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Unit 2 New Employment Practices Outsourcing, Contingent Workers, Employee Leasing

Contingent Workers = A contingent workforce is a provisional group of workers who work for an
organization on a non-permanent basis, also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants. Contingent Workforce Management (CWM) is the strategic approach to managing an organization's contingent workforce in a way that it reduces the company's cost in the management of contingent employees and mitigates the company's risk in employing them.

Drivers of growth
Among several other contributing factors, globalization has had a large impact on the growth in using contingent labor. Globalization contributes to rapid growth in industries, increased outsourcing, and a need for flexibility and agility to remain competitive.[5] By engaging contract workers, organizations are able to be agile and save costs. The contingent workforce acts as a variable workforce for companies to select from to perform specific projects or complete specialized projects.[6] Also as organizations make efforts to be more agile and to quickly NAACHO-BC

respond to change in order to be more competitive, they turn to the contingent workforce to have on-demand access to professionals and experts.[7] Organizations also see the opportunity to reduce benefits and retirement costs by engaging the contingent workforce.[8] However, there is risk involved in avoiding these costs if an employee is improperly classified as a contingent worker. Using the contingent workforce is also cost-effective in that using contingent labor allows for adjustments to employment levels and employment costs depending on what kind of expertise and labor is need and at what time it is needed. Trends in the contingent workforce are also impacted by the economy. A study conducted by the MPS Group shows the relationship between the contingent labor cycle and the state of the economy.[9] In a bullish economy, the demand for contingent labor is strong. This is most likely because organizations are trying to grow with the economy, and using contingent workers allows them to work with experts when needed, without the long-term costs of hiring them. A knowledge-driven economy also contributes to the growth in the use of the contingent workforce because organizations rely more on their specific and expert knowledge and expertise.[10] As demand increases for highly skilled and knowledgeable people, the expertise of contract workers becomes more attractive

Advantages and Disadvantages of using Contingent Workers

Advantages [11] Disadvantages

Flexibility in type and amount of labor resources

Lack of loyalty to employer or company

Save costs in benefits and tax

Disturbs organizations core morale and culture

Immediate access to expertise not present internally Training costs

Savings in long-term compensation costs


Reasons for outsourcing

Companies outsource to avoid certain types of costs. They outsource the non core activities. Among the reasons companies elect to outsource include the avoidance of regulations, high taxes, high energy costs, and costs associated with defined benefits in labor-union contracts and taxes for governmentmandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business. [12] Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction.[13][14] Import marketers may make short-run profits from cheaper overseas labor and currency mainly in wealthconsuming sectors at the long-run expense of an economy's wealth-producing sectors, thus straining the home country's tax base, income growth, and increasing the debt burden. When companies offshore products and services, those jobs may leave the home country for foreign countries, at the expense of the wealth-producing sectors.[3] Outsourcing may increase the risk of leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.

Adv Minimizing cost on IT infrastructure.

IT consultants are fully trained on the latest technologies. Service providers can offer more up-to-date advanced technologies. No need to retain technically qualified in-house personnel. Outsource your non-core activities and spend more time concentrating on your core business processes.


Offshoring gives you access to professional, expert and high -quality services. Your organization can experience increased efficien cy and productivity in non-core business processes. You can streamline your business operations. Offshore outsourcing can help you save on time, effort, manpower, operating costs and training costs, giving you overall cost advantage. Outsourcing can make your organization more flexible to change. Experience increased control of your business. Save on investing in the latest technology, software and infrastructure and let your outsourcing partner handle the entire infrastructure. Get the assurance that your business processes are being carried out efficiently, proficiently and within a fast turnaround time. Offshoring can help your organization save on capital expenditures. By outsourcing, your company can save on team management probl ems as your offshore partner will be managing the team who does your work. Cater to the new and challenging demands of your customers. Free up the cash flow of your company. Share your business risks. Give your business a competitive advantage - increase productivity in all the areas of your business. Outsourcing can help your organization cut its operational costs by 50% if not more. Continuous IT support coverage without having to rely on only one or two key people Disad Hidden costs are difficult to calculate or prepare for. Some degree of control is lost. Sometimes, communication skills are not satisfactory in the for every team-player of the service provider. Possible loss of flexibility in reacting to changing business conditions. Risk of fraud and confidentiality issues.


Employee leasing Employee leasing is a contractual arrangement in which the leasing company, also known as a professional employer organization (PEO), is the official employer. Employment responsibilities are typically shared between the leasing company and the business owner (you, in this case). You retain essential management control over the work performed by the employees. The leasing company, meanwhile, assumes responsibility for work such as reporting wages and employment taxes. Your main responsibility is writing a check to the leasing company to cover the payroll, taxes, benefits and administrative fees. The PEO does the rest. Employee leasing lets you add workers without adding administrative complexity. Employee leasing firms manage compliance with state and federal regulations, payroll, unemployment insurance, W-2 forms claims processing, and other paperwork. Some also offer pension andemployee assistance programs. By combining the employees of several companies into one large pool, PEOs can also offer business owners better rates on health-care and workers' compensation coverage. The net effect can be significant savings of your time and money. If you've decided to look into employee leasing and are considering working with a PEO, how can you decide if that PEO is right for your business? The National Association of Professional Employer Organizations (NAPEO)makes the following recommendations:

Look for services that fit your human resources needs. Is the company flexible enough to work with you? Check for banking and credit references and evidence that the company's payroll taxesand insurance premiums are up to date. Ask to see a certificate of insurance.

Ask for client and professional references, and call them. Investigate the company's administrative competence. What experience does it have? Understand how employees' benefits are funded. Do they fit your workers' needs? Find out who the third-party administrator or carrier is, and whether it is licensed if your state requires this.

Make sure the leasing company is licensed or registered if required by your state. Review the agreement carefully and try to get a provision that permits you to cancel with short notice--say, 30 days



Employment of Contract Labourers Provisions and Practices under

the relevant Act. NOT AVAILABLE

contract labour= the labour of workers whose freedom is restricted by the terms of a contractual relation and by laws that make such arrangements permissible and enforceable. The essence of the contract labourers obligation is his surrender for a specified period of the freedom to quit his work and his employer. Other stipulations cover such matters as repayment of the costs of transportation, housing, training, and other expenses. Contract labour has been based upon conditions of poverty and upon political and religious intolerance, and it is often expressed in penal codes. Historically, deception, kidnapping, and coercion have been used to obtain contract labourers, with contractual terms often reflecting the disadvantageous position of the labourer. Contract labour still carries implications of compulsion and unfairness, and conditions can approach slavery in their severity. Indentured labour, one form of contract labour, was common in North America in colonial times. Its subjects were western European (mainly British) males and females. Some of the contracts were similar to apprenticeships, while the terms of others were harshusually imposed on criminals whose sentences were commuted if they agreed to colonial indenture. This practice is also known as indentured servitude.

UNIT 5 Concept of Wage Minimum Wage, Fair Wage, Living Wage, Wage Policy

minimum wage =
A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labor. Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage claim it increases the standard of living of workers, reduces poverty, reduces inequality, boosts morale and forces businesses to be more efficient.[1] Critics of the minimum wage claim it actually increases poverty,[2] increases unemployment (particularly among low productivity workers), and is damaging to businesses


Fair Wage
Definition: Fair wage refers to wage levels and company practices regarding wages that provide

a living wage for workers while still complying with all national regulations (such as minimum wage, overtime payments, provision of paid holidays, etc).With a fair wage, employees should be able to maintain a decent standard of living for themselves and their families. Fair-wage while the lower level of fair wage is the minimum wage the upper-limit is the capacity of the industry to pay. Between these two limits, the actual wage can depend on (I) (II) (III) (IV) the productivity of labour the prevailing wage rate National income the place of industry in national economy.

Living Wage

It is the wage that provides, in addition to the necessities of life, certain amenities considered necessary for the well-being of the worker in a particular society. It should ensure a normal standard of life to the average employee regarded as human beings living in a civilized community. According to the Fair Wages Committee, the living wage should enable the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter but also a measure of frugal comfort including education for children, protection against ill-health, requirements of essential social needs and measure of insurance against the more important misfortunes including old age. The concept of living wage is dynamic related with the level of economic development in a country. There should be progressive improvement in the wage with improvements in the economic life of the nation. In an underdeveloped country like India living wage is the ideal or target that is to be achieved through higher productivity.


The term wage policy refers to all systematic efforts of the Government in relation to a national wage and salary system, The policy lays down guidelines concerning the level and structure of wages. The guiding principles of national wage policy are as follows:
1. 2. 3. 4. 5. 6. 7. Sub serves the national objective of economic growth with social justice. Promote employment, productivity and capital formation. Remove sectorial imbalances and wage differentials. Promote price stability. Avoid automatic double linkages. Ensure rising real wages consistent with the capacity of the industry and the national economy. Have relationship with national income, state of the industry and prevailing wage rates.


Pay structure in a company depends upon several factors, e.g., wage settlements, labor market situation, companys nature and size, etc. Pay structure consists of certain grades, scale and range of pay in each scale. Each scale has a minimum and a maximum limit. Jobs placed within a particular grade carry the same value though the actual pay in a grade depends upon length of service and or performance of the employee. Pay structure in India generally consists of the following components:
1. 2. 3. 4. Basic wage/salary. Dearness allowance (D.A.) and other allowances. Bonus and other incentives. Fringe benefits or perquisites.

