.

So if you want your organization to stay competitive and attract and retain top talent, it’s crucial to
review your compensation plans — and make any adjustments necessary to ensure your employees
are receiving wages that make sense for today’s economic climate.

Adjusting Compensation Plans to Keep Up With Inflation

How, when, and how much you adjust your compensation plans will depend on a variety of factors.
For example, if your business employs hourly workers, you probably have a set schedule for wage
increases (e.g. annually). But in the face of current inflation numbers, you may need to adjust their
hourly rate sooner than you typically do.

“Most compensation increases are done on an annual basis,” Asman said. “But when you have 5-6%
inflation, a consumer is going an entire year with 94-95% of the purchasing power [of] the prior year.”
Workers with a lower wage can also have a harder time navigating the financial challenges of
inflation, which should be an added incentive to increase wages as soon as possible.

“The impact of inflation is significantly worse for hourly wage workers,” Asman pointed out.
“Someone making $200,000 annually is a lot less likely to be affected by an extra $20 to fill up their
car with gas — versus someone making $10 per hour who now needs to work an additional two hours
to fill up.”

Increasing hourly wages will, of course, increase your labor costs, but generally, those increases are
manageable. Wage increases for more highly compensated employees, on the other hand, can be a bit
trickier. Increasing wages for employees with higher salaries locks you into that salary moving
forward (even if inflation returns to a more manageable level), which, when extrapolated across the
company, can put a major strain on your budget.

Plus, whether you’re dealing with hourly or salaried employees, constantly trying to adjust wages for
inflation can be like chasing a moving target: “Increasing salary or hourly wages can't always keep up
with the pace of inflation,” said Asman.

That’s why many companies opt for another kind of wage increase. “More highly compensated
employees often receive bonuses,” Kearney said. This type of compensation increase can be attractive
because “firms can tweak pay without the risk of locking in raises into [future] years,” he noted.

How much you increase wages will also depend on a variety of factors. Some things to consider when
adjusting your employee compensation strategy for inflation include:

• Competitor Compensation: If you want to attract and retain top talent, you need to pay them a
competitive wage. Doing competitive research (for example, using Salary.com or Glassdoor’s
Salary Index) can give you insights into how much your competitors are paying (and how much
they’re increasing wages during this time of increased inflation), which can help you adjust
your compensation plans accordingly.
• Budget: If you’re planning to increase employee compensation, you need to find that money
somewhere, which means you need to look in your budget to determine how you are going to
 account for increased labor costs. Can you increase the price of your products or services? Are
there areas where you can cut back spending to make room in your budget for increased wages?
Examine this closely to see what makes the most sense for your organization and your
employees.
• Inflation Projections: As mentioned, the Office of Management and Budget expects inflation
to return to more manageable levels in 2022, which could impact how and how much you
increase employee compensation. For instance, if you feel confident that inflation will return to
normal levels over the next few months, you may consider giving employee bonuses versus
salary increases to tide over your staff until things stabilize. On the other hand, if you believe
that inflation is here to stay through 2022 and beyond, increasing employee wages for the long
term might feel like the better solution.
—

At the end of the day, inflation diminishes the value of the dollar. And in order to ensure that
employees can stretch their dollars enough to cover their needs, it’s essential for organizations to
rethink their approach to employee compensation and make any changes necessary to help their staff
weather the challenges of the current inflated economy.
Employees need to be compensated fairly for the work they do for your company, and while at face
value this is an added expenditure, it will ultimately benefit your organization, too. You don’t want
your staff coming to work distracted by financial worries because their pay hasn’t kept pace with
inflation. Pay your employees fairly — which includes adjusting for changes in response to the greater
financial climate — and they can focus on their work and not be distracted by how to feed their
families, afford their commute to the office, or manage other pressing financial stressors.