The term compensation as a substitute word for wages and salaries, is of recent origin. Wages is now considered as a cost factor. Therefore, strategic management of wages and salaries is very important for organisations.
It has become imperative for organisations to balance the cost of compensation and employee motivation (for retention) to survive in a competitive world.
Employee compensation is a better term than employee benefits or wages or salaries. What the employee provides the employer is a labor service, usually known as work.
Pay or compensation represents an exchcange between the employee and the organisation. Each gives something in return for something else. In the past, the compensation issue was often confidential and governed by individual employer’s preference and choice.
However, in today’s competitive world, compensation issues are more transparent.
Different scholars in different countries, have defined the world compensation from different perspectives. Globally, almost every country views compensation as a measure of justice. Also, some countries (particularly developed ones) consider compensation as a means of protection against potential job loss.
Compensation should be fair, irrespective of economic consideration. Many scholars believe that compensation is the outcome of productivity. In India, right from Vedic Age, the volume of work and the time required to perform the work were considered to decide compensation.
I n Europe, the Church advocated the principles of just wage or compensation. The word compensation may be defined as all forms of financial returns, tangible ;services and benefits that an employee receives in his/her tenure of employment.
The modern definition of compensation, however, considers both intrinsic and extrinsic components of compensation. While extrinsic compensation covers both monetary and non-monetary rewards, intrinsic compensation covers both monetary and non-monetary rewards, intrinsic compensation reflects the employees’ mental satisfaction with their job accomplishments.
A wage is a basic compensation for labour and for Labour per period of time referred to as the wage rate. Other frequently used terms for wages are payment per unit of time (typically an hour or year) Total compensation representes earnings and other benefits for labour.
Wage Income represents total compensation and unearned income. Wages are also referred to as economic rent, which is the figure of total compensation, after reducing the opportunity cost. Opportunity cost represents the cost of something in terms of an opportunity forgone (and the benefits which could be received from that opportunity) or the most valuable forgone alternative.
The term ‘wages’ has emerged from French Word ‘wagier or gagier’ meaning to pledge or promise. The term wage is thus meant ;to indicate making a promise in monetary form.
“ payment to a person for service rendered, the amount paid periodically, by the day or week or month for the time during which workman or servant at the employers' discretion”- Oxford english dictionary
Under Sec. 2(m) wages includes ‘Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus etc. Any award of settlement and production bonus if paid, constitutes wages. But under Payment of Wages Act, 1948 ‘Retrenchment compensation , payment in lieu of notice and gratuity payable on discharge constitute wages.
TIME RATE- oldest and most common method- worker is paid according to the work doneduring a certain period of time.( hour, day, week, month etc)
PIECE RATE – Payment for each item produced, payment by result system.
BALANCE OR DEBT METHOD- Combination of time and piece rates, If the earnings of a worker calculated at piece rate exceeds the amount , which he could have earned if paid on time basis, he is credited for the balance( the excess piece rate earnings over time rate earnings)where piece rate earnings are less than time rate earnings , he is paid on the basis of time rate , but the excess which he is paid is carried forward as debt against him to be recovered from any future balance of piece work earnings over time work earnings.
From financial perspective, wages are defined as the cash paid for some specified quantity of labor, in contrast with salaries. Wages are paid based on wage rate (based on units of time) while salaries are paid periodically without reference to a specified number of hours worked. Given an established job description , wages can often be negotiated by workers through collective bargaining.
Differences between Wages and Compensation :
The term labour cost is best understood from the International Labour Organisation (ILO) Geneva. Labour cost is the cost incurred by the employer in the employment of labour. This also includes payments in respect of time paid for but not worked, bonuses, gratuities, the cost of food, drink and other payments in kind, the cost of workers’ housing borne by employers, employers’ social security expenditures, the cost to the employer for vocational training, welfare services, miscellaneous items, such as transport of workers, work clothes and cost of recruitment and taxes paid by the employers on employment .
From the employers’ perspective, therefore, the compensation consists of all payments (in kind or in cash) and all contributions to employees’ social security, pension, insurance etc.