Principles of Wage and Salary Administration: The following principles should be followed for an effective wage and salaryadministration ; 1. Wage policy should be developed keeping in view the interests of allconcerned parties viz., employer, employees, the consumers and thesociety. 2. Wage and salary plans should be sufficiently flexible or responsive tochanges in internal and external conditions of the organisation. 3. Efforts should be made to ensure that differences in pay for jobs arebased on variations in job requirements such as skill, responsibility,efforts and mental and physical requirements. 4. Wage and salary administration plans must always be consistent withoverall organizational plans and programmes. 5. Wage and Salary administration plans must always be in conformity withthe social and economic objectives of the country like attainment of equality in income distribution and controlling inflation, etc. 6. These plans and programmes should be responsive to the changing localand national conditions. 7. Wage and salary plans should expedite and simplify administrativeprocess. 8. Workers should be associated, as far as possible, in formulation andimplementation of wage policy. 9. An adequate data base and a proper organizational set up should bedeveloped for compensation determination and administration. 10. The general level of wages and salaries should be reasonably in line withthat prevailing in the labour market. 11. There should be a clearly established procedure for hearing and adjustingwage complaints. This may be integrated with the regular grievanceprocedure, if it exists. 12. The workers should receive a guaranteed minimum wage to protect themagainst conditions beyond their control.


13. Prompt and correct payments to the employees should be ensured andarrears of payment should not accumulate. 14. The wage and salary payments must fulfill a wide variety of humanneeds including the need for selfactualization. 15. Wage policy and programme should be reviewed and revisedperiodically in conformity with changing needs. For revision of wages, awage committee should also be preferred to the individual judgmenthowever unbiased of a manager. 4.1.6 Wage Structure According to economic theory, wages are defined broadly as any economic compensation paid by the employer to his labourers under some contract for the services rendered by them. In its actual sense which is prevalent in the practice, wages are paid to workers which include basic wages and other allowances which are linked with the wages like dearness allowances, etc. Traditionally, in the absence of any bargaining power possessed by labourers, they did not have any say in the determination of wages paid to them. This has led to the development of several theories of wages such as subsistence theory by Ricardo, wage fund theory by Adam Smith, surplus value theory by Karl Marx, residual claimant theory by Frascis Walker, marginal productivity theory by Philip Wickstted and John Clark, bargaining theory by John Davidson. And behaviouraI theory by James March and Herbert Simon. Each theory tries to explain how wages are determined. In the Indian context, soon after the independence, Government of India set up a Committee on Fair Wages in 1948 which has defined various concepts of wages which govern the wage structure in the country specially in those sectors which can be termed as underpaid and where workers do not have bargaining power through unions. These concepts are: i) minimum wage,ii) living wage, and iii) fair wage.

UNIT 6 Compensation Wage/Salary, Real Wage, Components of Wages:- Basic,

Dearness Allowances, House Rent Allowances, City Compensatory Allowance, Other Allowances, Wage Fixation, Pay for different types of employees, Managerial Compensation Wages and Salary: Wages represent hourly rates of pay, and salary refers to the monthly rate of pay,irrespective of the number of hours put in by an employee. Wages and salariesare subject to annual increments. They also differ from employee to employee,and depend upon nature of job, seniority, and merit.

Wage and Salary administration, also known as Compensation management, remuneration management, or reward management, is concerned with designing and implementing total compensation package. The traditional concept of wage and salary administration emphasised on only determination of wage and salary structures in organisational settings. However, entered the business field which necessiated to take wage and salary administration in comprehensive way with a suitable change in its nomenclature. Beach has defined wage and salary administration as follows:


"wage and salary administration refers to the establishment and implementation of sound policies and practices of employee compensation. It includes such areas as job evaluational, surveys of wages and salaries, analysis of relevant organisational problems, development and maintenance of wage structure, establishing rules for administering wages. wage payments, incentives, profit sharing, wage changes and adjustments, supplementary payments, control of compensation costs and other related items" Concept of Wage and Salary

Wage and salary are the most important component of compensation and these are essential irrespective of the type of organisation. Wage is referred to as remuneration to workers particularly, hourly-rated payment. Salary refers to as remuneration paid to white-collar employees including managerial personnel. Wages and salary are paid on the basis of fixed period of time and normally not associated with productivity of an employee at a particular time. BASIC SALARY All employees are entitled to a basic salary which is fixed as per their respective terms of employment either as a fixed amount or at a graded system of salary. Under this graded system, apart from the basic salary at which the employee will start, annual increments to be given to the employee are pre fixed in the grade. For example, if a person is employed on 1st May, 2004 in the grade of 12000 300 15000, this means that he will start at a basic salary of Rs.12000 from 1st May, 2004. He will get an annual increment of Rs.300 w.e.f. 1st May, 2005 and onwards every year on the same date till his basic salary reaches Rs.15, 000. No further increment is given thereafter till he is promoted and placed in other grade. Advance Salary, if received in previous year for next year is taxable on receipt basis in the same previous year.

Objectives Of Wage And Salary Administration

A sound plan of wage and salary administration seeks to achieve the followingobjectives :

1. To establish a fair and equitable compensation offering similar pay for similar work.


2. To attract competent and qualified personnel. 3. To retain the present employees by keeping wage levels in tune with competitive units. 4. To keep labour and administrative costs in line with the ability of the organisation to pay. 5. To improve motivation and morale of employees and to improve union management relations. 6. To project a good image of the company and to comply with legal needs relating to wages and salaries. 7. To establish job sequences and lines of promotion wherever applicable. 8. To minimize the chances of favoritisms while assigning the wage rates. FactorsInfluencing Wages And Salaries
A number of factors, thus, influence the remuneration payable to the employees. These factors can becategorized into

(i) (ii)

External Factors and Internal Factors.

External Factors=External factors influencing wages and salaries are as discussed below:

1. Demand and Supply:The labour market conditions or demand and supply forces operate at thenational and local levels and determine organizational wage structure. When thedemand of a particular type of labour is more and supply is less then the wageswill be more. On the other hand, if supply of labour is more demand on theother hand, is less then persons will be available at lower wage rates also. In thewords of Mescon, the supply and demand compensation criterion is veryclosely related to the prevailing pay, comparable wage and on going wageconcepts since, in essence all of these remuneration standards are determined byimmediate market forces and factors. 2. Cost of Living:The wage rates are directly influenced by cost of living of a place. The workerswill accept a wage which may ensure them a minimum standard of living.Wages will also be adjusted according to price index number. The increase inprice index will

erode the purchasing power of workers and they will demandhigher wages. When the prices are stable then frequent wage increases may not be undertaken. 3. Trade Unions Bargaining Power :The wage rates are also influenced by the bargaining power of trade unions.Stronger the trade union higher well be the wage rates. The strength of a tradeunion is judged by its membership, financial position and type of leadership.Unions last weapon is strike which may also be used for getting wage increases.If the workers are disorganized and disunited then employers will be successful in offering low wages. 4. Government Legislation:To improve the working conditions of workers, government may pass alegislation for fixing minimum wages of workers. This may ensure them aminimum level of living. In under developed countries bargaining power of labour is weak and employers try to exploit workers by paying them low wages.In India, Minimum Wages Act, 1948 was passed to empower government to fix minimum wages of workers. 5. Psychological and Social Factors :Psychological the level of compensation is perceived as a measure of success inlife. Management should take into consideration the psychological needs of theemployees while fixing the wage rates so that the employees take pride in theirwork. Sociologically and ethically, the employees want that the wage systemshould be equitable, just and fair. These factors should also be taken intoconsideration while devising a wage programme. 6. Economy:Economy also has its impact on wage and salary fixation. While it may bepossible for some organisations to thrive in a recession, there is no doubt thateconomy affects remuneration decisions. A depressed economy will probablyincrease the labour supply. This, in turn, should lower the going wage rate. 7. Technological Development:With the rapid growth of industries, there is a shortage of skilled resources. Thetechnological developments have been affecting skills levels at faster rates.Thus, the wage rates of skilled employees constantly change and an organization has to keep its level upto the mark to suit the market needs. 8. Prevailing Market Rates:No enterprise can ignore prevailing or comparative wage rates. The wage ratespaid in the industry or other concerns at the same place will form a base forfixing wage rates. If a concern pays low rates then workers leave their jobswhenever they get a job somewhere else. It will not be possible to retain goodworkers for long.
B. Internal Factors=The important internal factors affecting wage and salary decisions are asfollows:


1. Ability to Pay:The ability to pay of an enterprise will influence wage rates to be paid. If theconcerns is running into losses then it may not be able to pay higher wage rate.A profitable concern may pay more to attract good workers. During the periodof prosperity, workers are paid higher wages because management wants toshare the profits with labour. 2. Job Requirements:Basic wages depend largely on the difficulty level, and physical and mentaleffort required in a particular job. The relative worth of a job can be estimatedthrough job evaluation. Simple, routine tasks that can be done by many peoplewith minimum skills receive relatively low pay. On the other hand, complex,challenging tasks that can be done by few people with high skill levels generally receive high pay. 3. Management Strategy:The overall strategy which a company pursues should determine to remunerationto its employees. Where the strategy of the organisation is to achieve rapidgrowth, remuneration should be higher than what competitors pay. Where thestrategy is to maintain and protect current earnings, because of the decliningfortunes of the company, remuneration level needs to be average or even below average. 4. Employee:Several employee related factors interact to determine his remuneration. (i) Performance or productivity is always rewarded with a pay increase.Rewarding performance motivates the employees to do better in future. Seniority. Unions view seniority as the most objective criteria for payincreases whereas management prefer performance to effect payincreases. Experience. Makes an employee gain valuable insights and is generally rewarded. Potential. Organisation do pay some employees based on their potential.Young managers are paid more because of their potential to performeven if they are short of experience. Luck. Some people are rewarded because of their sheer luck. They havethe luck to be at the right place at the right time.


(iii) (iv)


The various allowances given to the employees are:(i) House Rent Allowance (HRA):Organisations are set up in various types of locations such as urban centres; industrial belt etc.where houses are not available at a reasonable rent.


