Compensation and
Reward Management

UNIT 17 COMPENSATION STRATEGY,
STRUCTURE, COMPOSITION
Objectives
After reading this unit, you should be able to: l appreciate compensation function and objectives;

l

analyse compensation issues and trends;

l

assess the characteristics of executive compensation and its determinants;

l

understand the principles and practices of compensation administration; and

l

identify the major components of wage structure in India.

Structure
17.1

Introduction

17.2

Compensation Issues

17.3

Compensation Function

17.4

Compensation Policies and Objectives

17.5

Compensation Administration

17.6

Compensation Determinants

17.7

Compensation Survey

17.8

Compensation Structure

17.9

Job Evaluation System

17.10

Pay Equity

17.11

Executive Compensation

17.12

Compensation Trends

17.13

Wage Structure in India

17.14

Case Study

17.15

Summary

17.16

Self-Assessment Questions

17.17

Further Readings

17.1

22

INTRODUCTION

One of the most difficult functions of human resource management is that of determining the rates of monetary compensation. It is not only complex, but significant both to the organisation and employees. Employee compensation decisions are crucial for the success of an organisation. From a cost perspective alone, effective management of employee compensation is critical because of the total operating costs.
Another reason for studying compensation from the organisation’s perspective is to assess its impact on a wide range of employee attitudes and behaviours and, ultimately the effectiveness of the organisation and its units. Compensation may directly influence key outcomes like job satisfaction, attraction, retention, performance, skill acquisition, cooperation, and flexibility.

17.2

COMPENSATION ISSUES

Compensation Strategy,
Structure, Composition

The main problem facing any organisation is the laying down a fair and equitable compensation system. While the objective is simple, the process is complex. For instance, the employer will be concerned primarily with productivity. The employee’s emphasis may be on higher compensation to offset their increased cost of living and perhaps the price his skill will fetch in a competitive job market. The compensation issues commanding most interest today and likely to continue in future will centre around questions of compensation levels and compensation structures. Obviously, this will raise questions concerning the level of compensation rates in the plant or firm, industry, region, or nation.
Closely related to this is the broad question of the determinants of compensation relationships. This involves an understanding of various influences controlling compensation, the nature of decision-making bodies and the different traditions and customary attitudes that have developed in individual firms or industries. In some cases, the controlling influences may be standards and mores of a particular locality or region, sudden change in technology, source of labour supply, firm’s competitive standing, and general sales-and-profits prospects of the industry.
A decision about compensation rates in a given situation has to be reconciled with a variety of considerations such as when pay rates should be changed and by how much, how they should be distributed among the different employees, and what firms should be covered. Disputes between employers and unions over wages and salaries are often a part and parcel of conflicts over such diversified matters.
One of the considerations in formulating a pay package is the quantum of take-home pay, that is the net packet, after an employee has paid for his deductions. Some of these deductions are savings for old age, like the provident fund and pension schemes.
The balance between what is received now and what he will get on retirement is something that is variable in each case. In an employee’s earlier years, normally, children’s education, medical treatment, recreation will necessitate a larger income. In his later years an employee will need to provide for his old age, in terms of a house and a steady income to maintain his habituated life style. Another related issue is salary and tax planning. In this context, organisations have taken recourse to fringe benefits, some of which are taxable. The incidence of tax, either on money incomes or on the total taxable income including perquisites, has to be worked out.

17.3

COMPENSATION FUNCTION

The compensation function contributes to the organisational effectiveness in four basic ways: 1)

Compensation can serve to attract qualified applicants to the organisation. Other things being equal, an organisation offering a higher level of pay can attract a larger number of qualified applicants than its competing units.

2)

Compensation helps to retain competent employees in the organisation. Although retaining competent workers is contingent on many factors, compensation policies help by maintaining a fair internal pay structure and by providing attractive benefits. Turnover is thus reduced, along with costs associated with recruiting, selecting, and training replacements.

3)

Compensation serves as an incentive to motivate employees to put forth their best efforts. Manufacturing and sales organizations, for example, use monetary incentives to attain higher levels of production or sales without hiring additional employees. When employees put forth their best efforts, average productivity of

23

Compensation and
Reward Management

labour increases. With increased productivity, fewer employees are needed to achieve the same level of output. Thus, labour costs are reduced and organisational profitability is increased.
4)

Minimising the costs of compensation can also contribute to organisational effectiveness since compensation is a significant cost for most employers.

