CHAPTER-IV

COMPENSATION MANAGEMENT – A
THEORETICAL FRAME WORK
4.1 Introduction:
Compensation management has become one of the issues both
for employees and employers around the world due to its importance.
Naturally, employees want to get more remuneration for their work as
where employers want to pay as minimum as they can. So regarding
the compensation there is a conflict between employees and employers
in many of the organizations.
Compensation is the remuneration an employee receives for his
or her contribution to the organization. It occupies an important place
in the life of employee. His or her standard of living, status in the
society, motivation, loyalty and productivity depend upon the
remuneration he or she receives. For the employer too, employee
compensation is significant because of its contribution to the cost of
production. The HR specialist has a difficult task of fixing wages and
wage differentials acceptable to employee and their leaders.
Remuneration is another term synonymously used with the
compensation1.
4.2. Compensation Management:
In today’s intensely competitive and global marketplace,
competitive advantage lies not just in differentiating a product or
service or in becoming the low cost leader but in also being able to tap
the company’s special skills or core competencies. Therefore skilled and
efficient employees of a company are now considered as one of the core
competencies of the company. Especially for power industry; skilled,
efficient and motivated employees are must which requires specialized,
technical and scientific knowledge and expertise. To attain such
objectives HR plays a vital role and one of the most used tools by HR in

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order to ensure motivation for each and every employee is a
satisfactory “Compensation Package”.
Employees need to be compensated for their efforts based on
volume of time or volume of production. Compensation refers to all
forms of financial rewards received by employees. It arises from their
employment. It occupies an important place in the life of the employee.
It is a considerable cost to the employer. Compensation dissatisfaction
can lead to absenteeism, turnover, job dissatisfaction, low
performance, strikes and grievances. Majority of labor-management
disputes relate to compensation. Compensation is a key factor in
attracting and keeping the best employees and ensuring that the
organization has the competitive edge in an increasingly competitive
world. The Compensation Management component enables to
differentiate between the remuneration strategies and those of
competitors while still allowing flexibility, control and cost
effectiveness. It provides a toolset for strategic remuneration planning
that reflects the organization culture and pay strategies and it
empowers line managers within a framework of flexible budget control.
Compensation Management allow to control bottom-line expenditures
and offer competitive and motivating remuneration, be it fixed pay,
variable pay, stock options, merit increases, or promotion – in other
words, total compensation.
Compensation has an impact on attracting, retaining and
motivating the executive. Disparities in compensation pattern often
lead to dissatisfaction among executives. To make the executives
comfortable to the extent possible and further to keep them from
turning hostile, private companies have been giving in recent years,
bigger and more frequent rises in salaries. Companies have started
looking at executive compensation more proactively so that they can
expect better performance from them.

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 The compensation system results from the allocation and
transfer of a portion of the income of an organization to its employees
for their monetary claims on goods and services. Monetary claims on
goods and services are wages or salaries paid to an employee in the
form of money. As a medium of exchange, money enables an employee
to purchase goods and services available in the marketplace.
Wages and salaries in the form of money may be subdivided further
into payments earned and acquired at the present time and payments
earned but not acquired until some future time-deferred payments.
Compensation or reward management is concerned with the
formulation and implementation of strategies and policies which are to
reward people fairly, equitably and consistently in accordance with
their value to the organizations and to help the organization to achieve
its strategic goals. It deals with the design, implementation and
maintenance of reward systems which aim to meet the needs of both
the organization and its shareholders.
4.3. Concept of Compensation Management:
Compensation could be defined as the reward of any work or
service offered by an individual to any organization or institution. To
some, compensation may reflect the value of their personal skills and
abilities, while to others it may refer to be return on the educational
qualification or the training they have acquired. To some, it may be their
worth in specific role or a job, based on their qualification, training,
skills and expertise that they possess. The form of compensation, the
type of compensation and the disbursement pattern of the compensation
thus they become a part of employment agreement.

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4.4. Types of Compensations:
There are two types of compensation. They are as follows
1. Direct compensation and 2. Indirect compensation.

Figure–4.1: Type of Compensation

Types of Compensation

Direct Compensation Indirect Compensation

4.4.1. Direct Compensation:

Direct compensation refers to the monetary benefits offered and
provided to employees in return of the services they provide to the
organization. The monetary benefits include basic salary, house rent
allowance, conveyance, leave travel allowance, medical reimbursements,
special allowances, bonus, provident fund/gratuity, etc. They are given at
a regular interval at a definite time.
Figure–4.2: Direct Compensation

Medical
Reimbursement
Special
Basic Salary Allowances

Direct
Compensation
House Rent Bonus
Allowance

Leave Travel
Conveyance
Allowances

Source: Compiled from www.slideshare.net

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 Medical Reimbursement
Organizations also look after the health conditions of their
employees. The employees are provided with medi-claims for them and
their family members. These medi-claims include Health-insurances
and treatment bills reimbursements.
 Special Allowance
Special Allowance such as overtime, mobile allowance, meals,
commissions, travel expenses, reduced interest loans, insurance, club
membership, etc., are provided to employees to provide them social
security and motivate them which helps in improving the
organizational productivity.
 Bonus
Bonus is paid to the employees during festive seasons to
motivate them and provide them social security. The bonus amount
usually amounts to one month’s salary of the employee.
 Leave Travel Allowance
These allowances are provided to retain the best talent in the
organization. The employees are given allowances to visit any place
they wish with their families. The allowances are scaled as per the
position of employee in the organization.
 Conveyance
Organizations provide cab facilities to their employees. Few
organizations also provide vehicles and petrol allowances to their
employees to motivate them.
 House Rent Allowance
Organizations either provide accommodations to its employees
who are from different state or country or they provide house rent
allowance to its employees. This is done to provide them social security
and motivate them to work.

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 Basic Salary
Salary is the amount received by the employee in lieu of the work
done by him/her for a certain period say a day, a week, a month, etc. It
is the money an employee receives from his/her employer by rendering
his/her service.
4.4.2. Indirect Compensation:
Indirect compensation refers to non-monetary benefits offered
and provided to employees in lieu of the services provided by them to
the organization. They include Leave Policy, Overtime Policy,
Hospitalization, Insurance, Leave Travel Assistance Limits, Retirement
Benefits, Holiday Homes and flexible timings.
Figure – 4.3: Indirect Compensation

Overtime
Policy
Hospitalization
Leave
Policy

Indirect Insurance
Compensation
Flexible
Timings

Leave Travel

Holiday
Homes Retirement
Benefits

Source: Compiled from www.slideshare.net

 Overtime Policy
Employees should be provided with the adequate allowances and
facilities during their overtime, if they happened to do so, such as
transport facilities, overtime pay etc.

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 Hospitalization
The employees should be provided with the adequate allowances
to get their regular check-ups, say at an interval of one year. Even their
dependents should be eligible for the medi-claims that provide them
emotional and social security.
 Insurance
Organizations also provide accidental insurance and life
insurance for employees. This gives them the emotional security and
they feel themselves valued in the organization.
 Leave Travel
The employees are provided with the leaves and travel allowances
to go for holiday with their families. Some organizations arrange a tour
for the employees of the organization. This is usually done to make
employees stress free.
 Retirement Benefits
Organizations provide pension plans and other benefits for their
employees which benefits them after they retire from the organization
at the prescribed age.
 Holiday Homes
Organizations provide holiday homes and guest house for their
employees at different locations. These holiday homes are usually
located at the hill station and other most wanted holiday spots. The
organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.
 Flexible Timings
Organizations provide flexible timings to the employees who
cannot come to work during normal shifts due to their personal
problems and valid reasons.

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 Leave policy
It is the right of the employee to get adequate number of leave
while working with the organization. The organizations provides paid
leaves like casual leaves, medical leaves (sick leaves) and maternity
leaves, statutory pay etc.
Broadly, the compensation includes wages, salaries, financial
and non-financial benefits. Wage and salary are the main components
of compensation and all the workers and employees are getting wages
or salaries. Only few of the workers and employees who are working in
few of the industries and organizations are getting other financial
benefits and non-financial benefits. Based on the nature of work,
wages is fixed, but apart from nature of work, there are different factors
such as time, required skills for work, efficiency, etc. will play
significant role in fixation of wages and salaries. It is difficult task for
the HRD to determine wages and salaries of workers and employees. In
this regard, many of the theories were already propounded by many of
the economic and management thinkers on wages and salary
determination as under.
4.5. Aims of Compensation Management
The following are the important aims of compensation
management.
i. Reward people according to what the organization values and
wants to pay for.
ii. Reward people for the value they create.
iii. Reward the right things to convey the right message about what
is important in terms of outcomes and behaviors.
iv. Develop a performance culture.
v. Motivate people and obtain their commitment and engagement.
vi. Help to attract and retain the high quality people the
organization needs.

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vii. Create total reward processes which recognize the importance of
both financial and non financial rewards.
viii. Align reward practices with both business goals and employee
values and
ix. Operate in ways which are as follows -
 Fair
 Equitable
 Consistent
 Transparent
 Fair: A fair reward system is one in which people are treated
justifiably in accordance with what is due to them and their
value to the organization. Fairness means that the reward system
operates according to the principles of distributive and
procedural justice. Distributive justice is provided to people what
they believe that rewards have been distributed in accordance
with the value of their contribution, that they receive what was
promised to them and that they get what they need. Procedural
justice conforms to the ways in which managerial decisions are
made. The following are the five factors which affect procedural
justice:
(i) The viewpoint of employees is given proper consideration.
(ii) Personal bias towards employees is suppressed.
(iii) The criteria for decisions are applied consistently to all the
employees.
(iv) Employees are provided with early feedback, about the outcome
of decision.
(v) Employees are provided with adequate explanations of why
decisions have been made.

 Equity: Equity is achieved when people are rewarded

appropriately in relation to others within the organization.

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 Equitable reward processes ensure that relativities between jobs
are measured as objectively as possible and that equal pay is
provided to employees for their work of equal value.
 Consistent: Consistent means decisions on pay should not differ
randomly among different people or at different times.
 Transparent: Transparency means that people understand how
reward processes operate and how they are affected by them. The
reasons for any decisions are explained to them at the time they
are made2.
4.6. Determinants of Compensation:
Compensation is the only HR activity which has its impact on all
other functions regarding personnel. The different activities such as job
analysis, job evaluation, performance appraisal etc determined while
fixing the compensation. Recruitment and selection are dependent
upon wages and salaries offered to prospective employees. There is a
close relationship between performance appraisal and remuneration.
This is particularly true in cases where ‘payment by results’ schemes
exist. Incentive payments depend on the employee performance which
needs to be carefully assessed. It needs no particular emphasis that union-
management relations largely depend upon employee remuneration.
Following are the determinants of compensation in an
organization:
(a) Labour Market:
Demand for and supply of labour influence wage and salary
fixation. A low wage may be fixed when the supply of labour exceeds
the demand for it. A higher wage will have to be paid when the demand
exceeds supply, as in the case of skilled labour. A paradoxical situation
is prevailing in our country—excessive unemployment is being
juxtaposed with shortage of labour. While unskilled labour is available
in plenty, there is a shortage of technicians, computer specialists and
professional managers. High remuneration to skilled labour is

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necessary to attract and retain them. But exploitation of unskilled
labour, for instance, paying niggardly wages because it is available in
plenty, is unjustifiable. The Minimum Wages Act, 1948, is precisely
meant to prevent this kind of exploitation.
(b) Productivity of Labour:
It also influences wage fixation. Productivity can arise due to
increased effort of the worker, or as a result of the factors beyond the
control of the worker such as improved technology, sophisticated
machines and equipment, better management, and the like. Greater
effort of the worker is rewarded through piece-rate or other forms of
incentive payments. This form of productivity, due to individual effort,
cannot form a criterion of general wage payments.
Productivity arising from advanced technology and more-efficient
methods of production will influence wage fixation. While productivity
can be measured in terms of any one of the several factors such as
capital equipment, materials, fuel and labour, what matters most is
labour productivity. It is the relationship between the input of labour
measured in man-hours and the output of the entire economy, or of a
particular industry or plant measured in terms of money or in physical
terms. It may be stated that productivity has only subordinate role in
wage fixation. It can, at best, help determine fair wages.
(c) Cost of Living:
Next in importance to labour market is the cost of living. This
criterion matters during periods of rising prices, and is forgotten when
prices are stable or falling. The justification for cost of living as a
criterion for wage fixation is that the real wages of workers should not
be allowed to be whittled down by price increases. A rise in the cost of
living is sought to be compensated by payment of Dearness Allowance,
basic pay to remain undisturbed.

