STET SCHOOL OF MANAGEMENT

(Affiliated to Bharathidasan University)

(Accredited with ‘A’ Grade {3.45/4.00} By NAAC)
(An ISO 9001: 2015 Certified Institution)
Sundarakkottai, Mannargudi-614 016.
Thiruvarur (Dt.), Tamil Nadu, India.

COMPENSATION MANAGEMENT

B.SARANYA

ASSISTANT PROFESSOR

DEPARTMENT OF MBA
 II MBA
Semester : III

ELECTIVE - II -COMPENSATION MANAGEMENT- P16MBA3EH2

Inst. Hours/Week : 5 Credit : 4
Objectives:
This course gives an introduction to compensation principles and practices. The goal of
the course is to give students an opportunity to comprehend the variety of theories and methods
used to recruit, retain and reward employees.
Unit I
INTRODUCTION TO COMPENSATION CONCEPTS
Introduction to Compensation, Goals of Compensation System, Compensation Strategy,
Monetary & Non-Monetary Rewards, Intrinsic Rewards ,Cafeteria Style Compensation,
Employees satisfaction and Motivation issue in compensation design. Establishing Internal,
External and individual equally.
Unit II
ESTABLISHING PAY VARIABLES AND WAGE BOARDS
Strategic importance of variable in a day-Determination of Inter and Intra industry
compensation differentials. Individual and Group Incentives.
Unit III
ISSUE RELATED TO COMPENSATION
Dearness Allowance Concept-Emergence & Growth in India. Fringe Benefits and
Supplementary Compensation- The role of fringe benefits in reward systems, retirement
Plans including VRS / Golden Handshake Schemes.
Unit IV
EXECUTIVE COMPENSATION
Executive Compensation Systems in Multinational Companies and IT companies
including ESOP.
Unit V
COLLECTIVE BARGAINING AND EMERGING TRENDS
Collective Bargaining Strategies – Long term settlements – Cases of Productivity
Settlements – Exercise on drawing up 12(3) and 8(1) settlement. Cases of Productivity
Settlement. Emerging Trends in IR due to LPG.
Recommended Text books
1. Compensation – By George T. Milovich and C.S. Venkatraman special Indian
Edition, Tata Mcgraw Hill.
2. Human Resource Management by C.B. Gupta sultan chand & sons.
3. Compensation Management Rewarding Performance By D.S.Upadhyay Global India
Business Publications, New Delhi.E-mail: [email protected]
4. Compensation: Theory, Evidence and Strategic Implications, Barry Gerhart and other
ISBN : 8178 2992 08 Sage Publications , New Delhi.
5. Reward Management – A Critical Text Vol:2, By White Geoff ISBN : 0415431891
(PB) Taylor and Francis, 2008 Marketing By Atlantic Publishers, Chennai.
E.mail: [email protected]
 COMPENSATION MANAGEMENT

UNIT-I

INTRODUCTION TO COMPENSATION CONCEPTS

Introduction to Compensation, Goals of Compensation System, Compensation Strategy,
Monetary & Non-Monetary Rewards, Intrinsic Rewards, Cafeteria Style Compensation,
Employees satisfaction and Motivation issue in compensation design. Establishing Internal,
External and individual equally.

COMPENSATION MANAGEMENT
Meaning
Compensation management is the act of providing monetary value to an employee for the
work they do by means of a company process or policy.
Some types of compensation include salary, bonuses, and benefit packages. Companies
use compensation management in order to find, keep, and motivate employees to do quality
work.
Process of compensation management is to establish & maintain an equitable wage &
salary structure & an equitable cost structure .it involves job evaluation, wage & salary survey,
profit sharing &control of pay costs.
Two important functions of compensation
Equity function
Motivation function
Equity is based on past & current performance
Motivation with which the work has been performed in the past & current performance.
Definition
Gary Dessler in his book Human Resource Management defines compensation in
these words “Employee compensation refers to all forms of pay going to employees and
arising from their employment.” The phrase ‘all forms of pay’ in the definition does not
include non-financial benefits, but all the direct and indirect financial compensations.
According to Thomas J. Bergmann(1988) compensation consists of four distinct
components: Compensation = Wage or Salary + Employee benefits +Non-recurring financial
rewards+ Non-pecuniary rewards.
The Concept of Compensation
Compensation refers to a wide range of financial and non financial rewards to
employees for their services rendered to the organization. It is paid in the form of
wages, salaries and employee benefits such as paid vacations, insurance maternity leave,
free travel facility, retirement benefits etc., Monetary payments are a direct form of
compensating the employees and have a great impact in motivating employees.
The system of compensation should be so designed that it achieves the following
objectives.
➢ The capable employees are attracted towards the organization

➢ The employees are motivated for better performance

➢ The employees do not leave the employer frequently

Components of Compensation
1.Basic Wages/Salaries

Basic wages / salaries refer to the cash component of the wage structure based on which
other elements of compensation may be structured. It is normally a fixed amount which is
subject to changes based on annual increments or subject to periodical pay hikes.

Wages represent hourly rates of pay, and salary refers to the monthly rate of pay,
irrespective of the number of hours put in by the employee. Wages and salaries are subject to
the annual increments. They differ from employee to employee, and depend upon the nature
of job, seniority, and merit.
2.Dearness Allowance
The payment of dearness allowance facilitates employees and workers to face the price
increase or inflation of prices of goods and services consumed by him. The onslaught of
price increase has a major bearing on the living conditions of the labour. The increasing
prices reduce the compensation to nothing and the money’s worth is coming down based
on the level of inflation. The payment of dearness allowance, which may be a fixed
percentage on the basic wage, enables the employees to face the increasing prices.
3.Incentives
Incentives are paid in addition to wages and salaries and are also called ‘payments by
results’. Incentives depend upon productivity, sales, profit, or cost reduction efforts.
There are:
(a) Individual incentive schemes, and

(b) Group incentive programmes.

Individual incentives are applicable to specific employee performance. Where a given
task demands group efforts for completion, incentives are paid to the group as a whole. The
amount is later divided among group members on an equitable basis.
4.Bonus
The bonus can be paid in different ways. It can be fixed percentage on the basic wage
paid annually or in proportion to the profitability. The Government also prescribes a
minimum statutory bonus for all employees and workers. There is also a bonus plan which
compensates the managers and employees based on the sales revenue or profit margin
achieved. Bonus plans can also be based on piece wages but depends upon the productivity
of labour.
5.Non-Monetary Benefits
These benefits give psychological satisfaction to employees even when financial benefit
is not available. Such benefits are:
(a) Recognition of merit through certificate, etc.

(b) Offering challenging job responsibilities,

(c) Promoting growth prospects,

(d) Comfortable working conditions,

6.Commissions
Commission to managers and employees may be based on the sales revenue or profits
of the company. It is always a fixed percentage on the target achieved. For taxation purposes,
commission is again a taxable component of compensation.
7.Mixed Plan
Companies may also pay employees and others a combination of pay as well as com-
missions. This plan is called combination or mixed plan. Apart from the salaries paid, the
employees may be eligible for a fixed percentage of commission upon achievement of fixed
target of sales or profits or Performance objectives.
 8.Piece Rate Wages
Piece rate wages are prevalent in the manufacturing wages. The laborers are paid
wages for each of the Quantity produced by them. The gross earnings of the labour
would be equivalent to number of goods produced by them. Piece rate wages improves
productivity and is an absolute measurement of productivity to wage structure. The fairness
of compensation is totally based on the productivity and not by other qualitative factors.