In brief, compensation is provided for two reasons, namely; as a reward for past service to the enterprise, and as stimulus to increased performance in the future.

17.4

COMPENSATION POLICIES AND OBJECTIVES

The aim of compensation statement is to set down the company’s policy with regard to salary. It is the responsibility of all concerned to implement the compensation policies and to explain the same fully to their subordinates. The compensation policy should aim: 1)

To recognise the value of all jobs in relation to each other within the company.

2)

To take account of wage rates paid by companies of similar size, product and philosophy. 3)

To ensure stable earnings.

4)

To enable individuals to reach their full earning potential as far as is reasonably practicable. 5)

To ensure employees’ share in the company’s prosperity as a result of increasing efficiency. The objectives of any compensation system are numerous and might include the following: 1)

To enable the employee to earn a good and reasonable salary or wage.

2)

To pay equitable sums to different individuals, avoiding anomalies.

3)

To reward and encourage high quality work and output.

4)

To encourage employees to develop better methods of working and their acceptance. 5)

To discourage wastage of materials or equipment.

6)

To encourage employees to use their initiative and discretion.

7)

To discourage overtime working unless it is very essential.

17.5

COMPENSATION ADMINISTRATION

The primary purpose of compensation administration is to assure management a sound compensation system, and for employees an equitable compensation for services rendered. The objectives of a sound compensation administration programme can be subdivided into specific sub-goals:
1)
2)

Consistency of payments between comparable occupations.

3)

Adjustment of payments in relation to changes in the labour market.

4)

Recognition of individual capability and proficiency.

5)

Comprehension of the plans by supervision and management.

6)
24

Equitable payment in proportion to relative work to the organisation.

Procedures to solve compensation problems rationally.

D.S. Beach in his book Personnel, The Management of People at Work provides seven principles of compensation administration:
1)

The enterprise should have a clear-cut plan to determine differential pay level in terms of divergent job requirements involving varied skill, effort, responsibility and working conditions.

2)

An attempt should be made to keep the general level of wages and salaries of the enterprise in line with that obtained in the labour market or industry.

3)

Adequate care should be taken to distinguish people from the jobs.

4)

Irrespective of individual considerations, care should be taken to ensure equal pay for equal work depending upon flexibility of jobs – of course, variations may be permitted within a pay range.

5)

There should be a plan to adapt equitable measure for recognising individual differences in ability and contribution.

6)

Attempt should be made to provide some procedure for handling wage grievances.

7)

Compensation Strategy,
Structure, Composition

Adequate care should be taken to inform the employees and the union, if any, about the procedure followed in determining wage rates.

If the first goal of attracting capable employees to the organisation is to be achieved, personnel must perceive that the compensation offer is fair and equitable. As a first step in the pursuit of equity, there should be established consistent and systematic relationship among base compensation rates for all jobs within the organisation. The process of such establishment is termed “job evaluation”.

17.6

COMPENSATION DETERMINANTS

At the outset, it is important to distinguish between two related but different questions.
First, one can ask what factors account for individual differences in pay within organisations. An extensive literature suggests that education, experience, performance, and other individual differences play some role. Also, product market and labour market play a crucial role in pay determination.

Product Market
Pay levels of labour market and product market competitors play an important role in determining pay levels. Dunlop (1957) argues that product market competition places an upper boundary on pay level because organisations in a particular industry
“encounter similar constraints of technology, raw materials, product demand, and pricing”. Thus, an organisation will find itself at a competitive disadvantage in the product market if its labour costs exceed those of its competitors. The reason being such costs will ordinarily be reflected to some extent in higher prices for its products.
For example, if Hindustan Motors has higher labour costs than Maruti Udyog,
Hindustan Motors will have difficulty in providing the same quality of automobile at a competitive price. Consequently, product market pressures may act as an upper boundary on employee compensation.

