23352847 Compensation Management 1

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COMPENSATION MANAGEMENT

INTRODUCTION


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INTRODUCTION :

The term compensation as a substitute word for wages and salaries,is of recent origin. Wages is now considered as a cost factor.Therefore, strategic management of wages and salaries is veryimportant for organisations.

It has become imperative for organisations to balance the cost ofcompensation and employee motivation (for retention) to survivein a competitive world.

Employee compensation is a better term than employee benefits orwages or salaries. What the employee provides the employer is alabor service, usually known as work. This labour service consists ofmany different kinds of employee behaviour, such as showing upregularly and on time, carrying out tasks dependently, cooperativewith others and making useful suggestions.


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Pay or compensation represents an exchcange between the employee

and the organisation. Each gives something in return for something else.

In the past, the compensation issue was often confidential and governed

by individual employers preference and choice.

However, in todays competitive world, compensation issues are more

transparent.

Different scholars in different countries, have defined the world

compensation from different perspectives. Globally, almost every country

views compensation as a measure of justice. Also, some countries

(particularly developed ones) consider compensation as a means of

protection against potential job loss.

Compensation should be fair, irrespective of economic consideration.

Many scholars believe that compensation is the outcome of productivity.

In India, right from Vedic Age, the volume of work and the time required

to perform the work were considered to decide compensation.


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In Europe, the Church advocated the principles of justwage or compensation. The word compensation maybe defined as all forms of financial returns, tangible;services and benefits that an employee receives in

his/her tenure of employment. The modern definition of compensation, however,

considers both intrinsic and extrinsic components ofcompensation. While extrinsic compensation coversboth monetary and non-monetary rewards, intrinsic

compensation covers both monetary and non-monetary rewards, intrinsic compensation reflects theemployees mental satisfaction with their jobaccomplishments.


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Wages and Compensation :

A wage is a basic compensation for labour and for Labourper period of time referred to as the wage rate. Otherfrequently used terms for wages are payment per unit of

time (typically an hour or year) Total compensationrepresents earnings and other benefits for labour.

Wage Income represents total compensation and unearnedincome. Wages are also referred to as economic rent, whichis the figure of total compensation, after reducing the

opportunity cost. Opportunity cost represents the cost ofsomething in terms of an opportunity forgone (and thebenefits which could be received from that opportunity) orthe most valuable forgone alternative.


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The term wages has emerged from French Wordwagier or gagier meaning to pledge or promise. Theterm wage is thus meant ;to indicate making a promisein monetary form.

Marxian economics suggests that the payment ofwages to workers should be based on the optimalallocation of cooperative human labour. Marxists viewthat workers participation in the production processcan be oppressive, irrational and exploitative on the

one hand and can be beneficial to the other. Thus, itbelieves that the most desirable form of labourorganisation in the workplace is one where workersmanage themselves collectively, and elect managers.


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From financial perspective, wages are defined as the cash paid for somespecified quantity of labor, in contrast with salaries. Wages are paid basedon wage rate (based on units of time) while salaries are paid periodicallywithout reference to a specified number of hours worked. Given anestablished job description , wages can often be negotiated by workersthrough collective bargaining.

Differences between Wages and Compensation : The term labour cost is best understood from the International Labour

Organisation (ILO) Geneva. Labour cost is the cost incurred by theemployer in the employment of labour. This also includes payments inrespect of time paid for but not worked, bonuses, gratuities, the cost offood, drink and other payments in kind, the cost of workers housing

borne by employers, employers social security expenditures, the cost tothe employer for vocational training, welfare services, miscellaneousitems, such as transport of workers, work clothes and cost of recruitmentand taxes paid by the employers on employment.


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From the employers perspective, therefore, thecompensation consists of all payments (in kind or in cash)and all contributions to employees social security, pension,insurance etc.

Labour cost and the compensation of employees are thusclosely-related concepts, with many common elements.The major part of labor cost comprises compensation ofemployees. However, definition of labour cost and thecompensation of employees differ from country to country.For example, some items of labour cost such as vocational

training are borne not by employers but by respectivegovernment s. In India, the Central Board for WorkersTraining and the Regional Labour Institutes provide eitherfree or subsidized training for industrial workers.