Labour cost and the compensation of employees are thus closely-related concepts, with many common elements. The major part of labor cost comprises compensation of employees. However, definition of labour cost and the compensation of employees differ from country to country. For example, some items of labour cost such as vocational training are borne not by employers but by respective government s. In India, the Central Board for Workers’ Training and the Regional Labour Insitutes provide either free or subsidised training for industrial workers.
The State’s contributions to wage-related social security schemes are not included in the cost of compensation for employers. In some countries, payroll taxes or ;employment taxes are considered as labour costs.
In Human Resource Management we consider the term from a broader perspective, that is, the strategic use of wages paid to employees. Some organisations refer to use the term rewards instead of wages or compensation.
Compensation or wage structure in a given case should take into account industrial adjudication as well as considerations of right and wrong and fairness and unfairness. Given social conscience and the welfare policy of the state, collective bargaining is now the most dynamic form of negotiation to decide wage structure in a particular organisation.
Wage issues are no longer purely mathematical issues. It was with this perspective that the framers of the Constitution drew up Article 43 (part of the directive principles of State Policy) which states that “The State shall endeavour to secure, by suitable legislation or economic organisation or in any other way, to all workers – agriculture, industrial or otherwise – work , a living wage, conditions of work ensuring a decent standard of life and full employment of leisure and social and cultural opportunities.” The declaration in effect, assured labour that where they were not able to secure a living wage for themselves, the government, through legislation or means will come to their aid.
Two aspects of the State’s role prevent employers from taking undue advantage of workers-strong bargaining strenghth and direct participation of the state in the economic life of the nation.
Wage Components :
Although the term ‘wage’ is an encompassing and includes any form of financial support and benefits , in a narrower sense wages are the price paid for the services of labour.
Broadly, there are two wage components – the base or basic wages and other allowances. The basic wage is the remuneration, by way of basic salary and allowances which are paid or payable to an employee in terms of the contract of employment` for the work done.
Allowances are paid in addition to the basic wage to ensure that the value of basic wage to ensure that the value of basic wages does not fall over a period of time. Some allowances are statutory , while others are voluntary.
The objectives of compensation or wages can be classified under four broad categories – equity, efficiency, macro-economic stability and optimum allocation of labor.
Equity : The first category is equity, which may take several forms. It includes income distribution through narrowing of inequalities, increasing the wages of the lowest paid employees, protecting real wages (purchasing power ) and the concept of equal pay for work of equal value. Compensation management strives for internal and external equity.
Efficiency : It is often closely related to equity, because two concepts are not antithetical. The objectives of efficiency are reflected in attempts to link a part of wages to productivity or profit, group or individual performance acquisition and application of skills and so on.
Macro-economic stability – It can be achieved through high employment levels and low inflation. For instance, an inordinately high minimum wage would have an adverse impact on levels of employment.
Efficient allocation of labour : The efficient allocation of labor in the labour market implies that employees will move to wherever they receive a net gain. Such movement may be
From one geographical location to another or from one job to another (within or outside an enterprise). The provision or availability of financial incentives causes such movement. For example, workers may move from a labor surplus or low-wage area to a high wage area. They may acquire new skills to benefit from the higher wages paid for skills.
When an employer’s wages are below market rates, employee turnover increases. When it is above market rates,then employer attracts job applicants.
When employees move from declining to growth industries, an efficient allocation of labor due to structural changes take place.
Acquire Qualified Personnel : Compensation needs to be high enough to attract applicants. Pay levels must respond to the supply and demand of workers in the labour market since employers compete for workers. Premium wages are sometimes needed to attract applicants already working for others.
Retain Current Employees : Employees may quit when compensation levels are not competitive, resulting in high turnover.
Reward Desired Behaviour : Pay should reinforce desired
Individual worth : The value of the individual’s performance to the organisation.
Determinants of Wage Rates : Wage rates are either the products of market forces (supply and demand). In the United States, market forces determine wage rates. In Japan, seniority is still the dominant factor for wage determination. Several countries, including have enacted a statutory minimum wage rate that fixes the price of certain kinds of labour.