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(d) Labour Unions:
The presence or absence of labour organizations sometimes
determines the wages paid to employees. Employers in non-unionized
factories enjoy the freedom to fix wages and salaries as they please.
Because of large-scale unemployment, these employers hire workers at
little or even less than legal minimum wages.
(e) Labour Laws:
There are different legislations passed by the Government of
India and different State Governments, such as Payment of Wages Act,
1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965;
Equal Remuneration Act, 1976; and the Payment of Gratuity Act. 1972.
The Payment of Wages Act was passed to regulate payment of wages to
certain classes of persons employed in the industry. It also seeks to
protect workers against irregularities in payment of wages and
unauthorized deductions by the employers. In addition, the Act
ensures payment of wages in a particular form and at regular intervals.
The Minimum Wages Act enables the central and the state
governments to fix minimum rates of wages payable to employees in
sweated industries. The Payment of Bonus Act provides for payment of
a specified rate of bonus to employees in certain establishments. The
Gratuity Act provides for payment of gratuity to employees after they
attain superannuation. The Equal Remuneration Act provides for
payment of equal remuneration to men and women workers for same
or similar work. The Act stipulated stringent punishments for
contravention of its provisions.
(f) The Economy:
The last external factor that has its impact on wage and salary
fixation is the state of the economy. While it is possible for some
organizations to thrive in a recession, there is no question that the
economy affects remuneration decisions. For example, a depressed

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economy will probably increase the labour supply. This, in turn, should
serve to lower the going wage rate.
(g) Internal Factors:
Business strategy the overall strategy which a company pursues
should determine the compensation to its employees. Where the
strategy of the enterprise is to achieve rapid growth, remuneration
should be higher than what competitors pay.
Job evaluation helps to establish satisfactory wage differentials
among jobs. Performance appraisal helps award pay increases to
employees who show improved performance. Performance is always
rewarded with a pay increase. Rewarding performance motivates the
employee to do better. Managements prefer performance to effect pay
increases but unions view seniority as the most objective criterion for
pay increases. Experience makes an employee gain valuable insights
and should therefore be rewarded. Potential is useless if it is never realized.
Yet, organizations do pay some individuals based on their potential.
4.7. Compensation Policy:
Compensation policy and practices are being viewed as an
important factor or a role of HRM in ensuring its survival and growth.
It is a written document, rather a commitment of the organization to
ensure the concept of equity, easing out payment, providing
opportunities to grow or earn more as to make it cost effective. From
employee’s point of view, compensation determines their standard of
leaving. Compensation policy is therefore an important commitment of
the company and obligation of the government to recognize the need of
developing this community. It is a written document of any HRM of the
company, which reflect the intension and objective of the company to
hire or acquire, maintain and retain its employees.
A company policy has to be transparent to highlight the
compensation determination criteria for future growth and increments
/promotions, compensation to bear the burden of inflation and

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appropriate measures to provide compensation relating to the injury or
accident at work, disablement and retirement benefit plans. It should
also cover the settlement process of any disputes or dissatisfactions
and the expectation of unions.
Few of the legislations are influencing the compensation policy of
the organization and the Industrial Policy Resolution emphasized inter
alia its intention;
(a) To fix statutory minimum wages in sweated industries and
(b) To promote fair agreements in the more organized sectors.
Accordingly acts such as the Minimum wages Act, Industrial
Dispute Act, Fair and Living Wage Act etc. were enacted by the
government. Further, following factors are influencing the
compensation policy of the organization:
4.7.1. Individual Factor:
An employee as individuals worries about compensation worth,
while compensation differentiation depends on sex, skill, experience,
and level of competition. In designing the compensation structure,
individual skill, knowledge, expertise, attitude, sex, work environment
and experience play an important role to fix the level of job to meet the
job description regarding personality of an individual. Similarly the
creativity, innovation, imitation desire to be used on specific job also
matters. These factors determine the worth of an employee for this
specific job and help in designing wage/salary differentiation.
4.7.2. Organizational Factor:
Organizational earning depends on productivity of employee and
their efficiency, this measure the company’s ability to pay. Besides this
the size and technology required to perform any task and span of
control depending upon the size and nature of organization. The
capacity to pay also depends upon the financial strength of the
company, size, nature and number of level and cost of technology being
used in the organization.

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4.7.3. Competitive Factor:
The level of pay will depend on the mission and vision of the
organization. That means whether the organization is willing to lead,
develop competitiveness or meet the changing environment. This help
to decide the datum for the minimum and maximum rangers to the
entry level, middle level or higher level or to retain the old talent.
4.7.4. Product-Cost Factor:
It is a process of converting the job price into a monetary award
to the employee performing or going to perform that job. The process,
thus, covers job analysis, job pricing consideration, government
legislation and organizational capacity to pay and developing pay
packages to different levels of employees.
4.7.5. Other Factors:
Besides the above common factors affecting design, the following
considerations need careful analysis in finalizing wages or salary
structure for effective administration and management:
i. Company objective and mission
ii. Marketing rates and trends to fulfill the objective of external equity.
iii. The organizational ability to pay maintains the commitments and
demand elasticity to view the future conditions of market values.
iv. Cost of living in the region.
v. Productivity linked performance.
vi. Strengths of unions and their pressure on compensation.
vii. Company’s goodwill and images in the market.
viii. Various government legislations to protect the interests of the
employees.
ix. Tribunal’s judgments on compensation disputes.
4.8. Dimensions of Compensation Policy:
A sound compensation policy has different dimensions to be
determined while fixing the wages and salaries including other
allowances and incentives.

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 Following are dimensions of compensation policy.
4.8.1. Ability to Pay:
Wage increases should be given by those organizations which
can afford them. Companies that have good sales and therefore high
profits tend to pay higher wages than those which are running at a loss
or earning low profits because of the high cost of production or low
sales. In the short run, the economic influence of the ability to pay is
practically nil. All employers, irrespective of their profits or losses,
must pay no less than their competitors and need pay no more if they
wish to attract and keep workers. In the long run, the ability to pay is
very important. During times of prosperity, employers pay high wages
to carry on profitable operations because of their increased ability to
pay. But during a period of depression, wages are cut because of the
shortage of funds. Marginal firms and non-profit organizations (like
hospitals and educational institutions) pay relatively low wages
because of low or no profit.
4.8.2. Supply and Demand of Labour:
Wages and salaries are affected by the market conditions of
supply and demand. If the supply of particular labour skills is scarce,
employers may offer higher wages. If the supply is excessive, lower
wages are usually given. Similarly, if there is a great demand for labour
expertise, wages rise, but if the demand for a manpower skill is
minimal, wages will be relatively low. The supply and demand
compensation criterion is very closely related to the prevailing pay,
comparable wage and ongoing wage concepts are determined by
immediate market forces and factors.
4.8.3. Prevailing Market Rate:
This is also known as the comparable wage or going wage rate
and is the most widely used criterion. An organization’s compensation
policies generally tend to conform to the wage rate payable by the
industry and the community. This is done for several reasons. First,

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competition demands that competitors adhere to the same relative
wage level. Second, various government laws and judicial decision
make the adoption of uniform wage rates an attractive proposition.
Third, trade unions encourage this practice so that their members can
have equal pay for equal work and geographical differences may be
eliminated. Fourth, functionally related firms in the same industry
require essentially the same quality of employees with the same skills
and experience. This results in a considerable uniformity in wage and
salary rates. Finally, if the same or about the same general rates of
wages are not paid to the employees as are paid by the organization’s
competitors, it will not be able to attract and maintain sufficient
quantity and quality of manpower. Belcher and Aitcheson observe:
“some companies pay on the high side of the market in order to obtain
goodwill or to leisure an adequate supply of labour while other
organizations pay lower wages because economically they have to or by
lowering hiring requirements they can keep jobs adequately manned.”
4.8.4. Cost of Living:
The cost of living pay criterion is usually regarded as an
automatic minimum equity pay correction. This criterion calls for pay
adjustments based on increases or decreases in an acceptable cost of
living index. In recognition of the influence of the cost of living,
“escalator clauses” are written into labour contracts. When the cost of
living increases, workers and trade unions demand adjusted-wages to
offset the erosion of real wages. However, when living costs are stable
or decline, the management does not resort to this argument as a
reason for wage reductions.
4.8.5. The Living Wage:
The living wage criterion means that wages paid should be
adequate to enable an employee to maintain himself and his family at a
reasonable level of existence. However, employers do not generally
favour using the concept of living wages as a guide to wage

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determination because they prefer to base the wages of an employee on
his contribution rather than on his need. Also they feel that the level of
living prescribed in a worker’s budget is open to argument since it is
based on subjective opinion.
4.8.6. Productivity:
Productivity is another criterion and is measured in terms of
output per man-hour. It is not due to labour efforts alone.
Technological improvements, better organization and management, the
development of better methods of production by labour and
management, greater ingenuity and skill by labour are all responsible
for the increase in productivity. Actually productivity measures, the
contribution of all the resource factors-men, machines, methods,
materials and management. No productivity index can be devised
which will measure only the productivity of a specific factor of
production. Another problem is that productivity can be measured at
several levels-job, plant, industry on national economic level. Thus,
although theoretically it is a sound compensation criterion,
operationally many problems and complications arise because of
measurement and conceptual issues.
4.8.7. Union Bargaining Power:
Trade unions do affect the rate of wages. Generally, the stronger
and more powerful the trade union, then there will be higher wages. A
trade union’s bargaining power is often measured in terms of its
membership, its financial strength and the nature of its leadership. A
strike or threat of a strike is the most powerful weapon used by it.
Sometimes, trade unions force wages up faster than increases in
productivity would allow and become responsible for unemployment or
higher prices and inflation. However, for those remaining on the pay
roll, a real gain is often achieved as consequence of a trade union’s
stronger bargaining power.

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4.8.8. Job Requirements:
Generally, the more difficult a job, the higher are the wages.
Measures of a job difficulty are frequently used when the relative value
of one job to another in an organization is to be ascertained. Jobs are
graded according to the relative skill, effort, responsibility and job
conditions required.
4.8.9. Psychological and Social Factors:
These factors determine in a significant measure, how hard a
person will work for the compensation received or what pressures he
will exert to get his compensation increased. Psychologically, persons
perceive the level of wages as a measure of success in life; people may
feel secure, have an inferiority complex, seem inadequate or feel the
reverse of all these. They may or may not take pride in their work or in
the wages they get. Therefore, these things should not be overlooked by
the management in establishing wage rates. Sociologically and
ethically, people feel that equal work should carry ‘equal wages’, that
wages should be commensurate with their efforts, that they are not
exploited and that no distinction is made on the basis of caste, colour,
sex or religion. To satisfy the conditions of equity, fairness and justice,
a management should take these factors into considerations3.
4.9. Components of Compensation:
An average employee in the organized sector is entitled to several
benefits - both financial as well as non-financial. To be specific, typical
remuneration of an employee comprises wage and salary, incentives,
fringe benefits, perquisites and non-monetary benefits.
4.9.1. Wage 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 salaries are subject to annual increments. They
differ from employee to employee and depend upon the nature of job,
type of industry, seniority and merit. Dearness Allowance (DA) forms

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part of salary/wage. Wage is a monetary payment made by the
employer to his employee for the work done or services rendered.
Wages is a monetary compensation for the services rendered. A worker
may be paid Rs. 100 per day or Rs. 4,500 per month. This is known as
wage payment. The worker gives his services and takes payment called
wage payment. Industrial workers are paid remuneration for their
services in terms of money called wage payment. Wages are usually
paid in cash at the end of one day, one week or one month. Money
wage is the monetary compensation or price paid by the employer to
his employee for the services rendered. Such compensation is also
called wage or salary or reward given by an organization to a person in
return to a work done.
 Importance of wage payment:
i. To worker: Wage payment is important to all categories of
workers. Wage is a matter of life and death to workers/
employees. Their life, welfare and even social status depend on
wage payment. It is only source of income to large majority of
workers. They and their unions always demand higher wages
and other monetary benefits. Majority of labour problems and
disputes are directly related to wage payment. The efficiency of
workers and their interest and involvement in the work depend
on wage payment. Even their attitude towards employer depends
on wage payment. In brief, wage payment is a matter of greatest
importance to workers. Wage problem is the most pressing and
persistent problem before the entire labour force.
ii. To Employer: Wage payment is equally important to employers
as their profit depend on the total wage bill. An employer in
general is interested in paying low wages and thereby controls
the cost of production. However, low wages are not necessarily
economical. In fact they may prove to be too costly to the

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 employer in the long run e.g., in garment manufacturing
company if tailors are not paid properly then it is difficult for the
company to retain them. An employer has a moral and social
responsibility to pay fair wages to his worker as they are equal
partners in the production process. He should give fair wages
which will benefit to both the parties. Employees will offer full co-
operation to the management when they are paid attractive
wages. On the other hand, strikes and disputes are likely to
develop when workers are paid low wages or when they are
dissatisfied and angry due to low wage rates. It is possible to
earn more profit by paying attractive wages to workers e.g.,
Reliance, Citi Bank, Motorola are earned huge profits because of
their higher pay packages.
iii. To Government: Government also give special importance and
attention to wages paid to industrial workers as industrial
development, productivity, industrial peace and cordial labour
management relation depend on the wage payment to workers.
Government desires to give protection to the working class and for
this Minimum Wages Act and other Acts are made. In India, wages
are now link with the cost of living. This is for the protection of
workers. Government is the biggest employer in India and the
wage rates of government servant and employees of public sector
organizations are decided by government only. Revision of pay
scale of government employees made for adjusting their wages as
per the cost of living. For this, Pay Commission is appointed and
pay scale is adjusted as per the recommendations made. In India,
wage payment is very critical, controversial and delicate issue for
all categories of work force. This is due to poverty, rising prices,
mass unemployment and rising population. Wage payment indeed
a vexatious problem and needs to be tackled from economic,
social and humanistic angles.