9.Fringe Benefits
Fringe benefits may be defined as wide range of benefits and services that employees
receive as an integral part of their total compensation package. They are based on critical job
factors and performance. Fringe benefits are supplements to regular wages received by the
workers at a cost of employers. They include benefits such as paid vacation, pension, health
and insurance plans, etc. Such benefits are computable in terms of money and the amount of
benefit is generally not predetermined. The purpose of fringe benefits is to retain efficient and
capable people in the organization over a long period.
10.Profit Sharing
Profit-sharing is regarded as a stepping stone to industrial democracy. Profit-sharing is
an agreement by which employees receive a share, fixed in advance of the profits. Profit-
sharing usually involves the determination of an organization’s profit at the end of the fiscal
year and the distribution of a percentage of the profits to the workers qualified to share in
the earnings.
Types of Compensation / Base and Supplementary Compensation
I.Direct /Base Compensation
1.Basic Salary
Salary is the amount received by the employee in lieu of the work done by him/her
for a certain period say a day, a week, a month, etc. It is the money an employee receives
from his/her employer by rendering his/her services
2.House Rent Allowance
Organizations either provide accommodations to its employees who are from
different state or country or they provide house rent allowances to its employees.
3.Conveyance
Organizations provide for cab facilities to their employees. Few organizations also
provide vehicles and petrol allowances to their employees to motivate them.
4.Leave Travel Allowance
These allowances are provided to retain the best talent in the organization. The
employees are given allowances to visit any place they wish with their families. The
allowances are scaled as per the position of employee in the organization.
5.Medical Reimbursement
Organizations also look after the health conditions of their employees. The employees
are provided with medi-claims for them and their family members.
6.Bonus
Bonus is paid to the employees during festive seasons to motivate them and provide
them the social security. The bonus amount usually amounts to one month’s salary of the
employee.

7.Special Allowance
Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses,
reduced interest loans; insurance, club memberships, etc are provided to employees to provide
them social security and motivate them which improve the organizational productivity.

II. Indirect /Supplementary Compensation

1.Leave Policy
It is the right of employee to get adequate number of leave while working with
the organization. The organizations provide for paid leaves such as, casual leaves, medical
leaves (sick leave), and maternity leaves, statutory pay, etc.
2.Overtime Policy
Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

3.Hospitalization
The employees should be provided allowances to get their regular check-ups, say at
an interval of one year. Even their dependents should be eligible for the medi-claims that
provide them emotional and social security.
4. Insurance
Organizations also provide for accidental insurance and life insurance for
employees. This gives them the emotional security and they feel themselves valued in the
organization.
5.Leave Travel
The employees are provided with leaves and travel allowances to go for holiday
with their families. Some organizations arrange for a tour for the employees of the
organization. This is usually done to make the employees stress free.
6.Retirement Benefits
Organizations provide for pension plans and other benefits for their employees
which benefits them after they retire from the organization at the prescribed age.

7.Holiday Homes
Organizations provide for holiday homes and guest house for their employees at
different locations. These holiday homes are usually located in hill station and other most
wanted holiday spots.
8.Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to
work during normal shifts due to their personal problems and valid reasons.
Factors Considered in Deciding the Compensation
I.External Factors

Demand and Supply of Labour

Wage is a price or compensation for the services rendered by a worker. The firm
requires these services, and it must pay a price that will bring forth the supply which is
controlled by the individual worker or by a group of workers acting together through their
unions.

Cost of Living
This tends to vary money wage depending upon the variations in the cost of living
index following rise or fall in the general price level and consumer price index. It is an
essential ingredient of long-term labour contract unless provision is made to reopen the wage
clause periodically.
Labour Union
Organized labor is able to ensure better wages than the unorganized one. Higher
wages may have to be paid by the firm to its workers under the pressure or trade union.
Government
To protect the working class from the exploitations of powerful employers, the
government has enacted several laws. Laws on minimum wages, hours of work, equal pay for
equal work, payment of dearness and other allowances, payment of bonus, etc., have been
enacted and enforced to bring about a measure of fairness in compensating the working
class.

Prevailing Wage Rates

Wages in a firm are influenced by the general wage level or the wages paid for similar
occupations in the industry, region and the economy as a whole. External alignment of
wages is essential because if wages paid by a firm are lower than those paid by other firms,
the firm will not be able to attract and retain efficient employees.
II.Internal Factors

Ability to Pay
Employer’s ability to pay is an important factor affecting wages not only for the
individual firm, but also for the entire industry. This depends upon the financial position and
profitability of the firm. However, the fundamental determinants of the wage rate for the
individual firm emanate from supply and demand of labour.

Top Management Philosophy

Wage rates to be paid to the employees are also affected by the top management’s
philosophy, values and attitudes. As wage and salary payments constitute a major portion
of costs and /or apportionment of profits to the employees, top management may like to
keep it to the minimum.

Productivity of Workers
To achieve the best results from the workers and to motivate him to increase his
efficiency, wages have to be productivity based. There has been a trend towards gearing wage
increase to productivity increases. High wages and low costs are possible only when
productivity increases appreciably.

Job Requirements
Job requirements indicating measures of job difficulty provide a basis for determining
the relative value of one job against another in an enterprise. Explicitly, job may be graded in
terms of a relative degree of skill, effort and responsibility needed and the adversity of
working conditions. The occupational wage differentials in terms of
 a) Hardship,

b) Difficulty of learning the job

c) Stability of employment

d) Responsibility of learning the job and

e) Change for success or failure in the work.

Employees Related Factors
i) Performance: productivity is always rewarded with a pay
increase. Rewarding performance motivates the employees to do
better in future.

ii) Seniority: Unions view seniority as the most objective criteria for
pay increases whereas management prefer performance to effect
pay increases.

iii) Experience: Makes an employee gain valuable insights and is generally

rewarded

iv) Potential: organizations do pay some employees based on their

potential. Young managers are paid more because of their
potential to perform even if they are short of experience.
Organizational Politics
i) Determination of firms included in the compensation survey:
managers could make their firm appear to be a wage leader by
including in the survey those organizations that are pay
followers.

ii) Choice of compensable factors for the job evaluation plan: Again,
the job value determined by this process could be manipulated

iii) Emphasis placed on either internal or external equity and

iv) Results of employee performance appraisal may be intentionally

disported by the supervisor
Objectives of Compensation Management
1.To Establish a Fair and Equitable Remuneration

Effective compensation management objectives are to maintain internal and external

equity in remuneration paid to employees. Internal equity means similar pay for similar
work.
2.To Attract Competent Personnel
A sound wage and salary administration helps to attract qualified and hard-
working people by ensuring an adequate payment for all jobs.
3.To Retain the Present Employees
By paying competitive levels, the company can retain its personnel. It can minimize the
incidence of quitting and increase employee loyalty.
4.To Improve Productivity
Sound wage and salary administration helps to improve the motivation and morale
of employees which in turn lead to higher productivity
5.To Control Cost
Through sound compensation management, administration and labour costs can be
kept in line with the ability of the company to pay. If facilitates administration and control
of pay roll. The companies can systematically plan and control labour costs.
6.To Improve Union Management Relations
Compensation management based on jobs and prevailing pay levels are more
acceptable to trade unions. Therefore, sound wage and salary administration simplifies
collective bargaining and negotiations over pay. It reduces grievances arising out of wage
inequities.

7.To Improve Public Image of the Company

Wage and salary programme also seeks to project the image of the progressive
employer and to company with legal requirements relating to wages and salaries.
8.To Improve Job Satisfactio
If employees would be happy with their jobs and would love to work for the company if
they get fair rewards in exchange of their services.
9.To Motivate Employees: Employees
Some of them want money so they work for the company which gives them higher pay.
Some of them value achievement more than money, they would associate themselves with
firms which offer greater chances of promotion, learning and development.
10.Peace of Mind
Offering of several types of insurances to workers relieves them from certain fears, as a
result workers now work with relaxed mind.
11.Increases Self-Confidence
Every human being wants his/her efforts to get acknowledgment. Employees gain more
and more confidence in them and in their abilities if they receive just rewards.
Goals of Compensation System

 To pay salary and benefits to attract and retain highly qualified employees.

