MODULE 5

COMPENSATION AND
BENEFITS
 Meaning

 Compensation is a systematic approach to providing monetary

value to employees in exchange of work performed.
 Compensation management is a process of determining cost-
effective pay structure, designed to attract and retain, provide
an incentive to work hard, and structured to ensure that pay
levels are perceived as fair.
 Compensation management refers to payment systems which
determine employee wages or salary, direct and indirect
rewards.
Compensation is also known as Total Rewards which includes all
the rewards earned by employees in return for their labor.

 Direct financial compensation consisting of pay received in the

form of wages, salary, bonus and commission provided at regular
intervals.
 Indirect financial compensation including all financial rewards
like benefits, leaves, retirement plans, etc.,
 Nonfinancial compensation referring to topics like career
development and advancement opportunities, opportunities for
recognition.
 Objectives of Compensation
 To acquire qualified competent personnel
 To retain the present employee
 To secure internal and external equity
 To ensure desired behavior
 To keep labor and administrative costs in line with the
ability of the organization to pay.
 To maintain satisfaction of human resources, reducing
voluntary separations and complaints and grievances
stemming from inadequate wages.
 The financial compensation system forms as an effective
motivator and increases performance.
 Importance of Compensation

Helps in attracting talent

Acts as a source of organizational effectiveness
Helps in retaining employees
Motivates employees
Encourages healthy competition and collaboration
Helps to differentiate between good and poor performers
Stimulates employee involvement
Strengthens organizational competitiveness
Maintains organizational harmony
Components of Compensation

Basic
wage/Salary

Fringe Dearness
benefits or Allowance &
prequisites Pay structure other
allowances

Bonus &
other
incentives
 Basic Wage/Salary
 Basic wage provides the foundation for pay pocket.
 It is the price for the services rendered.

 It varies according to the mental and physical requirements of

the job as measured through job evaluation.

 Basic salary is also known as need based minimum wage as it

should take care of the cost of basic existence which includes

food, clothing, housing, etc.,
 3 different levels of wages include

 Living wage
 Fair wage
 Minimum wage
 Dearness allowance and other allowances

 Allowances are the fixed amount of payment made by

employer on monthly basis other than salary.
 Common types of allowances include
 Dearness allowance
 House rent allowance,
 Leave travel allowance,
 Conveyance allowance,
 Shift allowance,
 Food allowance,
 Education allowance,
 Overtime allowance, etc.,
 Bonus and other incentives
 Bonus is the share of workers in the prosperity of an enterprise.
 An incentive for higher productivity.
 According to bonus act, 1965, every employee drawing salary not
exceeding Rs. 3500/month are entitled to bonus provided he has
worked not less than 30 days in the year.

 Incentives – Are monetary benefits paid to employees in

recognition of their outstanding performance.
 Vary from individual to individuals.
 Incentive systems are important part of organizational motivation.
 A good incentive system encourages to be productive, creative,
fosters loyalty among employees
 Benefits and Perks
 Employee benefits also known as fringe benefits or perks are
various non wage compensation provided to employees in
addition to normal salary.
 Fringe benefits means privilege, service, facility directly or
indirectly provided to employee from employer.
 Fringe benefits cover bonus, social security measures,
retirement benefits, housing, medical, canteen, recreational
facilities, etc.,
 Statutory Aspects of Compensation and Benefits

 Compensation particularly financial compensation like wage is

governed by various statutory legislations framed by the
government to secure betterment and well being of the
employees in organization.
 In the absence of such legislative framework, employees
particularly lower level employees are susceptible to
exploitation by employers.
 These legislative measures seek to ensure that minimum labor
standards in matters of wages and benefits are adhered to by
organizations including payment of minimum wages.
 Payment of wages act, 1936
 Minimum wages act, 1948
 Payment of Bonus act, 1965
 Payment of Gratuity act, 1972
 Employee state insurance act, 1948
 Employee Provident fund and miscellaneous provisions
act, 1952
 Equal remuneration act, 1976
 Workmen’s compensation act, 1923
 Payment of wages act, 1936
 Has been enacted to ensure the fixation of wage period and that
the payment of wages to workmen are made in time without
unauthorized deductions.
Objectives of act include,
 The act has been passed to regulate the payment of wages to
certain group of employees at regular intervals and without any
unauthorized deductions.
 Essentially meant for industrial employees not getting very high
wages and was enacted to safeguard their interest.
 It also provides against irregularities in payment of wages.
 It ensures payment of wages in a particular form and at regular
intervals without unauthorized deductions.
 Minimum wages act, 1948
 The foundation of minimum wages act is to prevent
exploitation of labor in industries.
 This act empowers the central and state government to fix

minimum wages from time to time.

 Objectives of this act include,

 To ensure that a minimum rate of wage is paid to all those

who are engaged in wage employment.
 The act sets up the official machinery for revising and
declaring minimum wage in listed industries.
 The act also specifies the structure of minimum wage and
procedure for fixing and revising minimum wages at regular
intervals.
 Payment of Bonus act, 1965
Objectives include,
 To impose statutory liability upon an employer of every

establishment covered by act to pay bonus to employees in the

establishment.
 To define the principle of payment of bonus according to

prescribed formula.
 To provide for payment of minimum and maximum bonus.