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4.9.2. Incentives:
Incentives are also called ‘payments by results’, incentives are
paid in addition to wages and salaries. Incentives depend upon
productivity, sales, profit, or cost reduction efforts. There are (i)
individual incentive schemes, and (ii) group incentive programmes.
Individual incentives are applicable to specific employee performance.
Where a given task demands group effort for completion, incentives are
paid to the group as a whole. The amount is later divided among group
members on an equitable basis.
4.9.3. Allowances:
Apart from dearness allowance, other allowances such as House
Rent Allowance (HRA), Conveyance Allowance and Leave Travel
Allowance (LTA) also form part of compensation.
4.9.4. Bonus:
Bonus is one of the ways of sharing the profits of establishments. It
is an incentive to increase production. It is neither an ex-gratia payment
nor a matter of deferred wages. It generally represents the cash incentive
given on some conditions, e.g., attainment of certain standards of
attendance and efficiency. It contributes to the earning of the industrial
concern and so labour should derive some benefit. However, under the
Payment of Bonus Act 1965, it has now assumed a character of ‘deferred’
wage. Bonus plays an important role in today’s competitive executive
payment programmes. This type of incentive is usually short-term (annual)
and is based on performance. For this reasons, the definition of
performance is crucial. This profit-sharing concept also resulted in a bonus
being paid at the end of the year to the employees. Good companies began
to pay up to three months’ pay as bonus to their employees even in years
which did not justify such a high bonus payment.
4.9.5. Claims:
A part of monthly salary may be made up by billed claims. These
include telephone/mobile allowance, Internet allowance, medical

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allowance and the like. These are subject to a limit and are generally
paid against submission of valid bills.
4.9.6. Gratuity:
This is a statutory notional component appearing in the salary
break-up, but is paid only at the time of employee’s exit after serving
more than five years. Gratuity is governed by the Payment of Gratuity
Act, 1922.
4.9.7. Taxes:
Taxes are levied as per the prevailing laws, it is the duty of the
employer to deduct taxes from an employee’s salary and remit the same
to the tax departments.
4.9.8. Fringe Benefits:
Fringe benefits are marginal extra earnings to make workers feel
comfortable at the workplace or to perform their duty. However, they
vary according to the management’s HR policy and objective regarding,
how to hire, maintain and retain the knowledge bank of company.
These include such employee benefits as provident fund, gratuity,
medical care, hospitalization, accident relief, health and group
insurance, canteen, uniform, recreation and the like.
4.9.9. Perquisites:
Perks constitute a major source of income for executives. In
addition to the normally allowed perks like provident fund, gratuity and
the like, executives enjoy special parking, plush office, vacation travel,
membership in clubs and well-furnished houses. Perks take care of all
possible needs. Executives are rarely required to spend money from
their pockets. Their holidays, servants, telephone bills and even
electricity and gas bills are taken care of by their companies.
4.9.10. Non-monetary Benefits:
These include challenging job responsibilities, recognition of
merit, growth prospects, competent supervision, comfortable working
conditions, job sharing and flexi time. Retaining competent individuals

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for long is more difficult than attracting fresh ones. An employee’s
longevity of service in a particular organisation depends more on non-
financial benefits, but the role of financial benefits cannot be ruled out,
particularly at the lower levels of hierarchy. Loyalty towards an
organization also depends on his or her perceptions about
remuneration. It is common knowledge that an employee feels satisfied
or dissatisfied with his or her renumaration - not so much by the total
amount he or she receives, but by comparing his or her benefits with
those enjoyed by others. Comparison provides a feeling of equity or
inequity. There is a sense of equity when the employee’s remuneration
is equal or more than the remuneration received by others in the same
category of jobs. If the remuneration is lower, the employee feels he or
she is inequitably treated. An employee sticks to an organization when
he or she is paid equitably. The organization’s pay structure must,
therefore, be equitable and consistent4.
As discussed by Tangthong (2014), in relation to the non-
financial aspect of compensation and benefits and rewards
management, organizations are determined to motivate employees in
other ways besides financial payments. Reward and recognition
programs have been considered as one of the ways to motivate
employees successfully and to influence their behavior in achieving
greater organizational efficiency. There are two types of reward, which
are extrinsic and intrinsic rewards. Extrinsic rewards are the tangible
rewards that can be physically given to employees. They can be
provided directly by the organization to employees through salary and
incentives or indirectly through contributions made to employee’s
benefit plans, such as medical benefits and life insurance. Intrinsic
rewards are the intangible rewards that employees experience from
doing their jobs, such as the feeling of satisfaction, involvement,
growth, autonomy and self-competence. This is an indication that
employees are no longer working for just monetary gains. They are also

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paying attention on personal growth, such as the improvement of
capabilities, and acquiring new skills and knowledge. As for the
organization, non-financial rewards, such as support and recognition,
are being given by managers to employees to motivate them.
Recognition is a process of giving employees a certain status within the
organization. The recognition of employees’ performance can be in the
form of praise, awards or ceremonies. Through reward and recognition
programs, employees’ morale will increase and a link will be created
between the performance and motivation of employees5.
The following Figure shows components of employee’s compensation.
Figure-4.4: Components of Employees’ Compensation
Environmen

Remuneration

Financial Non-financial

Hourly and Incentives Fringe Perquisites Job Context

Monthly Rated Individual Benefits P.F. Company car Challenging job
Wages Plans Group Club Responsibilities
Gratuity,
Salaries Plans membership Recognition
Medical care, Growth
Accident relief paid holidays
prospects
Health and furnished Supervision
Group house Stock Working
insurance, option conditions job
etc. schemes etc. sharing, etc.

Direct Indirect

Source: K. Aswathappa, HRM-text and cases, 7th edition, 2014. P- 393.

4.10. Theories of Compensation Management:

There are three main theories that are used by human resources
professionals when developing compensation management plans:
1. Reinforcement Theory
2. Equity Theory
3. Agency Theory

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4.10.1. Reinforcement theory is similar to that of operant
conditioning. If a person is rewarded for a particular behavior, he or
she is more likely to perform those actions again. You can probably
think about a time when you did something that made your parents or
teacher happy and you were rewarded in some way. The positive
reaction motivated you to do the same actions again because you
would anticipate getting the same or a similar reward.

4.10.2. Equity theory suggests that employees' actions will be changed

based on their perception of how they are paid in comparison to their
coworkers. For example, if you and Billy work the same number of hours
and have the same type of job and a similar level of work experience, you
would expect to be paid fairly and about the same salary. However, if you
discovered that Billy was paid more than you are, then your productivity
will probably decrease so that you are only working up to the level that is
fair based on your new perception of your compensation.
4.10.3. Agency theory attempts to use pay in order to get the different
interests of people involved with the company to become one in the
same. There are many categories of people within a company and each
has their own set of priorities:
 Employees wish to have a safe workplace, to be paid fairly based
on their level of effort and maybe even share in company profits if
the company is successful. (After all, the company could not
make profits without employees.)
 Management seeks to increase the productivity of employees and to
be paid fairly based on their level of expertise within the organization.
 Stockholders want the company to maximize profits by reducing
costs (including labor expenses) while increasing the value and
reputation of the company.
As you can see, the priorities of each group can be in direct conflict. The
agency theory of compensation management can make it a priority to maximize

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productivity, performance and the reputation of the company so that
employees, management and stockholders all ultimately have the same goals6.
4.11. Challenges of compensation:
People who administer wage and salary face challenges which
often necessitate adjustments to a remuneration plan. The more
important of the challenges are skill-based pay, salary reviews, pay
secrecy, comparable worth, employee participation, elitilism or
egalitarianism, below market or above market rates, and marketing
versus non-marketing rewards.
The following figure shows the challenges of compensation.
Figure-4.5: challenges of compensation

Skill-based Pay

Monetary versus Non

Monetary rewards Salary Reviews

Employee Compensation Pay Secrecy

Participation

Eliticism or
Below Market or Egalitarianism
Above Market rates
Comparable
Worth

Source: K. Aswathappa, Human Resource Management (text and cases), New Delhi,
Tata McGraw Hill, 7th edition, 2014 P-409.

4.11.1. Skilled based pay: in the traditional job-based pay, employees

are paid on the bases of job they do. In the skill-based system, workers
are paid on the basis of number of jobs they are capable of doing, or on
the depth of their knowledge. The purpose of this system is to motivate
employees to acquire additional skills so that they become more useful
to the organisation.

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 Table No. 4.1. Skill-Based Pay and Job-Based Pay Compared
Factors Job-Based Skill-based
Pay structure Based on job Based on ability to perform
performance
Employers Job carries wages; Employee carries wage;
focus employee linked to employee linked to skill
job
Employee focus Job promotion to Skill acquisition to earn
earn grater pay greater pay
Procedures Assess job content; Assess skills; Value skills
required Value jobs
Advantages Pay based on value Flexibility; Reduced workforce
of work performed
Disadvantages Potential personnel Potential personnel
bureaucracy; bureaucracies; cost controls
inflexibility.
Source: K. Aswathappa, ‘Human Resource Management-Text and Cases’, McGraw
Hill Education Private Limited, New Delhi 2014. P-409.

Skill-based pay systems work well when the following conditions exist:

1. A supportive HRM philosophy underpins all employment activities.

Such a philosophy is characterized by mutual trust and the conviction
that employees have the ability and motivation to perform well.
2. Other programmes such as profit sharing, participative
management, empowerment, and job enrichment complement the skill-
based pay system.
3. Technology and organisation structure change frequently.
4. There are opportunities to learn new skills.
5. Employee turnover is relatively high.
6. Workers value teamwork and opportunity to participate.
4.11.2. Salary reviews: pay, once determined, should not remain
constant. It must be reviewed and changed often, but how often
becomes a relevant questions. Pay reviews may be made on
predetermined dates, anniversary dates or there could be flexible
reviews. In the fixed-date reviews, wages and salaries of all employees
are reviewed and raised on a specified date each year. in the

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anniversary-date review, salaries may be reviewed at twelve-month
intervals from the date of the employees anniversary date of hire. Using
variable timing ensures flexibility. In addition, high-performing employees,
who are low on their salary ranges, can be rewarded more frequently.

In organized industrial establishments, pay review takes place

once in there years. Managements enter wage and salary agreements
with labour unions and the agreements will be valid for three years.
Pay negotiations will take place on the expiry of the three-year period
and new records are signed after conclusion of the talks.

In government departments, pay revisions take place once in ten

or fifteen years. Revisions will depend on the recommendations of the
pay commission.

4.11.3. Pay secrecy: the process by which a remuneration plan is

designed and administered is critical for any organisations. One
challenge facing HRM concerns the availability of information about
remuneration to employees. The tendency among most firms is to
maintain pay secrecy as this would help avoid pay comparisons likely
to be made by employees.

Just how much and what types of information about pay should
be provided to employees is a question that troubles HR managers.
This is a difficult question to answer. Much has been written about the
effects of pay secrecy on employee’s behaviors and attitudes.

Firms in the organized sector and public sector enterprises

disclose full information about wages and salaries. Similarly, most
union contracts spell out wages and grades of pay. As stated earlier,
most firms, particularly family-controlled organisations tilt towards
maintaining pay secrecy.