While market forces determine the wage rate in most developed countries, workers often negotiate their wage rate in most developed countries, workers often negotiate their wage rate through collective bargaining wherever Unions are present.
Theories of Wage Determination : There are two key theories to determine wages – the traditional theory of wage determination and the theory of negotiated wages.
Traditional Theory of Wage Determination : This theory assumes that market forces, that is, demand and supply determine wages. Computer programmers are in short supply, so they are able to command higher salaries. In our country, many organisations pay very high salaries to entry-level IT professionals, who sometimes get more than senior managerial employees in other sectors. This is because of demand and supply gap .
Theory of Negotiated Wages : Union employees can negotiate salaries. This is done through collective bargaining . Normally, in any unionised organisations Unions periodically submit their memorandum to the management, asking for wage raises to keep pace with market standards and organisational profitability.
ECONOMIC THEORY OF WAGES
Subsistence Theory : David Ricardo (1817) advocated this theory. In Ricardo’s words, workers ; should be paid “To enable them to subsist and perpectuate the race without increase or diminuation.” The theory is based on the notion that if workers are paid more than the subsistence wage their numbers will increase as they would procreate more
and this would bring down the rate of wages. If wages fell down below the subsistence level, the number of workers would decrease, as many would die of hunger, malnutrition, disease, cold etc and many would not marry. When this happened wages would increase again. In economics, the subsistence theory of wages states, that in the long run, wages will be reduced to the minimum level needed to keep workers alive.
Wages Fund Theory : This theory was developed by Adam Smith (1723-1790) on the assumption that wages are paid out of a predetermined fund of wealth, the surplus savings of the wealthy. This fund could be utilised for employing labourers for work. If the fund was large, wages would be high; if it was small , wages would be reduced to subsistence level. The demand for labour and the level of wages were determined by the size of the fund.
Surplus Value Theory : The surplus value theory owes its developments to Karl Marx (1818-1883) According to this theory, labour was an article of commerce, which could be purchased on payment of the ‘subsistence price’ . The price of any product was determined by labor and time needed for producing it. The labour was not paid in proportion to the time spent on work, but was paid much less, and the surplus was utilised for paying other expenses.
Residual Claimant Theory : The residual claimant theory advocated by Francis Walker (1840-1897) assumes that there are four factors of production/business activity – land, labour, capital and entrepreneurship. Wages represent the amount of value created in the production, which remains after payment has been made for all these factors of production. In other words, labour is the residual claimant.
Marginal Productivity Theory ( Henry Philips and bates clark ) : 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.
Bargaining theory of wages:(John Davidson): wages determined by relative bargaining power of labours
Compititive theory : employers compete among themselves by offering a higher a higher wage to attract employees.
BEHAVOIOURAL THEORY OF WAGES:
Employees acceptance of wage level
Internal wage structure
Wage and motivators
MOTIVATIONAL THEORIES: 1. MASLOWS HIERARCHY OF NEEDS 2. HERZBERGS TWO FACTOR THEORY 3. McCLELLAND 3 MODEL OF SUCCESS 4. VICTOR VROOMS EXPECTANCY THEORY 5. EQUITY THEORY
A minimum wage is one which has to be paid by an employer to his workers irrespective of his ability to pay. According to the above committee,
"Minimum wage is the wage which must provide not only for the bare sustenance of life, but for the preservation of the efficiency of
the workers. For this purpose, minimum wage must provide some measure of education, medical requirements and amenities. "
The Supreme Court has ruled that minimum wage must be paid in any event, irrespective of any extent of profits, the financial condition of the establishment or the availability of workers at lower wages.
Living Wage : Living wage is defined as ‘One which should enable the earner to provide for himself and his family not only the bare essentials of food, clothing and shelter but a measure of comfort, including education for his children, protection against ill-health, requirements of essential social needs and a measure of insurance against more important misfortunes, including old age.
Living wage is more than the concept of minimum wage. Such a wage is determined keeping in view the national income and paying capacity of industrial sector.
