COMPENSATION & MODULE

SESSION 2
4|

SALARY
ADMINISTRATION
Course ‘22BBL12C1’ | Class ‘BBA-LLB’

DR MUDIT S
 TYPES OF COMPENSATION
Compensation is the pay given by the employer to the employee for the services provided by him. It can be given in the following
three types:

>> Indirect compensation refers to the various forms

of non-monetary pay offered to employees, that can
include everything from common contractual features
to useful, attractive benefits.
These are not given in the form of cash. These are
given to the employees or group of employees
regardless of their performance.

EXAMPLES
Fringe Benefits
(Medical Care, Health Insurance, Retirements,
Retrenchment Compensation)

COMPENSATION & SALARY ADMINISTRATION | SESSION 2

 Direct compensation refers to the compensation that an
employee receives directly from his or her place of work. This
Non-monetary rewards are those that do not involve
money. They are intrinsic or internal benefits that can includes the base salary and any variable pay.
be gained from an employee’s work. They help Direct compensation can be in the form of wages, salaries,
employees to feel valued and motivated. commissions and bonuses that an employer provides regularly
and consistently.
EXAMPLES It can be of two types:
Praise
Thanks 3.a. Base Pay is the basic compensation given to the employee
Recognition by the employer in the form of wage or salary. it is classified
Rewards into two namely Hourly Base pay and Salaried Base Pay.
Paid Leaves
Vacations 3.b. Variable Pay is the direct compensation given to the
Flexibility at works employee which is not fixed but variable in nature as per the
individual, team or organizational performance. Variable Pay is
given in the form one time payment such as bonuses,
incentives, holidays, cash kind etc.

COMPENSATION & SALARY ADMINISTRATION | SESSION 2

 Fringe benefits refers to various extra benefits such as gratuity, medical care, accident relief,
health & group insurance, canteen facilities, recreational facilities etc. that are provided up and
above the compensation paid in terms of salaries.
Types of Fringe Benefits
Mentioned below are the various types of Fringe benefits that can be provided to the employees
A> of an organization.

FRINGE 1> Payment for Time not Worked

This is a sort of benefit where the employee’s salary is not deducted on his absence from work.
BENEFITS Sick leave pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time,
bargaining time, travel time, paid holidays, less hours worked all these kinds of benefits are
(Indirect Compensation)
provided under this category.

2> Employee Security

Confirmation of job to employees gives the big relief of security. Employees should be provided
with job security. Security should also be provided to employees’ family members.
 3> Retrenchment Compensation
The non-seasonal industrial establishments employing 50 or more workers have to give one
month’s notice or one month’s wages to all the workers who are retrenched after one year’s
continuous service (temporary).

4> Lay-off Compensation

Employees in case of lay off will be entitled to get 50% of the total of the basic wage and
A> dearness allowance for the period of their lay off except for weekly holidays (permanent).
FRINGE 5> Safety and Hygienic
BENEFITS Few of these measures include cleanliness, disposal of waste, lighting, drinking water, clean
urinals, and spittoons, fencing of machinery or near machinery in motion, easing of new
(Indirect Compensation) machinery, pressure plant, the safety of buildings and machinery etc.

6> Health Benefits

The employees are offered medical cover schemes which they can use in times of their ill health.
These benefits include sickness benefit, medical benefit, temporary disablement benefit,
permanent disablement benefit, maternity benefit etc.
 7> Welfare and Recreational Facilities
The employees should be provided welfare and recreational facilities that can be easily
approached and enjoyed at a reasonable price such as canteens, consumer stores, credit societies,
A> housing, legal aid, employee counselling, welfare organizations, holiday homes, educational
facilities, transportation, parties and picnics.
FRINGE 8> Old age and Retirement Benefits
BENEFITS Benefits covered under this plan are provident fund, pension. deposit linked insurance, gratuity,
medical benefits, deferred income plans, travelling concession to retired employees etc.
(Indirect Compensation)
 1> Recognition
This can be as simple as public praise, a compliment over an email, or a handwritten note.

2> Awards
These are great ways to recognize employees' accomplishments and can include trophies, plaques,
B> and certificates.
NON- 3> Perks and Benefits
FINANCIAL A perk is something extra you get, in addition to a salary, in exchange for working.
e.g. The major perk of your job at an ice cream shop might be all the hot fudge sundaes you can eat.
(Non-Monetary Compensation) Whereas benefits is a term that refers to all of the types of compensation and benefits that an
employee receives in return for their work.
 4> Flexibility at works
Another type of non-monetary incentive that is ideal for employee retention is flexibility at work. If
organisation allow their employees to work from home or if it give them the option to take days off,
it will promote greater loyalty.
B> 5> Gifts
NON- They don't have to be expensive — sometimes, a branded gift card worth $10 can show someone
how much you appreciate their hard work and dedication.
FINANCIAL
(Non-Monetary Compensation) 6> Time Off
Vacation time is one of the employers' most common non-monetary rewards. It's also one of the
most valuable because it can't be taken away from you.
 I: WAGE & SALARY PLAN
Components of Salary Structure 1> Basic Wage
This is the foundation of the pay structure, it constitutes the payment for the service rendered by the
worker over a period of time. It varies according to the requirements of the job measured by job
evaluation like skills and experience required, difficulty of work, responsibilities involved etc.

