Compensation Management (1)

COMPENSATION MANAGEMENT

INTRODUCTION

COMPENSATION MANAGEMENT• 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 very important for organisations.

• It has become imperative for organisations to balance the cost of compensation and employee motivation (for retention) to survive in a competitive world.

• Employee compensation is a better term than employee benefits or wages or salaries. What the employee provides the employer is a labor service, usually known as work. This labour service consists of many different kinds of employee behaviour, such as showing up regularly and on time, carrying out tasks dependently, cooperative with others and making useful suggestions.

COMPENSATION MANAGEMENT• 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 employer’s preference and choice.

• However, in today’s 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.

COMPENSATION MANAGEMENT• In Europe, the Church advocated the principles of just

wage or compensation. The word compensation may be 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 of compensation. While extrinsic compensation covers both monetary and non-monetary rewards, intrinsic compensation covers both monetary and non-monetary rewards, intrinsic compensation reflects the employees’ mental satisfaction with their job accomplishments.

COMPENSATION MANAGEMENT• Wages and Compensation :• A wage is a basic compensation for labour and for Labour

per period of time referred to as the wage rate. Other frequently used terms for wages are payment per unit of time (typically an hour or year) Total compensation representes earnings and other benefits for labour.

• Wage Income represents total compensation and unearned income. Wages are also referred to as economic rent, which is the figure of total compensation, after reducing the opportunity cost. Opportunity cost represents the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity) or the most valuable forgone alternative.

COMPENSATION MANAGEMENT• The term ‘wages’ has emerged from French Word

‘wagier or gagier’ meaning to pledge or promise. The term wage is thus meant ;to indicate making a promise in monetary form.

• Marxian economics suggests that the payment of wages to workers should be based on the optimal allocation of cooperative human labour. Marxists view that workers’ participation in the production process can be oppressive, irrational and exploitative on the one hand and can be beneficial to the other. Thus, it believes that the most desirable form of labour organisation in the workplace is one where workers manage themselves collectively, and elect managers.

COMPENSATION MANAGEMENT• From financial perspective, wages are defined as the cash paid for some

specified quantity of labor, in contrast with salaries. Wages are paid based on wage rate (based on units of time) while salaries are paid periodically without reference to a specified number of hours worked. Given an established job description , wages can often be negotiated by workers through 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 the employer in the employment of labour. This also includes payments in respect of time paid for but not worked, bonuses, gratuities, the cost of food, drink and other payments in kind, the cost of workers’ housing borne by employers, employers’ social security expenditures, the cost to the employer for vocational training, welfare services, miscellaneous items, such as transport of workers, work clothes and cost of recruitment and taxes paid by the employers on employment.

COMPENSATION MANAGEMENT• From the employers’ perspective, therefore, the

compensation 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 thus closely-related concepts, with many common elements. The major part of labor cost comprises compensation of employees. However, definition of labour cost and the compensation 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 respective government s. In India, the Central Board for Workers’ Training and the Regional Labour Insitutes provide either free or subsidised training for industrial workers.

COMPENSATION MANAGEMENT• The State’s contributions to wage-related social security schemes

are not included in the cost of compensation for employers. In some countries, payroll taxes or ;employment taxes are considered as labour costs.

• In Human Resource Management we consider the term from a broader perspective, that is, the strategic use of wages paid to employees. Some organisations refer to use the term rewards instead of wages or compensation.

• Compensation or wage structure in a given case should take into account industrial adjudication as well as considerations of right and wrong and fairness and unfairness. Given social conscience and the welfare policy of the state, collective bargaining is now the most dynamic form of negotiation to decide wage structure in a particular organisation.

COMPENSATION MANAGEMENT• Wage issues are no longer purely mathematical issues.

It was with this perspective that the framers of the Constitution drew up Article 43 (part of the directive principles of State Policy) which states that “The State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers – agriculture, industrial or otherwise – work , a living wage, conditions of work ensuring a decent standard of life and full employment of leisure and social and cultural opportunities. “ The declaration in effect, assured labour that where they were not able to secure a living wage for themselves, the government, through legislation or means will come to their aid.

COMPENSATION MANAGEMENT• Two aspects of the State’s role prevent employers from taking undue

advantage of workers-strong bargaining strenghth and direct participation of the state in the economic life of the nation.

• Wage Components :• Although the term ‘wage’ is an encompassing and includes any form of

financial support and benefits , in a narrower sense wages are the price paid for the services of labour.

