MU0006 (2 CREDITS)

SET 1

COMPENSATION BENEFITS

Q.1:- Explain in detail the objectives of compensation planning.

Ans:- Objectives of Compensation Planning The most important

objective of any pay system is fairness or equity. The term equity has
three dimensions:

a) Internal Equity: This ensures that more difficult jobs are paid more.

b) External Equity: This ensures that jobs are fairly compensated in

comparison to similar jobs in the labour market.

c) Individual Equity: It ensures equal pay for equal work, i.e., each
individual’s pay is fair in comparison to others doing the same/similar
jobs.

In addition, there are other objectives as well. The ultimate goal of

compensation administration (the process of managing a company’s
compensation program) is to reward desired behaviours and encourage
people to do well in their jobs. Some of the important objectives that are
sought to be achieved through effective compensation management are
listed below:

a) Attract Talent Compensation needs to be high enough to attract

talented people. Since many firms compete to hire the services of
competent people, the salaries offered must be high enough to motivate
them to apply.

b) Retain TalentIf compensation levels fall below the expectations of

employees or are not competitive, employees may quit in frustration.

c) Ensure Equity Pay should equal the worth of a job. Similar jobs
should get similar pay. Likewise, more qualified people should get better
wages.

d) New and Desired Behaviour Pay should reward loyalty,

commitment, experience, risk-taking, initiative and other desired
behaviours. Where the company fails to reward such behaviours,
employees may go in search of greener pastures outside.

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e) Control costs The cost of hiring people should not be too high.
Effective compensation management ensures that workers are neither
overpaid nor underpaid.

f) Comply with Legal Rules Compensation programs must invariably

satisfy governmental rules regarding minimum wages, bonus, allowances,
benefits, etc.

g) Ease of Operation The compensation management system should be

easy to understand and operate. Then only will it promote understanding
regarding pay-related matters between employees, unions and managers.

Q.2:- Discuss the wage policy of India including the short introduction of all the
components.

Ans:- Formulation of rational wage policy continues to be one of the most important and
significant social demands. Earlier, it formed the basic responsibility of the employer but
with the industrial progress, wage bargain has become a matter of concern for the employer,
employee, and the state.

Any rational wage policy has hence to be woven into the socio-economic texture reflecting
the objectives and aspirations of the people of a particular country. It cannot be dealt with, on
purely economic considerations in isolation from the social policy and political culture of that
particular community.

Problems of wage policy are hence of great concern to employees, management and
government alike. The pressures of rising prices, the demand for higher wages and better
working conditions create price, market and production problems for the management and the
final burden of finding a solution to the problems of wage policy ultimately falls on the
government.

Economic Objectives of Wage Policy

An important objective of any society is the achievement of maximum economic welfare.

This requires the national income to be maximized. The national income should be divided
equally among all the members of the economy and finally, there should be a fair amount of
stability in the national income. Economic welfare gets maximized if the highest and most
stable standard of living possible for each section of the community is attained. In order to
secure this, it is necessary to achieve:

a) Full employment and optimum allocation of all resources.

b) The highest degree of economic stability consistent with an optimum rate of economic
progress.

c) Maximum income security- for all sections of the community.

The Social Objectives

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A given wage policy must be instrumental in achieving the following:

a) Elimination of exceptionally low wages.

b) Establishment of ‘fair’ labour standards.

c) Protection of wage earners from the effects of rising prices.

d) Incentive for workers to improve their productive performance.

The social and economic objectives, no doubt, are closely inter-related. Measures inspired by
social considerations inevitably have economic effects, and those designed to achieve specific
economic results have social implications. For example, the raising of wages through fixing a
statutory minimum wage will normally affect production and employment in an organization.
If the organization institutes measures to keep cost of production at a competitive level, it
may frustrate the aspirations of the employees.

Keeping the above facts in mind, it is essential that wage policy should be necessarily inter-
related with broader economic decisions on one hand, and with the goals set for social policy
on the other. Wages, being a price of labour, have to be in harmony with other prices in the
system. Hence, it becomes necessary to maintain a balance between the objectives of
economic development and the principles of a democratic system in the formulation of a
wage policy.