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The States contributions to wage-related social security schemesare not included in the cost of compensation for employers. Insome countries, payroll taxes or ;employment taxes are consideredas labour costs.

In Human Resource Management we consider the term from a

broader perspective, that is, the strategic use of wages paid toemployees. Some organisations refer to use the term rewardsinstead of wages or compensation.

Compensation or wage structure in a given case should take intoaccount industrial adjudication as well as considerations of rightand wrong and fairness and unfairness. Given social conscience and

the welfare policy of the state, collective bargaining is now the mostdynamic form of negotiation to decide wage structure in aparticular organisation.


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Wage issues are no longer purely mathematical issues.It was with this perspective that the framers of theConstitution drew up Article 43 (part of the directiveprinciples of State Policy) which states that The State

shall endeavour to secure, by suitable legislation oreconomic organisation or in any other way, to allworkers agriculture, industrial or otherwise work , aliving wage, conditions of work ensuring a decentstandard of life and full employment of leisure and

social and cultural opportunities. The declaration ineffect, assured labour that where they were not able tosecure a living wage for themselves, the government,through legislation or means will come to their aid.


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Two aspects of the States role prevent employers from taking undueadvantage of workers-strong bargaining strength and direct participationof the state in the economic life of the nation.

Wage Components :

Although the term wage is an encompassing and includes any form offinancial support and benefits , in a narrower sense wages are the pricepaid for the services of labour.

Broadly, there are two wage components the base or basic wages andother allowances. The basic wage is the remuneration, by way of basicsalary and allowances which are paid or payable to an employee in termsof the contract of employment` for the work done.

Allowances are paid in addition to the basic wage to ensure that the valueof basic wage to ensure that the value of basic wages does not fall over aperiod of time. Some allowances are statutory , while others arevoluntary.


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Most organisations pay allowances such asholiday pay, overtime pay, bonus and socialsecurity benefits.

Under Sec. 2(m) wages includes Wages for leaveperiod, holiday pay, overtime pay, bonus,attendance bonus etc. Any award of settlementand production bonus if paid, constitutes wages.But under Payment of Wages Act, 1948

Retrenchment compensation , payment in lieu ofnotice and gratuity payable on dischargeconstitute wages.


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The following types of remunerations are excluded from the purview ofwages :-

Bonus or other payments under a profit-sharing scheme, which do notform part of the contract of employment.

Value of any house accommodation, supply of light, water, medicalattendance.

Any sum paid to defray special expenses entailed by the nature of theemployment of a workmen.

Any contribution to Pension, Provident Fund or a scheme of socialsecurity and insurance benefits.

Any other amenity or service excluded from the computation of wages by

a general or special order of an appropriate governmental authority. A wage level is an average of the rates paid for the jobs of an

organisation., an industry , a region or a nation. A wage structure is ahierarchy of jobs to which wage rates have been attached.


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Objectives of Compensation :

The objectives of compensation or wages can be classified

under four broad categories equity, efficiency, macro-

economic stability and optimum allocation of labor. Equity : The first category is equity, which may take several

forms. It includes income distribution through narrowing of

inequalities, increasing the wages of the lowest paid

employees, protecting real wages (purchasing power ) and the

concept of equal pay for work of equal value. 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.


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Efficiency : It is often closely related to equity, because two

concepts are not antithetical. The objectives of efficiency are

reflected in attempts to link a part of wages to productivity or

profit, group or individual performance acquisition and

application of skills and so on.

Macro-economic stability It can be achieved through high

employment levels and low inflation. For instance, an

inordinately high minimum wage would have an adverse

impact on levels of employment. Efficient allocation of labour : The efficient allocation of labor

in the labour market implies that employees will move to

wherever they receive a net gain. Such movement may be


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From one geographical location to another or from one job to

another (within or outside an enterprise). The provision or

availability of financial incentives causes such movement. For

example, workers may move from a labor surplus or low-

wage area to a high wage area. They may acquire new skills tobenefit from the higher wages paid for skills.

When an employers wages are below market rates, employee

turnover increases. When it is above market rates,then

employer attracts job applicants. When employees move from declining to growth industries,

an efficient allocation of labor due to structural changes take

place.


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Other Objectives of Compensation :

Acquire Qualified Personnel : Compensation needs to be

high enough to attract applicants. Pay levels must respond

to the supply and demand of workers in the labour market

since employers compete for workers. Premium wages are

sometimes needed to attract applicants already working for

others.

