2. EMPLOYEE COMPENSATION
• Employee compensation is a vital part of HR
management. wages ,salary and other form of
employee compensation constitute a very
large component of operating costs.
• Salary or wage—the compensation an
employee receives for a fair day’s work.
3. Types of Employee compensation
• Base or primary compensation
It refers to the basic pay in the form of wages
and salaries . It is fixed and paid on the basis
of time expended on the job.
4. Types of Employee compensation
• Supplementary compensation
It consists of fringe benefits such as housing,
medical aid, paid leave , retirement benefits
,etc.
5. Basis of Comparison Base compensation Supplementary
compensation
Meaning It means wages and salary
paid to the employees
It means fringe benefits
paid in addition to wage
and salaries
Form Cash Paid in kind
Purpose To compensate employee
for their services
To retain employee and to
increase their efficiency
Basis On the basis of job
evaluation and other
factors.
Depends on company
policies and needs.
6. Types of Employee compensation
• Incentive compensation
It refers to the monetary compensation paid
to the employee to motivate them . it is either
based on the individual performance or
performance of the whole group.
7. Types of Wage Incentive Plans
Wage incentive plans may be classified into two broad
categories as follows:
• Individual incentive plans, and
• Group incentive plans.
Individual Incentive Plans
• Under individual incentive plans, earnings are related
directly to the performance of the individual worker. In
case of group incentive schemes, earnings of a group are
related to the performance of the group as a whole.
Individual incentives may be based on time or output.
Under time based plans, a standard time is determined
and bonus is given if a worker completes the job in less
than standard time. Under output based plans, a
standard of output is determined and workers producing
more than the standard output are given bonus.
8. • Group Incentive Plans
In all the incentive wage plans given above,
incentive is linked to individual performance. But
in some cases, e.g., assembly line industries it is
not possible to determine the performance of an
individual worker. This is so because several
workers are required to jointly perform a single
operation. In such cases it is desirable to
introduce a group incentive scheme. Under such
a scheme, the bonus is calculated for a group of
workers and the total amount is distributed
among the group members in preparation to the
wages earned by each.
9. Group incentive plans, however, suffer from
the following disadvantages:
• An efficient worker may be penalized for the
inefficiency of some inefficient members of
the group.
• The incentive for an individual worker may not
be strong enough to motivate.
• Rivalry among the members of the group may
defeat the very purpose of team work and
cooperation.
10.
11. Compensation management
• Administration of employee compensation is
called compensation management or salary&
wage administration.
• It involves formulation and implementation of
policies and programmes relating to wages,
salaries and other form of compensations.
• It includes job evaluation, wage/salary survey ,
development and maintenance of wage structure
rules for administration of wages, profit sharing
and other incentives .
12. Issues in compensation management
The main challenge in developing a
compensation system are :-
A. To achieve firm’s strategic objective
B. To mould it to the firm’s unique
characteristics and environment.
13. Components of compensation
• Basic pay
• Allowances
• Dearness allowance
• House rent allowance
• City compensatory allowance
• Transport allowance
• Incentives
• Fringe benefits
14. Objective of Compensation
management
• To establish a fair and equitable remuneration
• To attract competent personnel
• To retain the present employee
• To improve productivity
• To control costs
• To establish job sequence and lines of promotion
wherever applicable
• To improve union management relations
• To improve public image of the company
15. Principles of wage and salary
administration
• Wage policy should be developed keeping in view
of the interest of the employer, Employee,
consumer and community.
• It should be stated clearly in writing for proper
application
• It should be consistent with the overall plans of
the company
• It should be flexible or responsive to changes in
internal and external changes in organisation.
16. Principles of wage and salary
administration
• Management must ensure that employees know and
understand the wage policy of the company.
• All wage and salary decisions must be checked
against the standards already set in wage policy
• Wage and salary plans should simplify and expedite
administrative process
• An adequate database should be developed for
compensation administration.
• Policies should be reviewed and revised periodically.
17. Essentials of wage and salary structure
1. Internal equity
2. External competitiveness
3. Built-in incentives
4. Link with productivity
5. Maintain real wages
6. Increments
18. Factors affecting wages
• Demand and supply for labour
• Ability to pay
• Labour unions
• Costs of living
• Prevailing wage rates
• Job requirements
• Productivity
• State regulations
19. Methods of wage payment
• The time rate system
It is that system of wage payment in which the workers
are paid on the basis of time spent by them in the
factory. Under this system, the workers and employees
are paid wages on the basis of the time they have worked
rather than the volume of output they have produced.