Q.3:- Apex is an ITES service provider Company. It is startup (new) company, which
is trying to woo talent from the market. Being a new company it might face difficulty in
hiring highly talented candidates. As remuneration plays an important role, what will
be the strategic incentives plans organization can offer to persuade talented employees
besides providing good salary?

Ans:-

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 MU0006 (2 CREDITS)

SET 2

COMPENSATION BENEFITS

Q.1:- What are the External factors that affect Remuneration? Explain briefly each of
them.

Ans:- External Factors Affecting Remuneration

a) Labour Market

i) 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 prevailing in our country is that the 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 necessary to attract and retain it. But exploitation of unskilled labour, like, for
instance, paying poor wages because it is available in plenty, is unjustifiable. The Minimum
Wages Act, 1948, is precisely meant to prevent this kind of exploitation.

ii) Going rate of pay is another labour-related factor influencing employee remuneration.
Going rates are those that are paid by different units of an industry in a locality and by
comparable units of the same industry located elsewhere. This is the only way of fixing salary
and wage in the initial stages of plant operations. Subsequently, a comparison of going rates
would be highly useful in resolving wage-related disputes.

iii) Productivity of labour 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 movements.

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.

b) Cost of Living

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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 if prices increase. A rise in the cost of living is sought to be
compensated by payment of dearness allowance, basic pay to remain undisturbed. Many
companies include an escalatory clause in their wage agreement terms of which dearness
allowance increases or decreases depending upon the movement of consumer price index
(CPI).

c) Labour Unions

The presence or absence of labour organisations often determines the quantum of wages paid
to employees. Employers in non-unionised 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. An individual in non-unionised company
may be willing to pay more to its employees if only to discourage them from forming one,
but will buckle under the combined pressure from the other non-unionised organisations. The
employees of strongly unionised companies too, have no freedom in matters of wage or
salary fixation. They are forced to yield to the pressure of labour representatives in
determining and revising pay scales.

d) Labour Laws

We have a plethora of labour laws at the central as well as at the state levels. Some central
laws which have a bearing on employee remuneration are the 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 unauthorised
deductions by the employers. In addition, the Act ensures payment of wage 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. In addition to legal enactments,
there are wage boards, tribunals and fair wages committees which aim at providing a decent
standard of living to workers. In fact, ours is the only democratic country in the world which
has attempted wage regulation on so large a scale through state-sponsored agencies.

e) Society

Remuneration paid to employees is reflected in the prices fixed by an organisation for its
goods and services. For this reason, the consuming public is interested in remuneration
decisions.
The Supreme Court, since its very inception, has had to adjudicate industrial disputes –
particularly, disputes relating to wages and allied problems of financial concern to the worker
– an ethical and social outlook liberally interpreting the spirit of the Constitution.

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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 organisations to thrive in a recession, there is no
question that the economy affects remuneration decisions. For example, a depressed economy
will probably increase the labour supply. This, in turn, should serve to lower the going wage
rate. In most cases, the cost of living will rise in an expanding economy. Since the cost of
living is commonly used as a pay standard, the economy’s health exerts a major impact upon
pay decisions. Labour unions, the government, and the society are all less likely to press for
pay increases in a depressed economy.

Q.2:- Discuss the Executive Remuneration in Indian Industry

Ans:- Executive remuneration has been a hot topic for debate in the corporate circles for
long. The remuneration is one tool used extensively by corporates to poach talent from a
competitor and also in an effort to retain talent. Salaries and perks paid to highest decision-
makers in organisations are only spiraling upwards as a result of economic deregulation and
the consequent entry of MNCs into the country. Brain drain is now an issue of the past. One
no longer has to travel shores to have exciting salaries. It is happening here in our own
country and in fact a reverse brain drain has started. The fact that the USA is increasing the
number of H1B visas for Indians is a good proof for this. This unit deals with the components
and features of executive remuneration and the issues raised in connection with executive
remuneration.