 To be competitive with appropriate labor markets.

 To reward meritorious performance by focusing salary increases on individual
achievement and contribution.

 To pay equal pay for equal work. To develop consistency in salaries paid persons
performing equal work for jobs which require equal skill, effort, and responsibility.

 To operate within the budget established for standard compensation.

 To communicate effectively to enhance understanding between employees and their

supervisors about the key elements of the total compensation program, including the pay
plan, performance reviews, benefit programs, and the classification system.

 To comply with appropriate federal and state laws.

Significance of Compensation Management

➢ An ideal compensation system will have positive impact on the efficiency
and results produced by employees. It will encourage the employees to
perform better and achieve the standards fixed.

➢ It will enhance the process of job evaluation. It will also help in setting up
an ideal job evaluation and the set standards would be more realistic and
 achievable.

➢ Such a system should be well defined and uniform. It will be apply to all
the levels of the organization as a general system.

➢ The system should be simple and flexible so that every employee would
be able to compute his own compensation receivable.It should be easy to
implement, should not result in exploitation of workers.
➢ It will raise the morale, efficiency and cooperation among the workers. It,
being just and fair would provide satisfaction to the workers.

➢ An ideal compensation system will have positive impact on the efficiency

and results produced by employees. It will encourage the employees to
perform better and achieve the standards fixed.

➢ It will enhance the process of job evaluation. It will also help in setting up
an ideal job evaluation and the set standards would be more realistic and
achievable.

➢ Such a system should be well defined and uniform. It will be apply to all
the levels of the organization as a general system.
Principles of Compensation
➢ Compensation policy should be developed by taking into
consideration of the views of employers, the employees, the
consumers and the community.

➢ The compensation policy or wage policy should be clearly defined

to ensure uniform and consistent application.

➢ The compensation plan should be matching with overall plans

of the company. Compensation planning should be part and
parcel of financial planning

➢ Management should inform the wage/salary related policies to

their employees. Workers should be associated in formulation
 and implementation of wage policy.

➢ All wage and salary related decisions should be checked against

the standards set in advance in the wage/salary policy

➢ To manage compensation related matters adequate

information/data should be developed and stored for future
planning and execution.

➢ The compensation policy and programme should be reviewed and

revised periodically in conformity with changing needs.
Theories related to Compensation Management

1.Traditional Theory of Wage Determination

This theory assumes the market forces demand and supply determines the wages.
Computer programmers are in short supply, so they are able to demand higher salaries.
2.Theory of Negotiated Wages
Unionized employee can negotiate salaries. This is done by collective bargaining process
normally in any organization; unions periodically submit their memorandum to the
management, asking for wage raises to keep pace with market standards and organizational
profitability. Then wages are negotiating in a collective bargaining meeting attended by the
unions and management nominees.

3.Subsistence Theory
David Ricardo (1772-1832) advocated the Subsistence Theory. It was homas R.
Malthus’s theory of population that provided the raw material for the first economic wage
theory. Population, according to the theory, is limited by the means of subsistence: it
increases geometrically whereas the means of subsistence increases arithmetically. David
Ricardo translated Malthus’s theory into the subsistence theory of wages. According to this
theory, wages in the long run tend to equal the cost of reproducing labor, the subsistence of
the laborer. This theory, often called the iron law of wages, indicated that little could be done
to improve the lot of the wage earner because increasing wages leads only to increasing the
number of workers beyond the means of subsistence.
4.Wage Fund Theory
The short-term version of classical wage theory was the wages-fund theory. As described
by John Stuart Mill, this theory explained the short-term variations in the general wage level
in terms of (1) the number of available workers and (2) the size of the wages fund. The wages
fund was thought to come from resources accumulated by employers from previous years and
allocated by them to buy labor currently. Employers were thought to have a fixed stock of
“circulating capital” for the payment of wages. Dividing the labor force (assumed to be the
population) into the wages fund determined the wage.

5.Surplus Value Theory

The surplus value theory of wages owes its development to Karl Marx (1818-1883).
According to this theory, labour was an article of commerce, which could be purchased on
the payment of the ‘subsistence price’. The price of any product was determined by labour
and the time needed for producing it. The labourer was not paid in proportion to the time
spend on work, but was paid much less, and the surplus was utilized for paying other
expenses.

6.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
remain after payment has been made for all these factors of production. In other words,
labour is the residual claimant.

7.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. In other words, it assumes that
wages depend upon the demand for and supply of labour. Consequently, worker is paid what
they are economically worth.

8.Bargaining Theory of wages

The bargaining theory of wages assumes that wages are determined by interaction of
management and labour in a collective bargaining process. Although this theory does not
provide adequate analysis of source of wages in the long-run, it forms an effective basis for
determining wages in the short-run.
9.Behavioral Theory of Wages
This theory was pioneered by several psychologists, such as Marsh and Simon,
Robert Dupin, and Eliot Jacques. Based on their various research studies, we can identify the
following area of interest in behavioral theories on wages:

The employee’s acceptance of a wage level; Individuals believe in employment

stability and prefer to stay on with the same organization, pacing with their salary level.
There are however, several other factors to be considered such as size and prestige of the
company, trade unions power in the organization, their level of knowledge and competencies,
etc.

The internal wages structure: Employees value internal pay equity. Moreover,
some jobs also command social status (such as the job of a journalist). Organizations design
wages for different cross-section of employees, while considering maximum and minimum
wage differentials, norms of span or control, and demand for specializes skill-sets. Balancing
wages with such internal equity also keeps employees more motivated.

10.Recognition and Rewards

In a competitive business climate, more business owners are looking at improvements in
quality while reducing costs. Meanwhile, a strong economy has resulted in a tight job market.
So while small businesses need to get more from their employees, their employees are
looking for more out of them. Employee reward and recognition programs are one method of
motivating employees to change work habits and key behaviors to benefit a small business

Rewards are said to signal the organizational values to the employees as describes them
“as a means of aligning a company’s most strategic asset – their employees – to the strategic
direction of the organization”. Ghoshal and Bartlett (1998)

TYPES OF REWARDS
i. Extrinsic rewards
Extrinsic rewards are the non-job related rewards such as pay, salary and work
conditions.
ii. Intrinsic rewards
Intrinsic rewards are the job inherent, intangible, non-financial rewards included in the
job itself such as job tasks, challenging and interesting job and training possibilities offered to
the employees.

Designing a Reward Program

Identification of company or group goals that the reward program will support

Identification of the desired employee performance or behaviors that will reinforce

the company's goals

Determination of key measurements of the performance or behavior, based on the

individual or group's previous achievements

Determination of appropriate rewards

Communication of program to employees

WAGE & SALARY ADMINISTRATION (EXTERNAL EQUITY)

Wage & salary administration is essentially the application of a systematic approach to the
problem of ensuring that employees are paid in a logical, equitable and fair manner. In
soundness of compensation management depends upon the amount of wage and salary paid to
an employee for a fair days work.
Wage and salary is significant to most of the employees as it constitutes a major share of
their income "Pay" in one form or another is certainly one of the main springs of motivations in
our society 'Salary provides more than a means of satisfying the physical need it provides
recognition, a small of accomplishment. The term "wage" may be defined as the remuneration
paid by the employer for the services of hourly, daily, weekly and fortnightly employees.'Salary
is defined as the remuneration paid to the clerical and managerial personnel employed on
monthly or annual basis'.