Labour Market
Organisations not only compete solely in the product market but also in the labour market. Maruti Udyog, for example, competes for technicians and managers with similar such organisations. A pay level that is too low relative to these competitors could lead to difficulties in attracting and retaining sufficient number of quality employees. As such, labour market competition can be seen as placing a lower boundary on pay level. In order to avoid such a situation, many companies emphasise that their total compensation is equal to or better than other companies in the market.

25

Compensation and
Reward Management

17.7

COMPENSATION SURVEY

A compensation survey is a process of collecting data and facts about compensation policies, practices and programmes of companies in some labour market. It provides information that has many uses. This information is particularly relevant to the problem of establishing and adjusting salary levels. It may also be used to validate the compensation structure. The objectives of compensation survey vary from one organisation to another. Before conducting a compensation survey, an organisation should study the compensation data that are already available. If such information is not available, a company may either conduct its own survey or participate with other organisations in a cooperative effort.
The data collected through survey should include not only information on the key jobs and their comparability to the surveyed organisation’s jobs but also information on benefits, bonuses, and other methods of compensation besides direct salary. Failure to include these factors would give a distorted picture of the total compensation package offered. It is also useful to collect information on the characteristic of the organisation to determine how similar the organisation is to the one surveyed. In either case, great care must be given to compensation survey procedures.
Conducting a compensation survey is a complex, costly and time-consuming process.
For this reason, employers should thoroughly examine existing compensation surveys before planning to conduct one of their own. Before deciding to use an existing standard survey, an employer should consider a number of factors. First, will the survey provide information to suit the organisation’s needs? If one survey does not meet an employer’s needs, perhaps several surveys will provide the needed information. Second, how representative are the surveyed organisations of those with which an employer wishes to make pay comparisons? Third, does the existing survey provide sufficiently detailed job descriptions to permit detailed comparison with jobs in one’s organisation?
There are three basic methods of conducting a compensation survey: personal interviews, mail questionnaires, and telephone interviews. The most reliable is the personal interview, even though it is time consuming and expensive. Compensation survey serves as a valuable tool for the compensation administrator to acquire useful and necessary information concerning industry pay structures and practices.

17.8

COMPENSATION STRUCTURE

A sound compensation structure must be based on job evaluation programme in order to establish fair differentials in payments depending upon differences in job contents.
Besides the basic factors provided by a job description and job evaluation, those that are usually taken into consideration for determining compensation structure are: l l

Supply and demand for labour

l

The prevailing market rate

l

The cost of living

l

Productivity

l

Trade union’s bargaining power

l

Job requirements

l

Managerial attitudes

l

26

The organisation’s ability to pay

Psychological and sociological factors

The compensation structure must be linked to what the company is trying to achieve.
It is not unusual to find a company with a wage structure in direct conflict with the company’s overall objectives. For example, a company may plan to produce a high quality product while at the same time, it may have a direct incentive geared to quality. Compensation Strategy,
Structure, Composition

An attitude survey should be made to ascertain what needs have to be satisfied through a compensation structure. What are the employees’ attitudes towards the current pay structure and what are their deeper expectations? The pay structure, to a large extent, determines and reinforces attitudes. Two of the areas a survey ought to highlight are the reasons why employees work for a particular company, and what motivates them.

17.9

JOB EVALUATION SYSTEM

Job evaluation is a method used to describe, analyse, compare and evaluate jobs within a unit, a branch, or an industry on the basis of the work content and the job requirements in order to place them under particular wage or salary grades. It is a systematic attempt which provides basis for comparing jobs and determines the relevant worth of different jobs in an organisation. It has two basic objectives: (i) to compare jobs and determine their level within each occupational group; and (ii) to compare jobs between occupational groups.
A number of specific goals may be derived from the basic objectives:
1)

To provide a basis for more objective and rational wage structure.

2)

To correct wage inequities, resulting from personal acquaintance, bargaining pressures, change, customs, and so forth.

3)

To provide the means for the ranking of new and changing jobs.

4)

To reduce pay dissatisfactions by providing procedures for appeals and for grievances and their redressal.

5)

To provide basic information for wage negotiations and wage determination.

While job evaluation approaches are probably the most prevalent methods of establishing base pay, their usefulness like the usefulness of any management system depends on how well they achieve their objectives. Nevertheless, they have a role to play in the administration of compensation. It can provide, atleast an internally justifiable wage structure for organisations.