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 The goals of achieving equity and employee satisfaction would
seem to call for telling employees about pay policies and levels. For
merit pay systems to have a motivating effect, an employee’s needs to
know how efforts translate into rewards. Information about maximum
and the average raises should be made available each year. Each
employee should be told what the midpoint is for his or her job, as well
as the pay range. In addition, the organisation should explain how it
arrived at the pay structure. Allowing employees to see where their jobs
are located in the wage structure should not create significant
problems for an employer that has a well-designed job evaluation plan.

4.11.4. Eliticism versus Egalitarianism: Firms become egalitarian

when they place most of their employees under the same remuneration
plan. The plan becomes elitist when the organisation establish
different remuneration schemes. In some firms only the CEO is eligible
for stock options. In others, even the lowest paid workers are offered
stck options. In some other companies only one category of employees
is offered incentive schemes but in others all employees are covered by
pay-for-performance schemes.

Egalitarianism gives organisations more flexibility to deploy

employees in different areas without having to change their pay levels.
It can also reduce barriers between people who need to work together.
Egalitarian remuneration systems are found mainly in highly
competitive environments where companies frequently take business
risks and try to expand their market share by continually investing in
new technologies, ventures and products.

Elitist remuneration systems are prevalent among older, well-

established firms with mature products, a relatively stable market
share and limited competition. Elitist pay structures lend to result in a

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more stable work-force because employees make more money only by
moving up through the company.

4.11.5. Comparable worth: One of the popular principles in employee

remuneration is equal pay for equal work. Infact, this principle has
been the inspiration behind the enactment of the Equal Remuneration
Act. Under the Act, male and female nurses are to be paid the same if
their merit and seniority match, but a female nurse and a male
electrician could be paid different rates.

Beyond the concept of equal wages for equal work, is the idea of
comparable worth which implies that if both a nurse and an electrician
receive the same number of points under a point-ranking method of job
evaluation, they have to be paid the same, subject, of course, to
seniority and merit differences.

Any bias in the job-evaluation process is sure to render

comparable worth unworkable. Bias is bound to occur in job
evaluations because of the tendency to assign higher number of points
for jobs traditionally held by women.

4.11.6. Below Market versus Above Market Remuneration:

Remuneration involving decision relating to below market or above
market pay structure has two implications. First, a firm’s ability to
attract talent from other depends on employee’s pay relative to
alternative employment opportunities. Second, the choice has an
important cost component. Decision to above going rate obviously
adds to the cost. However in general, above market pay policies are
more prevalent among larger companies in less competitive industries,
such as utilities and among companies that have been performing well
and have the ability to pay more. In addition, companies desirous of
growing fast in a tight labour market need to pay above market rates.
Unionized firms also need to pay higher rates.

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 Firms paying below market rates tend to be small and
disorganized. Garment units, beedi rolling and incense-sticks rolling
firms pay wages that do not come anywhere near current rates

4.11.7. Employee Participation: When employees are involved in

designing a remuneration plan, they exhibit little resistance in
accepting it. Such a plan is much more likely to be a successful
motivator than the one imposed by the management.

It is appropriate to involve employees in many phases of a reward

system. For example, a wide variety of employees should serve in job
evaluation committees. If a point-ranking method is adopted, it is
reasonable to involve employees in identifying the compensable factors
to be used and the weight to be assigned to each factor. Employees are
also likely to have a good insight in identifying competitor firms that
should be included in a wage survey.

There are several mechanisms for employee involvement. At the

broadest level the employees can be surveyed to learn about their
preferences. Employee task forces can help integrate these preferences
into a system. Such groups are usually an excellent way to involve
employees in any decision associated with a reward system.

The decision to involve employees in designing or administering a

remuneration plan should not be made in haste. Employee
participation is unlikely to work well unless the organisation has
already established an overall philosophy of participative management,
as well as a reasonable climate of organisational trust. Participation
takes considerable time – if time and trust are limited, a more
traditional, a top-down approach might be more appropriate.

4.11.8. Monetary versus Non-monetary Rewards: The issue relating

to monetary and non-monetary rewards has primarily tax implications.

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Many non-monetary rewards such as medical benefits and housing are
fully or partially exempted for taxes. Employees and even employers
prefer non-monetary benefits than monetary rewards. There are other
implications of non-monetary benefits7.

4.12. Concepts of Wages:

The concepts of minimum, living and fair wages:
 Minimum Wage
 Fair Wage
 Living Wage
4.12.1. Minimum wage:
The concept of Minimum Wage stands for different standard of
different countries. The fair wage committee in India has observed
that in India the level of the national income is so low at present that
it is generally accepted that the country cannot afford to prescribe by
law a minimum wage must provide not merely for the bare
sustenance of life but for the preservation of the efficiency of the
worker. Thus, a minimum wage is one, which may be sufficient to
enable a worker to live in reasonable comfort having regard to all
obligations to which an average worker would ordinarily be subject.
Objective of minimum wage
i. To prevent explanation of workers and secure a wage equal to
work load.
ii. To raise the wages in the industries where they are
low, thus prevent sweating in industry.
iii. To promote peace in industry by guaranteeing a wage rate
this will enable them to meet their minimum requirements.
iv. Raise the standards of living and efficiency of workers.

4.12.2. Fair wage

To bring improvement in the relations between labour and
management the industrial truce resolution was passed in 1947, which

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provided for the payment of fair wages of labour Govt. of India
appointed a fair wages committee in 1948, and the committee report
was published in 1949. Marshall and Pigou have defined fair wages.
Marshall says, in any given industry wages are fair relatively in
industry in general. Lower limit of fair wages must be the minimum
wage for workers and upper limit will be the industry capacity to pay.
However, between these two limits following factors have to be
considered:
i. The productivity of labour
ii. The prevailing rate of wages in the same or neighboring
locality.
iii. The place of the industry in the economy.
iv. The level of national dividend and its distribution.
4.12.3. Living wage
The living wage represented the higher level of wage and it would
include all amenities which a citizen living in a modern civilized society
could afford. After considering various observations made by Indian
authorities, the committee on Fair wages observed, the living wages
should enable to male earner to provide for himself and his family the
bare essential of food, clothing and shelter but a measure of frugal
comfort including duration for the children, protection against ill health
requirement of essential social needs and a measure of insurance
against the more important misfortunes including old age.
4.13. Theories of Wages and Salary Determination:
Wage determination, apart from the statutory aspect, is
influenced by different theories. These theories are described as under.
4.13.1. Subsistence Theory:
David Ricardo (1772—1832) advocated the subsistence theory. In
Ricardo’s words, workers should be paid ‘To enable them to subsist
and perpetuate the race without increase or diminution’. The theory
was based on the assumption that if the workers were paid more than

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subsistence wage, their numbers would increase as they would
procreate more and this would bring down the rate of wages. If the
wages fell below the subsistence level, the number of workers would
decrease, as many would die of hunger, malnutrition, disease, cold
etc., and many would not marry, when this happened wages would
increase again. In economics, the subsistence theory of wages states
that, in the long run, wages will be reduced to the minimum level
needed to keep workers alive.
4.13.2. Wages Fund Theory:
This theory was developed by Adam Smith (1723—1790) on the
assumption that wages are paid out of a predetermined fund of wealth,
the surplus savings of the wealthy. This fund could be utilized for
employing labourers for work. If the fund was large, wages would be
high; if it was small, wages would be reduced to subsistence level. The
demand for labour and the level of wages were determined by the size
of the fund.
4.13.3. Surplus Value Theory:
The surplus value theory of wages owes its development to Karl
Marx (1818— 1883). According to this theory, labour was an article of
commerce, which could be purchased on the payment of the
‘subsistence price’. The price of any product was determined by the
labour and the time needed for producing it. The labourer was not paid
in proportion to the time spent on work, but was paid much less, and
the surplus was utilized for paying other expenses.
4.13.4. Residual Claimant Theory:
The residual claimant theory advocated by Francis Walker (1840-
1897), assumes that there are four factors of production/ business
activity - land, labour, capital, and entrepreneurship. Wages represent
the amount of value created in the production, which remains after
payment has been made for all these factors of production. In other
words, labour is the residual claimant.

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4.13.5. Marginal Productivity Theory:
This theory assumes that wages are based upon an
entrepreneur’s estimate of the value that will probably be produced by
the last or marginal worker. In other words, it assumes that wages
depend upon the demand for and supply of labour. Consequently,
workers are paid what they are economically worth.
4.13.6. Bargaining Theory of Wages:
This theory considers that wages are determined by the relative
bargaining power of workers, trade unions and employers. When a
trade union is involved the basic wages, fringe benefits, job
differentials, and individual differences tend to be determined by the
relative strength of the organization and the trade union.
4.13.7. Behavioural Theory of Wages:
This theory was pioneered by several psychologists and
sociologists, such as Marsh and Simon, Robert Dubin and Eliot
Jacques. Based on their various research studies, we can identify the
following areas of interest in behavioural theories on wages:
a. The employee’s acceptance of a wage level: Individuals believe
in employment stability and prefer to stay on with the same
organization, pacing with their salary level. There are, however,
several other factors to be considered such as size and prestige of
the company, trade unions’ power in the organization, their level
of knowledge and competencies, etc.
b. The internal wage structure: Employees value internal pay
equity. Moreover, some jobs are also command social status
(such as the job of a journalist). Organizations design wages for
different cross-sections of employees, while considering
maximum and minimum wage differentials, norms of span or
control and demand for specialized skill-sets. Balancing of wages
with such internal equity also keeps employees more motivated8.

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4.14. Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
Provident Funds and Pension are the retrial benefits but unlike
pension where the entire financial burden falls on the employer,
provident funds are contributory in the sense that, besides putting in
service, a worker has also to contribute a part of his wages.
The Employees’ Provident Funds and Miscellaneous Provision Act,
1952 is one of the important social security measures to workers on his
retirement and for the benefit of dependents in case of his/her death.
The Act seeks to provide for institution of (i) provident funds; (ii)
pension fund and (iii) deposit linked insurance funds for employees in
factories and other establishment9.
4.15. Employee Benefits:
Apart from salaries, bonus, perquisites, etc., there are also many
benefits such as old age benefits, retirement benefits, voluntary
retirement benefits, disability benefits, etc., also plays significant role
while selecting the work and job of the employees at different
organizations. Further, in case of risky works in different types of
industries and organizations such as power sector, the employers stress
more on disability and death benefits to their employees. Generally,
following benefits are provided to the employees as benefits with their
salaries and compensation management also includes the same.
Some of the benefits to employees are explained here.
4.15.1. Gratuity:
Gratuity is a retirement benefit of employees for their long and
continuous service. “It is a lump sum payment made to a worker or to
his heirs by the employer on termination of his service due to
retirement, retrenchment, invalidity or death.” The Payment of Gratuity
Act, 1972 was passed as Act No. 30 of 1972 and received the assent of
the President of India on 21 August, 1972. It was enforced with effect
from 16 September, 1972. According to Sub-section (3) of Section 1,
this Act shall apply to:

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 a) Every factory, mine, oil-field, plantation, port and Railway
Company.
b) Every shop or establishment within the meaning of any law for
the time being in force in relation to shops and establishments in
a State in which 10 or more persons are employed or where
employed, or any day of preceding 12 months.
c) Such other establishments or class of establishments, in which 10
or more employees are employed or were employed, of any day of
the preceding twelve months, as the Central Government may, by
notification specify in this behalf. (3A) A shop or establishment to
which Act has been applicable shall continue to be governed by this
Act, notwithstanding that number of persons employed therein any
time after it has become so applicable falls below 10.
4.15.2. Voluntary Retirement Scheme (VRS):
Voluntary Retirement is legally tenable and is an integral part of
public policy. Immediately after liberalization the Government has
created a special fund called National Renewal Fund and allocated
nearly 90 per cent of the fund to voluntary retiree from the central
public sector undertakings which are not commercially viable. The
government service rules also provide for voluntary retirement of civil
servants as a part of government policy to downsize the government.
4.15.3. Disability Benefits:
Disability may be classified as regular, temporary total, or
partial. When employees are unable to work because of an accident or
some health-related problem, disability income continuation payments
assist them in maintaining their existing lifestyle without major
modification. Various disability income continuation components
provide weekly or monthly payments in lieu of the regular earned
income paycheck. The major components are as follows9:
 Short-term disability
 Long-term disability