Principles of Wage & Salary administration

1. Wage & salary plans and policies should be sufficiently flexible.

 2. Job evaluation must be done scientifically.

3. Wage & salary administration plans. Must always be consistent with overall
organisation plans & programmes.

4. Wage & salary administration plans and programmes should be in conformity with
the social & economic objectives of the country like attainment of equality of
income distribution and controlling inflationary trends.

The Elements of Wage and Salary System

1. Identifying the available salary opportunities, their costs, estimating the worth of its
members of these salary opportunities and communicating them to employees.

2. Relating salary to needs and goals.

3. Developing quality quantity and time standards relating to work and goals.

4. Determining the effort necessary to achieve standards.

5. Measuring the actual performance.

6. Comparing the performance with the salary received.

7. Measuring the job satisfaction gained by the employees.

8. Evaluating the unsatisfied wants and unreached goals of the employees.

9. Finding out the dissatisfaction arising from unfulfilled needs and unattained goals.

Wage Differential
Wage differential is a term used in labor economics to analyze the relation between the
wage rate and the unpleasantness, risk, or other undesirable attributes of a particular job.
Wage differential had been classified into three categories (scribd, 2014):
Firstly, the differential that can be attributed to imperfections in the employment
markets. Secondly, the wage differentials were originated in social values and prejudices and
which are deeper and more persistent than economic factors. Third, occupational wage
differentials, which would exist even if employment markets were perfect and social
prejudices, were absent.
Wage differentials arise due to following factors:
a. Difference in the efficiency of labor, which may be due to inborn quality,
education and conditions under which work may be done.
b. The existence of non-competing group due to difficulties in the way of the
mobility of labor from low paid to high paid employments.
c. Differences in the agreeableness or social esteem of employment.

d. Differences in the nature of employment and occupation.

Wage Survey

After the relative worth of jobs in the organisation has been determined by job evaluation,
the actual wages to be paid to employees must be determined taking into consideration wages
of similar job in other organisations.

A major factor in taking such decisions is the survey of wages of similar jobs in other
enterprises in the same region and in the same industry. The purpose of wage survey in to
determine the extent to which the organisation's pay scale are like those of other enterprises in
the region. So they must be taken into consideration while fixing the wages for different jobs in
an organisation. The wages and salary practices of other organisation have an important impact
on the employment, retention and morale of the personnel.
Method of wage fixation

1. Wage boards
The government of India, acting upon the recommendations of the First Five-Year Plan,
appointed wage boards for fixing wages. The first wage board was set up in 1957 for the cotton
textile industry. The wage board are tripartite in nature, with independent members and a
chairman. It was actually the Committee on Fair Wages that recommended the setting up of
wage boards for fixing wages.

2. Job evaluation
Job evaluation is another method of wage fixation. Job analysis explains the duties of a
job, authority relationships, skills, required, conditions of work, and additional relevant
information. Job evaluation, on the other hand, uses the information in job analysis to evaluate
each job-valuing its components and ascertaining relative job worth.

3. Collective bargaining
Bi-partite union management negotiations determine the wages. It is common in private
and public sector enterprises.

4. Wage legislation
In India workers have always needed state protection against exploitation. As such, the
state has enacted a number of legislations to ensure regular, expeditious, equitable and minimum
payment of wages and bonus tow workers.

Laws Relating to Wages

1.Workmen’s Compensation Act, 1923

The Workmen’s Compensation Act, 1923 provides for payment of compensation to
workmen and their dependents in case of injury and accident (including certain occupational
disease) arising out of and in the course of employment and resulting in disablement or death.
The amount of compensation to be paid depends on the nature of the injury and the average
monthly wages and age of workmen. The minimum and maximum rates of compensation
payable for death (in such cases it is paid to the dependents of workmen) and for disability
have been fixed and is subject to revision from time.

2.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. Hence, the main object of
the Act is to eliminate all malpractices by laying down the time and mode of payment of
wages as well as securing that the workers are paid their wages at regular intervals, without
any unauthorised deductions.
3.Minimum Wages Act, 1948
The Minimum Wages Act, 1948 was enacted to safeguard the interests of workers,
mostly in the unorganized 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. The fixation of minimum wages depends on a number of
factors such as level of income and paying capacity, prices of essential commodities,
productivity, local conditions, etc. The last revision had being Rs. 66/- per day with effect
from 1.2.2004, on the recommendations of the Central Advisory Board. All the States/UTs
Governments are required to ensure that fixation/revision of minimum rates of wages in all
the scheduled employments is not below this national minimum wage.

4.Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 was enacted to provide for the payment of bonus to
persons employed in certain establishments on the basis of profits or productivity and for the
matters connected therewith. The Act applies to:- (i) every factory as defined under the
Factories Act, 1948; and (ii) every other establishment in which twenty or more persons are
employed on any day during an accounting year.

5.Payment of Gratuity Act, 1972

The Act was enacted to provide for a scheme for the payment of gratuity to
employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops
or other establishments employing ten or more persons and for matters connected therewith
or incidental thereto. The appropriate Government may, by notification, and subject to such
conditions as may be specified in the notification, exempt any establishment to which this
Act applies or any employee or class of employees employed therein, from the operation of
the provisions of this Act, if in the opinion of the appropriate Government, the employees in
such establishment are in receipt of gratuity or pensionary benefits not less favourable than
the benefits conferred under this Act.
6.Employees' Provident Funds & Miscellaneous Provisions Act, 1952

The Act was enacted with the main objective of making some provisions for the
future of industrial workers after their retirement and for their dependents in case of death. It
provides insurance to workers and their dependents against risks of old age, retirement,
discharge retrenchment or death of the workers.

7.Employees' State Insurance Act, 1948

The Employees' State Insurance Act, 1948 (ESI Act) provides for health care and cash
benefit payments in the case of sickness, maternity and employment injury. The Act applies
to all non-seasonal factories run with power and employing 10 or more persons and to those
factories which run without power and employing 20 or more persons. The appropriate
Government may after notification in the Official Gazette, extend the provision of the Act to
any other establishment or class of establishments, industrial, commercial, agriculture or
otherwise. Under the Act, cash benefits are administered by the Central Government through
the Employees State Insurance Corporation (ESIC), whereas the State Governments and
Union Territory Administrations are administering medical care.
8.Maternity Benefit Act, 1961
The Maternity Benefit Act, 1961 regulates employment of women in certain
establishments for a certain period before and after childbirth and provides for maternity and
other benefits. Such benefits are aimed to protect the dignity of motherhood by providing for
the full and healthy maintenance of women and her child when she is not working. The Act is
applicable to mines, factories, circus industry, plantations, shops and establishments
employing ten or more persons, except employees covered under the Employees’ State
Insurance Act, 1948. It can be extended to other establishments by the State Governments.

9.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".