17.10

PAY EQUITY

Although pay differentials must be sufficiently large to provide incentives, perceived inequity in pay structures may result in detrimental effects such as turnover, grievances, and decreased motivation to perform. Organizations also sometimes face a conflict between the goals of internal consistency and external competitiveness in designing their structures.
Lawler (1986) has argued that organisations need to focus greater attention on external competitiveness. He believes that an internal focus encourages employees to compare themselves with others within the organisation, rather than focusing on the real competition with other organizations. He also suggests that an internal focus results in employees focusing on promotions rather than performing well on their current job. Moreover, there is some belief that conflicts between external and internal equity may be resolved by increasing the pay scales of all jobs, irrespective of their competition in the labour market.

27

Compensation and
Reward Management

Various steps for creating pay equity are listed below:
1)

Categorise employees by job. Fewer jobs are better because too many jobs can cause the compensation system to be cumbersome and difficult to administer.

2)

Compare pay levels with that of the labour market. There are many compensation surveys available.

3)

Manage internal equity. Managing internal equity is more important than external equity.

4)

Link pay with job performance. Those employees who perform their jobs better should receive larger salary increases than those who do not.

5)

Communicate the compensation system and how it works.

Companies often conduct formal or informal surveys of their competitors to get an idea of appropriate pay levels. This helps them to achieve external pay equity by comparing the differences that may exist among similar operations in a particular labour market. The external considerations when developing a compensation plan may include labour market conditions, cost of living, and economic factors.

17.11

EXECUTIVE COMPENSATION

In modern business, executives hold the most pivotal place in an organisation. They play a major part in looking after the economic health of the company. As they are important for the success, growth and profitability of an organisation, they have to be compensated properly. To make the executives happy to the extent possible, companies have been giving in recent years, bigger and more frequent rises in salaries.
The cumulative effect is that executive compensation cost is today a sizeable cost and rising cost. Companies have started looking at executive compensation more systematically and more proactively so that they can expect better performance from the executives.
For the higher management, salaries are influenced by the size of a company, by the specific industry, and in part by the contribution of the incumbent to the process of decision-making. The bigger the company, the greater is the compensation paid to the executives. Straight salaries, bonuses, stock purchase plans and profit sharing are used to compensate executives. In addition, executives are compensated for the various expenses incurred by them, for taxation takes away a major portion of their salary. Such payments are in the form of:
1)
2)
3)
4)
5)
6)

medical care; professional service in legal and financial matters; facilitates for entertaining customers and for dining out; company recreational services; the cost of education and training of executives, scholarships for their children, and allowances for professional magazines and books; and free well-furnished accommodation, conveyance and servants. All these go under the head of perquisites.

A sound system of executive compensation is essential for a number of reasons, namely: 28

i) ii) iii) iv) to attract the right kind of personnel; to retain the right kind of personnel; to motivate the right kind of personnel; and to get the best out of the right kind of personnel in the face of competition.

The absence of internal equity leads to dissatisfaction among executives. In organizations, there are disparities between compensation patterns. For whatever reasons, compensation practices are kept as guarded secrets by organisations. Surveys of compensation practices tells us among other things, that executive compensation practices are based on factors like traditions, technology, management beliefs and executive acceptance.

Compensation Strategy,
Structure, Composition

To be effective, executive compensation has to be seen as a whole, evolved for a situation and administered in letter and spirit. Essentially, an executive compensation system or scheme for an organisation has to be tailor-made. Also, it has to be reviewed and revised from time to time. Top management should develop an approach to compensation that accounts for internal as well as external equity. The executive compensation will succeed when the total package:
i)

establishes sufficient levels of pay;

ii)

provides internal and external competitiveness;

iii) supplies opportunity, security and status; iv) maximises after tax earnings;
v)

calls forth maximum effort; and

vi) makes the executive a much better performer both as an individual and as a team member both for today and for tomorrow.
Activity A
Suppose your organisation’s recently completed compensation survey showed that remuneration levels of several executive positions were either less than or more than they should be. How do you bring these positions ‘on line’, and establish pay equity? ............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................
............................................................................................................................................