Retain Current Employees : Employees may quit when

compensation levels are not competitive, resulting in high

turnover.

Reward Desired Behaviour : Pay should reinforce desired


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Behaviorus and act as an incentive for such behaviour to

occur in the future. Effective compensation plans reward

performance, loyalty, experience, responsibility and other

behaviours.

Control Costs : A rational compensation system helps an

organisation obtain and retain workers at a reasonable cost.

With effective compensation management, workers might

be over-paid or under-paid.

Comply with Legal Regulations : A sound wage and salary

system considers the legal challenges imposed by the

Government and ensures the employers compliance.


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Facilitate Understanding : The compensation management

system should be easily understood by human resource

specialists, operating managers and employees.

Further Administrative Efficiency : Wage and salary

programmes should be so designed that they can be managed

efficiently.

Principles of Compensation Formulation : The main factors

affecting wage or compensation levels within an organisation

are external relativities, salary and individual worth.

External relativities Market rate as affected by supply,

demand and general movements in pay levels.


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Individual worth : The value of the individuals performance to

the organisation.

Determinants of Wage Rates : Wage rates are either the

products of market forces (supply and demand). In the United

States, market forces determine wage rates. In Japan, seniorityis still the dominant factor for wage determination. Several

countries, including have enacted a statutory minimum wage

rate that fixes the price of certain kinds of labour.

While market forces determine the wage rate in mostdeveloped countries, workers often negotiate their wage rate

in most developed countries, workers often negotiate their

wage rate through collective bargaining wherever Unions are

present.


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Theories of Wage Determination : There are two key

theories to determine wages the traditional theory of

wage determination and the theory of negotiated wages.

Traditional Theory of Wage Determination : This theory

assumes that market forces, that is, demand and supply

determine wages. Computer programmers are in short

supply, so they are able to command higher salaries. In our

country, many organisations pay very high salaries to entry-

level IT professionals, who sometimes get more than senior

managerial employees in other sectors. This is because of

demand and supply gap.


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Theory of Negotiated Wages : Union employees can

negotiate salaries. This is done through collective bargaining .

Normally, in any unionised organisations Unions periodically

submit their memorandum to the management, asking for

wage raises to keep pace with market standards andorganisational profitability.

Principles of Compensation Determination :

Subsistence Theory: David Ricard (1772-1832) advocated this

theory. In Ricardos words, workers ;shoul dbe paid To enablethem to subsist and perpectuate the race without increase or

diminuation. The theory is based on the notion that if

workers are paid more than the subsistence wage their

numbers will increase as they would procreate more


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And this would bring down the rate of wages. If wages fell down

below the subsistence level, the number of workers would

decrease, as many would die of hunger, malnutrition, disease, cold

etc and many would not marry. When this happened wages would

increase again. In economics, the subsistence theory of wagesstates, that in the long run, wages will be reduced to the minimum

level needed to keep workers alive.

Wages Fund Theory : This theory was developed by Adams Smith

(1723-1790) on the assumption that wages are paid out of a

predetermined fund of wealth, the surplus savings of the wealthy.This fund could be utilised for employing labourers for work. If the

fund was large, wages would be high; if it was small , ages would be

reduced to subsistence level. The demand for labour and the level

of wages were determined by the size of the fund.


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Surplus Value Theory : The surplus value theory owes its developments to

Karl Marx (1818-1883) According to this theory, labour was an article of

commerce, which could be purchased on payment of the subsistence

price . The price of any product was determined by labor and time

needed for producing it. The labour was not paid in proportion to the time

spent on work, but was paid much less, and the surplus was utilised forpaying other expenses.

Residual Claimant Theory : The residual claimant theory advocated by

Francis Walker (1840-1897) assumes that there are four factors of

production/business activity land, labour, capital and entrepreneurship.

Wages represent the amount of value created in the production, whichremains after payment has been made for all these factors of production.

In other words, labour is the residual claimant.


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Marginal Productivity Theory : This theory assumes that wages

are based upon an entrepreneurs estimate of the value that will

probably be produced by the last or marginal worker.

Types of Wages in India :

Any minimum rate of wages or revised may consist of a basic rate ofwages and a special allowance

The Central Government appoints a Central Advisory Board to

advise the central and state governments on the fixing and revising

of the minimum rate of wages.