If the employees are required to pay house rent as per the prevailing market rates, a substantial portion of their wages will go as house rent and the employees will not be left with sufficient money to meet their other requirements. Hence HRA is paid to the employees enabling them to pay house rent for a suitable accommodation . It varies according to the cost of living in different cities and places. Employees are paid HRA as per their slabs in their wages and salaries. This allowance is not considered as wages. The HRA shall also not be reckoned for any direct payment like gratuity, overtime, provident fund etc. (ii) Leave Travel Allowance (LTA): Employees while working, seldom get opportunity to visit places where they can go and spend sometime along with the members of their families to get relaxed and reenergized for the work to be continued with zeal and enthusiasm. For such purpose employees are also willing to visit their native places. Many organisations have introduced schemes commonly called Leave Travel Assistance (LTA)/Leave Travel Concession (LTC) etc. and this facility facilitates the employees to go to their home town or places for relaxation and reenergising . Organisations have different types of practices for various categories of employees. Normally employees who have completed a few years of service satisfactorily are entitled to LTA/LTC.

(iii) Washing Allowance: While employees are working in various industrial processes, various kind of dirt gets accumulated on their body and uniform. If the employees do not keep themselves clean, they are likely to get different types of diseases. A particular amount is paid as washing allowance to certain categories of employees and they are expected to keep themselves clean. In some organisation duty uniforms are provided to front line employees who directly come in touch with customers .These employees are given washing allowance and are expected to keep their unforms clean and make better presentation before the customer.

Once washing allowance is provided, the employers are in a position to enforce a .standard of cleanliness on the workforce which will ultimately force the employees to keep themselves clean and in due course of time, the organisation will have its own standard of cleanliness. (iv) Conveyance Allowance: For smooth and efficient functioning of any organisation, employees are required to come to work place in time. Employees who neither have got a residence in the housing colony nor at any nearby places, commutes everyday distance by various means while coming to -work


place. While commuting employees loose hilt of time and energy and after reaching work place they find themselves exhausted. In order to facilitate employees to come to the work place comfortably and in time , employers provide convence allowance to the employees for availing better transport service, or maintaining and using own vehicle. The conveyance allowance is paid to employees for the days in which he receives normal wages. This however is not paid for days on which he is on leave without pay.

(v) Shift Allowance (S'A);Someorganisations are required to work continuously under shift system because of the nature of production or service they have. Normally there are three shifts 6 A.M. to 2 RM., 2 P.M. to 10 RM. and 10 RM. to 6 A.M. In order to establish balance among employees, so far shift duty is concerned; the employees are rotated among these three shifts. It implies that all employees will get by rotation duties at night shift equally. However there are organisations where a few employees are required to work more in nightshifts and rotations are not possible. They are paid an additional allowance called night shift allowance because they do jobs frequently during night hours which is streneous. The rate of SA varies from organisation to organisation. 159 of the time a fixed amount is paid as SA.

vi) Cash Handling Allowance: There are organisations where one particular category of employees handles a lot of cash (currencies and coins) of various denominations. Their job is to receive/pay , transfer cash amount. While doing so, they are required to count cash correctly. Sometimes by way of genuine error, they receive less money, pay more money and also receive bad currencies and coins. In such situation they are required to compensate the loss caused to the employers due to such error.. Thus an element of risk is involved. In order to cover this risk element, these employees receive this allowance on regular basis. (vii)Lunch Allowance and Dinner Allowence: Those employees who are required to do the organisadon's work away from the usual place of duty during the lunch or dinner period, are paid lunch & dinner allowance.

(viii)Education Allowance: The education allowance is paid to the employees to make the package more attractive and facilitate greater spirit to educate their children.

(ix) Underground Allowance: All employees working in underground operations are entitled to this allowance because the underground job is more strenuous and risky.


(x) Outstation Allowance: This allowance is paid to all employees on outstation duty.

(xi) Servant Allowance: In order to enable the executives to work in a relax mind and free from household duties, they are provided servants or allowance enabling them keep servants.

(xii)Social Security Allowance: This allowance is paid to employees to help them to protect themselves and their families in an unforeseen situations in life. 'The employers get their employees insured under various types of social security schemes. The amount for the insurance schemes is paid by the employers.

(xiii)City Compensatory Allowance: In cities due to high prices the cost of living remains higher. Employees posted in these cities are paid city compensatory allowance by way of compensating them against loss of real income caused to them due to higher consumer price index prevailing there. This allowance varies in rates according to consumer price index prevailing in various categories, of cities.

(xiv)Overtime Allowance: Daily working ,hours for workers are prescribed under various acts' Workers working for more than the prescribed hours are entitled to receive overtime payments, which is normally double the ordinary rates of wages.

UNIT 7 Dearness Allowance Methods of DA payment, Consumer Price Index,


Dearness Allowance Employees are employed with a particular wage or salary rate. In due course of time due to price increase, the real income of employees goes down. It means with the same level of wages employees are unable to buy goods and services, which they were able to buy before increase in prices. Dearness


Allowance is paid to employees by way of compensating them for the loss of real income caused to them by increase in the cost of living due to increase in prices.

4.3.4 Systems of Payments of Dearness Allowance The system of payment of Dearness Allowance are mainly classified into two categories. They are: (i) Not linked to consumer price index numbers and (ii) Linked to consumer price index numbers. Not linked to consumer price index numbers

(A) Flat Rate : Flat Rate system of payment is a method under which a fixed amount is paid to all employees irrespective of their categories and wage scales. The practice of paying Dearness Allowance at a fixed rate is regardless of any change in the consumer price index.

(B) Graduated Scale: Workers belonging to higher income groups objected to the award of the same amount of Dearness Allowance to all employees irrespective of their wages or salaries. , With this background the graduated scale system came into existence.

According to this method Dearness Allowance is paid on a graduated scale according to various wage scale. On the basis of different wage scale the workers are divided into groups. Dearness allowance increases with each scale of salary increase but after a limit, their is no increase in the amount of Dearness allowance, whatever high the wage rate is. A minimum amount of dearness allowance is also set for the workers in each scale, below which the dearness allowance is not allowed to fall.

This method is considered to be equitable and hence it is quite popular. Linked to consumer price index numbers: Under this system the dearness allowance is linked with the consumer price index number.


(A)Flat rate: In this method dearness allowance rate per point or scale is fixed and this varies only with variations in points of consumer price index numbers.

(B)As a percentage of Pay In this method the dearness allowance is fixed. It is calculated as the percentage of pay per slab of the consumer price index numbers. The dearness allowance is expressed as a fixed percentage of pay and equated to a scale of points of the consumer price index. The system of dearness allowance being linked with consumer price index is in vogue today.

The payment of Dearness Allowance for central government employees is based on the recommendation of the Pay Commissions.

In the banking sector Dearness Allowance is paid as per the Desai Award. Under this dearness allowance is paid at a rate of 3 percent for every 4 points rise over 100 in the quarterly average of the consumer price index of the working class. In various other industries and commercial houses, payment of dearness allowance is paid in common according to the scales. In many companies a 100 percent neutralisation system has been introduced against the rise in prices. This implies that the employees are under complete protection against the rising prices. On the other hand some organisations have provided a ceiling on the payment of dearness allowances, in terms of maximum amount of dearness allowance payable to a person.

Apart from the basic, Dearness allowance, many other allowances are paid to employees to compensate them adequately so that the total package of remuneration provides them suitable compensation package.

A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."[1]


A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Calculating the CPI for a single item[edit]

Current item price ($) = (base year price) * (Current CPI) / (Base year CPI) or

Where 1 is usually the comparison year and CPI1 is usually an index of 100.

Alternatively, the CPI can be performed as . The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread in 2010) is divided by the initial year (the price of bread in 1970), then multiplied by one hundred.[2]

UNIT 8 Productivity and Wages Productivity Bargaining, Incentive Payments, Productivity Linked
Bonus, Incentives Individual & Group, Case Studies on Productivity Bargaining.

PRODUCTIVE BARGAINING A form of collective bargaining leading to a productivity agreement in which management offers a pay raise in exchange for alterations to employee working practices designed to increase productivity Productivity bargaining has been described as "an agreement in which advantages of one kind or another, such as higher wages or increased leisure, are given to workers in return for agreement on their part to accept changes in working practices or in methods or in organization of work which will lead to more efficient working. The changes in the interests of efficiency are seen as an integral part of the bargaining and as necessary contribution to meeting the cost of advantages conceded to the workers."

The prime purpose of productivity bargaining is to raise labour productivity and lower unit labour


costs, and this is achieved by the exchange of alternations in working practices for increased leisure, higher remuneration for labour, more comprehensive fringe benefits, and general increase in the status of manual employees. Moreover, it is an exercise in problem solving and creating new gains, rather than just power bargaining over shares.

Productivity bargaining is a complex process. It involves lengthy, detailed negotiations about the implementation of a variety of management techniques such as work study and job evaluation. The content of negotiations is more or less comprehensive in the sense that it includes not only bargaining over earnings but bargaining over other related matters such as reductions in hours, introduction or extension of shift working, manning of machines, demarcation lines, the introduction of new payment system, and re-allocation of job control. In addition, the coverage of productivity bargaining is more or less comprehensive in that generally speaking it will aply to all employees in an enterprise. Productivity bargaining generally occurs at the level of the enterprise or company. Productivity bargaining is a process that employers and employees enter into in order to increase the overall efficiency and productivity of the business. This type of negotiation is almost always seen in factory or construction work, although it may also be present in the film industry and other heavily regulated workforce areas. It is rarely used in service industries where specific types employee labor are not required.