Fair Wage: The concept of fair wage is linked with the capacity of the industry to pay. The Committee has defined fair wage as follows: "Fair wage is the wage which is above the minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum wage: the upper limit is to be set by the capacity of the industry to pay. " Thus, fair wage depends on different variables affecting wage determination. Such factors are labor productivity prevailing wage rates, the level of national income and its distribution and the capacity of industry to pay.
Form a compensation committee (presumably consisting of officers or at least including one officer of the company).
Decide what, if any, differences should exist in pay structures for executives, professional employees, sales employees, and so on (e.g., hourly versus salaried rates, incentive-based versus non-contingent pay).
Determine whether the company should set salaries at, above, or below market.
Decide the extent to which employee benefits should replace or supplement cash compensation.
Conduct a general task analysis by major departments. What tasks must be accomplished by whom? Get input from senior vice presidents of marketing, finance, sales, administration, production, and other appropriate departments to determine the organizational structure and primary functions of each.
Interview department managers and key employees, as necessary, to determine their specific job functions.
Decide which job classifications should be exempt and which should be nonexempt.
Develop model job descriptions for exempt and nonexempt positions and distribute the models to incumbents for review and comment; adjust job descriptions if necessary.
Develop a final draft of job descriptions.
Meet with department managers, as necessary, to review job descriptions.
Classification Job descriptions are slotted into a series of classes that cover the range of jobs. Each class has a definition. These definitions are the standards against which the jobs are compared.
GS-5 includes all classes of positions the duties of which are (1) to perform, under general supervision, difficult and responsible work in office, business, or fiscal administration…
GS-9 includes all classes of positions the duties of which are (1) to perform, under general supervision, very difficult and responsible work along special technical, supervisory, or administrative experience
Officially known as the Hay Guide Chart-Profile Method of Job Evaluation.This system utilizes three factors to arrive at a job’s evaluation. The job’s content is the sole basis for the job evaluation .
Performance –related pay enhances corporate performance in a competitive environment. When performance and pay are linked together, it would be reflected in employee behaviour. For example, when organisations focus on customer satisfaction, employees also focus on this aspect, ensuring quality of goods and services.
Collective relationship in the workplace are a common organisational pursuit to achieve teamwork. Workplace and employer relationship can be decollectivised by individualising, particularly reward mechanisms. Performance related pay can be used in teamwork environment i.e. social partnership .
Organisations adopt various strategies depending upon their business priorities. A common cost minimising strategy requires different range of behaviours. An organsiation has to devise a PRP (Performance Realated Pay) structure in tune with its strategies.
Monitoring and evaluation are important and organisations often lack focus in these areas . In teamwork systems, linkage between the base pay and team contribution hardly exist. Many interesting team performance bonuses and gain-sharing scheme are available.
Employee soften perceive compensation of senior managers as being disproportionately higher.
In most of the organisations, PRP is designed by the top management and then implemented down the line. Participation and involvement of all cross-sections of employees is essential. The employees also feel that they are pat of the organisation and hence cooperate in implementation.
PRP can be designed either based on individual performance criteria, such as piece rate wages or collective performance pay schemes such as profit-sharing. Empirically it was established that PRP increases productivity of any organisation substantially.
Performance research should delving into the issues of identifying the performance objectives both for the individual employee and also for the organisation as a whole. The performance objectives must be : (1) focused on a result (2) consistent (3) specific (4) measurable (5) related to time (6) attainable.
Developing Performance Standards : For effective compensation design, developing performance standards is an important task. For example, Task description – Write Annual Reports – Standard Produce Monthly Reports as per departmental format and submit to Business Heads within 5 working of the close of the beginning of calendar month.
Competency Based Pay : Theoretically, in today’s organisations, the term competency, rather than skill is used. Competency is more holistic, as it aggregates knowledge, skill and abilities of employees, integrated with the behavioural requirements. Instead of compensating for the position and the job title, competency-based pay emphasises on the job accomplishments, much wider than job efficiency (outcome of skill only).
The major goal of any compensation programme is to motivate employees to deliver their perforamance. Merit-based pay mainly focuses on employee performance.
Introduction : The team-based compensation system rewards employees who work in a team. This means that individual employees are compensated based on the team performance.