Wages in Kind : Minimum wages payable under this Act are to be

paid in Cash. However, the payment of minimum wages can be

made partly in cash and partly in kind.


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Payment of minimum rate of wages : The employer is

required ton pay every employee, engaged in a scheduled

employment under him, wages at a rate not less than the

minimum rate of wages notified for that class of employee,

without any deduction except as may be authorised.

Overtime : If any employee whose minimum rate of wages is

fixed under the Act works on any day in excess of the number

of hours constituting a normal working day, the employer is

required to pay him for excess hours at the overtime rate fixedunder this Act or under any law of the appropriate

government for the time being in force, whichever is higher.

A rest day should be allowed in a week.


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Living Wage : Living wage is defined as 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 comfort, including education for his children,

protection against ill-health, requirements of essential socialneeds and a measure of insurance against more important

misfortunes, including old age.

The Supreme Court has ruled that minimum wage must be

paid in any event, irrespective of any extent of profits, thefinancial condition of the establishment or the availability of

workers at lower wages.


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The wages be fair, that is, sufficiently high to provide a

standard family with food, shelter, clothing, medical care and

education of children appropriate to the workers.

Wages must be paid on industry-wise and regionwise basis,

having due regard to the financial capacity of the unit.

Fair Wage : Fair wage represents the wage above the

minimum wage but below the living wage. The lower limit of

the fair wage is obviously the minimum wage. The fair wage

is an adjustable step.

Wage Board The Government aware of the problems of the

organised labour sector felt that the trade unions had

inadequate bargaining power.


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The Wage Boards are tripartite in character. , that is

representatives of workers, employers and independent

members. The utility of these boards are debatable. So far

Government has appointed wage boards for Journalists and

non-journlist newspaper organisations, Sugar Sector.

Types of Executive Compensation : Executive compensation

packages typically comprise the following components :-

1.Base salary 2. Annual incentives 3. Long term compensation

(shares) 4. Special severance and retirement arrangements.

Compensation Trends in India :

There is a substantial difference in gross compensation for

Managers and their immediate subordinates.


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Companies design personalised salaries out of a basket of options

for individuals at senior levels.

There has been a significant increase in basic salary, and hence in

deferred benefits.

Companies have restricted non-tax perks in the form ofreimbursement under various heads to certain top levels of

management.

Companies provide higher annual increases, average increments

varying from 50% to 100% to different levels of management.

A soft furnishing allowance is being provided towards the purchase

of curtains, carpets, cutlery and crockery and this is usually paid as

an annual, non-taxable allowanace.


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Loans to bury-two and four wheelers are a common practice.

Interest rates may vary, with the repayment period.

Medical benefits are common, with tie-ups with insurance

companies and hospitals in many cases. Companies organise

annual medical check-ups for all employees.

Club memberships in the form of reimbursement of the one-

time joining fee and or annual subscription to one or more

clubs is an attractive perk for senior management.

Soft loans for purchase of furniture, appliances and

computers re also extended to employees by some

organisation.

Housing loan or interest subsidy is also provided.


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Companies reimburse books, periodicals, newspapers, journals etc.

Leased accommodation is provided.

Elements of Employee Rewards in India :

Basic pay or base pay is the level of pay that constitute the rate for the job.

It may act as a platform for determining additional payments related toperformance, competence or skills. It may also govern pension

entitlement.

Additions to Base Pay :

Individual Performance-related Pay : Increases in base pay or cash bonuses

are determined by performance assessment and ratings (also known asmerit pay).

Bonus It refers to rewards for successful performance and may be

related to the results by individual, team or the organsiation.

Commissions a special form of incentive in which sales representatives

are paid on the basis of a percentage of the sales value they generate.


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Allowances : Elements of pay in the form of a separate sum of

money for such aspects of employment as overtime.

Employee benefits These benefits are also known as

indirect pay. These include pensions, sick pay, insurance cover

and company cars.

Non-financial reward : It includes any reward that focuses on

the need people have in varying degrees for achievement,

recognition, responsibility and personal growth.

Employee Stock Options : Stock options are common in

executive compensation. By offering stock options

particularly, companies may dilute ownership, infuse a sense

of belongingness.