COLLECTIVE BARGAINING= Collective bargaining is a process of negotiations between employers and a group of employees aimed at reaching agreements that regulate working conditions. The interests of the employees are commonly presented by representatives of a trade union to which the employees belong. The collective agreements reached by these negotiations usually set out wage scales, working hours, training, health and safety, overtime, grievance mechanisms, and rights to participate in workplace or company affairs. [1] The union may negotiate with a single employer (who is typically representing a company's shareholders) or may negotiate with a group of businesses, depending on the country, to reach an industry wide agreement. A collective agreement functions as a labor contract between an employer and one or moreunions. Collective bargaining consists of the process of negotiation between representatives of a union and employers (generally represented by management, i


4.2.1 Meaning of Incentive


Incentive may be defined as any reward of benefit given to the employee over and above his wage or salary with a view to motivating him to excel in his work. Incentives include both monetary as well as non-monetary rewards. A scheme of incentive is a plan to motivate individual or group performance. 4.2.2Definitions of Incentive

The following are some of the definitions of the term Incentive: 1. 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 Labour. 2. It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job Hummel and Nickerson. 3. 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. 4.2.3 Need for incentive It is true that monetary compensation does constitute very important reason for the working of an employee. But this compensation alone cannot bring job satisfaction to the workers. One cannot expect effective performance from a worker who is dissatisfied with its job, even if he is well paid. Sociologists and industrial psychologists also view that the financial aspect is not the only dominant motivating force. Confidence in the management, pride in the job and in firm and concern for the overall good cannot be brought by a bonus. Hence the modern authorities on management science have recognized the need for the provision of incentives to build up good morale.

4.2.4 Incentives for work Incentives can take any form. According to Z. Clark Dickinson the important incentives for work can be listed as follows: 1. Desire for livelihood and fear of want.


2. Desire for approval of master and fear of punishment. 3. Desire for praise and fear of being dismissed. 4. Impulse to activity or joy in work and dislike of inactivity. 5. The moral command and fear of conscience. Robert E. Salton has mentioned the following nine factors as the Motives for work. 1. Doing something worthwhile (Good). 2. Trust in leadership. 3. Doing my share (Participation) 4. I count for something (Recognition). 5. A decent living (Fair Wages). 6. A chance to get somewhere (Opportunity). 7. A safe future (Security). 8. Know whats going on (Communication). 9. Conditions at work (Environment)

4.2.5 Classification of incentives

All forms of incentives can be broadly classified into two kinds namely, (i) Financial Incentives, and (ii) Non-financial Incentives. These incentives can be further sub-divided into various kinds. These kinds can be explained with the help of the figure below: Types of Incentives Financial or Pecuniary Incentives Non-financial Incentives

1. Wages 2. Salary 3. Premium 4. Bonus

1. Job Security 2. Recognition 3. Participation 4. Pride in Job 5. Delegation of Responsibility 6. Quick Promotion 7. Facilities for Development 8. Labour Welfare Amenities

Now we shall briefly discuss the various kinds of incentives. 1. Financial Incentives


Financial incentives or pecuniary incentives are the most original of all the incentives. It is given in the form of money. The financial incentives still form the most important influencing and motivating factor up to a certain limit. Because it is only by virtue of the monetary compensation that the workers can satisfy their fundamental needs such as food, clothing, shelter etc. 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. 2. Non-financial Incentives Non-financial or non-pecuniary incentives include all other influences planned or unplanned, which stimulate exertion. Mere monetary incentive cannot help the management in solving all the problems of industrial unrest. Further additional cash wage may also tempt the workers to misuse the money in vices like gambling, drinking etc. Under such circumstances, the non-financial incentives have a significant role to play. Such incentives create a healthy atmosphere and change the mental outlook of the workers. They make the working class more stabilized and economically sound. Thus, in short, 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 labour productivity. Examples of Non-Financial Incentives Non-Financial Incentives can take a variety of forms. Some of the popular ones are given below: 1. Job Security: The management must try its best to create a sense of job security. There should be no risk of retrenchment, demotion and termination. Experiences have also shown that the productivity is less in those concerns where workers have no feeling of safe and secure. But it is high in those concerns where they have a feeling of job security. 2. Recognition: Recognition of work is the essence of securing good work. Efficient people would naturally like to get recognition for their skill and excellence in their work. Such recognition can do many things that what a cash reward can do. Of course it is not practicable for the superiors to praise everybody for everything done by them. But the technique of praise must be practiced as far as possible. 3. Participation: Workers feel more satisfied when they are given an opportunity to raise their voice in handling the affairs of the enterprise. Since they actually take part in the decision-making their cooperation is assured. 4. Sincere Interest in Subordinates as Individual Persons: The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food products, dynamic


leadership, fair treatment, ethical conduct etc. can effectively stimulate the workers pride in their job and in the firm. 5. Pride in job: The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food products, dynamic leadership, fair treatment, ethical conduct etc. can effectively stimulate the workers pride in their job and in the firm. 6. Delegation of Responsibility: Delegation of rights and responsibilities to execute a given task often proves to be a strong motivating factor. By delegation the superior trusts his workers and stimulates them to show better results. 7. Other Incentives: Other incentives like quick promotion, provisions of facilities for development and training, provision of labour welfare amenities etc. also have a significant role to play in motivating the employees.

4.2.6 Merits of Incentives

The following are the advantages derived by providing incentives to employees: 1. Higher output:By providing incentives to his employees, the employer is able to induce them to work better. This leads to higher output. 2. Greater profits:Needless to say, higher output results in greater profits for the business. This happens in two ways. First, the cost per unit becomes less and second, the enterprise is able to keep the selling price low and this results in greater sales. 3. No problem of idle time:In an organisation where no proper incentives are available for the workers, the tendency will be to while away the time. When suitable incentives are available, the workers become time conscious. They begin to see every minute in terms of money. 4. Supervision does not pose any problem:When suitable incentives are available, the workers become duty conscious. The need for close supervision, thus, does not arise. 5. Efficient workers are able to earn more:Such of those workers who are highly efficient are able to earn more by way of performance bonus, higher commission and so on. 6. Possible to identify inefficient and dull workers: If, in spite of the incentive schemes, some workers are able to earn only their normal wage, it should mean that they are basically dull. The employer, therefore, has to decide whether to retain them or subject them to rigorous training. 7. Rate of labour turnover is bound to be low:If adequate incentives are available to the workers, they may not have a feeling of dissatisfaction. Such workers are sure to have greater work


commitment and therefore may not leave the organisation. The rate of labour turnover, as a result, is bound to be low. 8. Reduction in complaints and grievances:As the organization makes available suitable incentives to the workers, they may not have anything to complain about. This leads to reduction in complaints and grievances.

4.2.7 Problems arising out of incentives

The following problems are bound to arise while implementing an incentive plan:

1. Quality of work may suffer:The workers, those in the production department in particular, may give undue importance to the quantity of output produced neglecting the quality of output. Such a problem can be overcome only if the organization has a perfect system of quality control. 2. Inter-personnel relationships may suffer:Only those employees who are really efficient will be benefited out of incentives. This may promote ill-feelings among the employees of an organization. 3. Wear and tear of machines may be more:As the employees are keen on increasing the output all the time, they may handle the machines carelessly. This increases the wear and tear of machines. 4. Health of the workers may get affected:Some workers tend to overwork in order to earn more and this may affect their health. 5. Increase in accidents:There is always a preference to step up output disregarding even safety regulations and this may increase the rate of accidents in the workplace. 6. Increase in paper work: Proper administration of any incentive scheme involves lot of paper work. It necessitates the maintenance of proper records and books. 4.2.8 Requirements of a sound incentive plan
A good incentive plan shall fulfill the following requirements: 1. Trust and confidence The success of any incentive plan depends on the existence of an atmosphere of trust and confidence between the workers and the management. In the absence of such an atmosphere, the workers may resist any such proposal by the management. 2. Consensus required The management should not take a unilateral decision while evolving an incentive scheme. Consensus between the workers and the management is necessary for the success of the plan.

3. Assured minimum wage Payment to any worker should not be totally related to his performance. Every worker should be assured of a minimum wave notwithstanding performance. Only then the workers would have a sense of security. 4. No scope for bias or favouritism- The standards set under the incentive plan should be based on objective analysis. It should not expect too much out of the employee nor should it give scope for bias or favouritism. 5. Simple to operate - The incentive plan should not involve tedious calculations. It should be so simple that the worker will be in a position to work out his total earnings himself. 6. Beneficial to both the workers and the management - The incentive plan should be beneficial to both the workers and the management. From the management's point of view, it should be cost effective. From the workers' point of view, it should offer return, at a rate higher than the normal rate of wages, for the extra efforts made by them. 7. Sound system of evaluation - A perfect system of evaluating the employees performance should be created in the organisation. The results of evaluation should be made known to the employees at the earliest. 8. Redressing grievances - Grievances and complaints are bound to arise whenever any incentive plan is in vogue in the organisation. Proper machinery should be installed for the quick handling of all such complaints. 9. Review - The progress of the incentive scheme should be periodically reviewed. Only then it would be possible to notice and remove defects, if any, in the plan.