It has been proved that employees working in a team deliver better results than those who work individually. It also requires the adoption of a collective performance evaluation method, rather than individual assessment based on the result areas (KRAs). A team based compensation system emphasises on team performance.
Team based rewards , therefore, reward the behaviour of people working in a team who can sustain team performance.
Organisations adopted the idea of team work during the late eighties, when teamwork was found more effective and competitive operationally. The collective efforts of people in a team setting increase overall performance and productivity.
Teamwork helps organisations benefit from synergy, cooperation and the unity of command. It is driven by one aim/goal, provides flexibility, and ensures better customer service. However, teamwork can only be efficient if the team is composed of ‘like-minded’ , intelligent people, not just intelligent people.
Designing team-based compensation in an organisation is operationally not always possible.
Teamwork is often more a myth than a reality. It may be done through monthly or quarterly rewards to employees, based on the degree of their improvement in performance.
Usually 5 to 10% of base pay is provided as an incentive to reward individual employees. Apart from team performance criteria, team members’ contribution to productivity, cost savings and quality are the other elements considered for team-based compensation. Gift is the common example of non-financial team-based compensation.
Lumpsum rewards, irrespective of base pay is a convention used by organsiations in rewarding team members.
Effective Design of team-based compensation : Organisations need to link the proposed compensation design with the strategy, culture and competencies of employees. Understand the nature and types of teams and job categories, evaluate performance properly and design a system.
Organisations can have different types of teams – Project team, hybrid teams, parallel team.
Parallel team members are temporarily assigned some tasks to accomplish. They are selected from different functional areas. On completion of the assigned tasks or project, they are sent back tot heir mother department. The design of team-based compensation for a short time frame is difficult.
Incentives: Incentives are the additional payment to employees besides the payment of wages and salaries. Often these are linked with productivity, either in terms of higher production or cost saving or both. These incentives may be given on individual basis or group basis. Fringe Benefits: Fringe benefits include such benefits which are provided to the employees either having long-term impact like provident fund, gratuity, pension; or occurrence of certain events like medical benefits, accident relief, health and life insurance; or facilitation in performance of job like uniforms, Canteens, recreation, etc.
Perquisites: These are normally provided to managerial personnel either to facilitate their job performance or to retain them in the organization. Such perquisites include company car, club membership, free residential accommodation, paid holiday trips, stock options, etc.
The following are some of the definitions of the term ‘Incentive’ : Wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvements in the present or targeted results” – The National Commission on Labor. “ It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job” – Hummel and Nickerson. “ It is any formal and announced programme under which the income of an individual, a small group, a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity output” – Scott.
All forms of incentives can be broadly classified into two kinds namely,
Financial Incentives, and
The financial incentives may be either direct or indirect. Direct incentives include wages, bonus and other incentives directly given to the workers in the form of cash. Indirect financial incentives include subsistence allowance expenses, medical expenses etc.
The workers by virtue of the non-financial incentives are enabled to enjoy a richer and fuller life. Experiences of foreign countries particularly countries like Britain, America and Japan have shown that there is a high degree of positive correlation between non-financial benefit schemes and labor productivity.
Non-Financial Incentives can take a variety of forms . Some of the popular ones are given below:
Sincere Interest in Subordinates as Individual Persons
Pride in job
Delegation of Responsibility:
Other Incentives: Other incentives like quick promotion, provisions of facilities for development and training, provision of labor welfare amenities etc. also have a significant role to play in motivating the employees.
Payment for Time Not worked: Benefits under this category include: sick leave with pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc.
Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, Deewali or Pooja bonus etc.
The fringe benefits are classified under heads as given here under:(Dale and Yoder )
Employment Security :
Benefits under this head include unemployment, insurance, technological adjustment 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.
Health Protection :
Benefits under this head include accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.
Old Age and Retirement : Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling, and medical benefits for retired employees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like. 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. The compensation is paid at the rate of 15 days wage for every completed year of service with a maximum of 45 days wage in a year. Workers are eligible for compensation as stated above even in case of closing down of undertakings.
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.