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Compensation Plan : Compensation Plan is defined as the

components of organisational compensation. A strategic

compensation plan should emphasise employee retention ,

cost efficiency and a performance-driven culture.

Compensation Practices in India : The elements of CTC arebasic pay, HRA, CCA and other allowances, PF contribution,

medical reimbursement, food coupons etc. Thus CTC in reality

can be defined as the annual total cost of compensation to

the company, which employees may not get on hand.


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Performance-Related Compensation Management

Performance Related Compensation : Employees form the

core strength of any organisation. An effective performance

management system ensures good quality of employees. The

performance system links the ability and contributions of

employees, individually and as a team, to the overallperformance of the organisation.

A performance appraisal system in any organisation is used to

formally analyse, review and evaluate performance of an

employee. Performance Related Pay : The term performance-relatd pay

encompasses several companywide schemes, such as

employee participation and share ownership schemes which

are awarded to the employees.


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Performance-Related

Compensation Management Performancerelated pay enhances corporate performance in

a competitive environment. When performance and pay are

linked together, it would be reflected in employee behaviour.

For example, when organisations focus on customer

satisfaction, employees also focus on this aspect, ensuringquality of goods and services.

Collective relationship in the workplace are a common

organisational pursuit to achieve teamwork. Workplace and

employer relationship can be decollectivised byindividualising, particularly reward mechanisms. Performance

related pay can be used in teamwork environment i.e. social

partnership.


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Performance-Related

Compensation Management Organisations adopt various strategies depending upon their

business priorities. A common cost minimising strategy

requires different range of behaviours. An organsiation has to

devise a PRP (Performance Realated Pay) structure in tune

with its strategies. Monitoring and evaluation are important and organisations

often lack focus in these areas . In teamwork systems, linkage

between the base pay and team contribution hardly exist.

Many interesting team performance bonuses and gain-sharingscheme are available.

Employee soften perceive compensation of senior managers

as being disproportionately higher.


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Performance-Related

Compensation Management In most of the organisations, PRP is designed by the top

management and then implemented down the line.

Participation and involvement of all cross-sections of

employees is essential. The employees also feel that they are

pat of the organisation and hence cooperate inimplementation.

PRP can be designed either based on individual performance

criteria, such as piece rate wages or collective performance

pay schemes such as profit-sharing. Empirically it wasestablished that PRP increases productivity of any

organisation substantially.


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Selection of Performance Objectives :

Performance research should delving into the issues of identifying

the performance objectives both for the individual employee and

also for the organisation as a whole. The performance objectives

must be : (1) focused on a result (2) consistent (3) specific (4)measurable (5) related to time (6) attainable.

Developing Performance Standards : For effective compensation

design, developing performance standards is an important task. For

example, Task description Write Annual Reports Standard

Produce Monthly Reports as per departmental format and submitto Business Heads within 5 working of the close of the beginning of

calendar month.

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Performance-Related

Compensation Management

Guidelines :

Performance Standards should be related to the employees

assigned work and job requirements (check job descriptions)

Quantifiable measures may not apply for all functions.Describe in clear and specific terms the characteristics of

performance quality that are verifiable ad that would meet or

exceed expectations.

Accomplishment of organisational objectives should be

included where appropriate, such as cost control, improv3ed

efficiency, productivity, project completion, customer service

etc.

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Performance-Related

Compensation Management

Check list :

Are the standards realistic ? Are the standards specific ? Are

the standards based on measurable data ? Are the Standards

consistent with organisational goals ? Standards should link

individual and team performance to organisational goals ?

Are the standards challenging ? Recognising performance

that is above expectations or outstanding is crucial to

motivating employees.

Are the Standards dynamic ? As organisational goals,

technologies change, standards should evolve.

f l d


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Performance-Related

Compensation Management Compensation Design Through Skill-Based Programmes :

Compensation design through a skill-based programme

rewards employees for attainment of additional skills and

knowledge. A skill-based pay system enables employees to

enjoy addition payment of compensation for new learning.

This process can develop multi-skilled employees in an

organisation, competent to execute jobs in different cross-

functions. Fro example, Bank employees become eligible for

additional increments after completion of CAIIB examination.College Lecturers become eligible to get additional increments

after completing Ph.D course.