Components of Executive Remuneration

From the point of remuneration, an executive is an individual who is in a management

position at the highest levels. This category includes Presidents, Vice-Presidents, Managing
Directors and General Managers. Their remuneration generally comprises four elements.
They are:

1. Salary

2. Bonus

3. Long-term incentives

4. Perquisites (perks)

1. Executive Salary

Salary is the basic component of executive remuneration. Salary, though supposed to be

determined through job evaluation and serves as the basis for other types of benefits, it may
be only a partial solution. This is because executives must be paid for their capabilities and
competence rather than for job demands. For this precise reason, norms of wage and salary
fixation are generally not observed while fixing salaries for executives. Salary as a
component of total remuneration is insignificant as it is subject to deductions at source and is
also capped by government regulations. In order to make good the cuts and ceilings,
executives are offered hefty incentives and attractive perks.

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2. Executive Bonus

This is an important component of modern day remuneration for executives. This type of
incentive is usually annual in nature and is performance-based. For this reason, the definition
of performance is crucial. There are almost as many bonus systems as there are companies
using this form of executive remuneration. In some systems, the annual bonus is tied by the
formulae to the share price or the return on investment. Other bonus plans are based on the
subjective judgement of the Board of Directors and the Chief Executive Officer. More
complex systems establish certain targets, for example, a 10 per cent increase in corporate
earnings from the previous year, and then a bonus pool after the target is attained. The bonus
is then distributed, either in accordance with a preset formula or on the basis of subjective
judgements. Executives deserve bonus because they have much more opportunity to
influence organisational success than non-managerial staff.

3. Long-term Incentives for Executives

Generally, stock options are offered as long-term incentives. Companies allow executives to
purchase their shares at fixed prices. Stock options are valuable as long as the price of share
keeps increasing. The share price crashes when the company starts incurring loss, and
executives stand to lose in the process. The following aspects are relevant as regards stock
options:

a) An option is not a bonus. Executives have to use their own resources to exercise their right
to purchase the stock.

b) The executives are assuming the same risk as all other shareholders, namely, that the price
could move in either direction.

c) Options are a form of profit-sharing that links the executive’s financial success to that of
the shareholders.

d) Stock options are one of the few ways to offer large rewards to executives without the
embarrassment of "millions of dollars of obvious money changing hands." Nevertheless, the
risk factor in this type of incentive may be too great for it to be attractive to executives.

4. 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, auto expenses, 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.
Q.3:- Explain the objectives of features of Fringe Benefits.

Ans:- A fringe benefit is a form of pay (including property, services, cash or cash
equivalent) in addition to stated play for the performance of services. Some forms of
additional compensation are specifically designated as “fringe benefits” in the Internal
Revenue Code; others, such as moving expenses or awards, have statutory provisions
providing for special tax treatment but are not so designated by the Code. This publication

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uses the term broadly to refer to all remuneration other than stated pay for which special tax
treatment is available. The definition of fringe benefits applies to services of employees and
independent contractors; however, unless otherwise indicated, this guide applies to fringe
benefits provided by an employer to an employee. (For a discussion of whether a worker is an
employee or independent contractor, see Publication 15-A.) Fringe benefits for employees are
taxable wages unless specifically excluded by a section of the Internal Revenue Code (IRC).

Fringe benefits are one of the means to ensure, maintain and increase the material welfare of
employees. The physical and mental strain of workers in an industry is considerably
alleviated by tax benefits through creating an environment that insulates them from fatigue
and monotony.

Objectives of Fringe Benefits

The viewpoint of employers is that fringe benefits form an important part of employee
incentives to obtain their loyalty and retain them. The important objectives of fringe benefits
are:

a) To create and improve sound industrial relations.

b) To boost up employee morale.

c) To motivate the employees by identifying and satisfying their unsatisfied needs.

d) To provide qualitative work environment and work life.

e) To provide security to the employees against social risks like old age benefits and
maternity benefits.

f) To protect the health of the employees and to provide safety to the employees against
accidents.

g) To promote employee’s welfare by providing welfare measures like recreation facilities.

h) To create a sense of belongingness among employees and to retain them. Hence, fringe
benefits are called ‘golden handcuffs’.

i) To meet requirements of various legislations relating to fringe benefits.

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