17.12

COMPENSATION TRENDS

Individual organisations may have differences in their compensation system based on factors best suited to their perceived needs. However, some general compensation trends are evident, as given below:
1)

Basic or consolidated salary continues to remain as the major component of compensation system.

2)

Allowances may be linked to the salary as a percentage or by slabs, but preference is for flat amounts, which do not increase automatically.

3)

Reimbursements of expenses incurred on company work will become limited, and in line to conform with the tax laws. Being actuals in most cases, they will not be considered as part of the compensation, unless it is provided towards personal benefits.

4)

Annual payments such as bonus or commission, leave travel are common features – some tax reliefs apply for the latter.

29

Compensation and
Reward Management

5)

Benefits will comprise mostly unfurnished company owned or leased accommodation, use of company owned or leased vehicle, medical coverage, retiral benefits covering provident fund, pension or superannuation or gratuity, post retiral medical assistance, and easy loan schemes at low or zero interest rates for house building.

6)

Employee stock option schemes – which have been popular in IT industry – are yet not extensively used due to their lesser share values, especially in the well established older companies.

7)

Retiral benefits are important to many, whilst the younger generation and specially IT professionals, do not consider it as an advantage, unless the benefit value is available to them on moving to a new job.

8)

Against the past practice of modest gradual increases applicable to all, the differential in performance is now being recognised during the review of performance. Often a salary freeze is being used for poor performance and substantial and varying increases to the good performer.

9)

Emphasis on variable performance pay or bonus as a reward is increasingly becoming important and growing component of the compensation system.

10) From the earlier grade oriented compensation system within reasonable boundaries, compensation is now somewhat tailor made for specialist or key contributors to retain them in the very volatile job market.
11) Compensation review periods have become generally annual and sometimes frequent, as compared to three to five years earlier, in the fast changing market situation. 17.13

WAGE STRUCTURE IN INDIA

The employee benefit package normally contains apart from basic wage, a dearness allowance, overtime payment, annual bonus, incentive systems, and a host of fringe benefits. Basic Wage
The concept of basic wage is contained in the report of the Fair Wages Committee.
According to this Committee, the floor of the basic pay is the “minimum wage” which provides “not merely for the bare sustenance of life but for the preservation of the efficiency of the workers by providing some measure of education, medical requirements and amenities.” The basic wage has been the most stable and fixed as compared to dearness allowance and annual bonus which usually change with movements in the cost of living indices and the performance of the industry.

Dearness Allowance
The fixation of wage structure also includes within its compass a fixation of rates of dearness allowance. In the context of a changing pattern of prices and consumption, real wages of the workmen are likely to fluctuate greatly. Ultimately, it is the goods and services that a worker buys with the help of wages that are an important consideration for him. The real wages of the workmen thus require to be protected when there is a rise in prices and a consequent increase in the cost of living by suitable adjustments in these wages. In foreign countries, these adjustments in wages are effected automatically with the rise or fall in the cost of living.
30

In India, the system of dearness allowance is a special feature of the wage system for adjustment of the wages when there are frequent fluctuations in the cost of living. In our country, at present, there are several systems of paying dearness allowance to the employees to meet the changes in the cost of living. In practice, they differ from place to place and industry to industry.

Compensation Strategy,
Structure, Composition

One of the methods of paying dearness allowance is by a flat rate, under which a fixed amount is paid to all categories of workers, irrespective of their wage scales.
The second method is its linkage with consumer price index numbers published periodically by the government. It indicates the changes in the prices of a fixed basket of goods and services customarily bought by the families of workers. In other words, the index shows the rise or fall in the cost of living due a rise or fall in consumer prices. The third method of paying dearness allowance is on a graduated scale according to slabs. Under this method, workers are divided into groups according to the slabs of wage scales to whom fixed amounts of dearness allowance are paid on a graduated scale. After a limit, there will not be any increase in the amount of dearness allowance at all, however high the wage rate may be. This method is popular because it is convenient and also considered to be equitable.