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  Workers compensation
 Non-occupational disability
 Social security
 Travel accident insurance
 Accidental death and dismemberment
 Group life insurance: Total permanent Disability (TPD)
 Sick leave
 Supplemental disability insurance
 Retirement plans.
4.15.4. Deferred Income:
Over the years, employers have established the following kinds of
compensation components to help employees accumulate capital and
meet future financial goals:
I. Social security
II. Qualified Retirement Plan
a. Pension plan
b. Profit-sharing plan
c. Stock bonus plan
III. Simplified employee Pension Plans(SEPs)
IV. Supplemental executive Retirement Plans(SERPs)
V. Supplemental and executive group life Insurance Plans
VI. Stock purchase Plan
VII. Stock Option Plan
VIII. Stock Grant
4.15.5. Spouse and family income protection:
Most employees attempt to ensure the future welfare of their
dependents in case of their death. One component, life insurance, and
a number of other components previously identified and described have
specific features to assists a worker’s dependents in the event of such a
calamity. The major components available to protect workers’
dependents are:

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 a. Life Insurance
b. Social Security and Medicare
c. Tax – sheltered Annuity
d. Workers’ Compensation
e. Retirement plans
f. Accidental death and Dismemberment
g. Travel Accident Insurance
h. Healthcare Coverage.
4.15.6. Health and Accident Protection:
Organizations provide their employees with a wide variety of
insurance services to help them and their families maintain a normal
standard of living when unusual or unexpected health-related adversities
occur. These healthcare-related insurance plans cover medical, Surgical,
and hospital bills resulting from an accident or illness.
Medical coverage included in medical plans continues to expend
every year. Basic medical coverage includes payments for diagnostic
visits to the doctor’s office, outpatient X-rays, and Laboratory coverage.
Recent additions include home visits by the doctor and ambulatory or
outpatient surgery. Although still rare among medical benefits, the
annual physical is beginning to appear in more health insurance
programs. Another recent addition to healthcare insurance plans is the
extension of comprehensive healthcare benefits to include some of the
survivors of deceased company employees and retirees. A relatively new
provision covers outpatient and non-hospital psychiatric care10.
4.15.7. Time-Off with Pay:
Many of the organizations also provide the time-off with pay such
as Leave Travel Allowances, Home Travel Allowances, and Special Leave
with holiday packages, etc. The more common time-off with pay
components are:
a. Holiday’s
b. Vacations

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 c. Jury duty
d. Election official
e. Witness in court
f. Civic duty
g. Military duty
h. Funeral Leave
i. Illness in family leave
j. Marriage leave
k. Paternity leave
l. Maternity leave
m. Sick leave
n. Wellness leave
o. Time off to vote
p. Blood donation
q. Grievance and contract negotiations
r. Lunch, rest and wash-up periods
s. Personal leave
t. Sabbatical leave.
4.16. Compensation Trends in India:
From corporate practices, one can highlight the following salient
features of employee compensation in India:
i. There is a substantial difference in gross compensation for
managers and their immediate subordinates.
ii. Differences in gross compensation and sometimes
compensation structure are practiced between the project and
support functions.
iii. Companies design personalized salaries out of a basket of
options for individuals at senior levels,
iv. There has been a significant increase in basic salary, and
hence in deferred benefits.

108
 v. Companies have restricted non-tax perks in the form of
reimbursement under various heads to certain top levels of
management.
vi. Companies provide higher annual increments, average
increments varying from 50 to 100 per cent to different levels
of management.
vii. There has been a shift in incentives to group/team incentives
from individual based incentives. Different kinds of incentives,
such as performance incentive, commission, performance
payment, and performance bonus, are not always individual
specific. They are usually team or level based. Individual-
based cash incentives are on the decrease except at very
senior levels.
viii. A soft furnishing allowance is being provided towards the
purchase of curtains, carpet, cutlery, and crockery and this is
usually paid as an annual, non-taxable allowance.
ix. Most companies have abolished components such as servants’
wages and utilities allowances, as they are not non-taxable
any longer. Conveyance is an area which provides a lot of
scope for variations. Practices with regard to provision of car,
driver, and reimbursement of expenses on car, parking,
cleaning, petrol, and maintenance are covered under this
category.
x. The practice of providing company-owned cars to employees is
on the decline. Instead the company encourages employees to
buy the cars themselves through hire-purchase schemes, and
the installments are then paid by the company. This is to
combat the problem of accumulation of used cars by
companies with a high-employee turnover.

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 xi. Loans to buy two- and four-wheelers are common practice.
Interest rates may vary, with the repayment period varying
from three to five years.
xii. Medical benefits are common, with tie-ups with insurance
companies and hospitals in many cases. Companies organize
annual medical check-ups for all employees. In some
companies, though rare, hospital expenses are also entirely
reimbursed by the company, based on grade or age-level
slabs.
xiii. Some companies assist employees in their higher education
by sponsoring evening classes or providing sabbaticals at
company cost.
xiv. Special, interest-free loans up to Rs. 3 lakhs are sometimes
extended to employees.
xv. Companies reimburse books, periodicals, newspapers,
journals, etc., against a predetermined limit. Subscriptions to
professional bodies are also reimbursed.
xvi. Club memberships in the form of reimbursement of the one-
time joining fee for one club, plus the monthly/annual
subscription to one or more clubs, is an attractive perk for
senior management. Alternatively, companies also go for bulk
corporate club memberships.
xvii. Soft loans for purchase of furniture, appliances, and
computers are also extended to employees by some
organization.
xviii. Housing loan or interest subsidy is also provided.
xix. Companies reimburse travel expenses for holidays including
accommodation in guesthouses and transit flats. Increasingly,
this is being extended to cover holidays abroad for senior
employees and their families. In most cases, this is used as a

110
 discretionary reward for exemplary performances rather than
as a perk.
xx. There is a trend of providing pre-employment benefits for
attracting talent, including coverage of all relocation expenses
for the family, transport of personal goods, assistance in
locating housing, schooling, etc.
xxi. Some components such as long-term paternity or maternity
leave, as well as part and flexi – time employment options, are
also available.
xxii. The trend has shifted to making components direct and
taxable. There is a distinct shift towards schemes for asset
creation.
xxiii. Under profit-sharing schemes, senior executives sometimes
share accrued profits when the company earns profits beyond
a certain fixed level. The average share is 20 to 25 percent of
the excess profit.
xxiv. Companies also provide employee stock options (ESOP) to
employee.
4.17. Workmen’s Compensation Act, 1923:
The Workmen’s Compensation Act of 1923, now employee’s
compensation act was a turning point in the history of labour
jurisprudence and trade union movement. This was the earliest
national legislation to provide compensation to the workman by their
employers for injury which could be suffered by the workman as a
result of an accident during the course of employment. The general
principal is that a workman, who suffers injury in the course of his
employment, should be entitled to compensation and in case of fatal
injury his dependents should be compensated. The Act provides
security to the workman who is incapacitated resulting in a loss in the
earning capacity.

111
4.18. Act 8 of 1923:
The Workmen's Compensation bill having been passed by the
legislature received its assent on the 5th March, 1923. It came on the
statute book as the Workmen’s Compensation Act, 1923 (8 of 1923). By
section 4 of the Workmen’s Compensation (amendment) Act, 2009 (45
of 2009) nomenclature of the act has been amended by substituting the
word “employees” for the word “Workmen’s” (w.e.f. 18-1-2010). Now
the Act stands as The Employees Compensation Act, 1923 (8 OF 1923)
came into force from 1st July, 1924. It applies to the whole of India,
including the State of Jammu and Kashmir. The Act provides for the
payment of compensation by certain Classes of employers to their
Employees for injury by accidents11.
The Workmen's Compensation Act does not apply to factories
covered by the Employees State Insurance Act.
4.19. Definitions under Workmen's Compensation Act:
Some of the definitions under workmen’s compensation
Act are explained here.
4.19.1. Workman: The definition of the term workman is important
because only a person coming within the definition is entitled to the
reliefs provided by the Workmen's Compensation Act. "Workman" is
defined in Section 2(n) read with Schedule II to the Act.
In Schedule II, a list (consisting of 32 items) is given of persons
who come within the category of workmen. Examples: Persons
employed otherwise than in a clerical capacity or in a railway to
operate or maintain a lift or a vehicle propelled by steam, electricity or
any mechanical power; person employed otherwise than in a clerical
capacity in premises where a manufacturing process is carried on;
seamen in ships of a certain tonnage; persons employed in
constructing or repairing building or electric fittings; persons employed
in a circus or as a diver; etc.

112
 Subject to the exceptions noted below, the term workman means:
(a) a railway servant as defined in Section 3 of the Indian Railways
Act of 1890 who is not permanently employed in any
administrative, district or sub-divisional office of a railway and
not employed in any capacity as is specified in schedule II or
(b) Employed on monthly wages not exceeding Rs. 1000 in any such
capacity as is mentioned in Schedule II. I from 1st April 1976, the
limit of monthly wages for purposes of this Act, was raised from
Rs. 500 to Rs. 1000. I the words used in clause (b) mean that the
wages must not exceed on average (now Rs. 1000) a month.
The contract of employment may be expressed or implied, oral or
in writing.
The Act provides that the following categories of persons are not
to be deemed as workmen for the purposes of the Act:
a) Persons working in the capacity of a member of the Armed Forces
of the Union.
b) A person whose employment is of a casual nature and who is
employed otherwise than for the purposes of the employer's trade
or business.
The exercise and performance of the powers and duties of a local
authority or of any department acting on behalf of the Government
shaft, for the purposes of the Act, unless a contrary intention appears
be deemed to be the trade or business of such authority or
department.
The State Government has been given power to add to the list in
Schedule II any hazardous occupation or specified injuries in such an
occupation. The addition may be made by notification in the official
Gazette, with not less than 3 months' notice.
There is legal decision regarding the question who is a workman.
The general rule is that there must be the relationship of master and
servant between the employer and the workman.

113
 4.19.2. Wages: Wages include any privilege or benefit which is
capable of being estimated in money, other than a travelling allowance
or the value of any travelling concession. Or a contribution paid by the
employer of a workman towards any pension or provident fund or a
sum 'paid to a workman to cover any special expenses entailed on him
by the' nature of his employment Sec. 2 (m).
The definition of wages is important because an employee whose
monthly wages exceed Rs. 1000 is not a workman for the purpose of
the Act.
The definition of wages is not exhaustive. Wages include all pay-
ment which can be calculated in terms of money, e.g., ordinary wages,
extra payment for overtime, bonus and other inducements in the shape
of payment for idle time, free meals, allowances for grain and clothing,
free or cheap housing, etc., offered to the workman to enter into a
contract with the employer.
4.19.3. Monthly Wages: Section 5 of the Act defines "monthly
wages" and states the methods of calculating it. "Monthly" wages
means the amount of wages deemed to be payable for a month's
service (whether the wages are payable by the month or by whatever
other period or at piece rate). Monthly wages are calculated as follows:
(a) Where the workman was in service for a continuous period of 12
months immediately preceding the accident, monthly wages
shall be one-twelfth of the total wages due for the last twelve
months of the period.
(b) Where the whole of the period of continuous service was less
than one month, monthly wages shall be the average monthly
amount which during the twelve months immediately preceding
the accident was being earned by a workman employed on the
same work by the same employer, or if there was no workman
so employed, by a workman employed on similar work in the
same locality.