Safety and Health : Employee’s safety and 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. Provisions relating to safety measures include fencing of machinery, work on or near machinery in motion, employment of young persons 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.
Rising prices and cost of living has brought about incessant demand for provision of extra benefit to the employees.
Employers too have found that fringe benefits present attractive areas of negotiation when large wage and salary increases are not feasible.
As organizations have developed ore elaborate fringe benefits programs for their employees, greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees.
Recognition that fringe benefits are non-taxable rewards has been major stimulus to their expansion.
Rapid industrialization, increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments.
The growing volume of labor legislation, particularly social security legislation, made it imperative for employers to share equally with their employees the cost of old age, survivor and disability benefits.
The growth and strength of trade unions has substantially influenced the growth of company benefits and services.
Labor scarcity and competition for qualified personnel has led to the initiation, evolution and implementation of a number of compensation plans.
The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go, at least partly, to the employees who are responsible for it, so that they may be protected against the insecurity arising from unemployment, sickness, injury and old age.
What are Flexible Benefits? Flexible benefits allows allow employees to pick benefits that most their needs. The idea is to allow each employee to choose a benefit package that is individually tailored to his or her own needs and situation. It replaces the traditional “one-benefit-plan-fits-all” programs that dominated organizations for more than 50 year s.
The average organization provides fringe benefits worth approximately 40% of an employee’s salary. Traditional benefit programs were designed for the typical employees of the 1950s—- a male with wife and two children at home. Less than 10% of employees now fit this stereotype. While 25% of today’s employees are single, a third are part of two-income families with no children. As such these traditional programs don’t tend to meet the needs of today’s more diverse workforce. Flexible benefits, however, do meet these diverse needs. They can be uniquely tailored to reflect differences in employee needs based on age, marital status, spouses’ benefit status, number and age of dependents, and the like.
The three most popular type of benefit plans are modular plans, core-plus options, and flexible spending accounts . Modular plans are pre-designed packages of benefits, with each module put together to meet the needs of a specific group of employees. So a module designed for single employees with no dependents might include only essential benefits. Another, designed for single parents, might have additional life insurance, disability insurance, and expanded health coverage. Core-plus plans consist of a core of essential benefits and a menu-like selection of other benefits options from which employees can select and add to the core. Typically, each employee is given “benefit credits,” which allow the “purchase” of additional benefits that uniquely meet his or her needs.
Flexible spending plans allow employees to set aside up to the dollar amount offered in the plan to pay for particular services. It’s a convenient way, for example, for employees to pay for health-care and dental premiums. Flexible spending accounts can increase employee take-home pay because employees don’t have to pay taxes on the dollars they spend out of these accounts.
I ncentive systems also have been classified into three groups: individual wage incentive plan, group incentive scheme, and organisation-wide incentive system. The individual wage incentive plan is the extra compensation paid to an individual over a specified amount for his production effort. Individual incentive systems are based upon certain norms established by work measurement techniques such as past performance, bargaining between union and the management, time study, standard data, predetermined elemental times and work sampling. There are four types of individual incentive systems such as measured day-work, piece-work standard, group plans and gains-sharing plans.
Under the measured day-work incentive wage system, an individual receives his regular hourly rate of pay, irrespective of his performance. Piece-work system form the most simple and frequently used incentive wage. In this, individual’s earnings are direct and proportionate to their output. Group plans embody a guaranteed base rate to the workers in which the performance over standard is rewarded by a proportionate premium over base pay. Gains-sharing system involves a disproportionate increase in monetary rewards for increasing output beyond a predetermined standard. As the gains are shared with the entrepreneurs, the worker gets less than one per cent increment in wage for every one percent increase in output.