Overtime Payment
Working overtime in industry is possibly as old as the industrial revolution. The necessity of the managements’ seeking overtime working from employees becomes inevitable mainly to overcome inappropriate allocation of manpower and improper scheduling, absenteeism, unforeseen situations created due to genuine difficulties like breakdown of machines. In many companies, overtime is necessary to meet urgent delivery dates, sudden upswings in production schedules, or to give management a degree of flexibility in matching labour capacity to production demands.
The payment of overtime allowance to the factory and workshop employees is guaranteed by law. All employees who are deemed to be workers under the Factories
Act or under the Minimum Wages Act are entitled to it at twice the ordinary rate of their wages for the work done in excess of 9 hours on any day or for more than 48 hours in any week. The major benefit of overtime working to workers is that it offers an increase in income from work.

Annual Bonus
The bonus component of the industrial compensation system, though a quite old one, had assumed a statutory status only with the enactment of the Payment of Bonus Act,
1965. The Act is applicable to factories and other establishments employing 20 or more employees. The Act has statutorily imposed an obligation on the employer to pay bonus to employees at the minimum rate of 8.33 per cent of the salary earned.
The maximum is fixed at 20 per cent. The Act has restricted payment of bonus to employees drawing wages or salaries up to rupees 3,500 per mensem. In cases of those eligible employees whose salary is more than rupees 3,500 per month, it is computed at rupees 2,500 per month. The quantum of bonus under the Act is dependent upon “available surplus”.

Incentive Systems
The term “incentive” has been used both in the restricted sense of participation and in the widest sense of financial motivation. It is used to signify inducements offered to employees to put forth their best in order to maximise production results.
31

Compensation and
Reward Management

Incentives are classified as financial and non-financial. Important financial incentives are attractive wages, bonus, dearness allowance, traveling allowance, housing allowance, gratuity, pension, and provident fund contributions. Some of the nonfinancial incentives are designation, nature of the job, working conditions, status, privileges, job security, opportunity for advancement and participation in decisionmaking. However, a vast diversity exists in regard to policy and practice of incentive payments. Incentive 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.
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 of organisation-wide incentive system is profit 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.
One of the essentials of a sound profit sharing system is that it should not be treated as a substitute for adequate wages but provide something extra to the participants. Full support and cooperation of the union is to be obtained in implementing such a scheme.

32

Activity B

Compensation Strategy,
Structure, Composition

Is there any system of production bonus and/or any other kind of incentive payment in your organisation? If so, give details as to:
(a) how payment is linked to production/productivity?
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................
(b) who are the employees covered under the scheme?
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................
(c) any differential incentive payments for different categories of employees.
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................

Fringe Benefits
The remuneration that the employees receive for their contribution cannot be measured by the mere estimation of wages and salaries paid to them. Certain supplementary benefits and services known as “fringe benefits” are also available to them. The characteristics of fringe benefits are:
1)

These benefits are distinctly additional to the regular wages paid to the workers.
As such, they are not provided as a substitute for wages or salaries of the employees. 2)

These benefits are meant primarily to be of advantage to the employees.

3)

The advantages accrued to the employees through the provision of fringe benefits are as such they cannot be secured through their own individual efforts.

4)

Only those benefits fall within the purview of fringe benefits which are or can be expressed in cash terms.

5)

The scope of fringe benefits is different from that of welfare services. Fringe benefits are provided by the employers alone whereas welfare services may be provided by other agencies as well. Benefits that have no relation to employment should not be regarded as fringe benefits.

Fringe benefits have been classified in several ways. In terms of their objectives,
Meggison classifies them into two groups: those providing for employees’ security and those purporting to increase employees’ job satisfaction causing reduction in labour turnover and improvement in productivity. The former group includes retirement programmes, workmen’s compensation, unemployment compensation, social insurance, and other provisions. The later group incorporates vacations, holidays, sick leave, discounts on company goods and services, and allied tangible and intangible benefits. Fringe benefits are also categorised as statutory, contractual, and voluntary. Statutory benefits include social security and medical care, unemployment compensation, workmen’s compensation, provident fund, and gratuity. The benefits provided by the employers in pursuance of agreements with workers may include dearness allowance, house rent allowance, city compensatory allowance, medical allowance, night-shift