10.Industrial Disputes Act, 1947

Industrial disputes are the disputes which arise due to any disagreement in an
industrial relation. The term 'industrial relation' involves various aspects of interactions
between the employer and the employees; among the employees as well as between the
employers. In such relations whenever there is a clash of interest, it may result in
dissatisfaction for either of the parties involved and hence lead to industrial disputes or
conflicts. These disputes may take various forms such as protests, strikes, demonstrations,
lock-outs, retrenchment, dismissal of workers, etc.
CAFETERIA APPROACH
In Cafeteria benefit plan the employees could spend their benefits, allowances on a
choice of benefits options. The idea is to allow the employee to put together his/her own benefit
package subject to two constraints-
1. The employer must carefully limit total cost for each total benefit package.
2. Each benefit plan must include certain non-optional items.
Advantages of Cafeteria approach
1. Employees choose packages that best satisfy their unique needs.
2. Flexible benefits, help firms need the changing needs of a changing workforce.
3. Increased involvement of employees and families improves understanding of benefits.
4. Flexible plans make introduction of new benefits less costly. The new option is added
merely as one among a wide variety of elements from which to choose.
5. Cost containment- the organization sets the dollar maximum. Employee chooses within
the constraint.
Disadvantages of Cafeteria style
1. Employees made bad choices and find themselves not covered for predictable
emergencies.
2. Administrative burdens and expenses increase.
3. Adverse selection- employees pick only benefits they will use.The subsequent high
benefit utilization increases its cost.

JOB EVALUATION (INTERNAL EQUITY)

Meaning
Job Evaluation is a systematic (Quantitative and qualitative) method, for determining the
relative worth of a job in comparision with in and outside organisation . It helps to eliminate
wage inequities and to establish a basis for sound salary and wage-structure.
Definition
British standard Institution (1969) Job Evaluation is "A generic term covering methods of
determining the relative worth (Equity) of jobs."
Job Evaluation consists the following:

 Job analysis: the process of examining the content of a job,

breaking it down into it's task, functions, processes, operation
& elements.
 Job Description: description of a job based on job analysis.

 Job Specification: the statement of the content of job based on

job description and job grading.
 Job Grading: ranking of job as a result of job analysis

 Job Classification: grouping jobs according to their worth

 Job Assessment: the ascription of a monetary value on the basis of job . grading.

Objectives
Primary Objectives:

 To. establish wage level of a plant

 To establish relative wage level in a plant.
 To bring new jobs to their proper relative parity with existing jobs
 To facilitate wage negotiations
Secondary Objectives

 To determine qualities (Job-Specification) for new Jobs for employee selection

 To determine criterion for merit rating & promotions

 To analyse wage rates.
 To find scope of automation & improvement
 To train new supervisors
 To improve working condition as better compensation
Job Evaluation Procedure
1. Select the group of jobs
 Such as workmen category, office staff, supervisory or managerial as distinct
groups.
2. Study the Job (Job analysis)

The jobs are studied by (a) qetting information from the employee about his
work, (b) Observing the work, and (c) Consulting the supervisors of the employees.

3. Prepare Job Descriptions - approval.

On the basis of detailed information, recorded in thed Job Analysis Sheet, Job
descriptions are prepared. These job descriptions state simply and clearly a comprehensive
picture of the job.

4. Device an evaluation plan - common characteristics/traits

A set of key factors such as education, experience, responsibilities and working

conditions are selected and weightages given to all these factors. Each factor is generally
divided into degrees which indicates the extent to which the factor is required for
successful performance of the job. This constitutes the job evaluation plan. It is known
as the point plan as it involves giving points to each of the jobs to indicate their relative
values.

5. Establish a committee of raters and Rate/Evaluate

A committee of raters jointly rate the jobs by applying the point plan to the job
description. In case of any difference of opinion among the raters, efforts are made to arrive at
a conclusion by referring to facts stated in the job description, the job analysis, and in some
cases by going back to the work spot.

6. Establish a Committee of raters and Rate/Evaluate

A committee of raters jointly rate the jobs by applying the point plan to the job
description. In case of any difference of opinion among the raters, efforts are made to arrive at a
conclusion by referring to ,facts stated in the job description, the job analysis, and in some cases
by going back to the work spot.
 7. Group or Classify the jobs

The point values given to the job on various factors are totalled up and the total
points secured by different jobs are classified into grades. The number of grades into which they
can be classified depends upon the policies of the organisation, the view of management and
union, and the experience and judgement of the raters.

8. Convert job grades to money value (Wage Survey)

The point values of the jobs are converted into money values on the basis of wage
survey results and finances available for establishing a more equitable wage differential in the
organisation.

9. Obtain approval from Union & Management

10. Establish a suitable grievance Procedure

A report on the job evaluation containing full details regarding the work done and
a set of recommendations is prepared for use, at the time of implementation and in dealing with
any appeals from the employees.

Methods and Systems of Job Evaluation

A.CONVENTIONAL:

A variety of job evaluation systems are in use and all of them are modifications of four
basic systems. These are the ranking system, the grading ,system, the factor comparison system,
and the point system. All of them are similar to each other in certain respects and are applicable
to all types of jobs at all levels.

I.Non quantitative

a.. Ranking method

b. Classification method

II. Quantitative
a.Points Rating method

b. Factor Comparision method

B.INNOVATIVE/NON-CONVENTIONAL:

These systems are quite innovative and use concepts of management- decision
making and related aspects as factors for establishing internal equity. These are:

iTime span of Discretion method

ii Decision Band Method

iii Direct Consensus method
iv Guide Chart Profile method
v Urwick Orr Profile method

A.CONVENTIONAL:
1.Ranking Method

In this method simple & easy job-descriptions are made and sorted in the sequential
order of their worth as whole. The jobs common in various organisations are checked and jobs
are ranked/rated by interpolation. All the jobs in an organisation are ranked in the order of
complexity, responsibility and demands they make on the respective employees. Ranking of all
the jobs is made easier by first identifying those that come at two extreme ends of the scale and
locating the rest in the middle-region. A committee carries out this ranking more than once and
the results of repeated ranking are pooled to arrive at the final ranking.

Advantages

 It is simplest of all procedures

 It is less time consuming

 It leaves more room for unions to bargain Disadvantages

 Sometimes equal differentials are assessed to adjacent ranks

 None of the committee member is likely to be familiar with all jobs

2.Classification Method

This method is sometimes called as predetermined grading method. A limited number

of job grades are established on the basis of a knowledge about the existing jobs in the
organisation. Each of these grades is defined in terms of general functions and qualifications
required. This is followed by development of job descriptions which briefly state the nature of
duties of each job. These global job descriptions are matched with the grades, and jobs are
classified into one or the other grades.

Advantages

 It is comparatively easier method

 It is less time consuming

Disadvantages

 It is irrational in absence of logic, and nearby jobs are sometimes put in different
classes

 It is very hard to determine the pre-requisites of classes.

3.Point Rating Method

In this method the whole job is analysed through 5-8factors and over 20-50 sub- factors
based on requirements. These factors/sub-factors are given points which totals out as the
overall position of the jobs. Though it is not scientific it is systematic method. It is the most
popular method in use today in judging the relative of worth of job factor.

Advantages
 It is the most sophisticated system.
 All the outcome is in hard fact numbers

Disadvantages

 It is time consuming
 Satisfying Benchmark jobs for the degrees are required to be put forth for rating
effectively.

4.Factor Comparision Method

The factors usually considered in this system are five in number. Mental requirement, skill ,
physical requirements, Responsibility and working conditions. The system involves detailed
job analysis, ranking jobs in respect of pre-determined factors, apportioning the total money
paid to the different factors of the job, fitting key jobs into the system, and locating all other
jobs in relation, to the key jobs. The main features of the system consist of evaluating
important elements of the job in terms of money value and establishing the relative positions
of jobs in terms of specific factors.

Advantages:
 Internal comparision & External comparision of job within and out of the
industry are considered.
 Monetary units are used for comparision

Disadvantages:

 Conflict may arise on the valuation of each factor

 It is difficult of apportion the total wage in various factors

B.INNOVATIVE/NON-CONVENTIONAL:
1.Time Span of Discretion Methods

This system uses the concept that all make decisions in their work and the effect of such
a decision on the work/organisation is felt after a certain period for taking up a follow-up action.
Here "the longest possible time for which discretion (decision' to . fructify) could be exercised
without direct managerial review" is considered, as the key factor in determining the levels. For
e.g. A decision taken by a board member may get reflected after a few years, as against a
supervisors in a week and a worker in a few hours similarly.