Hence, according to this system, wages are paid on
hourly, weekly or monthly basis. Under time rate system,
the wages earned by a worker is determined by using the
following formula.
Wages Earned = Time spent(Attended) x Wage rate per
hour/day/week/month
20. Advantages of Time wage system
The following are some of the important advantages of
time rate system of wage payment:
* Time rate system is simple to understand and easy to
calculate.
* Time rate system is quite useful for organizations that use
costly inputs for quality outputs.
* Time rate system is beneficial for average and below
workers.
* Time rate system assures regular income and creates the
feeling of economic security among the workers.
* Time rate system does not discriminate the workers and
is preferred by trade unions.
21. Disadvantage of Time wage system
The following are some notable disadvantages of time rate system
of wage payment.
* Time rate system does not help in increasing output and
improving efficiency as there is no correlation between effort
and reward.
* Time rate system is not justifiable between efficient and
inefficient workers and skilled and unskilled workers.
* Time rate system pays for idle time, which increases the cost of
production.
* Time rate system encourages a g0-slow tendency among workers
during working hours and encourages them to work overtime.
* It is difficult to estimate exact labor cost in advance.
* It requires strict supervision to get the required quantity of
output.
22. • Piece wage system
The piece rate system is that system of wage payment in
which the workers are paid on the basis of the units of
output produced. Piece rate system does not consider the
time spent by the workers. Piece rate system is the method
of remunerating the workers according to the number of
unit produced or job completed. It is also known as
payment by result or output. Piece rate system pays wages
at a fixed piece rate for each unit of output produced. The
total wages earned by a worker is calculated by using the
following formula.
Total Wages Earned= Total units of outputs produced x
Wage rate per unit of output.
OR,
Total Wages Earned= Output x Piece Rate
23. Advantages Of Piece Rate System
The following are some important advantages of piece
rate system of wage payment.
* Piece rate system pays wages according to the output
produced by the workers. It encourages efficient
workers.
* Piece rate system helps to reduce idle time.
* Piece rate system gives incentives to the workers to
adopt a better method of production for increasing
their production and earning.
* Piece rate system helps the management to
determine the exact labor cost per unit for
submitting quotation.
* Piece rate system reduces per unit cost of production
due to increased volume of production.
* Piece rate system requires less supervision cost.
24. Disadvantages Of Piece Rate System
The following are the notable disadvantages of piece
rate system
* Piece rate system does not help in producing quality
output as the workers are concentrated more on
quantity instead of quality.
* Piece rate system does not help for a uniform flow of
production and makes difficult to regulate the
production schedule.
* It is very difficult to fix an acceptable and reasonable
piece rate for each item of output or job.
* Piece rate system adversely affect the workers' health
as well.
* It requires extra supervision cost for quality output
and effective use of materials, tools and
equipment.
25. Balance or Debt method
• This method is a combination of time and
piece wage systems. The worker is guaranteed
a time rate with an alternative piece rate. If
the wage calculated at piece rate exceeds the
time rate, the worker gets credit. On the other
hand, if those wages exceed piece wages, the
worker is paid time wage and the deficit is
carried forward as debt to be recon served in
future.
26. Suppose, the time rate is Rs. 250per week and the piece rate is
Rs. 2per unit. The wage of a worker, who produces 150, 100,
125 units in three weeks will be calculated as follows:
28. Wage policy of India
The guiding principles of national wage policy are as
follows:
• Sub serves the national objective of economic growth with
social justice.
• Promote employment, productivity and capital formation.
• Remove sectoral imbalances and wage differentials.
• Promote price stability.
• Avoid automatic double linkages.
• Ensure rising real wages consistent with the capacity of the
industry and the national economy.
• Have relationship with national income, state of the
industry and prevailing wage rates.
29. Objectives of National wage policy
1. To eliminate malpractices in the payment of wages.
2. To set minimum wages for workers, whose bargaining position is weak due
to the fact that they are either un-organised or inefficiently organised. In
other words, to reduce wage differential between the organised and
unorganised sectors.
3. To rationalise inter-occupational, inter-industrial and inter-regional wage
differentials in such a way that disparities are reduced in a phased manner.
4. To ensure reduction of disparities of wages and salaries between the private
sector and public sector in a phased manner.
5. To compensate workers for the raise in the cost of living in such a manner
that in the process, the ratio of disparity between the highest paid and the
lowest paid worker is reduced.