4.2.9 Categories of Incentive Plans

Incentive Plans are two types. These are 1) Individual Incentive Plans 2) Group Incentive Plans

Individual Incentive Plans also two types. These are (i) Time- based Plans 1. Hasley's Plan (ii) Output-based Plans 1. Taylor's Differential Piece


2. Rowan's Plan 3. Emerson's Plan 4. Bedeaux's Plan

Rate Plan 2. Merrick's Multiple Piece Rate Plan 3. Gnatt's Task Plan

4.2.10 Time-based Individual Incentive Plans

Halsey's Plan F.A.Halsey, an American engineer, introduced this plan. Under this plan, standard time is determined for each job. A worker who completes the job by taking the standard time or even exceeding it is paid normal wages calculated at the time rate. In case, he completes the job in less than the standard time, he is given bonus equal to 50% of the money value of the time saved. The bonus payable to the worker and his total earnings, under the Halsey's plan, are calculated as follows: Bonus = 50% (Time Saved x Time Rate) Total Earnings = Time Rate x Time Taken + Bonus

Merits of Halsey's Plan The following are the plus points of Halsey's plan: 1. It is simple to understand. 2 The workers are assured of a minimum wage. 3. The employer and the worker share equally the benefit resulting from savings in time. 4. The plan encourages workers to be more efficient in their work. Demerits Halsey's plan, however, suffers from the following limitations: 1. The efficiency of the worker is rewarded to the extent of50% only. 2. The time saved is wholly due to the efficiency of the worker but the management grabs 50% of the resulting benefit. 3. The plan does not say anything about, the quality of the work done. Rowan's Plan Under Rowan's plan, the manner of calculating bonus is slightly different from that under the Halsey's plan. Bonus, under Rowan's plan is calculated as follows: Bonus = % of Timesaved x Time Wage Standard Time Total Earnings of the worker = Time Wage + Bonus


Total Wage = Time Taken X Time Rate + Time Saved / Standard Time X Time Taken X Time Rate or

E = T X R + S-T / S X T X R E = Total earning T = Actual Time S = Standard Time R = Rate per hour For example, a worker takes 12 hours for completing our works but our standard time is 16 hours. Rate per hour is $ 2. As per Rowan Premium plan, we will calculate wages of a worker with following way E = 12 X 2 X 16-12/ 15 X 12 X 2 = $ 30 Merits The following are the positive aspects of Rowan's plan: 1. Minimum wage is guaranteed to all workers. 2. When compared with Halsey's plan, bonus under Rowan's plan is more although the basic time wage is the same under both the plans. 3. The plan provides a check against over-speeding by workers. As the worker saves more time, his bonus and total earnings only begin to decline. In the above illustration, suppose, the worker completes his task within one hour, i.e. he saves 4 hours, his bonus will only be Rs.16. He earns the same bonus of Rs.16 by completing the task in 4 hours, saving just one hour. Demerits The drawbacks of Rowan's plan are given below: 1. It is not as easy as Halsey's plan is. 2. The earnings of the worker become less as he saves more time. This discourages efficient workers. Emerson's Efficiency Plan Under Emerson's plan too minimum wage is guaranteed to all workers. Payment of bonus, however, is related to the efficiency of the workers. Efficiency is determined by the ratio of time taken to standard time. Usually, a worker is given bonus only when his level of efficiency, in terms of percentage, is above 66.67%. Merits

The following are the advantages of Emerson's efficiency plan: 1. Minimum wage is guaranteed. 2. It pays bonus to workers based on their level of efficiency. 3. The 66.67% or two-third efficiency criterion is within the reach of many workers. Demerits The disadvantages of the plan are as follows: 1. It is not a straight-forward approach to determining bonus. 2. If the standard time allowed itself is low, it may not be possible for many workers to fulfil the efficiency criterion laid down under the plan. . Bedeaux's Plan Under this plan, the standard time and time taken for each job is reduced to minutes, and each minute is referred to as "B", i.e., one hour is the same as 60 B's. The bonus and total earnings of the worker, under the plan, are calculated as follows: Bonus = 75% (Standard Time - Time Taken) x Time Rate Total Earnings = Time Wage + Bonus Merits The benefits of Bedeaux's plan are: 1. It guarantees minimum wages to the workers. 2. It enables efficient workers to earn more. 3. The benefit of three-fourth of the time saved is given to the worker. Demerits The weaknesses of the plan may be stated as follows: 1. The unit name of 'B' in place of the 'minute' does not make the plan altogether different. 2. The entire benefit of time saved by the worker is not passed on to him.

4.2.11 output-based individual incentive plans

Taylor's Differential Piece Rate Plan F. W.Taylor, who is known as the Father of Scientific Management, developed the differential piece rate plan. Under the plan, two piece rates are laid down


(i) A lower rate for those workers who are not able to attain the standard output within the standard time; and (ii) A higher rate for those who are in a position to produce the standard output within or less than the standard time. Under the plan, minimum daily wage is not guaranteed. Taylor's differential piece rate plan has the following components: (i) Standard Output. (ii) Standard Time (iii) A Lower Piece Rate and (iv) A higher Piece Rate Merits The following are the merits of Taylor's differential piece rate plan: l. It is easy to understand and simple to operate. 2. It enables efficient workers to earn more. 3. Workers not reaching the standard are paid at a lower rate. Such people, thus, are punished for their inefficiency. This protects the interests of the organisation. Demerits The limitations of Taylor's plan are given below: l. It does not guarantee minimum wage. This creates a sense of insecurity for the workers. . 2. There may be ill-feelings among workers in view of the differential piece rates. 3. The quality of the output is ignored. Merrick's Multiple Piece Rate Plan Under this plan too a standard task is set for the workers. But unlike Taylor's plan that provides for two differential rates, Merrick's plan contemplates three rates as shown below: (i) Workers producing less than 83% of the standard output are paid at a


basic rate. (ii) Workers producing between 83 % and 100% of the standard output will be paid 110% of the basic piece rate. (iii) Those producing more than the standard output will be paid at 120% of the basic piece rate. Merits The merits of the plan may u~ stated as follows: 1. It is an improvement over Taylor's plan. 2. It has greater flexibility. 3. It offers greater scope for efficient workers to earn more. Demerits The following are, probably, the drawbacks of the plan: 1. It is a complicated plan. 2. Even a worker achieving 83% target is branded as a poor performer. Gantt's Task Plan This plan guarantees minimum daily wage. Its special feature is that it combines time rate, piece rate and bonus. A worker who is unable to produce the standard output receives only the time wage. He becomes eligible for bonus only when he attains or exceeds the standard output within the standard time. The rate of bonus varies between 20% to 50% of his wages. Merits The plus points of Gantt's task plan are: 1. It has, as mentioned above, time wage, piece rate and bonus. It is, therefore, a three-in-one scheme. 2 It guarantees daily minimum wage. 3. It provides enough opportunities for efficient workers to earn more. Demerits The weaknesses of the plan are: 1. It is not easy to understand. 2. The fluctuations in the output levels, of different workers not attaining the standard, are ignored and they all receive the same daily minimum wage. In the illustration given above, if two workers

produce 6 units and 8 units respectively (against standard output of 10), each is assured a daily wage of Rs.50.

4.2.12 group incentive plans

Profit sharing Profit sharing is the most popular method rewarding the employees. Under it, the employees are paid in addition to the regular wage, a particular share of the net profits of the business as incentive. Characteristics of Profit Sharing The key features of profit sharing may be stated as follows: 1. It is based on an agreement between the employer and the employees. 2. It is a payment made after ascertaining the net profits of the business. It is not therefore, a charge on profits. 3. The amount paid to the employees is over and above their normal pay. 4. The amount to the paid is determined based on some agreed formulas. 5. The payments based on seniority and wage level of individual workers. Merits of Profit Sharing The advantages are profit sharing are as follows: 1. Better employer-employee relations - This is possible, as the employer is ready to share the profits of the enterprise with his employees. 2. Increase in productivity -The employees make every possible effort to increase productivity because they know very well that higher profits for the enterprise would mean higher bonus for them. 3. Better living standards - It helps to increase the living standards of the employees as the amount received is in addition to the usual wages. 4. Reduced costs of supervision - The workers themselves are duty conscious and, therefore, they need no close supervision. Thus, costs of supervision are reduced. 5. Promotion of team spirit - The employees know the importance of Teamwork, as only such an effort would result in higher output. Limitations of Profit Sharing The limitations of profit sharing are as follows:


1. Regular income not assured:Payment to workers, by way of profit sharing, at a particular rate depends upon the profits of the enterprise. If the enterprise makes low profits or incurs losses, it will not be in a position to pay bonus as agreed. 2. Suppression of profits:Attempts may also be made to suppress true profits so that the employees need not be paid their share. This is done by manipulating accounts. 3. No inducement:Payment under the profit sharing scheme will be made to the employees once or twice a year when accounts are closed. Such, payments at longer intervals may not really motivate employees. Daily or weekly incentive payments are far more superior to profit sharing.

4.All workers paid alike:Payment to workers under profit sharing is made without considering their relative level of efficiency. This amounts to doing injustice to those who have really made target attainment possible.

1) Individual incentive plan: it may either be time based or production based. Under time based plan a standard time is fixed for doing the job. A worker is said to be efficient if he completes the job in time and he is given the reward for his efficiency. i) The time based individual incentive plans are: a) Halsey plan b) Rowan plan c) Emerson plan d) Bedeaux plan a) Halsey plan: under Halsey plan minimum wages are guaranteed to every worker. A standard time is fixed for the workers. If the workers finish the work before standard time they are given bonus. But no penalty if they fails to do that. Total wages (W) =T*R+ 50% of (S-T)*R Standard time(S) =15 hours Time taken (T) = 10 hours Rate of wages(R) =rs 10 per hour Bonus (P) = wages of 50% of time saved


Than wages= 10*10+50 %*( 15-10)*10 = rs 125 b) Rowan plan: it is the modification of the Halsey plan it also guarantees the minimum wages and does not penalize the slow workers. Standard time is fixed and the bonus is paid on the basis of time saved Total wages (W) =T*R+[T*R* Time saved/ Standard time] Standard time(S) =15 hours Time taken (T) = 10 hours Rate of wages(R) =rs 10 per hour Bonus (P) = Time saved/ Standard time Than wages= 10*10+[10*10* 5/15] = rs 133.33 c) Emerson plan: in this plan minimum wages are guaranteed to the workers efficiency is measured on the basis of the comparison of actual performance with the standard fixed. Under this method if the efficiency is 100% the bonus would be paid at 20% and above 100% bonus at 30% would be paid. Thus efficient workers will be rewarded at an increasing rate with the increase in saving time. d) Bedeaux plan: under this minute is the time unit described as the standard minute. The standard time for each job is fixed after undertaking time and motion study expressed in terms of B. the standard time for a job is the number of Bs allowed to complete it. Generally the bonus paid to the worker is 75% of the wages for time saved. The rest 25% goes to the foreman. Standard time(S) = 360 Bs (6hours*60 minutes) Actual time (T) =300 Bs (5hours*60 minutes) Wage rate(R) = Rs 10 per hour Value of time saved=360-300/60*10 =Rs10 Total wages (W) =S*R+75%of value saved