114
 (c) In other cases, including cases in which it is not possible for
want of necessary information to calculate the monthly wages
under clause (b) the monthly wages shall be thirty times the
total wages earned in respect of the last continuous period or
service immediately preceding the accident from the employer
who is liable to pay compensation divided by the number of
days comprising such period.
A period of service is deemed to be continuous which has not
been interrupted by a period of absence exceeding 14 days.
4.19.4. Dependant: Section 2(d) gives a list of persons who come
within the category of "dependant" of a workman. In ordinary
language the dependant of a person is one who lives on his earnings.
Under Section 2 (d) there are three categories of dependants.
1. The following relations are dependants, whether actually so or
not-widow, minor legitimate son, unmarried legitimate
daughter, a widowed mother - Sub-sec. (i).
2. The following relations come within the category if any were
wholly dependent on the earnings of the deceased workman at
the time of his death-a son or daughter who has attained the
age of 18 years and who is infirm - sub-sec. (ii).
3. The following relations are dependants if they were wholly or
partially so at the time of the workman's death-widower; parent,
other than widowed mother; minor illegitimate son; unmarried
illegitimate daughter or a daughter legitimate or illegitimate if
married and a minor or if widowed and a minor, a minor brother
or an unmarried sister or widowed sister if minor; a widowed
daughter-in-law, a minor child from a predeceased son; a minor
child from a predeceased daughter where no parent or child is
alive: or a paternal grandparent if no parent of the workman is
alive - Sub-sec. (iii). Parent, other than widowed mother. Calcutta
High Court held that the term 'step mother' does not include this

115
 phrase. Manada Devi v. Bengal Bone Mill. But Nagpur High
Court held that the term includes an adoptive widowed mother.
Additional Dy. Commissioner, Simbhum v. Smt. Lakhmibai
Naidu.
4.19.5. Minor: Minor means a person who has not attained the
age of 18 years, Sec. 2(ff).
4.19.6. Employer: Sec. 2( e) provides that the term Employer
"includes" the following: (i) anybody of persons, whether incorporated
or not (ii) any managing agent of an employer (iii) the legal
representatives of a deceased employer, and (iv) any person to whom
the services of a workman are temporarily lent or let out, while the
workman is working for him. The definition is not exhaustive12.
4.19.7. Total Disablement: According to Section 2(1) total disable-
ment means such disablement, whether of a temporary or permanent
nature, as incapacitates a workman for all work which he was capable of
performing at the time of the accident resulting in such disablement,
provided that permanent total disablement shall be deemed to result from
the permanent total loss of the sight of both eyes or from any
combination of injuries specified in Schedule I, where the aggregate.
Percentage of the loss of earning capacity as specified in that schedule
against those injuries amounts to one hundred percent.
4.19.8. Partial Disablement:
Disablement, in ordinary language, means loss of capacity to work
or move. Such incapacity may be partial or total and accordingly there are
two types of disablement, partial and total. In the Act both types of
disablement are further subdivided into two classes, they are as follows:
1. Temporary
2. Permanent
By Section 2 (g) Temporary Partial Disablement means such
disablement as reduces the earning capacity of a workman in any
employment in which he was engaged at the time of the accident.

116
 Permanent Partial Disablement means such disablement as
reduces his earning capacity in every employment he was capable of
undertaking at that time. The Act is not limited only to physical capacity
of disablement, but extends to the reduction of earning capacity.
In a case of Partial Disablement it is necessary that (a) there
should be an accident, (b) as a result of the accident the workman
should suffer injury, (c) which should result in permanent disablement
and (d) as a result whereof his earning capacity must have decreased
permanently. In the proportion in which his earning capacity has been
decreased permanently he is entitled to compensation.
The medical evidence showing loss of physical capacity is a relevant
factor but it is certainly not the decisive factor as to the loss of earning
capacity. It is the loss of earning capacity that has to be determined.
The type of disablement suffered is to be determined from the
facts of the case. But it is provided that every injury specified in
Schedule I to the Act shall be deemed to result in permanent partial
disablement. The schedule also mentions the percentage loss of
earning capacity which is to be presumed in each such case.
The following table shows the list of injuries deemed to result in
permanent partial disablement.
Table No. 4.2
List of Injuries Deemed to Result in Permanent Partial
Disablement
Sl. Percentage loss of
Description of Injury
No. earning capacity
1 Amputation through shoulder joint 90
2 Amputation below shoulder with setup less than
80
(20.32 cms) from tip of acromion
3 Amputation form (20.32 cms) from tip of acromion
70
to less than (11.43 cms) below tip of olecranon
4 Loss of a hand or of the thumb and four fingers of
one hand or amputation from (11.43 cm) below tip 60
of olecranon
5 Loss of thumb 30
6 Loss of thumb and its metacarpal bone 40
7 Loss of four fingers of one hand 50

117
 8 Loss of three fingers of one hand 30
9 Loss of two fingers of one hand 20
10 Loss of terminal phalanx of thumb 20
10A Guillotine amputation of tip of thumb without loss
10
of bone (amputation cases-lower limbs)
11 Amputation of both feet resulting in end bearing
90
stumps
12 Amputation through both feet proximal to the
80
metatarso-phalangeal joint
13 Loss of all toes of both feet through the metatarso-
40
phalangeal joint
14 Loss of all toes of both feet proximal to the
30
proximal inter-phalangeal joint
15 Loss of all toes of both feet disable to the proximal
20
inter-phalangeal joint
16 Amputation at hip 90
17 Amputation below hip with stump not exceeding
(12.70 cms) in length measured from tip of great
80
trenchanter

18 Amputation below hip with stump exceeding

(12.70 cms) in length measured from tip of great 70
trenchanter but not beyond middle thigh
19 Amputation below middle thigh to (8.89 cms)
60
below knee
20 Amputation below knee with stump exceeding
50
(8.89 cms) but not exceeding (12.70 cms)
21 Amputation below knee with stump exceeding
50
(12.70 cms)
22 Amputation of one foot resulting in end bearing 50
23 Amputation through one foot proximal to the
50
metatarso-phalangeal joint
24 Loss of all toes of one foot through the metatarso-
20
phalangeal joint
25 Loss of one eye, without complications, the other
40
being normal
26 Loss of vision of one eye, without complications or
30
disfigurement of eye-ball, the other being normal
26A Loss of partial vision of one eye loss of 10
27 Whole A—fingers of right or left hand 14
28 Two phalanges 11
29 One phalanx 9
30 Guillotine amputation of tip without loss of bone
5
middle finger
31 Whole middle finger 12
32 Two phalanges 9
33 One phalanx 7
34 Guillotine amputation of tip without loss of bone
4
Ring or little finger

118
 35 Whole ring or little finger 7
36 Two phalanges 6
37 One phalanx 5
38 Guillotine amputation of tip without loss of bone
2
B-Toes of right or left foot Great toe
39 Through metatarso-phalangeal joint 14
40 Part, with some loss of bone any other toe 3
41 Through metatarso-phalangeal joint 3
42 Part, with some loss of bone any other toe two
1
toes of one foot, excluding great toe
43 Through metatarso-phalangeal joint 5
44 Part, with some loss of bone any other toe, three
2
toes of one foot, excluding great toe
45 Through metatarso-phalangeal joint 6
46 Part, with some loss of bone any other toe, four
3
toes of one foot, excluding great toe
47 Through metatarso-phalangeal joint 9
48 Part, with some loss of bone any other toe 3
Note: Complete and permanent loss of the use of any limb or member referred to in
the schedule shall be deemed to be the equivalent of the loss of that limb or
member.
Source: H.L Kumar (2015), Practical Guide to Employee’s Compensation -Act & Rule.
Universal Law Publishing Co. Pvt. Ltd. New Delhi – India.

Table-4.3: List of Injuries Deemed to Result in Permanent Total

Disablement
(SCHEDULE - I)
Sl. Percentage loss of
Description of Injury (From Schedule 1)
No. earning capacity
1 Loss of both hands or amputation at
100
higher sites
2 Loss of a hand and a foot 100
3 Double amputation through leg or thigh,
or amputation through leg or thigh on 100
one side and loss of other foot
4 Loss of sight to such an extent as to
render the claimant unable to perform any 100
work for which eye-sight is essential
5 Very severe facial disfigurement 100
6 Absolute deafness 100
Source: The Employee’s Compensation Act 1923, Universal Law Publishing Co. Pvt.
Ltd. New Delhi. P. 44-46.

119
4.20. Rules regarding workmen's compensation:
When is employer liable to pay compensation? Section 3(I) lays
down that if personal injury is caused to a workman by accident
arising out of and in course of employment, his employer shall be liable
to pay compensation.
From the above it follows that the employer is liable when (a)
injury is caused to a workman by accident and (b) the accident arises
out of and in course of employment. An occupational disease is deemed
to be an injury by accident and the employer is liable to pay
compensation. The section itself provides that in certain cases of
injury, no compensation is payable.
4.20.1. What is an accident? Lord Macnaughten in Fenton v.
Thorley & Company defined an accident as “an unlocked for mishap or
untoward event which is not expected or designed". Thus, a self
inflicted injury is not an accident ordinarily. In Grim v. Fletcher a
person became insane as a result of accident and then committed
suicide. It was held that death was the result of the accident and com-
pensation was awarded. But where insanity was not the direct result of
the accident compensation cannot be awarded.
4.20.2. Personal Injury: A personal injury is not necessarily
confined to physical or bodily injury. Injury includes psychological at
physiological injury such as nervous shock, insanity etc. The injury
must be personal.
4.20.3. Arising out of and the course of employment: This
phrase been copied from the English Act on the subject. The phrase
has been interpreted in a large number of cases, English and Indian.
But difficulties still remain.
In the course of employment: This part of the phrase covers the
period of time during which the employment continues. Compensation
is payable if the accident occurs within the period of employment.
Generally speaking employment commences when the employee

120
reaches his place of work and ceases when he leaves the place. But
there are several exceptions to the above rule.
(1) When the workman uses transport provided by the employer for
the purpose of going to and from the place of work the time
during which he uses the transport, is included in the course of
his employment.
(2) The time during which the workman is upon the premises of the
employer should be included in the period of employment. An
employee of the E. I. Railways was knocked down and killed by a
train while returning from duty by crossing the platform. Area,
Held, the accident arose out of and in course of employment.
(3) If the workman reaches the place of employment before the time
when the employment begins: if it was necessary and not too
early, or if at the time of accident he was doing something to
equip himself for the work, he is in course of employment.
(4) If the workman with the knowledge and permission of the
employer lives at some distance from the place where he is called
upon to work and if in the course of proceeding at a reasonable
time and in a reasonable manner from his place to the place of
work. He meets with fatal accident then his accident must be
held to arise out of and in course of employment.
(5) The period of rest during the period of employment is in the
course of employment. But if the workman goes outside the
employer's premises during the rest period and meets with an
accident, it is not in course of employment.
Arising out of the employment: In Dennis vs. Whlite, it was
observed that, "When a man runs a risk incidental to his employment
and is thereby injured, then the injury arises out of the employment."
4.20.4. National Extension: As a rule the employment of a
workman does not commence until he has reached the place of
employment and does not continue when he has left the place of

121
employment, the journey to and from the place of employment being
excluded. It is now well settled, however, that this is subject to the
theory or notional extension of employer's premises so as to include an
area which the Workman passes and reposes in going to and in leaving
the actual place of work".
4.20.5. Occupational Diseases: Persons employed in certain
occupations are liable to be attacked by certain diseases. For example, a
person engaged in an employment involving exposure to dust containing
silica is liable to contract silicosis, telegraph operators are liable to have
what is called Telegraphist’s Cramp. Such diseases are known as
Occupational Diseases. Schedule III to the Workmen's Compensation Act
contains a list of occupational diseases divided into three parts, part A,
Part B and Part C. Part A includes Anthrax, Compressed Air Sickness,
and Poisoning by lead tetra-ethyl and nitrous fumes. 'Part B includes
poisoning by lead compounds, phosphorus, mercury etc., cancer of the
skin, telegraphist's cramp etc. Part C includes Silicosis, Asbestosis etc.
Section 3(2) of the Act provides that an occupational disease.
"Shall be deemed to be an injury by accident within the meaning of this
section and unless the contrary is proved, the accident shall be deemed
to have arisen out of, and in the course of, the employment."
For diseases included in Part A of Schedule III, the employer
liability' to pay compensation when a workman employed by him con-
tracts the disease. For the diseases included in Part B, the employer is
liable if a workman contracts it while in his service and if the workman
has been in his service for a continuous period of six months. Which
period shall not include a period of service under any other employer in
the same kind of Employment? For diseases included in Part C of
Schedule III, the workman is entitled to Compensation if he has been
in the service of one or more employers for such continuous period as
the Central Government may specify. In such cases the compensation
is to be paid by all the employers in such proportions as the

122
Commissioner of Workmen's Compensation may deem just Sec. 3(2A).
This list of occupational diseases and the employments
producing them as contained in Schedule I may be extended (by
notification) by the State Government in the case of Parts A and B and
by the Central Government in the case of Part C.
Section 3 (4) lays down that save as provided above, no
compensation shall be payable to a workman in respect of any disease
unless the disease is directly attributable to a specific injury by
accident arising out of, and in the course of his employment.
4.20.6. When is employer not liable to pay compensation?
Section 3 of the Act provides that the employer is not liable to pay
compensation in the following cases:
a) In respect of any injury which does not result in the total or partial
disablement of the workman for a period exceeding three days
b) In respect of any injury not resulting in death, caused by an
accident which is directly attributable.
c) The workman having been at the time thereof under the
influence of drink or drugs, or,
d) The willful disobedience of the workman to an order expressly
given, or to a rule expressly framed, for the purpose of securing
the safety of workmen, or,
e) The willful removal or disregard by the workman of any safety
guard or other device which he knew to have been provided for
the purpose of securing the safety of workmen.
As regards exception clause (b) in a workman would not lose his
right to compensation only by reason of tile fact that he had acted
thoughtlessly or foolishly.
From Section 3 it follows that the employer is not liable to pay
compensation under the Workmen's Compensation Act, in the cases also
a) When the accident did not arise out of or in the course of the
employment.