Unskilled worker - few hours

Marketing Manager- 2-3 years

Board of direction- 10 years

2.Decision Band Method

Here, type of decision to be made by the job is considered and placed in the
applicable band. The Bands are:

 Band E-Policy Making decisions i.e. Top Management

 Band D-Programming decisions i.e. by Senior Managers

  Band C-Interpretive decisions i.e. by middle managers

 Band B-Routine decisions i.e. by skilled operators on line

 Band A-Automatic decisions regarding when, how & where i.e. by semi-Skilled
operators

 Band O-Defined decisions by unskilled workmen.

3.Direct Concensus Method

Here the workman & evaluator reach to the value by mutual concensus.

4.Guide Chart Profile method

This method is also called Hay MSL method. Its operational distinction is that it
attempts to combine job evaluation with external comparision of market rates as a unified
package. Its concern only managerial jobs.

5.Urwick-Orr Profile Method

Here the point & ranking methods are applied with an addition of concensus
method. It is not a new method but an advancement in evaluation with the addition of
employees! union to a very high degree.

EMPLOYEE SATISFACTION

Meaning

Employee satisfaction or job satisfaction is, quite simply, how content or satisfied
employees are with their jobs. Employee satisfaction is typically measured using an
employee satisfaction survey. Factors that influence employee satisfaction addressed in
these surveys might include compensation, workload, perceptions of management,
flexibility, teamwork, resources, etc.

Define

Dawes (2004) describes “Job satisfaction basically as a psychological contract that

has two components: an affective component (feelings along with cognition) and a
cognitive competent (needs are being fulfilled according to one’s perception)”.

Factor Affecting Employee satisfaction

I.Personal Factor
The personal determinants also help a lot in maintaining the motivation and personal
factors of the employees to work effectively and efficiently. Employee satisfaction can be
related to determining the numbers of personal variables and psychological factors an of the
employees .
i. Emotion

Mood and emotions form the affective element of job satisfaction. Moods tend to be longer
lasting but often weaker states of uncertain origin, while emotions are often more intense,
short-lived and have a clear object or cause
ii. Race

Research evidence with regard to the relationship between race and job satisfaction have
yielded inconsistent results Research conducted on various occupational classes consisting of
blue collar and white collar employees, reflected that African employees experienced higher
levels of job satisfaction than the other racial groups
iii. Genetics

It has been well documented that genetics influence a variety of individual differences. The
genetics also play a role in the intrinsic, direct experiences of job satisfaction like challenge
or achievement was suggested by some research (as opposed to extrinsic, environmental
factors like working conditions).

iv. Personality

Some research suggests an association between personality and job satisfaction. The research
describes the role of negative affectivity and positive affectivity. Negative affectivity is
related strongly to the personality trait of neuroticism. Individuals high in negative affectivity
were experience less job satisfaction. Positive affectivity is related strongly to the personality
trait of extraversion. Those high in positive affectivity were satisfied with most of the
dimensions of their life and including their job.
v. Age:

Age is one of the important determinants of employee satisfaction. The younger age
employees having higher energy levels, so they were highly satisfied then the older age
employees.
vi. Education:

Education plays a significant determinant of employee satisfaction as it provides an

opportunity for developing one’s personality. Education develops and creates individual
understanding and evaluation process .The highly educated employees can better understand
the situation and evaluate it positively as they possess persistence, rationality and thinking
power .
vii. Gender Differences

The gender of the employees plays important role in determining of employee satisfaction.
Women, the fairer gender are more likely to be satisfied than their counterpart even if they
are employed in same job.
viii. Tenure

Tenure refers to the number of years an employee has spent working in organization

ix. Marital Status

The effect of marital status of employee on job satisfaction has produced inconclusive effects.
The study carried out by Kuo and Chen (2004) found that marital status of employee is
highly correlated to general, intrinsic and overall satisfaction and it indicated that married
employees experienced higher levels of job satisfaction in comparison of unmarried
employees
II.Organizational Factors
The organizational determinants play important role in employee satisfaction play. The
employees spend lots of time in organization so there are number of organizational factor that
affect satisfaction of the employees.
i. Working Environment

Work environment plays important role in influencing job satisfaction, as comfortable

physical work environment that will ultimately renders more positive level of job satisfaction
in employees. Lack of favorable working conditions, amongst other things, can affect badly
on the employees mental and physical health
ii. Workload and Stress Level
Dealing with a workload that was too heavy and deadlines that were impossible to touch it
can cause job dissatisfaction in the most dedicated employee. Falling short of deadlines can
cause conflict between employees and supervisors and it could raise the stress level in the
workplace.
iii. Respect from Co-Workers

Employees seek to be treated with respect by those they work with. A hostile work
environment with rude or unpleasant coworkers is one that usually has lower job satisfaction.
iv. Organization Development

Organizational development is an continuous and organized process to implement effective

change in an organization. Its objective is to enable the organization in adopting-better to the
fast-changing external environment of new markets, regulations, and technologies. It starts
with a careful organization-wide analysis of the current situation and of the future
requirements.
v. Policies of Compensation and Benefit

Pay is one of the fundamental components of job satisfaction since it has a powerful effect in
determining job satisfaction. Employees should be satisfied with competitive salary packages
and they should be satisfied with it when comparing their pay packets with those of the
outsiders who are working in the same industry.

vi. Promotion and Career Development

Promotion can be reciprocated as a significant achievement in the life. It promises and

delivers more pay, responsibility, authority, independence and status. So, the opportunity for
promotion determines the degree of satisfaction to the employee.
vii. Job Security

Job security is an employee's assurance or confidence that they will keep their current job.
Employees with a high level of job security have a low probability of losing their job in the
near future
viii. Relationship with Supervisor

Research demonstrates that a positive relationship exists between job satisfaction and
supervision. According to Ramsey (1997), supervisors contribute to high or low morale in
the workplace. The supervisor’s attitude and behavior toward employees may also be a
contributing factor to job-related complaints (Sherman & Bohlander, 1992).

ix. Leadership Styles

The satisfaction of employees was also affected by the leadership style. Employee
satisfaction is high with democratic style of leadership. It is because democratic leaders
encourage friendship, respect and warmth relationship among the employees.

Importance of Employee satisfaction

i. Life Satisfaction

Job satisfaction is correlated to life satisfaction which means that people who satisfied with
life will tend to be satisfied with the job and people who satisfied with job will tend to
satisfied with their life
ii. Productivity

The satisfied workers will be more productive and stay with the organization longer, while
dissatisfied workers will be less productive and will have more tendency to quit the work
iii. Organizational Commitment
The researchers showed relationship between organizational commitment and job satisfaction
.Both the organizational commitment and the job satisfaction are interrelated, to attitudes .

iv. Reduced Turnover

Another benefit of job satisfaction is reduced turnover. The satisfied employees are more
likely to stay in the organization than those who are dissatisfied .
Theories of Employee Satisfaction
i. Comparison Theory
The most widely accepted view of job satisfaction assumes that the degree
of affect experienced, results from the objective outcomes from the job received by the
individual. Rather, the magnitude of satisfaction is a function of the size of the discrepancy
between the individual’s standard and what the individual believes he or she is receiving from
job. The bigger the discrepancy the bigger the dissatisfaction (Porter, 1961). The standard is
considered by some as the individual’s need (Porter, 1962; Morse, 1953), and by others as
his values (Locke, 1976). This theory referred as the aspiration-achievement or expectation-
achievement discrepancy theory of job satisfaction. However, the situation is complicated by
the fact that aspiration and achievement are not independent of each other. Aspiration or
expectations can be set by the minimum needs of the individual and/or current level of
achievement of needs.