=6*10+75/100*10 =Rs67.5 The above discussed wage payment methods were based on the time while the wage payment methods based on the productivity are going to be discussed below:

ii) The production based individual incentive plans are: Under the production based incentive plan a standard output is fixed and the workers are paid on the basis of the production. They are given incentive if they produced more number of units than the standard fixed. it includes the a) Taylor plan b) Merrick plan c) Gantt plan a) Taylors differential piece rate system: in this plan, Taylor did not give minimum guarantee to each worker. As per his statement it is possible to calculate standard workload for every worker on the basis of time and motion studies. He gave two piece rates for the workers. The lower rate for average and less efficient workers


who produce less than the standard production and the higher piece rate for the above average or efficient workers. So the efficient workers are paid more than the inefficient workers. Standard production = 40 units in a day Wage rate = between 60 to 70 rs If the worker produces 40 units in a day he will be paid 40* 70= rs 280 If the worker produces 30 units in a day he will be paid 30* 60 = rs 180 As only those who give standard output or more will be paid at rs 70 and rest will be paid at rs 60 only. Thus in this method inefficient workers are penalized. Workers are treated like machines and there is no guarantee of minimum wages in this method. b) Merricks multiple piece rate plan: under this plan there are three grade piece rate rather than two given by Taylor. Workers who produce Less than 83% are paid basic piece rate Workers who produce between 83%- 100% are paid 110% of basic piece rate Workers who produce more than 110% paid 120% of basic Thus this system is improvement over the Taylors plan. But this system also does not give guarantee minimum wages to the workers. All the workers producing between 1 to 82% of standard output are considered same and paid at the same piece rate.

c) Gantts bonus plan: under this method minimum wages are guaranteed. If the worker fails to complete the task within the standard time he receives only the wages for actual time spent at the specified rate. But if he completes the task within time he gets extra wages. Standard time= 10 hours

Rate= rs 8 per hour Bonus 25% of the standard time If the worker finishes his job within 8 hours he will get rs 80 plus 25% of the days wages i.e. 80*25%=20 that means total rs 80+20= rs 100 so he will get bonus for 8 hours work. 2) Group incentive plan: under this method group bonus is given instead of individual bonus. The bonus is distributed among all the employees of the organization on the different basis which are as follows: a) Priestmans plan: under this method Bonus is increased in proportion to increase in output. Increased production/standard production*100 b) Profit sharing method: under this method increased profit is shared among the workers and management as agreed between both the parties. c) Scanlon plan: under this method bonus is paid in proportion to the production 1% bonus if 1% increases in production.

Productivity linked bonus

Bonus Bonus is a deferred wage aimed at bridging the gap between actual wage and the need based wage. Bonus is a share of the workers in the prosperity of an enterprise. Bonus may also be regarded as an incentive to higher productivity. According to the Bonus Commission (1961), bonus is sharing by the workers in the prosperity of the concern in which they are employed. In the case of low paid workers such sharing in the prosperity augments their earnings and helps to bridge the gap between the actual wage and the need based wage. It has little direct incentive effect because it is usually paid to all workers at the same rate irrespective of their individual efficiency and long after the close of the financial year. Payment of Bonus Act, 1965. The Act provides for the payment of bonus to persons employed in specified establishments. The main provisions of the Act are as follows: Every employee in the specified establishments drawing a salary (basic pay plus D.A.) not exceeding Rs. 3,500 per month is entitled to bonus provided he has worked for not less than 30 days in the year. NAACHO-BC

Bonus is to be calculate on a salary of Rs. 2,500 per month wherever the actual salary exceeds this amount. Every employer is bound to pay a minimum bonus of 8.33 per cent of the salary of an employee or Rs. 100 per year whichever is higher whether or not he has any allocable surplus1? in the accounting year2. Where an employee has not worked for all the working days in any accounting year, the minimum bonus of Rs. 100 or 60 as the case may be, shall be proportionately reduced, if such bonus is higher than 8.33 of his salary or wage. No minimum bonus is payable by a newly set up establishment in the circumstances prescribed under Section 16 of the Act. The bonus is to be paid within 8 months from the close of the accounting year. An employee dismissed from service for fraud, theft, misappropriation of sabotage of property and riotous/violent behavior on the premises or the establishment is not entitled to bonus. Thus, the Payment of Bonus Act imposes a statutory liability upon an employer to pay bonus. It also defines the principle of bonus payment as per the prescribed formula.
A performance-linked incentive (PLI) is a form of payment from an employer to an employee, which is directly related to the performance output of an employee and which may be specified in an employment contract. PLI may either be open-ended (does not have a fixed ceiling) or close-ended (has an upper ceiling which is normally stipulated in the employment contract). Open-ended incentives are normally applicable to revenue-generating activities (e.g., sales), while closeended incentives are associated with support functions (e.g., operations, human resources, administration

PLI vs salary[edit]
Salary is paid for the efforts that one puts in and PLI is paid for the results. Salary is paid in short, definitive cycles (e.g., weekly, monthly, fortnightly etc.) while PLI is paid in a longer cycle of monthly, quarterly or half-yearly,yearly.

PLI vs bonus[edit]
Bonus is paid for the performance of the organization while PLI is paid for the individual's performance. Bonus is normally paid yearly or half-yearly. This is normally paid as a percentage of one's salary, or as a fixed amount, of the employee's individual performance.

Individual vs group incentives -With parameter wise comparision

Parameter-PERFORMANCE Individual Incentives


Since each direct labor employee who is motivated by money is theoretically in "business for him/her self" there should be a strong inducement for high performance. A piece work operator could care less about a fellow operators performance. The relative productivity of each individual can be readily determined. Likewise, actual time spent on specific jobs is also easily determined and standards set. Individual incentives work best on singularity of product and long runs. They lose their effectiveness and are usually costly to maintain in a high style, fast in-process turnover environment. Group Incentives Group incentives attempt to empower people and tend to have a leveling effect on labors performance. Rather than restrict production, the group pressures the superior producer to handle more job assignments. Group pressures may likewise have an upward leveling effect upon the operator who would be satisfied with relatively low individual earnings. Therefore, average group output often is higher than average individual output. Parameter-EARNINGS Individual Incentives If the standards are "fair" each individual is rewarded according to his/her own output. Low earnings on the part of one operator does not affect the earnings of others. Earnings by the day, order, or lot are readily determined. Individual piecework plans traditionally employ an "engineering" staff of to keep the pay plans balanced and current. Group Incentives Peer pressure is harnessed and earnings are vote consistent, since all members of a group share equally in the bonus. Objective records of individual production are often not readily available. Individual hourly rates may be adjusted on the basis of periodic merit ratings by the group leader, individual records for temporary periods or work-sampling studies, or excessive goal attainments. Meeting various production criteria forms the basis for Merit pay plans. Empowered groups tend to offer more valid suggestions on ways to overcome production issues and usually pressure management continuously until the issues are resolved. Another added benefit is that companies who have successfully moved towards various group incentives have ultimately been able to downsize their overhead labor. Parameter-QUALITY

Individual Incentives Frustrated and unknowing employees like to try to beat the system and see what substandard work they can pass though and not get caught. When found. defective work penalizes only the person responsible. If however, several persons are performing the same operation and necessary identification controls are lacking, quality may be difficult to enforce and the company may have to absorb the cost of rework. Group Incentives Peer pressure will rapidly straighten out any employees bad attitude. The group only gets paid for quality production at the end of the line. Defective work penalizes all members of the group causing all group members become inspectors. Quality standards are simpler to enforce since it is usually easier to identify the group responsible for defective work than to fix responsibility upon an individual. Parameter-MORALE Individual Incentives Significant inconsistencies in earnings; supervisors who distribute "good" work to their picks or favorites; "good" versus "bad" piece rates etc. lead to controversies, lowered morale and . . .
Individual incentive systems attempt to relate individual effort to pay. Conditions necessary for the use of individual incentive plans are as follows: -Identification of individual performance: The performance of each individual can be measured and identified because each employee has job responsibilities and tasks that can be categorized from those of other employees. -Independent work: Individual contributions result from independent work and effort given by individual employers. -Individual competitiveness desired: Because individuals generally will pursue the individual incentives for themselves, competition among employees will occur. Therefore, independent competition whereby some individuals win and others do not must be desired.

UNIT 9 Employee Benefits Statutory & Voluntary Benefits, Retirement Benefits Provident Fund,
Gratuity, Pension, Medical Insurance; Reward Management

Statutory Benefits

Statutory is defined as something fixed, authorized, or established by statute, therefore the benefit packages that Canadian employers offer, are designed to enhance the well-being of their employee base, and will contain both statutory and discretionary benefits. Statutory benefits are some of the benefits also referred to as employer paid benefits. Employment Insurance Employment Insurance provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills. People who are sick, pregnant or caring for a newborn or adopted child, as well as those who must care for a family member who is seriously ill with a significant risk of death, may also be assisted by Employment Insurance. Employment Insurance (EI) premiums are calculated on, and deducted from, an employee's maximum insurable earnings (MIE), which are insurable salary, wages, cash allowances and other remuneration paid to an employee. The Canada Revenue Agency is responsible for determining what is considered insurable employment and which earnings are insurable. All employees in insurable employment must have EI premiums deducted from their earnings. Premiums are set annually as a rate per $100 of Insurable Earnings up to the level of Maximum Insurable Earnings. Their employers are also required to make payments at 1.4 times the employee rate, unless Human Resources and Skills Development Canada has granted the employer a reduced rate. Procedures for premium deductions and remittances are outlined in Canada Revenue Agency Instructions to Employers Manulife Financial Types of Employment Insurance benefits There are several types of benefits available to Canadians, depending on their situation. Regular Benefits These benefits are available to individuals who lose their jobs through no fault of their own (for example, due to shortage of work, seasonal layoffs, or mass layoffs) and who are available for and able to work, but cant find a job. Maternity and Parental Benefits These benefits provide support to individuals who are pregnant, have recently given birth, are adopting a child, or are caring for a newborn. Voluntary benefits and services are gaining importance for companies' employee value propositions (EVPs). Employers are turning to voluntary benefits and services to personalize their benefit offerings and support their employee rewards strategy. Voluntary benefits and services offerings today tend to be geared toward baby boomers, who are a large segment of todays workforce. However, as baby boomers begin to retire in increasing numbers across the next decade, expect to see voluntary benefits and services redesigned for younger generations, who are generally attracted to customized benefit packages.