123
 b) When the workmen filed a suit for damages in the Civil Court:
and
c) When disablement lasted 3 days or less (that is injuries were not
significant)
4.20.7. The Amount of Compensation- the Act provides
compensation for:
 Death
 Permanent total disablement
 Permanent partial disablement and
 Temporary disablement.
For determining the amount of compensation payable under the
Act, Section 4 has to be read with Schedule IV to the Act. which is
presented in table No 4.4.
Table 4.4 Factors for working out lump sum equivalent of
compensation amount in case of permanent disablement and
death
Completed years of age on the Completed factors years of age
last birthday of the workmen factors on the last birthday of the
immediately preceding the date workman immediately preceding
on which the compensation fell the date on which the
due compensation fell due
1 2 1 2
1 228.54 33 219.95
2 227.49 34 218.47
3 226.38 35 216.91
4 225.22 36 215.28
5 224.00 37 213.57
6 222.71 38 211.79
7 221.37 39 209.92
8 219.95 40 207.98
9 218.47 41 181.37
10 216.91 42 178.49
11 215.28 43 175.54
12 213.57 44 172.52
13 211.79 45 169.44
14 209.92 46 166.29
15 207.98 47 163.07
16 205.98 48 159.80
17 203.85 49 156.47
18 201.66 50 153.09

124
 19 199.40 51 149.67
20 197.06 52 146.20
21 194.64 53 142.68
22 192.14 54 139.13
23 189.56 55 135.56
24 186.90 56 131.95
25 184.17 57 128.33
26 228.54 58 124.70
27 227.49 59 121.05
28 226.38 60 117.41
29 225.22 61 113.77
30 224.00 62 110.14
31 222.71 63 106.52
32 221.37 64 102.93
65 and more 99.37
Source: The Employee Compensation Act, 1923. Pp – 60-61.

4.20.8. For Permanent Partial Disablement: Schedule I to the

Act contains a list of injuries deemed to result in permanent partial
disablement together with the percentage loss of earning capacity
which is presumed to occur in each case When permanent partial
disablement occurs from an injury specified in Schedule I, the amount
of compensation is to be calculated by finding out from Schedule IV the
compensation payable for permanent total disablement to the workman
concerned and multiplying it with the percentage loss of earning
capacity as stated in Schedule I. Thus, suppose that there is an injury
which, according to Schedule I, causes a 30% loss of earning capacity.
Suppose that the monthly wage of the workman is Rs. 50. From
Schedule IV it is seen that for permanent total disablement be would
have obtained Rs. 10,080. Hence, for the permanent partial
disablement he would get 30% of Rs. 10,080, i.e., Rs. 3,024.
In the case of an injury not specified in Schedule I, the
percentage loss of earning capacity permanently caused must be found
out. This figure multiplied by the amount of compensation for
permanent total disablement gives the amount of compensation
payable for the partial disablement. Where more injuries than one are
caused by the same accident, the amount of compensation payable

125
under this head shall be aggregated but not so in any case as to
exceed the amount which would have been payable if permanent total
disablement had resulted from the injuries.
4.20.9. Temporary disablement: Where as a result of the injury
there is a temporary disablement, total or partial, the employer is
required to make a half-monthly payment to the workman. The rate of
half-monthly payment is given in column 4 of Schedule IV (There are
different-rates for different age groups.)
4.21. Rules regarding Half-monthly Payment: The first half-
monthly payment is to be made on the sixteenth day (i) from the date of
the disablement, where such disablement lasts for a period of 28 days
or' more, or (ii) after the expiry of a waiting period of three days from
the date of the disablement, where such disablement lasts for a period
of less than 28 days. Thereafter the payments must be made half -
monthly during the disablement or during a period of five years
whichever period is shorter.
4.22. Power of the [state government] to make rules:

(1) The state government may make rules to carry out the purpose of
this act.
(2) In particular and without prejudice to the generality of the
foregoing power, such rules may provide for all or any of the
following matters, namely:
(a) For prescribing the intervals at which and the conditions
subject to which an application for review may be made under
section 6 when not accompanied by a medical certificate;
(b) For prescribing the intervals at which and the conditions
subject to which [an employee] may be required to submit
himself for medical examination under sub-section (1) of
section 11;

126
(c) For prescribing the procedure to be followed by commissioner
in the disposal of the cases under this Act and by the parties
in such cases;
(d) For regulating the transfer of matters and cases from one
commissioner to another and the transfer of money in such cases;
(e) For prescribing the manner in which money in the hands of a
commissioner may be invested for the benefit of dependants
of a deceased [employee] and for the transfer of money so
invested from one commissioner to another;
(f) For the representation in proceedings before commissioners
of parties who are minors or are unable to make an
appearance;
(g) For prescribing the form and the manner in which
memoranda of agreements shall be presented and registered;
(h) For the withholding by commissioners, whether in the whole
or in part of half-monthly payments pending decision on
applications for review of the same;
(i) For regulating the scales of costs which may be allowed in
proceedings under this act;
(j) For prescribing and determining the amount of the fees
payable in respect of any proceedings before a commissioner
under this act;
(k) For the maintenance by commissioner of registers and
records of proceedings before them;
(l) For prescribing the classes of employers who shall maintain
notice-books under sub-section (3) of section 10, and the
form of such notice-books;
(m) For prescribing the form of statement to be submitted by
employers under section 10 A;
(n) For prescribing the cases in which the report referred to in section
10B may be sent to an authority other than the commissioner;

127
 (o) For prescribing abstracts of this act and requiring the
employers to display notices containing such abstracts;
(p) For prescribing the manner in which diseases specified as
occupational diseases may be diagnosed;
(q) For prescribing the manner in which diseases may be
certified for any of the purpose of this act;
(r) For prescribing the manner in which, and the standards by
which, incapacity may be assessed.
(3) Every rule made under this section shall be laid, as soon as may
be after it is made, before the state legislature13.
4.23. Distribution of Compensation: Section 8 lays down the
following rules regarding the distribution of compensation:
1. Compensation for death and lump sum payment due to a woman or to a
person under a legal disability must be deposited with the Commissioner.
2. But in the case of a deceased workman, an employer may make
to any dependent advances on account of compensation not
exceeding an aggregate of one hundred rupees. So much of such
aggregate as does not exceed the compensation payable to that
dependent shall be deducted by the Commissioner from such
compensation and repaid to the employer.
3. Any other sum amounting to not less than Rs. 10 which is payable
as compensation may be deposited with the Commissioner on
behalf of the person entitled thereto.
4. The receipt of the Commissioner shall be sufficient discharging
respect of any compensation deposited with him.
5. After the deposit of the compensation, the Commissioner shall
deduct there from the actual cost of the workman's funeral
expenses to an amount not exceeding Rs. 50 and pay the' same
to the person by whom the expenses were incurred.

128
 6. The Commissioner may serve notices calling upon the
dependents to appear before him for the purpose of determining
the distribution of the compensation.
7. If the Commissioner is satisfied that no dependent exists, he
shall repay the balance of the money to the employer.
8. The Commissioner shall on application by the employer, furnish
a statement showing in detail all disbursements made.
9. The compensation money is to be distributed among the
dependents in such proportions as the Commissioner thinks fit.
The whole of it may be given to one person.
10. Except in the case of a woman or a person under a legal
disability, the compensation money is to be paid to the person
entitled thereto.
11. Money payable to a woman or a person under a legal disability
may be invested or otherwise dealt with as the Commissioner
thinks fit. Half-monthly payments payable to a person under a
legal disability may be paid to a dependent of the workman or to
any other person whom the Commissioner thinks well fitted to
provide for the welfare of the workman.
12. The orders of the Commissioner regarding the distribution of
compensation may be varied later if necessary.
13. Notice must be given to the parties affected.
14. Where under the previous Para, the Commissioner Aries an order
on the ground that the payment of compensation to any person
has been obtained by fraud, impersonation or other improper
means, any amount so paid may be recovered by the procedure
laid down for the recovery of arrears of land revenue.
4.24. Other Provisions Regarding Compensation:
Some of the provisions regarding compensation are explained below:
4.24.1. Payment of Compensation: [Sec. 4A.] Compensation shall
be paid as soon as it falls due. Where the employer does not accept the

129
liability to the extent claimed, he must make provisional payment based
on the extent of liability which he accepts. This is without prejudice to the
right of the workman to make any further claim.
If an employer fails to pay the compensation within one month of
the date on which it fell due, the Commissioner may direct the payment
of simple interest thereon at 6%.
If the Commissioner thinks that there is no justification for the
delay, he may direct make the payment of a further sum, not exceeding
50% of the sum due, by way of penalty.
4.24.2. Protection of Compensation: Save as provided by this
Act, no lump sum or half-monthly payment payable under the Act shall
in any way be capable of being assigned or charged or be liable to
attachment or pass to any person other than the workman by operation
of law, nor shall any claim be set off against the same Sec. 9.
This section has been framed, to protect as far as possible the
workman from moneylenders.
4.24.3. Notice and Claim: Section 10 of the Act provides that no
claim or compensation shall be entertained by the Commissioner unless
notice of the accident has been given in the manner provided as soon as
practicable. (This is subject to certain exceptions noted below.)
The required notice must be served upon the employer or upon
any of several employers or upon any person responsible to the
employer for the management of any branch of the trade or business
in which the injured workman was employed.
The notice shall give the name and address of the person injured
the cause of the injury and the date of the accident. The notice may be
given by the injured workman or by anybody on his behalf. It may be
served by delivering it or sending it by registered post.
The State Government may require that any prescribed class of
employers shall keep at the place of employment a notice book (acces-
sible to all workers or persons acting bonafide on their behalf) where

130
the occurrence of accidents may be recorded. An entry in the notice
book is sufficient.
The want of notice or any defect or irregularity in it shall not be a
bar to a claim in the following cases:
(1) Where a workman dies or an accident occurring in the premises
of the employer or while working under the control of the em-
ployer or of any person employed by him and the workman died
on the premises or without leaving the vicinity of the premises.
(2) If the employer or anyone of several employers or any person
responsible to the employer for the management of any branch of
the trade or business in which the injured workman was
employed, had knowledge of the accident from any other source
at or about the time when it occurred.
(3) If the Commissioner is satisfied that the failure to give notice was
due to sufficient cause.
A workman is bound to give notice of any accident which is not
merely trivial, and it is not for him to decide whether it is likely to give
rise to a claim for compensation.
Section 10 also provides s that a claim for compensation must be
preferred before the Commissioner. Within two years of the occurrence
of the accident or the date of death as the case may be. In case the
accident is the contracting of a disease the date of its occurrence is the
first of the days during which the workman was continuously absent
from work in consequence of the disablement caused by the disease.
The Commissioner may entertain a claim filed after the
prescribed time, if he is of opinion that the failure to file it within time
was due to14.
4.24.4. Fatal Accident: Section 10 A provides that where a
Commissioner receives information that a workman has died as a result
of an accident arising out of and in course of his employment, he may
send by registered post a notice to the workman's employer requiring him

131
to submit, within thirty days of the service of the notice, a statement in
the prescribed form, giving the circumstances attending the death of the
workman and indicating whether in the opinion of the employer, he is or
is not liable to deposit compensation on account of the death.
If the employer is of opinion that he is liable, he shall make the
deposit within thirty days of the service of the notice. If he is of opinion
that he is not liable, he must state his grounds. In the latter case, the
Commissioner, after such enquiry as he may think fit inform any of the
dependents of the deceased workman that it is open to them to prefer a
claim and may give them such further information as he may think fit.
Section 10 B provides that where by any law for the time being in
force, notice is required to be given to any authority by or on behalf of
an employer, at any accident resulting in death or serious bodily
injury, the person required to give the notice shall also send a report to
the Commissioner. The report may be sent alternatively to any other
authority prescribed by the State Government.
The State government may extend the scope of the provision
requiring reports of fatal accidents to any class of premises. But Sec.
10 B does not apply to factories to which the Employees' State
Insurance Act applies.
4.24.5. Medical Examination [Sec. 11]
1. After a workman gives notice of an accident, the employer may,
within three days of the service of the notice, offer to have him
examined free of charge by a qualified medical practitioner.
2. Any workman in receipt of half-monthly payments may also be
required to submit for examination from time to time.
3. The Examination must be in accordance with the rules framed for
the purpose. If the workman refuses, without sufficient cause, to
submit to the examination or if he leave the vicinity of the place in
which he was employed, his right to receive compensation shall be