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

• Allowances are paid in addition to the basic wage to ensure that the value of basic wage to ensure that the value of basic wages does not fall over a period of time. Some allowances are statutory , while others are voluntary.

COMPENSATION MANAGEMENT• Most organisations pay allowances such as

holiday pay, overtime pay, bonus and social security benefits.

• Under Sec. 2(m) wages includes ‘Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus etc. Any award of settlement and production bonus if paid, constitutes wages. But under Payment of Wages Act, 1948 ‘Retrenchment compensation , payment in lieu of notice and gratuity payable on discharge constitute wages.

COMPENSATION MANAGEMENT• The following types of remunerations are excluded from the purview of

wages :-• Bonus or other payments under a profit-sharing scheme, which do not

form part of the contract of employment.• Value of any house accommodation, supply of light, water, medical

attendance.• Any sum paid to defray special expenses entailed by the nature of the

employment of a workmen.• Any contribution to Pension, Provident Fund or a scheme of social

security 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 a hierarchy of jobs to which wage rates have been attached.


• 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.


• 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


• 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 to benefit from the higher wages paid for skills.

• When an employer’s 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.


• 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


• 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 employer’s compliance.


• 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.


• Individual worth : The value of the individual’s 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, seniority is 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 most developed countries, workers often negotiate their wage rate in most developed countries, workers often negotiate their wage rate through collective bargaining wherever Unions are present.


• 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.


• 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 and organisational profitability.

• Principles of Compensation Determination : • Subsistence Theory : David Ricard (1772-1832) advocated this

theory. In Ricardo’s words, workers ;shoul dbe paid “To enable them 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

COMPENSATION MANAGEMENT• 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 wages states, 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.

COMPENSATION MANAGEMENT• 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 for paying 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, which remains after payment has been made for all these factors of production. In other words, labour is the residual claimant.

COMPENSATION MANAGEMENT• Marginal Productivity Theory : This theory assumes that wages

are based upon an entrepreneur’s 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

of wages 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.


• 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 fixed under 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.


• 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 social needs 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, the financial condition of the establishment or the availability of workers at lower wages.


• 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.


• 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.

COMPENSATION MANAGEMENT• 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 of

reimbursement 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.


• 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.

COMPENSATION MANAGEMENT• 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 to performance, 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 as merit 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.


• 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.


• 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 are basic 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.

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 overall performance 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.


• Performance –related 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, ensuring quality of goods and services.

• Collective relationship in the workplace are a common organisational pursuit to achieve teamwork. Workplace and employer relationship can be decollectivised by individualising, particularly reward mechanisms. Performance related pay can be used in teamwork environment i.e. social partnership.


• 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-sharing scheme are available.

• Employee soften perceive compensation of senior managers as being disproportionately higher.


• 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 in implementation.

• 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 was established that PRP increases productivity of any organisation substantially.


• 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 submit to Business Heads within 5 working of the close of the beginning of calendar month.


• Guidelines : • Performance Standards should be related to the employee’s

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.


• 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.


• 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.


• Competency Based Pay : Theoretically, in today’s 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 and the 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 to motivate employees to deliver their perforamance. Merit-based pay mainly focuses on employee performance.

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 also requires 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.


• 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 just intelligent people.

• Designing team-based compensation in an organisation is operationally not always possible. This is because absolute


• 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 performance criteria, 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.


• 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.


• 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 the performance 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.


• 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 functional areas. 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.


• 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 behavioural competencieis, 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.

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 taxable except a few.

• Going by industry practice, we can categorize employee benefits as group insurance, retirement benefits, contribution to social security systems, club membership, vacation leave etc. Most employee benefits are paid by employers, while in some such as social security benefits are paid by employers and employees.

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 statutory benefits. 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 are company cars, hotel stays, refreshments, leisure activities etc.

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 monetary compensation is the prime mover in this respect, carefully chosen non-monetary compensation can also do wonders.

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 skills and knowledge.

• The young age group values recognition and career advancement. Functional autonomy, personal recognition, pleasant work environment , training, flexible working hours and challenging opportunities help attract and retain employees.

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 asre often 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.

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 can invest 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.

Employee Benefits• Medical and healthcare : Accident insurance, disability

insurance, 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.

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 for compensation 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 in a year.

Employee Benefits

• A deferred Compensation Plan is an arrangement whereby an employee or owner defers some portion of an employee’s current income unt ila specified future date.

• Life Insurance can be used to fund a deferred compensation plan. Premiums are paid by the company. The cash value can then 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 their needs, provide a good work environment and work life , promote employee welfare

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.

Compensation Management (1)

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