Against this backdrop, companies are thinking more creatively and strategically to design rewards programs that are both within cost constraints and attractive to employees. Many are turning to voluntary benefits and services to help achieve this goal. In some form, voluntary benefits and services have supplemented core benefit packages since the 1960s. Today, these benefits are evolving, and deserve a fresh look given the new landscape and their role in the overall EVP.

Statutory benefits in India Scope: This policy applies to all RIT employees. Policy Statement Family Medical Leave Act (FMLA) The Federal Family and Medical Leave Act (FMLA) was signed into law in 1993, for the purpose of guaranteeing job protection to eligible employees who are absent from work due to specified family, family military and medical reasons defined in the law. Eligibility Eligible employees are: Full-time and extended part-time faculty and staff Who worked at least 1,250 hours during the 12 months prior to the first day of leave Who completed 12 months of employment at RIT prior to the first day of leave Student employees, part-time employees and adjunct faculty are not typically eligible. Benefits FMLA provides up to 12 work weeks of unpaid leave during a 12 month period. If an employee qualifies for paid leave for the absence (such as sick leave, salary continuation, short-term disability or workers compensation), the paid leave and unpaid leave will run concurrently. Exempt employees receive unlimited salary continuation days for absence for their own intermittent sick days. However, exempt employees approved under FMLA for reduced hours or consistent, on-going medical appointments would not be paid for this FMLA time unless they use vacation hours to cover the time not worked under FMLA. Voluntary Insurance Benefits What are Voluntary Benefits? Benefits that the employee chooses, and pays for through payroll deduction, such as life insurance, dental coverage, etc. Voluntary benefits are insurance products that employees may choose to purchase through their companies at rates that are lower than they could get on their own. A few examples of voluntary benefits are dental, vision, life, disability, supplemental health and cancer insurance. Many employers NAACHO-BC

offer voluntary benefits because they allow companies to provide a more robust benefits package at no cost to them. How do voluntary benefits work for employees? For an example of how voluntary benefits work well need our good friends Gary and Greta. Tonight, theyre going to a restaurant for dinner. Gary and Gretas entres include soup and salad with the price of their meals. In this case, their meal is like their companys health plan they get what they want along with a few added extras. Hopefully, their food tastes better than their health plan. Anyway, tonight Gary and Greta want more than the basic entre, soup and salad. Theyd also like to order some appetizers, a bottle of wine and dessert. These extras are kind of like voluntary benefits Gary and Greta get more than the basic offering, but only pay for what they order. Like appetizers, desserts and wines, voluntary benefits come in many varieties that help protect your financial and physical well-being. For example, for a little extra money thats simply deducted from his paycheck each month, Gary can purchase disability insurance that will help offset loss of income if he is unable to work due to sickness or injury. He can choose supplemental insurance to cover copays, deductibles or other costs of care not covered by his regular health insurance. And benefits are paid directly to the employee, so Gary can use the money however he needs to. Most consumers dont plan for loss of income, or for expenses like childcare and travel that are necessitated by illness or injuries but not covered by medical insurance. Yet studies show that unexpected illness and injuries account for more than 350,000 bankruptcies every year. By enrolling in these voluntary benefits, Gary is rewarded with greater peace of mind. As an added bonus, the premiums Gary pays for voluntary benefits are paid using pre-tax dollars. Voluntary benefits may also include options like vision and dental insurance, which can protect more than your eyes and teeth. Annual eye exams, for example, can help detect health problems like diabetes and high blood pressure. And did you know that gum disease is a serious risk factor for heart disease? Keeping your teeth and gums in good shape helps protect your overall health. Now, what are the advantages for employers who offer voluntary benefits? Offering voluntary benefits to employees provides a great incentive for people to stay with your company. Your employees can receive more benefits and you dont pay any extra. Youre also helping your employees protect their health, their savings and everything theyve worked so hard to achieve. As an added bonus, offering voluntary benefits provides the opportunity to lower your payroll taxes with each enrolled employee.

Retirement Benefits Provident Fund, Gratuity, Pension, Medical Insurance

Retirement and pension benefits are provided to retired government officials to ensure a regular income and a secure future. The provision of such financial benefits results in a feeling of independence and a decent standard of life. As far as retirement benefits are concerned, they usually consist of leave encashment, retirement gratuity and contributed provident fund.


Along with these retirement benefits, senior citizens are also entitled to pension benefits that allow them to live a hassle free life after completion of their job tenure. Different types of pension available to senior citizens are superannuation, retiring pension, voluntary retirement pension, compensation pension, compassionate allowance, extraordinary pension and family pension. Provident Fund= Provident Fund Scheme is a welfare scheme for the benefit of employees. Under this scheme, certain amount is deducted by the employer from the employees salary as his contribution to Provident Fund every month. The employer alsocontributes certain percentage of the salary of the employee to the Fund. The contributions are invested outside in securities. The interest earned on it is also credited to the Provident Fund Account. At the time of retirement, the accumulated balance is given to the employee. Tax treatment of provident fund depends upon the type of provident fund being maintained by the employer. Employees provident fund may be of the following 3 types:
(i) Statutory Provident Fund This is set up under the provisions of Provident Fund Act, 1925 and is maintained by Government and Semi-Government organisations, local authorities, railways, universities and recognised educational institutions. (ii) Recognised Provident Fund This is set up under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act, 1952) and is maintained by private sector employees. The establishments covered under PF Act, 1952 have two options; either to follow the same scheme at by the Government under the PF Act or draft their own scheme of PF but get recognition from Commissioner of Income Tax. (iii) Unrecognized Provident Fund If a provident fund is not recognized by the Commissioner of Income Tax, it is known as unrecognized PF. Besides these 3 funds, a person can also become a member of Public Provident Fund. (iv) Public Provident Fund The Central Government has established the Public Provident Fund for the benefits of general public to mobilize personal savings. Any member of general public (whether salaried or self employed) can participate in this fund by opening a Provident Fund Account at the State Bank of India or its subsidiaries or other nationalised banks. A salaried employee can simultaneously become member of employees provident fund (whether statutory, recognized or unreconised) and public provident fund. Any amount may be deposited (subject to minimum of Rs.500 and maximum of Rs.70, 000 per annum) under this account. The accumulated sum is repayable after 15 years. At present, it carries an interest rate of 8% per annum which is credited every year but payable only the time of maturity.

Gratuity Gratuity is the payment made by the employer to an employee in appreciation of past services rendered by the employee. It is received by the employee on his retirement. Gratuity is exempted upto certain limit depending upon the category of employee. For the purpose of exemption, employees are divided into 3 categories: (i) Government employees and employees of local authority:

In case of such employees, the entire amount of gratuity received by then is exempted from tax. Nothing will be added to gross salary. (ii) Employees covered under Payment of Gratuity Act, 1972. 55 In case of employees who are covered under Payment of Gratuity Act, the minimum of the following amounts are exempted from tax: Amount of gratuity actually received 15 days of salary for every completed years of service or part thereof in excess of six months. (15 / 26 x [basic salary + Dearness Allowance] x No. of years of service+1 [if fraction > 6 months]). Rs.3, 50,000 (amount specified by government). (iii) Other employees. In case of employees not falling in the above two categories, gratuity received from the employers is exempt to the extent of minimum of following amounts: Actual amount of gratuity received. Half month average salary for every completed year of service (1/2 x average salary of last 10 months x completed years of service). Rs.3, 50,000 (amount specified by government).
Gratuity is one of the least understood components of salary Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.

Eligibility As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year). How does it work? An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme. Tax treatment of gratuity The gratuity so received by the employee is taxable under the head Income from salary. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head Income from other sources. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail. For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories

Government employees and Non-government employees covered under the Payment of Gratuity Act, 1972


Non-government employees not covered under the Payment of Gratuity Act, 1972 In case of government employees they are fully exempt from receipt of gratuity. In case of non-government employees covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below:

1. 2. 3.

Actual gratuity received; Rs 10,00,000; 15 days salary for each completed year of service or part thereof Note: Here, salary = basic + DA + commission (if its a fixed % of sales turnover). Completed year of service or part thereof means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored. Here, number of days in a month is considered as 26. Therefore, 15 days salary is arrived as = salary * 15/26 In case of non-government employees not covered under the Payment of Gratuity Act, 1972 Maximum exemption from tax is least of the 3 below: Actual gratuity received; Rs 10,00,000; Half-months average salary for each completed year of service (no part thereof) Note: Here, salary = basic + DA + commission (if its a fixed % of sales turnover). Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored. Average salary =10 months salary (immediately preceding the month of leaving the job)/10

1. 2. 3.