 To provide machinery for enforcement of liability for payment

of bonus.
 Payment of bonus act : 8.33% of the salary on completion of 5

yrs after first accounting year.

 Eligibility include employees drawing wages up to 10,000/-

month or less.
 Equal Remuneration Act, 1976
 The principle of equal pay for equal work to men and women
workers has been gaining increasing acceptance all over the
world.
 In many countries laws has been passed prohibiting

discrimination between men and women in matters relating to

payment of wages for the same or similar work.
 It extends to whole of India.

 The laws aims at

 To pay equal remuneration to men and women workers

 To prevent discrimination based on sex, against women in the
matter of employment.
 To provide increasing opportunity to women.
 Payment of gratuity act, 1972
 The act applies to all factories, shops and establishments
employing 10 or more employees on any day of the preceding
12 months.
 All the employees irrespective of their status or salary are
entitled to the payment of gratuity on completion of 5 yrs of
service.
 The amount of gratuity payable shall be at the rate of 17 days
wages based on the rate of wages last drawn, for every
completed year of service.
 The maximum amount of gratuity payable is Rs. 10 lakhs.
 Employee state insurance (ESI) act, 1948

 ESI act provides to workers not only accident benefit but also
other benefits such as sickness benefit, maternity benefit and
medical benefits.
 Every employee drawing wages up to Rs. 15,000/- month is
required to be insured under this act.
 Applies to establishment/factory employing 20 or more
employees.
 To secure sickness, maternity, disablement and medical
benefits to employees of factories and dependents benefits to
the dependents of such employees.
 Employee provident fund and miscellaneous
provisions act, 1952

 This act provides retirement benefits to the employees in the

form of lump sum amount and also provides for a pension
scheme to the employees and his family.
 The employer and employee’s contribution is 12% each.
 An employee earning more than 6,500/- month is eligible for
availing this scheme.
 Diversion to pension scheme: Out of employer’s contribution
of 12% the employer’s contribution of 8.33% will be diverted
to employees pension scheme. The balance will be retained in
the EPF scheme.
Workmen’ Compensation Act, 1923

 This act was enacted to help workmen face the hardships

resulting from accidents.
 An employer is liable to provide monetary compensation to a
disabled workman or to his dependents in case of this death, if
the disablement or death occurs “out of and in the course of
employment”.
 The injury must disable him for more than 3 days totally or
partially.
The compensation is paid to the workers according to the
damage.
 In case of death: 40% of the monthly wage of the deceased

workman, multiplied by relevant factor or Rs. 20,000

whichever is more.
 In case of total permanent disablement: 50% of the monthly

wage, multiplied by the relevant factor or 24,000 whichever is

more.
 In case of total/partial temporary disablement: A sum equal to

25% of the monthly wages of the workman shall be paid half-

monthly.
 The minimum rate of compensation is proposed to be raised
from Rs.50,000 to Rs.80,000 for death and from Rs.60,000 to
Rs.90,000 in case of permanent/total disablement.
 The stage government appoints commissioners to investigate
and solve every case for workmen’s compensation.
 An appeal against any order of the commissioner can be filed
in the high court and this must be done within 60 days of the
order or decision of the commissioner.
 Structured pay scales of Government
sector
 A structured pay scale is offered to compensate for experience
and educational background plus an annual evaluation and
potential market adjustment increase once per year.
 There is a strong comparison/parity between the pay scales in
government and private sector.
 The following disparities in the pay scales are noticeable

 The pay scales are on a higher footing in the public sector.

 The private sector employees are entitled for perks/incentives.
Bonus in government is only for a few sections of the lower
cadre staff.
 Loans and advances in the PSUs are commensurate with their
requirements and the interest charged is nominal which is
around 4% when compared to private sector where the interest
rate would be as high as 10-12%.
 The job guarantee and retirements benefits are available to the
employees under PSU.
 Whereas the private sector employees are paid very high pay
and allowances, perks, incentives during their working period
to extract the maximum work output from them.
 The public sector uses a highly structured pay system whereas
private sector tends to favor systems that emphasize merit.
 Cost to Company Approach of the Private
Consultant

 CTC is the term used to denote the overall package an

employer is going to offer you. This includes everything from
salary to benefits and perks.
 CTC which includes cost which company incur on employee
in form of statutory contributions, reimbursement, benefits
and sometime administrative costs other than Gross salary of
employee.
 Components of CTC
 Salary like Basic, DA, HRA, Allowances
 Perquisites and Reimbursements given to employees (i.e.) - bonus,
incentives, reimbursement of conveyance/medical/telephone/,
benefits extended through various schemes like
housing/vehicle/furniture/ Air-conditioners etc.
 Contributions that the company makes for the employees like PF,
Gratuity, Medical Insurance, etc.
 Reasonable estimates of Leave Encashment, Stock Option Plans
and Non cash concessions
 Tax Benefit on Stock Option plans only.
Statutory components in CTC may be ..

1. Provident Fund
2. ESI
3. Leave Encashment
4. Gratuity
5. Bonus
6. Insurance Premium