ii. Instrumentality Theory

A second view of job satisfaction is that individuals calculate the
degree to which the extent to which the job is satisfying by considering the extent to which
the job leads to valued outcomes. This theory postulates that individuals assess their
satisfaction with jobs by considering the extent to which the jobs lead to valued outcomes. It
is assumed here that each individual has a set of judgments’ about how much he values
certain outcomes such as pay, promotion, good working, condition etc. The person then
estimates the extent to which holding the job leads to these valued outcomes. Job satisfaction
then results from a summation of outcomes or instrumentalities obtained multiplied by the
valences of these outcomes. Job satisfaction then results from a summation of outcomes or
instrumentalities obtained multiplied by the valences of these outcomes.
iii. Social Influence Theory
Salancik & Pfeffer (1997) questioned comparison theories of job
satisfaction and suggested that perhaps people decide how satisfied they are with their job not
by processing all kinds of information about it but by observing others on similar jobs and
making inferences about others satisfaction. The basic assumption of the social influence
theory of job satisfaction is that individuals may come into new job not knowing how
satisfied they will be with these. They look around, see others like themselves who are
satisfied or dissatisfied with these and are then influenced by these observations. Thus people
decided how satisfied how satisfied they are with their jobs not by processing all types of
information about themselves but by observing others on similar jobs and making inferences
about their satisfaction. Thus satisfaction more a product of self- perception and social
perceptions, rather than determined by intrinsic characteristic of job. An individual simply
infers a level of his or her personal satisfaction by their perception of other’s satisfactions.
iv. Equity Theory
Adams (1965) argued that satisfaction is determined by a person’s perceived
equity, which is determined by his / her input / outcome balance compared to some other’s
perceived input / output balance.
The Equity theory of motivation suggests that individuals have a strong want
to maintain a balance between what they perceive their inputs or contributions to be in
relation to expected rewards (Dessler, 1988). In terms of the Equity theory, Robbins (1993)
states that satisfaction is determined by an individual’s input-outcome balance (Koneru &
Chunduri, 2013).

v. Fulfillment Theory
This theory proposes that employees will be satisfied in a direct proportion to
the extent to which their needs are satisfied (Schafer, 1953). That people’s satisfaction is a
function of how much they receive and of how much they feel they should and / or want to
receive (Locke, 1969).
vi. Dispositional Theory
Crow and Hartmann (1995) offered that job satisfaction “is a result of a
multiplicity of factors, most of which cannot be influenced by the employer”. They further
explained that “enhancing job satisfaction for chronically dissatisfied employees may be
impossible”, suggesting that some employees will be dissatisfied wherever they will find
themselves given their inborn disposition towards life and work, by extension. Staw and Ross
(1985) suggested that job satisfaction is influenced by an employee’s genetics, which might be a
determinant of personality. (Kumari, 2013)

FRINGE BENEFITS

Meaning

Fringe benefits are supplementary compensation made in addition to wages, the

object being to stimulate the interest of the workers and to make the job more attractive and
conducive.

Fringe benefits are indirect form of compensation given to employees in addition

to the various forms of cash pay- base pay, dearness allowance and inventive pay. They
provide a quantifiable value for individual employees. They are the indirect form of
compensation as they are not related to the performance but are granted to the
employees for just being a member of the organization.
Define
According to the International Encyclopedia of social sciences “A fringe
benefits has to meet two tests, it must provide a specific benefit to an employee and it
must represent a cost to the employer”
Objectives of Fringe Benefits
➢ To create and improve sound industrial relations

➢ To boost up employee morale.

➢ To motivate the employees by identifying and satisfying their unsatisfied

needs.

➢ To provide qualitative work environment and work life.

➢ To provide security to the employees against social risks like old

age benefits and maternity benefits.

➢ To protect the health of the employees and to provide safety to the

employees against accidents.

➢ To promote employee’s welfare by providing welfare measures like recreation

facilities.

➢ To create a sense of belongingness among employees and to retain

them. Hence, fringe benefits are called golden hand-cuffs.

➢ To meet requirements of various legislations relating to fringe benefits.

Features of Fringe Benefits
➢ They are the payments and benefits to an employee by his
employer in addition to his normal earnings

➢ Fringe benefits are not linked to performance or efficiency of any employee

➢ Fringe benefits may be statutory or voluntary in nature

➢ Difference in fringe benefits may exist due to classification of

employees based on organizational status
 ➢ Fringe benefits are paid to all the employees based on their
membership in the organization

➢ Fringe benefits are indirect compensation because these are

usually extended as a condition of employment and are not
directly related to performance.

➢ Fringe benefits involve labour cost for the employer and are not
meant directly to improve efficiency

➢ Fringe benefits may be statutory or voluntary. Provident fund is a

statutory benefit whereas housing is a voluntary benefit

➢ Fringe benefits raise the standard of living of the employees

Types of Fringe Benefits

1.Mandated (Statutory) and Optional (Voluntary) Benefits

Mandated benefits include social security and employee welfare, optional
benefits include health insurance, life insurance, retirement plan, leave, welfare and
recreational plans
2.Accounting Purpose Classification
➢ Payment for the time on the job. It includes overtime payment and
cost of living increases

➢ Payment for time not on the job. It involves paid holidays,

vacations, sick leave, unemployment insurance, vacations and
holiday’s sick leave, paternity leave, maternity leave, severance
pay, supplemental unemployment benefits.

➢ Payment for varied benefits (a) pay for time not worked (b)
insurance benefits (c) Retirement benefits (d) Employee services
3.Classification Based on its Objectives
Those providing for employees security such as retirement programme,
unemployment compensation, workmen’s compensation, insurance and allied
provisions.Those purporting to increase employees’ job satisfaction causing
reduction in labour turnover and improvement in productivity. It includes
vacations, holidays, sick leave, discounts on company goods and services and
allied intangible and tangible benefits.
4.Deferred Benefits and Immediate Benefits
Pension scheme, insurance cover, sick pay are some of the deferred benefits,
whereas providing company car to an employee constitute immediate benefits.
General Types of Fringe Benefits