6. To provide for the promotion and growth of trade unions and collective
bargaining.
7. To obtain for the workers a just share in the fruits of economic development
30. Objectives of National wage policy
8. To avoid following a policy of high wages to such an extent that it
results in substitution of capital for labour thereby reducing
employment.
9. To prevent high profitability units with better capacity to pay a level
of wages far in excess of the prevailing level of wages in other
sectors.
10.To permit bilateral collective bargaining within national framework
so that high wage islands are not created.
11.To encourage the development of incentive systems of payment
with a view to raising productivity and the real wages of workers.
12.To bring about a more efficient allocation and utilisation of man-
power through wage differentials and appropriate systems of
payments.
31. Pay structure of India
Pay structure in India generally consists of the
following components:
• Basic wage/salary.
• Dearness allowance (D.A.) and other
allowances.
• Bonus and other incentives.
• Fringe benefits or perquisites.
32. 1. Basic Wage
The basic wage provides the foundation of pay pocket. It is a
price for services rendered. It varies according to mental and
physical requirements of the job as measured through job
evaluation. In India, basic wage has been influenced by
statutory minimum wage, wage settlements, and awards of
wage boards, tribunals, pay commissions, etc.
Minimum Wage
Minimum wage is that wage which is sufficient to cover the
bare physical needs of a worker and his family. But the
committee felt that the minimum wage should provide not
merely for the base subsistence or sustenance of life but for
the preservation of the health, efficiency and well-being of
the worker by some measure of education, medical facilities
and other amenities. Minimum wage has got to be paid to
every worker irrespective of the capacity of the industry to
pay. If an enterprise is unable to pay its workers at least a
bare minimum, it has no right to exist . the minimum wage
in Delhi is Rs 297 for unskilled labour.
33. The Fair Wages Committee defined the components of
minimum wage but did not quantify them. The Indian Labour
Conference at its 15th Session held in July 1957 formally
quantified the minimum wage. The Conference laid down the
following criterion for the calculation of minimum wage.
• The standard working class family should be taken to consist of 3
consumption units for the one earner, disregarding the earnings of
women, children and adolescent.
• Minimum food requirements should be calculated on the basis of a
net intake of 2,700 calories, as recommended by Dr. Aykroyed for
an average Indian adult of moderate activity.
• Cloth requirements should be 18 yards per consumption unit per
annum.
• Rent is to be calculated as per the minimum rent charged by the
Government under the subsidized Industrial Housing Scheme for
law income groups.
• Fuel, lighting and other miscellaneous expenditure is to constitute
20 per cent of the minimum wage.
34. Fair Wage
A fair wage is something more than the minimum wage
providing the bare necessities of life. While the lower limit
of the fair wage is set by the minimum wage, the upper
limit should be the capacity of the industry to pay. Between
these two limits, fair wage should depend on several
factors like:
• The productivity of labour
• The prevailing rates of wages in the same or similar
occupations in the same region or neighbouring regions,
• Level of national income and its distribution,
• The place of the industry in the economy of the country
• The employer’s capacity to pay. Thus, the fair wage should
be determined on industry-cum-region basis. Fair wage is a
step toward the ideal of living wage.
35. • Living Wage
It is the wage that provides, in addition to the necessities of life,
certain amenities considered necessary for the well-being of the
worker in a particular society. It should ensure a normal standard of
life to the average employee regarded as human beings living in a
civilized community. According to the Fair Wages Committee, “the
living wage should enable the male earner to provide for himself
and his family not merely the bare essentials of food, clothing and
shelter but also a measure of frugal comfort including education for
children, protection against ill-health, requirements of essential
social needs and measure of insurance against the more important
misfortunes including old age.”
The concept of living wage is dynamic related with the level of
economic development in a country. There should be progressive
improvement in the wage with improvements in the economic life
of the nation. In an underdeveloped country like India living wage is
the ideal or target that is to be achieved through higher
productivity.
36. Dearness Allowance (D.A.) and Other Allowances
This allowance is given to protect the real wages of workers during
inflation. Under Section 3 of the Minimum Wages Act it is described as
cost of living allowance. Dearness allowance has now become an integral
part of the wage system in India. The following methods are used to
calculate dearness allowance:
• Flat Rate. According to this method, D.A. is paid at a flat rate to all workers
irrespective of their wage levels and regardless of changes in the
consumer price index. This method was used in jute, cotton and
engineering industries in West Bengal in the early days of adjudication.