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Competency Based Pay : Theoretically, in todays

organisations, the term competency, rather than skill is used.

Competency is more holistic, as it aggregates knowledge, skill

and abilities of employees, integrated with the behavioural

requirements. Instead of compensating for the position andthe job title, competency-based pay emphasises on the job

accomplishments, much wider than job efficiency (outcome of

skill only).

The major goal of any compensation programme is tomotivate employees to deliver their perforamance. Merit-

based pay mainly focuses on employee performance.


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Team Based Compensation Management

Introduction : The team-based compensation system rewards

employees who work in a team. This means that individual

employees are compensated based on the team performance.

It has been proved that employees working in a team deliver

better results than those who work individually. It alsorequires the adoption of a collective performance evaluation

method, rather than individual assessment based on the

result areas (KRAs). A team based compensation system

emphasises on team performance. Team based rewards , therefore, reward the behaviour of

people working in a team who can sustain team performance.

T B d C i


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Team Based Compensation

Management Organisations adopted the idea of team work during the late

eighties, when teamwork was found more effective and

competitive operationally. The collective efforts of people in

a team setting increase overall performance and productivity.

Teamwork helps organisations benefit from synergy,cooperation and the unity of command. It is driven by one

aim/goal, provides flexibility, and ensures better customer

service. However, teamwork can only be efficient if the team

is composed of like-minded , intelligent people, not justintelligent people.

Designing team-based compensation in an organisation is

operationally not always possible. This is because absolute

T B d C ti


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Management Teamwork is often more a myth than a reality. It may be done

through monthly or quarterly rewards to employees, based on

the degree of their improvement in performance.

Usually 5 to 10% of base pay is provided as an incentive to

reward individual employees. Apart from team performancecriteria, team members contribution to productivity, cost

savings and quality are the other elements considered for

team-based compensation. Gift is the common example of

non-financial team-based compensation. Lumpsum rewards, irrespective of base pay is a convention

used by organsiations in rewarding team members.

T B d C ti


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Management Moreover, organisations customise team-based

compensation based on organisational strategy. Team based

compensation encourages members to cooperate, as they are

rewarded based on the performanace of the team as a whole.

Individual rewards consisting of enhanced rate of bonus,promotions, increment etc are often considered against the

principles of collectivism. Relative rewards naturally induce

competition and a moderate rate of competition in teamwork

is always possible. Group Incentive Plans : In team-based compensation design,

providing a group incentive to team members is often

common.

T B d C ti


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Management The entire team shares the reward based on performance

gains, which are linked to the overall profitability of the

organisation. To design an effective group incentive plan, an

organisation should first identify performance targets and the

standards of performance required to achieve theperformance targets. It then needs to document these

standards so that it can properly guide team members. In the

said documentation, the organisation also needs to specify

how rewards will be allocated. The group incentive plan thus helps the team members to

focus on specific performance targets.

T B d C ti


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Management Effective Design of team-based compensation : Organisations

need to link the proposed compensation design with the

strategy, culture and competencies of employees.

Understand the nature and types of teams and job categories,

evaluate performance properly and design a system. Organisations can have different types of teams Project

team, hybrid teams, parallel team.

Parallel team members are temporarily assigned some tasks

to accomplish. They are selected from different functionalareas. On completion of the assigned tasks or project, they

are sent back tot heir mother department. The design of

team-based compensation for a short time frame is difficult.

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Management Project Team Members work full-time in a Project Team so

the reward so the reward largely follows the principles of

equity.

The most commonly used criteria for team-based

compensation design are appropriate behaviouralcompetencieis, demonstration of skill and knowledge

acquisition, achievement of specific time-bound objectives

and quantitiive and qualitative objectives.

For a project team, results are most important criteria.


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Employee Benefits

Employee benefit is a holistic term , comprising of both wage

and non-wage components of total labor costs. Employee

benefits are known as fringe benefits or perks.

When employee benefits are given in cash it is called wage or

salary. Both the wage and non-wage components are taxableexcept a few.

Going by industry practice, we can categorize employee

benefits as group insurance, retirement benefits, contribution

to social security systems, club membership, vacation leaveetc. Most employee benefits are paid by employers, while in

some such as social security benefits are paid by employers

and employees.