For Employment Security

Benefits under this head include unemployment, insurance, technological
adjust- ment pay, leave travel pay, overtime pay, level for negotiation, leave for
maternity, leave for grievances, holidays, cost of living bonus, call-back pay, lay-off,
retiring rooms, jobs to the sons/daughters of the employees and the like.
For Health Protection
Benefits under this head include accident insurance, disability insurance,
health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave,
etc.
For Old Age and Retirement
Benefits under this category include: deferred income plans, pension,
gratuity, provident fund, old age assistance, old age counseling, medical benefits for
retired employees, traveling concession to retired employees, jobs to
sons/daughters of the deceased employee and the like.
For Personnel Identification, Participation and Stimulation
This category covers the following benefits: anniversary awards, attendance
bonus, canteen, cooperative credit societies, educational facilities, beauty parlor
services, housing, income tax aid, counseling, quality bonus, recreational programs,
stress counseling, safety measures etc.
Employee Security
Physical and job security to the employee should also be provided with a view
to promoting security to the employee and his family members. The benefit of
confirmation of the employee on the job creates a sense of job security. Further a
minimum and continuous wage or salary gives a sense of security to the life.
Retrenchment Compensation
The Industrial Disputes Act, 1947 provides for the payment of compensation in case of
lay-off and retrenchment. The non-seasonal industrial establishments employing 50 or more
workers have to give one month’s notice or one month’s wages to all the workers who are
retrenched after one year’s continuous service.
Lay-off Compensation
In case of lay-off, employees are entitled to lay-off compensation at the rate to
50% of the total of the basic wage and dearness allowance for the period of their lay-
off except for weekly holidays. Lay-off compensation can normally be paid up to 45
days in a year.
Health Facility
Employee’s health should be taken care of in order to protect the employee
against accidents, unhealthy working conditions and to protect worker’s capacity.
In India, the Factories Act, 1948, stipulated certain requirements regarding
working conditions with a view to provide safe working environment.
These provisions relate to cleanliness, disposal of waste and effluents,
ventilation and temperature, dust and fume, artificial humidification, over-crowding,
lighting, drinking water, latrine urinals, and spittoons.
Safety Facility
Provisions relating to safety measures include fencing of machinery, work on
or near machinery in motion, employment of young person’s on dangerous machines,
striking gear and devices for cutting off power, self-acting machines, easing of new
machinery, probation of employment of women and children near cotton openers,
hoists and lifts, lifting machines, chains ropes and lifting tackles, revolving
machinery, pressure plant, floors, excessive weights, protection of eyes, precautions
against dangerous fumes, explosive or inflammable dust, gas etc. Precautions in case
of fire, power to require specifications of defective parts of test of stability, safety of
buildings and machinery etc.
Accident or Health Plans
The value of accident or health plan coverage provided by the employer is
usually not included in the income. However, benefits may be taxable to employee.
If employer does not pay the entire cost of your health insurance, employee may be
able to enter into a “salary reduction agreement” with employer. Under these
agreements, employer reduces salary or wages by the amount of cost of the health
insurance and pays the full amount.

Adoption Assistance
Employee may be able to exclude from your income amounts paid or expenses
incurred by your employer for qualified adoption expenses if employee attempt to
adopt an eligible child.

DeMinimis Benefits
These are benefits having a minimal value. If the cost is so small it would be
unreasonable for the employer to account for it, the value is not included in employee
income. Examples would include use of the copy machine, coffee, discounts at
company cafeterias, and the cost of company picnics.

Holiday Gifts
If employer gives employee a ham, turkey, or other item of nominal value at
Christmas or other holidays, it is not included in employee income. However, cash,
gift cards, or similar items are included in the income regardless of the amount.

Qualified Employee Discounts

These are not taxable if the discount for services does not exceed 20%.
Discounts for merchandise are limited to the employer’s gross profit percentage. No
discounts are allowed for real estate, stock, or other investment property. This is
available to employees, spouses, dependents and retirees.

Working Condition Benefits

These include items such as professional dues paid by the employer or
subscriptions to professional publications and are not included in income.

Qualified Transportation Fringe Benefits

Employer may provide to the employee transit passes and tokens for
parking. These amounts are excluded from employee income. Also, transportation
in a commuter highway vehicle, provided by employer, between employee home
and place of work is not taxable income.

Recreation and Athletic Facilities

The use of employer-owned athletic or recreation facilities is not taxable income.This
benefit is available for employees, spouses, dependents and retirees.

Educational Assistance
Employer provides educational assistance to employee to go for higher studies,
training, children’s education etc.,

Employer-Provided Vehicles
Employer provides a vehicle employees personal use is a taxable non cash
fringe benefit. Employer must determine the actual value of the benefit and include
that amount on employees account.

Retirement Planning Services

Employer has a qualified retirement plan, qualified retirement planning
services provided by the employer to employee and his spouse are not included in
employee income. This does not include the value of tax preparation, accounting,
legal, or brokerage services provided by employer.

Retirement Plan Contributions

Employer’s contributions qualified retirement plans for the employee are not
included in his income. Generally speaking, contributions into a non-qualified plan
are taxable income.

Stock Options
These are classified as non-statutory or statutory options. If it is a non-
statutory option employee will have income when he receive the option, when he
use the option, or when he sell or otherwise dispose of the option.

Meals and Lodging

Meals provided by an employer may be excluded from an employee’s
income if the meals are furnished on the employer’s premises and are for the
convenience of the employer. Lodging provided by an employer may be excluded
from an employee’s income if it is furnished on the employer’s premises, is for the
convenience of the employer, and is required that the employee accept the lodging
as a condition of employment.

Dependent Care Benefits

These benefits are employee-financed programs that provide care for an
employee’s children or other dependents. The care must be care that would qualify
for the dependent care credit if the employee had paid the amounts.
MONETARY AND NON –MONETARY REWARD
Meaning
Monetary compensation, in the context of employment, is money paid to an employee
in exchange for the use of the employee's labor, as opposed to non-monetary
compensation such as health insurance.
Non-monetary compensation is defined as any compensation rewarded to an employee
in a non-cash form. On a simple level, that could mean a trip awarded to “Salesperson of the
Month,” where the award has a value but is not paid out as additional cash their paycheck.
However, the modern workplace provides many other types of non-monetary rewards, whose
total value may be less evident to employees at first glance.

Different forms of Non-monetary Rewards

Knick- Social On-the-Job
Treats Awards Environment Tokens
Knacks acknowledgement Rewards
Free Decorative Trophies Renovation Information Movie tickets More

lunches recognition responsibility

Festival Company Plaques Music Recognition at Vacation Job rotation

bashes Watches office get-together trips

Coffee breaks Brooches Certificates Flexible Friendly greetings Coupons Special

Hours redeemable arrangement
at stores
 Picnics Diaries Scrolls E-Mail Solicitation Early time Training
of advice, offs
suggestions

Dinner Calendars Letters of Membership of Anniversary/ Representing

with Boss Appreciation clubs birth day the company
presents at public fora

INTRINSIC AND EXTRINSIC REWARDS IN COMPENSATION

Intrinsic Rewards

It includes all activities that have an impact on the intellectual , emotional , and physical well
being of an employee and is not specifically covered by the extrinsic compensation system .

 It is the least costly and one of the most powerful rewards of the organisation .
 It can be done by simply putting a pat on the back of the employee thereby recognizing
them as useful and valuable contributors .
 This kind of recognition leads to employee feeling of self worth and pride in making
contributions .
 It can be done by providing a healthy and safe working environment to the employees.
 More focus should be given on improving quality of work life of employee .
 Employees feel free to choose the way of working , work from home facility comes under
the type of reward .
 Another kind of intrinsic rewards are career growth paths of employees and enhancing
their employ-ability.

Extrinsic Rewards

They are tangible rewards given to the employees by the managers .

Basic pay wages and salary add-ons , Deferred payments ( pension plans , supplementary
income plans etc ) , services and benefits ( accommodation , medical benefits group insurance ,
conveyance etc ) , pay for work not done ( gazetted holidays , leaves etc) .

Objectives that guide the design of compensation system

 Individual Equity
o To establish a fair and equitable remuneration offering a similar pay for similar
work .
o To attract qualified and competent personnel .
 External Equity
o To retain present employees by keeping wage level in tune with the competitors .
o To control labor cost and administrative cost in line with ability of the
organisation to pay .
o To improve motivation and morale of employees and to improve union
management t relations.
o To project a good image of the company and to comply with legal needs relating
to wages and salaries .
o To comply with legal rules .compensation programmes must invariably satisfy
governmental rules regarding minimum wages , bonus , allowance etc.
o Ease of operation . the compensation management system should be easy to
understand and operate . then only it will promote understanding regarding pay
relation matters between employees , unions and managers .
o Reward new and desired behavior . pay should reward loyalty , commitment ,
experience , risk taking initiative and other desired behaviors .
 Internal Equity
o This ensures that more difficult jobs are more
o seniority of employee should take into considerations .