• Graduated Scale. Under this method, D.A. increases with each slab of
salary. Therefore, D.A. as a percentage of basic pay decreases steadily.
Currently DA rate is 80%.
37. Index Based D.A.
In this method a flat rate per point of index is prescribed so that all workers
determine the same amount of D.A. irrespective of their pay scale. For example, if
Rs. 1.50 is the rate Rs. 15 will be paid as D.A. whenever the All India Consumer
Price Index (AICPP) increases by 10 points. This method is in force in the cotton
mills of Mumbai and Chennai and in many Central Government undertakings.
• D.A. Linked to Index and Pay Scale. Under this method, a higher rate of D.A. is
prescribed for lower pay scales and a lower rate for higher pay scales. This method
is used to pay D.A. to employees in Government offices and in many central public
sector undertakings.
• Types of Allowances Paid to Employees
38. • Bonus
Bonus is a deferred wage aimed at bridging the gap
between actual wage and the need based wage. Bonus
is a share of the workers in the prosperity of an
enterprise. Bonus may also be regarded as an incentive
to higher productivity. According to the Bonus
Commission (1961), bonus is “sharing by the workers in
the prosperity of the concern in which they are
employed. In the case of low paid workers such sharing
in the prosperity augments their earnings and helps to
bridge the gap between the actual wage and the need
based wage. “It has little direct incentive effect
because it is usually paid to all workers at the same
rate irrespective of their individual efficiency and long
after the close of the financial year.
39. Wage Board
• G.O.I set up wage board on industry wise
basis to fix and revise pay. It consists of an
impartial chairman, two independent
members and 2 or 3 representative of workers
and employers each. The recommendations of
wage board are first submitted to the govt.
Govt may accept it ,modify or reject the
recommendations. once accepted ,the parties
are requested to enforce the
recommendations.
40. While determining wages ,following things are
taken into account.
• Need based minimum wages
• Industry capacity to pay
• Productivity of labour
• Prevailing rates of wages
• Level of income and its distribution
• Place of industry in the economy
• Need to provide incentive for improving
productivity.
41. Acts made by regulatory authorities
• The minimum wages act, 1948
The Minimum Wages Act, 1948 was enacted to safeguard
the interests of workers, mostly in the unorganised sector
by providing for the fixation of minimum wages in certain
specified employments. It binds the employers to pay their
workers the minimum wages fixed under the Act from time
to time.
Under the Act, both the Central Government and the State
Governments are the appropriate Governments to fix,
revise, review and enforce the payment of minimum wages
to workers in respect of 'scheduled employments' under
their respective jurisdictions. There are 45 scheduled
employments in the Central sphere and as many as 1530 in
State sphere.
42. Under the Minimum Wages Act, there are two methods
for fixation/revision of minimum wages, namely:-
• Committee method - Under this method, committees and
sub-committees are set up by the appropriate
Governments to hold enquiries and make
recommendations with regard to fixation and revision of
minimum wages, as the case may be.
• Notification method - Under this method, Government
proposals are published in the Official Gazette for
information of the persons likely to be affected thereby
and specify a date not less than two months from the date
of the notification on which the proposals will be taken
into consideration.
43. Payment of Wages Act, 1936
• The Payment of Wages Act, 1936 is a central
legislation which has been enacted to regulate the
payment of wages to workers employed in certain
specified industries and to ensure a speedy and
effective remedy to them against illegal deductions
and/or unjustified delay caused in paying wages to
them. It applies to the persons employed in a factory,
industrial or other establishment or in a railway,
whether directly or indirectly, through a sub-
contractor. Further, the Act is applicable to employees
drawing wages up to Rs. 1600/- a month.
• The Central Government is responsible for
enforcement of the Act in railways, mines, oilfields and
air transport services, while the State Governments
are responsible for it in factories and other industrial
establishments.
44. The basic provisions of the Act are as follows:-
• The person responsible for payment of wages shall fix the wage period up to which
wage payment is to be made. No wage-period shall exceed one month.
• All wages shall be paid in current legal tender, that is, in current coin or currency
notes or both. However, the employer may, after obtaining written authorisation of
workers, pay wages either by cheque or by crediting the wages in their bank
accounts.
• All payment of wages shall be made on a working day. In railways, factories or
industrial establishments employing less than 1000 persons, wages must be paid
before the expiry of the seventh day after the last date of the wage period. In all
other cases, wages must be paid before the expiry of the tenth day after the last
day of the wage period. However, the wages of a worker whose services have been
terminated shall be paid on the next day after such termination.