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Employee Benefits

In some organisations, perks is used interchangeably with

employee benefits. Conventionally, perks denote those

employee benefits which are discretionary in nature and

usually paid to senior level employees

Companies use perks even for non-discretionary or statutorybenefits. For example, canteen facilities are mandatory for

organisations that employ more than a certain number of

employees at one work location.

Going again by industry practice, some common perks arecompany cars, hotel stays, refreshments, leisure activities etc.


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Employee Benefits

Non-Monetary benefits : Non-monetary benefits are used,

either when the organsiation feels that any additional

monetary compensation will reduce the cost-competitiveness

or when organisations strategically use this for motivation and

retension. Achieving success is the first priority. Hence any reward or

incentive, which does not strain organisational financial

health is always desirable. The aim is to motivate employees

and turn them into good performers. Although monetarycompensation is the prime mover in this respect, carefully

chosen non-monetary compensation can also do wonders.


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Employee Benefits

Non-monetary benefits can be provided in various forms

(such as stock etc.). Globally, non-monetary compensation

and benefits are gaining importance. The common non-

monetary incentives are career advancement opportunities,

flexible working hours, and opportunities to acquire new skillsand knowledge.

The young age group values recognition and career

advancement. Functional autonomy, personal recognition,

pleasant work environment , training, flexible working hoursand challenging opportunities help attract and retain

employees.


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Employee Benefits

Tax Obligations on Employee Benefits : As per tax laws,employee benefits, both monetary and non-monetary are

considered fringe benefits. In India, they are subject to tax

liabilities. Employee benefits in the form of profit sharing asreoften used by organisations as incentive plans. Profit depends

upon organisational profitability and thus it is not predictable

or regular income for employees. Many companies allot share

to their employees.

Organisations also often golden parachute clauses as

employee benefits, particularly, to protect executives from

possible termination in the event that company is acquired.

Such a benefit is severance pay.


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Employee Benefits

Similarly, a golden handshake clause entitles employees to

receive huge benefits as a severance package. Organisations

because of restructuring may often hive off employees, giving

them the option of pre-mature retirement.

In India, voluntary retirees availing golden handshakes caninvest their receipts in post offices upto a ceiling of Rs.15

lakhs to get a relatively higher rate of interest at 9 per cent

per annum.

Types of Employee Benefits : Employment Security , Unemployment allowance or

insurance, overtime pay, leave pay, pay for holidays, lay off

compensation, retrenchment compensation etc.


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Employee Benefits

Medical and healthcare : Accident insurance, disabilityinsurance, life insurance, medical care, sick leave etc.

Old Age and retirement benefits Pension, gratuity,

provident fund, old-age medical benefits for retired

employees, travelling concession for retired employees etc. Miscellaneous benefits Birthday gifts, attendance bonus,

canteen, cooperative credit societies, educational facilities,

recreational programmes etc.

Statutory benefits in India : Bonus Bonus is an extra payment payable to workmen at a

minimum of 8.33 percent as minimum. Maximum @ 20% of

Basic and dearness allowance.


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Employee Benefits

Retrenchment Compensation : The Industrial Disputes Act,

1947 provides for payment of compensation in case of lay-off

and retrenchment employing 50 or more workers.

Compensation is paid at the rate of 15 days of wages for every

completed year of service. Workers are eligible forcompensation in case of closure of undertakings.

Lay off compensation In case of lay off, employees are

entitled to 50% of the total basic wags and dearness

allowance for the period of lay off, maximum upto 345 days ina year.


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Employee Benefits

A deferred Compensation Plan is an arrangement whereby an

employee or owner defers some portion of an employees

current income unt ila specified future date.

Life Insurance can be used to fund a deferredcompensation

plan. Premiums are paid by the company. The cash value canthen be available at retirement to supplement other income.

Objectives of fringe benefits :

Create and improve sound industrial relations, boost

employee morale, motivate employees by satisfying theirneeds, provide a good work environment and work life ,

promote employee welfare


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Employee benefits

Employee benefit progra mes are necessary as they help to :-

enable employees to guard against rising prices and cost of

living, avail of the most cost-effective compensation plan,

attract and retain employees, encash the opportunities of tax

saving (wherever possible)

Demonstrate employers concern for employees

Meet the legal requirements of compensation and welfare of

employees.

Accede to the demands of the trade union.

23352847 Compensation Management 1

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