132
 suspended during the continuance of the refusal or until his
return to the vicinity and examination.
4. In case the workman, who refused medical examination,
subsequently dies, the Commissioner has discretionary powers of
direct payment of compensation to the dependents of the deceased
workman.
5. The condition of an injured workman may be aggravated by
refusal to submit to medical examination or refusal to follow the
instructions of the medical examiner or failure to be attended by
or follow the instructions of a qualified medical practitioner
6. In such a case he would get compensation, not for the aggravated
injury, but for what the injury would have been had he been
properly treated.
Employment by contractors: [Sec. 12] When an employer engages
contractors who engage workmen, any workman injured may recover
compensation from the employer if the following conditions are
satisfied:
(a) The contractor is engaged to do a work, which is part of the trade
or business of the principal.
(b) The engagement is in the course of or for the purposes of his
trade or business, and
(c) The accident occurred in or about the vicinity of the employer's
premises.
The workman may also proceed against the contractor. So he has
alternative remedies. When the employer pays compensation, he is
entitled to be indemnified by the contractor15.
4.24.6. Remedies of employer against stranger: [Sec. 13.] Where
a workman has recovered compensation in respect of any injury caused
under circumstances creating a legal liability of some person over than
the person by whom the compensation was paid and any person who has

133
been called on to pay an indemnity under Section 12 shall be indemnified
by the Person so liable to pay damages as aforesaid.
4.24.7. Insolvency of Employer: [Sec. 14.] The liability to pay
workmen's compensation can be insured against. If an employer who
has entered into a contract of insurance for this purpose, becomes
insolvent or enters into a scheme of composition or arrangement or
(being a company) is wound up, the rights or the employer as against
the insurer shall be transferred to the workman. The liability to pay
compensation to a workman is to be treated as a preferred debt under
insolvency and winding" up. For this purpose, the liability to pay half-
monthly payments is to be taken as equivalent to the lump sum
payment into which it can be commuted. This section does not apply
where a company is wound up voluntarily merely for the purpose of
reconstruction or amalgamation with another company16.
4.24.8. Transfer of Assets by Employer: [Sec. 14A.] Where an
employer transfers his assets before any amount due in respect of any
compensation, the liability therefore accrued before the date of the
transfer, has been paid, such amount shall, notwithstanding anything
contained in any other law for the time being in force, be a first charge on
that part of the assets so transferred as consists of immovable property.
4.24.9. Master and Seamen: So far as masters and seamen are
concerned, the provisions of the Act apply with certain modifications
laid down in Section 15.
4.24.10. Returns: The State Government may, by notification in
the official Gazette, direct employers to submit returns regarding
compensation paid by them and particulars relating to the
compensation. Sec. 16.
4.24.11. Contracting Out: Section 17 provides that any contract
by which a worker relinquishes bias right to receive compensation for
injury is null and void in so far as it purports to remove or reduce the
liability of any person to pay compensation under this Act.

134
 4.24.12. Penalties: Section 18A provides for penalties for failure
to perform the duties prescribed under the Act, e.g., failure to send
returns or maintain notice books etc.
4.24.13. Bar to Civil Suits: A Civil Court has no jurisdiction to
settle, decide or deal with any question which, because of the
provisions of the Act, is required to be decided or dealt with by the
Commissioner or to enforce any liability under this Act.-Sec. 19(2).
4.24.14. Recovery of the amount awarded: Any amount
payable under the Act, whether under an agreement or otherwise, shall
be recovered as an arrear of land revenue- Sec. 31.
4.25. Commissioners
The Act provides for appointment of Officers to be known as
Commissioners of Workmen's Compensation. The Commissioners are
to determine the liability of any person to pay compensation (including
the question whether a person is or is not a workman) and the amount
or duration of compensation (including any question as to the nature
or extent of disablement). No civil court bas jurisdiction to deal with
matters which are required to be dealt with by a Commissioner. Certain
powers have been given to the Commissioners, e.g., the power to call for
further deposits. The Commissioner has the powers of a Civil Court.
4.25.1. Form of application: No application for settlement of
any matter by a Commissioner shall be made, if the parties have been
able to settle it by agreement.
An application to the Commissioner shall be made in the
prescribed form according to the rules, and accompanied by a
prescribed fee. The following particulars must be given namely: (a)
concise statement of the circumstances and the relief claimed; (b) in
case of claim for compensation against an employer, the date of service
of notice of accident, with its due time of notice and the reason why
notice was not given; (c) the names and addresses of the parties; and
(d) except in case of application by dependent for compensation a

135
concise statement of the matter on which, agreement has and of those
on which agreement has not been come to. If the applicant is illiterate
or for any reason is unable to furnish the required information, the
application, if the applicant so desires, shall be prepared under the
direction of the Commissioner.-Sec. 22 [pp. 280, 281]
4.25.2. Appearance of parties: Appearance may be done on
behalf of applicant by a legal practitioner or an official of Insurance
Company, or an authorized person of a registered Trade Union, duly
authorized, Sec. 24.
4.25.3. Appeals and References: For proceedings under the Act,
the High Court of the State is the Appellate Court. The Commissioner
can refer a question of law to the High Court for decision and he must
decide the matter according to such decision.--Sec 27
4.25.4. Appeals: An appeal lies to the High Court from the
following orders of a Commissioner
(a) an order awarding as compensation a lump sum whether by way
of redemption of a half-monthly payment or otherwise or an
order awarding interest or penalty under section 4A;
(b) An order refusing to allow redemption of a half-monthly
payment;
(c) An order providing for the distribution of compensation among
the dependents of a deceased workman, or disallowing any claim
of person alleging himself to be such dependent.
(d) An order allowing or disallowing any claim for the amount of an
indemnity under the provisions of section 12(2);
(e) An order refusing to register a memorandum of agreement or
registering the same or providing for the registration of the same
subject to conditions.
4.25.5. Other Provisions Regarding Appeal:
1. No appeal shall lie against any order unless a substantial question
of law is involved in the appeal and, in the case of an order other

136
 than an order such as is referred to in clause (b), unless the
amount in dispute in the appeal is not less than Rs. 300.
2. No appeal lies in any case in which the parties have agreed to
abide by the decision of the Commissioner, or in which the order
of the Commissioner gives effect to an agreement come to by the
parties.
3. No appeal by employer lies unless the memorandum of appeal is
accompanied by a certificate by the Commissioner to the effect
that the applicant has deposited with him the amount payable
under the order appealed against.
4. The period of limitation for an appeal under this section shall be
60 days and the provisions of Section 5 of the Indian Limitation
Act, 1908, shall be applicable to appeals under this section.
4.26. Power and procedure of commissioners:
The commissioner shall have all the powers of a civil court
under the code of civil procedure; 1908 (5 of 1908), for the purpose of
taking evidence on oath (which such commissioner is hereby
empowered to impose) and of enforcing the attendance of witness and
compelling the production of documents and attendance of witness and
compelling the production of documents and material objects, [and the
commissioner shall be deemed to be a civil court for all the purpose of
[section 195 and of chapter xxvi of the code of criminal procedure,
1973 (2 of 1974)]17.
4.27. Power of commissioner to require further deposit in cases of
fatal accident:
(1) Where any sum has been deposited by an employer as
compensation payable in respect of [an employee] whose injury
has resulted in death, and in the opinion of the commissioner
may, by notice in writing stating his reasons, call upon the
employer to show cause why he should not make a further
deposit within such time as may be stated in the notice.

137
 (2) If the employer fails to show cause to the satisfaction of the
commissioner, the commissioner may make an award
determining the total amount payable, and requiring the
employer to deposit the deficiency18.
4.28. Forum of claiming workmen’s compensation:
An injured workman may, if he wishes, file a civil suit for
damages against the employer. Section 3(5) of the Workmen's
Compensation Act, however, provides that if such a suit is filed,
compensation cannot be claimed under the Act and if compensation
has been claimed under the Act, or if an agreement has been entered
into between the employer and the workman for the payment of
compensation, no suit can be filed in the civil court. Thus, the
workman has to choose between two reliefs (i) civil suit for damages
and (ii) claim for compensation under the Act. He cannot have both.
In a civil suit for damages, it is open to the employer to plead all
the defenses provided by the law of Torts. Therefore, a civil suit is a
risky procedure for a workman and is rarely adopted. The legal position
of workmen has, however, been improved by two Acts, viz., The Indian
Fatal Accidents Act of 1855 and the Employers' Liability Act of 1938.
4.28.1. Workmen's Compensation Claim Process:
 Basic Documents:
4.28.2. General for all type of claims
 Claim Form duly filled in & signed.
 Claim Bill.
4.28.3. Temporary Disablement Claims:
 Medical Certificate regarding Cause & Duration of Disablement.
 Medical Bills.

4.28.4. Permanent Disablement Claims:

 Medical Certificate regarding Disablement.
 Memorandum of Agreement as per Workmen Compensation Act
between Insured and the injured workman.

138
4.28.5. Fatal Claims:
 Death certificate.
 Copy of post Mortem report.
 F.I.R / Final Investigation report
 Form A of Workmen Compensation Act duly completed by the
Insured.
 Statement of Witnesses.
4.29. Conclusion:
It is revealed from the Act discussed above, the rules mainly
deals with the compensation in case of disability in work, death,
accident, work related health risks, etc. The Act does not address the
pay package of the employees in an organization. Hence, the Act is
suitable for organizations, where there are risks of health, disability,
death, accidents, etc. Power sector is one of the riskiest sectors for its
employees, especially working in technical jobs. There are risks of
electric shocks, falls from electrical polls, accidents while loading and
unloading heavy transformers or electric polls, driving, etc. Hence,
Workmen’s Compensation Act is suitable for KPTCL, but, there is need
to revise the compensation amount, health benefits, etc., in the
compensation policy.

139
References:
1. Aswathappa, K, Human Resource Management, New Delhi, Tata
McGraw Hill, 2014, Pp. 390.
2. Biswanath Ghosh, Compensation and Reward Management, New
Delhi, Sterling, 2012, Pp. 2 – 3.
3. Biswanath Ghosh, Ibid, Pp. 43-46.
4. Aswathappa, K, Human Resource Management, New Delhi, Tata
McGraw Hill, 2014, Pp. 393.
5. Tangthong, Sorasak, A causal model of compensation and
benefits and reward management on organizational effectiveness
of MNCs, Asian Journal of Management Research, Vol. 5,
No. 1, January 2014, Pp. 44-65.
6. K. Aswathappa, Human Resource Management (text and cases),
New Delhi, Tata McGraw Hill, 7th edition, 2014.Pp.393-395.
7. K. Aswathappa, Human Resource Management (text and cases),
New Delhi, Tata McGraw Hill, 7th edition, 2014.Pp.408-412.
8. Bhattacharyya, Dipak Kumar, Compensation Management, New
Delhi, Oxford University Press, 2013, Pp. 11-12.
9. Biswanath Ghosh, Compensation and Reward Management, New
Delhi, Sterling, 2012, Pp. 95.
10. Singh, BD, Compensation Reward Management, 2nd ed, New
Delhi, Excel Books, 2012, Pp.232-236.
11. H.L. Kumar (2015), Practical Guide to Employee’s Compensation
-Act & Rule. Universal Law Publishing Co. Pvt. Ltd. New Delhi –
India.Pp.248-249.
12. H.L. Kumar (2015), Practical Guide to Employee’s Compensation
-Act & Rule. Universal Law Publishing Co. Pvt. Ltd. New Delhi –
India.Pp.252.

140
13. H.L. Kumar (2015), Practical Guide to Employee’s Compensation
-Act & Rule. Universal Law Publishing Co. Pvt. Ltd. New Delhi –
India.Pp.286-288.
14. H.L. Kumar (2015), Practical Guide to Employee’s Compensation
-Act & Rule. Universal Law Publishing Co. Pvt. Ltd. New Delhi –
India.Pp.266-267.
15. H.L. Kumar (2015), Practical Guide to Employee’s Compensation
-Act & Rule. Universal Law Publishing Co. Pvt. Ltd. New Delhi –
India.Pp.270.
16. H.L. Kumar (2015), Employee’s Compensation –Act 1923.
Universal Law Publishing Co. Pvt. Ltd. New Delhi – India.Pp.25-
26.
17. H.L. Kumar (2015), Employee’s Compensation –Act 1923.
Universal Law Publishing Co. Pvt. Ltd. New Delhi – India.Pp.35.
18. Ibid., Pp.35.

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