• Although the wages of an employed person shall be paid to him without
deductions of any kind, the Act allows deductions from the wages of an employee
on the account of the following:- (i) fines; (ii) absence from duty; (iii) damage to or
loss of goods expressly entrusted to the employee; (iv) housing accommodation
and amenities provided by the employer; (v) recovery of advances or adjustment of
over-payments of wages; (vi) recovery of loans made from any fund constituted for
the welfare of labour in accordance with the rules approved by the State
Government, and the interest due in respect thereof; (vii) subscriptions to and for
repayment of advances from any provident fund;(viii) income-tax; (ix) payments to
co-operative societies approved by the State Government or to a scheme of
insurance maintained by the Indian Post Office; (x) deductions made with the
written authorisation of the employee for payment of any premium on his life
insurance policy or purchase of securities.
45. Payment of Bonus Act, 1965.
The Act provides for the payment of bonus to persons employed in
specified establishments. The main provisions of the Act are as follows:
• Every employee in the specified establishments drawing a salary (basic
pay plus D.A.) not exceeding Rs. 3,500 per month is entitled to bonus
provided he has worked for not less than 30 days in the year.
• Bonus is to be calculated on a salary of Rs. 2,500 per month wherever
the actual salary exceeds this amount.
• Every employer is bound to pay a minimum bonus of 8.33 per cent of
the salary of an employee or Rs. 100 per year whichever is higher
whether or not he has any allocable surplus1? in the accounting year2.
• Where an employee has not worked for all the working days in any
accounting year, the minimum bonus of Rs. 100 or 60 as the case may
be, shall be proportionately reduced, if such bonus is higher than 8.33
of his salary or wage.
• No minimum bonus is payable by a newly set up establishment in the
circumstances prescribed under Section 16 of the Act.
• The bonus is to be paid within 8 months from the close of the
accounting year.
• An employee dismissed from service for fraud, theft, misappropriation
of sabotage of property and riotous/violent behavior on the premises or
the establishment is not entitled to bonus.
46. The Equal remuneration act,1976
• The Equal Remuneration Act, 1976 aims to provide for the payment
of equal remuneration to men and women workers and for the
prevention of discrimination, on the ground of sex, against women
in the matter of employment and for matters connected therewith
or incidental thereto. According to the Act, the term 'remuneration'
means "the basic wage or salary and any additional emoluments
whatsoever payable, either in cash or in kind, to a person employed
in respect of employment or work done in such employment, if the
terms of the contract of employment, express or implied, were
fulfilled". Nothing in this Act shall apply:-
• (i) to cases affecting the terms and conditions of a woman's
employment in complying with the requirements of any law giving
special treatment to women
• (ii) to any special treatment accorded to women in connection with
the birth or expected birth of a child, or the terms and conditions
relating to retirement, marriage or death or to any provision made
in connection with the retirement, marriage or death.
47. The main provisions of the Act are:-
• No employer shall pay to any worker, employed by him/ her in an establishment,
a remuneration (whether payable in cash or in kind) at rates less favourable than
those at which remuneration is paid by him/ her to the workers of the opposite
sex in such establishment for performing the same work or work of a similar
nature. Also, no employer shall, for the purpose of complying with the provisions
of this Act, reduce the rate of remuneration of any worker.
• No employer shall, while making recruitment for the same work or work of a
similar nature, or in any condition of service subsequent to recruitment such as
promotions, training or transfer, make any discrimination against women except
where the employment of women in such work is prohibited or restricted by or
under any law for the time being in force.
• Every employer shall maintain such registers and other documents in relation to
the workers employed by him/ her in the prescribed manner.
• If any employer:- (i) makes any recruitment in contravention of the provisions of
this Act; or (ii) makes any payment of remuneration at unequal rates to men and
women workers for the same work or work of a similar nature; or (iii) makes any
discrimination between men and women workers in contravention of the
provisions of this Act; or (iv) omits or fails to carry out any direction made by the
appropriate Government, then he/ she shall be punishable with fine or with
imprisonment or with both.
• Where an offence under this Act has been committed by a company, every
person who at the time the offence was committed, was in charge of, and was
responsible to the company for the conduct of the business of the company, as
well as the company, shall be deemed, to be guilty of the offence and shall be
liable to be proceeded against and punished accordingly.