33

Compensation and
Reward Management

allowance, heat allowance, transport, housing and educational allowances. Voluntary fringe benefits which are provided unilaterally by the company include group insurance, death benevolent fund, washing allowance, leave encashment, leave travel concession, conveyance allowance, incentive for family planning, service awards, and suggestion awards.
Currently fringe benefits are a significant part of employee compensation system and the employees tend to take them for granted and do not link these items with wages or income as they do not have any direct bearing on payments. They are no more on the fringe of compensation but form an integral component of individual’s earnings involving spiralling costs for the company. However, the fringe benefit system can become effective if attempts are made to gear them to the needs of human resource in organisational settings.
Activity C
List out various fringe benefits currently offered to executives of your organisation.
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
Activity D
Does your organisation show any favourable indication from fringe benefits in terms of:
a)

Low labour turnover.
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................

b)

Low absenteeism.
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................

c)

Fewer disputes and stoppages.
..........................................................................................................................
..........................................................................................................................
..........................................................................................................................

Activity E
Are there any ways in which you would like to see an extension or reduction of fringe benefits in your organisation?
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
34

.............................................................................................................................................................

Compensation Strategy,
Structure, Composition

Activity F
If you were establishing your own business, which benefits would you be statutorily required to pay and which you would offer voluntarily?
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................
.............................................................................................................................................................

17.14

CASE STUDY

The United National Bank has just decided to open a branch in town “X”, which is an exclusive resort located about 40 kms. away from a large city “Y”. There is no bank in that town at present.
The United National Bank is anxious to determine the appropriate salary for the clerical staff it expects to recruit. Clerks in the bank’s offices in the neighbouring city
“Y” receive a starting salary of rupees 3,000 a month. As a matter of company policy, pay scales have been fixed on a par with other banks in the city.
A survey of local establishments at the town “X”, primarily insurance offices and other comparable concerns, indicates that the salary for qualified clerical personnel is rupees 3,500 a month. The higher salary in town “X” may be attributed in part to the substantial higher cost of living, the limited number of people seeking employment and the fact that there are no other banks. Banks in city “Y” have traditionally paid lesser salaries than other establishments, on the ground that banks offer better working conditions and higher dignity.

Discussion Questions
1)

What should be the salary structure for the clerical staff in the United National
Bank?

2)

If there is a difference in pay scales in two different locations, how can the bank justify the same?

17.15

SUMMARY

The goals of compensation administration are to design the lowest cost-pay structure that will attract, motivate, and retain competent employees. It consists of organisation’s policies, procedures, and rules determining the compensation system.
Compensation is usually composed of the basic wage or salary, allowances, incentive or bonuses, and benefits. Job evaluation serves as the foundation of most wage and salary systems. The question of fair pay involves both internal and external equity.
The fact that how employees are paid has important consequences for individual, group and organisational performance. Top executives, particularly receive special attention in the compensation literature because of their potential influence on organisational success.

35

Compensation and
Reward Management

17.16

SELF-ASSESSMENT QUESTIONS

1)

What are the basic principles of compensation administration?

2)

What are the characteristic features of executive compensation?

3)

What type of compensation system normally motivate the executives?

4)

Analyse the future trend of employee compensation in India.

5)

Briefly explain the major components of industrial wage structure of India.

6)

Compare and contrast individual, group, and organisation-wide performance bonus systems. How are they alike? and/or Different?

17.17

FURTHER READINGS

Backman J., Wage Administration: An Analysis of Wage Criteria, D. Van Nostrand
Co. Ltd., New York, 1959.
Beach, D.S., The Management of People at Work, Macmillan, New York, 1980.
Bowey A.M., Handbook of Salary and Wage Systems, Gower Press, 1975.
Dayal S., Industrial Relations System in India: A Study of Vital Issues, Sterling
Publishers Pvt. Ltd., New Delhi, 1980.
Laxmi Narain, Managerial Compensation and Motivation in Public Enterprises,
Oxford and IBH Publishing Co., New Delhi, 1973.
Mathur A.N., Dynamics of Wages, Popular Prakashan (P) Ltd., Bombay, 1986.
Wayne F. Cascio, Werther W.W., Davis K., and Elios M. Awa,
Human Resources and Personnel Management, McGraw-Hill, New York, 1993.

36