FormulaUsed: Gratuity Calculation In India = [(Basic Pay + D.A) x 15 days x No. of years of service ] / 26

Illustration Lets understand the above math clearly with an example: Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varuns basic and DA have been the same since past 1 year. Lets consider 2 situations here (a) Varuns employer is covered under Payment of Gratuity Act, 1972; and (b) Varuns employer is not covered under Payment of Gratuity Act, 1972. Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm Average salary = 10 months salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-months average salary is = Rs 45,000/2 Important points to remember Generally, only government employers give DA to their employees. Above example is only for illustrative purpose. The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors.


In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000. Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years. In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.

Pension= Pension is a payment made by the employer after the retirement or death of employee as a reward for past service. It is normally paid as a periodical payment on monthly basis but certain employers may allow an employee to forgo a portion of pension in lieu of lumpsum amount. This is known as commutation of pension. The treatment of these two kinds of pension is as under: (i) Periodical pension (or uncommuted pension). It is fully taxable in the hands of all employee, whereas government or nongovernment. (ii) Commuted pension For employees of government organisations, local authorities and statutory corporations, it is fully exempted from tax, hence not included in gross salary. For other employees, commuted value of half of the total value of pension is exempted from tax. Any amount received over and above this amount is taxable, so included in gross salary. If, however, the employee is also receiving gratuity (another retirement benefit) along with pension, then one third of the total value of pension is exempted from tax. Amount received in excess of this is taxable, so included in gross salary. Pension received by employee is taxable under the head Salaries. However, family pension received by legal heirs after death of employee is taxable underIncome from other sources.
REWARD MGMT= Reward management is concerned with the formulation and implementation of strategies and policies that aim to reward people fairly, equitably and consistently in accordance with their value to the organization. [1] Reward management consists of analysing and controlling employee remuneration and all of the other benefits for the employees. Reward management aims to create and efficiently operate a reward structure for an organisation. Reward structure usually consists of pay policy and practices, salary and payroll administration, total reward, minimum wage, executive pay and team reward. [1] There are two kinds of rewards: Extrinsic rewards: concrete rewards that employee receive. Bonuses Salary raise Gifts


Promotion Other kinds of tangible rewards

Intrinsic rewards: tend to give personal satisfaction to individual [7] Information / feedback Recognition Trust Relationship Empowerment Monogrammed name plaque


How to calculate Dearness Allowance from the year 2006, twice a year using this average index? It is quite simple. Say, if you want to calculate Dearness Allowance with effect from Jan-06, get the average of monthly All India Consumer Price Index (AICPI) with the base year 2001=100 for the preceding 12 months and apply the same in the following formula Dearness Allowance = (Avg of AICPI for the past 12 months 115.76)*100/115.76

OTHERS Gross Salary = Total of Basic + HRA + DA + MA

The structure of the salary being offered, in terms of the breakup of the various components that constitute the compensation is called as salary structure. The usual components include: Basic Salary:It is the taxable base income and generally not more than 40% of CTC. House Rent Allowance: The HRA constitutes 40 to 50% of the basic salary. Special Allowances:Makes up for the remainder part of the salary, mostly smaller than the basic salary and completely taxable. Leave Travel Allowance: The non- taxable amount paid by the employer to the employee for vacation/trips with family within India. Gratuity: It is basically a lump sum amount paid by the employer when the employee resigns from the organization or retires.


PF:Fund collected during emergency or old age. 12% of the basic salary is automatically deducted and goes to the employee provident fund.

Medical Allowance: The employer pays the employee for the medical expenditures incurred. It is tax free up to Rs.15,000.

Bonus:Taxable part of the CTC,usually a once a year lump sum amount, given to the employee based on the individuals as well as the organization al performance for the year.

Employee Stock Options: ESOPS are Free/discounted shares given by the company to the employees. Done to primarily increase employee retention.

Salary, Net Salary, Gross Salary, Cost to Company: What is the difference
Salary, Net Salary, Gross Salary, Cost to Company are they same or different. For most people it is plain confusion especially when one gets a new job. The excitement of getting first job is punctured on getting the first pay. It is usually less than what the fresher employee expected. Usually in the campus interviews company advertise their Cost to Company (or CTC) and people mistake their salary to be based on that (CTC/12). Educated but have No Financial Education is about the confusions of a new employee. In this article we shall try to cover what makes the salary? What is the difference between Salary, Net Salary, Gross Salary, Cost to Company .


Basic Salary: As the name suggests, this forms the very basis of salary. This is the core of salary, and many other components may be calculated based on this amount. It usually depends on ones grade within the companys salary structure.It is a fixed part of ones compensation structure. Allowance: It is the amount received by an individual paid by his/her employer in addition to salary to meet some service requirements such as Dearness Allowance(DA), House Rent Allowance (HRA), Leave Travel Assistance(LTA) , Lunch Allowance, Conveyance Allowance , Childrens Education Allowance, City compensatory Allowance etc. Allowance can be fully taxable, partly or non taxable. One can read Understanding the components of your salary and their taxation for more details. Perquisite: Is any benefit or amenity granted or provided free of cost or at concessional rate such as Rent free unfurnished house, Rent free furnished house, Motor car facility, Reimbursement of Gas, Electricity & Water, Club facility, Domestic Servant Facility, Interest Subsidy on Loan , Reimbursement of medical bills, Reimbursement of Hospital bills, Reimbursement of telephone bills, Benefits derived by employee stock option, and so on. How are perquisites taxed? Since these are non-cash components, they cannot be taxed directly. So the income tax laws attach a certain value to each of these components and charges a tax on them. The calculation of this value varies from category to category. Nevertheless, the thumb rule across all categories is that only those benefits that you use for personal purpose will be considered as perquisites.

Deductions: Two type of deduction are made from salary

Compulsory deduction such as Provident Fund, Income tax,Professional Tax (where applicable) . Optional deduction such as recovery for advance or loan if taken, voluntary contribution to P.F etc

Provident Fund Contribution

Provident fund contribution has two sides the employers contribution and employees contribution. This is usually 12 per cent of the basic salary. However, this contribution is not paid out . It is directly deposited in Provident Fund(PF) account and paid to employee when he retires or resigns.There is also employees contribution to PF. This amount is deducted from his monthly salary and deposited in his PF account. For details on provident fund you can readProvident Fund (PF) and Voluntary Provident Fund (VPF)

Different types of salary

Gross Salary: is the amount of salary paid after adding all benefits and allowances and before deducting any tax. Net Salary: is what is left of your salary after deductions have been made. Take Home Salary: Is usually the Net Salary unless there are some personal deductions like loan or bond re-payments. Cost to Company: Companies use the term Cost to Company to calculate the total cost to to employ . i.e. all the costs associated with an employment contract. Major part of CTC comprises of compulsory deductibles. These include deductions for provident fund, medical insurance etc. They form a part of your compensation structure but you not get them as a part of in-hand salary. As such, although it increases your CTC, it does not increment your net salary.


Lets see an example explaining the salary. An arbitrary salary break up is given below (Note: salary structure varies from one company to another): Component of Salary(per annum or p.a) Basic Salary Dearness Allowance House Rent Allowance Conveyance Allowance Entertainment Allowance Overtime Allowance Medical Reimbursements Gross Salary Benefits vary from company to company. Example of benefits for the above employee are: Medical insurance Provident Fund (12% of Basic) Laptop Total Benefits Cost to Company=Gross Salary + Benefits 2000 57,600 (12% of 4,80,000) 50,000 109600 6,75,000 + 109600=7,84,600

Benefits would also vary from company to company. In some Laptop may not be provided. In some cost of cubicle would be added. For example: If rent of office space is Rs 200 per sq ft and then a cubicle of 6 feet by 8 feet (i.e48 square feet) would cost Rs. 9,600 per month, or Rs. 1,15,200 per year. Which can be added to your CTC. Please note CTC varies from company to company. One can read Cost To Company or CTC salary: Understanding and Calculation for more details.


HRA CALCULATION The minimum of the three amounts will be exempt from tax: a. Actual HRA allowance in the salary package, that is Rs 96,000 OR b. HRA received less 10 per cent of salary and DA, that is 43,200 (96,000 10% of 528,000) OR c. If you live in metropolitan (Delhi, Chennai, Bombay and Calcutta), 50 per cent of salary and DA However, if you live in any other city, it is 40 per cent of salary + DA. So, in this case it would be Rs 2,11,200 (40% of 528,000) So HRA will be minimum of ( 96,000; 43,200; 2,11,200) which is 43,200 which will be exempted. So the portion that will be taxed in this example is = 96,000 43,200 = 52,800 Tax As Gross Taxable Salary 6,07,200 falls in the highest tax bracket. This tax amount includes education cess too. Assumption: Employee does not make any tax saving investment. Tax based on Assement Year 2011-2012 : 57,103. For tax estimator Calculator of InvestmentYogi is very helpful. Tax 57,103 Employee PF contribution(12% of Basic) Professional Tax Total Deductions Net Salary = Gross Taxable Salary Tax Net Monthly Salary 57,600 2400 1,17,103 =6,07,200- 1,17,103=4,90,097 =490097/12=40,841.41


Can Take Home salary be increased?

Yes it is possible and that too legally. An employee can plan taxes and increase the take home. If employee invests Rs 1, lakh in tax saving instruments, Section 80C such as PPF, Equity Linked Saving Scheme(ELSS) etc he can save taxes. So now employee in above example will be taxed on 6,07,2001,00,00 = 5,07,200. Amount to be taxed Tax Employee PF contribution(12% of Basic) Professional Tax Total Deductions Net Salary = Gross Taxable Salary Tax Net Monthly Salary Tax saving instruments under section 80C, 80G, House loan etc are beautifully depicted in this infographic. Optimum Salary Structure Maximum In Hand Salary Or Minimum Tax Liability explains how restructuring the salary would increase the take home 5,07,200 33,413 57,600 2400 93,413 =6,07,200- 93,413=5,13,787 =513787/12=42,815.58