Individual Incentive Plans Method of Rate Determination Units of production per time period Time period per unit of production (1) (2) (4) (3) Straight piecework plan Standard hour plan Bedeaux plan Halsey 50 - 50 method Rowan plan Gantt plan Taylor differential piece rate system Merrick multiple piece rate system Pay constant function of production level Pay varies as function of production level Relationship between production level and pay
Types of Incentives Plans The ILO classifies all the schemes of payment by results into four categories: Earning vary in the same proportion as output Straight Piece Work Standard Hour Earnings vary less proportionately than output Halsey Plan Rowan Plan Barth Scheme Bedaux Plan Earnings vary Proportionately More than outputs High Piece Rate High Standard Hour Earnings differ at different levels of output Taylor’s Differential Piece Rate Merrick Differential Piece Rate Gantt Task System Emerson’s Efficiency plan
Halsey Plan Rowan Plan Barth Plan Bedaux Plan Time - Based Output - Based Taylor’s Differential Piece Rate Merrick Differential Piece Rate Gantt Task System Emerson’s Efficiency plan
The group or area incentive scheme provides for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job – the difference between allowed time and actual time. Such schemes may be most appropriate where: (a) people have to work together and teamwork has to be encouraged; and (b) high levels of production depend a great deal on the cooperation existing among a team of workers as compared with the individual efforts of team members.
The organisation-wide incentive system involves cooperation among employees and the management and purports to accomplish broader organisational objectives such as: (i) to reduce labour, material and supply costs; (ii) to strengthen loyalty to the company; (iii) to promote harmonious labour-management relations; and (iv) to decrease turnover and absenteeism.
One of the aspects o f organisation-wide incentive system is profit sharing or gain sharing under which an employee receives a share of the profit fixed in advance under an agreement freely entered into. The major objective of the profit sharing system is to strengthen the unity of interest and the spirit of cooperation. Some of the advantages of such a scheme are: (i) it inculcates in employees’ a sense of economic discipline as regards wage costs and productivity; (ii) it engenders improved communication and increased sense of participation; (iii) it is relatively simple and its cost of administration is low; and (iv) it is non-inflationary, if properly devised. Others are- Scanlon plan and Kaiser plan.
Retirement Compensation system: There are two main types of employer-sponsored retirement plans: defined benefit and defined contribution. A defined benefit plan, such as a traditional pension plan, sets the amount that the employer will pay to workers upon their retirement. In defined contribution plans, the plan sets the amount of the contributions that an employer makes, not the benefit it will pay at retirement. In 1978, section 401(k) of the Internal Revenue Code authorized a new kind of defined contribution plan that allows the employee to make pre-tax contributions to the plan.
In a 401(k) plan, the employer sets up a special savings and investment account with an investment company, a bank trust dept, or an insurance company. The employee agrees to put part of his or her salary into the plan through automatic deductions each pay period. This money is deducted before the employee’s paycheck is taxed, so that it remains untaxed until it is taken out of the plan, often years or even decades later. Employers frequently match employee contributions up to a certain level, sometimes by as much as 100 percent, but are not required to do so. The money in the plan is invested into one or more funds provided in the plan according to choices made by the employee. The plans usually are intended to earn money over a very long period of time, which is much less risky than short-term investing.
Employees like 401(k) plans for several reasons. The tax deferral an obvious plus. Others popular features include the increased portability of this plan from one employer to another, the matching contributions, and the sense of control due to the ability to choose one’s own investments.
What is a Provident Fund ? It is a mandatory, tax-qualified, defined, contribution retiral benefit plan wherein equal contribution at the specified rate is made by the employer and the employee and the same is payable in lump sum on retirement.
Dearness allowance (D.A.) is part of a person's salary. D.A. is calculated as a percent of the basic salary. This amount is then added to the basic salary along with house rent allowance to get the total salary. Rates vary as per rural/urban areas etc.
It varies from state to state, industry to industry, country to country.
Calculated as- flate rate, graduated scale, cost of living and consumer price index number
“ an award in cash or its equivalent by an employer to an employee, for accomplishment being consiuderd desirable and perhaps implied though not required by the contract of employment. It is uasually intended as a stimulus but may alkso express a desire on the part of the employer to sahre with the employees the fruit of their joint entriprise ”.- Encyclopaedia Britannica
It has 3 dimensions:
1. Moral and sociological dimensions
2. Economic dimensions
3.Dimensions in the direction of recognition of industrial democrasy ans co-partnership: her the profit sharing bonus to share in management.