C> Wage policy in India covers the below statutory wages

1.a. Minimum Wage
DIRECT PAY These wages are fixed by the government. These wages should be enough to provide the workers the
basic amenities of life.
(Direct Compensation)
Minimum Wages should be able to cover the below aspects as per the Statutory standards laid down by
the government. It should be assumed or calculated to
 Comprise of three consumption units for one earner.
 Minimum food requirements
 Clothing requirements
 Rent component
 Lighting, fuel and other expenditure should constitute 20% of the total minimum wage.
 1.b. Fair Wage
Components of Salary Structure These wages are more than the minimum wages but less than the living wages.
the actual wages will depend on:
 The productivity of labour.
 The prevailing rates of wages.
 The level of the national income and its distribution.
 The place of the industry in the economy of the country.
C> 1.c. Living Wage
DIRECT PAY The living wage should enable the male earner to provide for himself and his family not merely the bare
essentials of food, clothing and shelter but also a measure of frugal comfort including education for
(Direct Compensation)
children, protection against ill-health, requirements of essential social needs and measure of insurance
against the more important misfortunes including old age.

2> Dearness Allowance (DA)

Dearness Allowance is paid to neutralize the impact of inflation. It is paid as a percentage of an
employee’s basic salary to enable them to face the increasing price of the essential commodities. It is
flexible and can fluctuate.
 II: INCENTIVE PLAN
Components of Salary Structure Incentives are given to the workers both in monetary and non-monetary terms over and above their
wages. These are provided to them for their exceptional performance over a period of time.
1> Individual Based Incentive Plans
1.a. Taylor’s Differential Piece Rate System
This plan was defined by F. W. Taylor. Under this plan, there are two piece work rates: Lower and
Higher. If a worker finishes work within standard time or produces more than standard output within the
C> standard time, he will be given higher piece rate. On the other hand, if a worker is below the standard, he
shall be given lower piece rate.
DIRECT PAY
(Direct Compensation) 1.b. Merrick’s Differential Piece Rate System
Merrick defines three-piece rates. One was for beginners, second for the developing workers and third
for the highly skilled workers.
Under this method, workers tries to improve their efficiency. Every worker wants to reach the third piece
rate. These piece rates are defined as follows:
 Up to 83% – Ordinary Piece Rate
 83 – 100% – 110% of ordinary piece rate
 Over 100% – 120% of ordinary piece rate
 1.c. Halsey Plan
Components of Salary Structure This plan was introduced by F. A. Halsey. Under this plan, workers who complete their job within the
standard time or more than the standard time are given guaranteed wages. Whereas, workers who
complete their job in less than the standard time is rewarded with the ‘bonus’, which is calculated on the
basis of time saved.

C> 1.d. Rowan Plan

It was introduced after Halsey plan. It is a modified form of the Halsey plan and was given by James
DIRECT PAY Rowan. In this plan, a standard time is determined in advance, and minimum wages are guaranteed to
every worker, this helps the slow workers and they are not made to suffer.
(Direct Compensation)
1.e. Gantt Task and Bonus Plan
This system guarantees minimum wages on the basis of time. Fixed time rates are guaranteed. Every
worker gets the minimum wages according to this plan, but if any worker completes his task in less than
the standard time or stipulated time, he gets a hike in his wage rate. This hike is given to him in the form
of a percentage bonus.
 1.f. Bedeaux Plan
Components of Salary Structure In this plan B’s represent the standard minutes for every operation. A worker gets his wages as and when
he completes his job in standard time.
If his actual performance exceeds standard performance in terms of B’s then out of his total wages 75%
of wages of time saved is paid to the worker as a bonus and 25% is given to the foreman. This is done
considering the fact that a worker cannot show good results without co-operation and proper direction
from the foreman.
C>
DIRECT PAY 2> Group or Team Based Incentive Plans
Team-based incentive plans follow the same principles as the individual incentive plans discussed above,
(Direct Compensation)
the only difference is that here it is paid to a group of people for the output they produce.
Amongst all the individual incentive plans the piece-work system is the most commonly used in the team
based incentive plan. The total incentive awarded to the group may be divided amongst its members
equally if the skills possessed and the contribution made by each member is similar. If the members of
the group possess unequal skills and the contribution made by each individual varies then the sharing of
incentive will be divided in proportion to their individual contribution or a specified percentage.
 3> Organization Wide Incentive Plan
Components of Salary Structure When the organization is growing and is successfully running a profitable business it can decide to adopt
organization-wide incentive plans. These incentive plans not only instill a feeling of belongingness in the
minds of the employees, but it also increases their commitment and loyalty towards the organization.

Below are the three types of organization-wide incentive plans:

3.a. Profit Sharing
C> In this plan, a particular portion of net profit is agreed to be paid to the deserving employees. On the
basis of certain service qualifications and service conditions, the employers agree to pay a certain portion
DIRECT PAY of their profits amongst the deserving employees. This profit can be shared in the form of cash or shares.
(Direct Compensation)
3.b. Gain Sharing
Under this plan, a comparison of a standard performance is made with the actual productivity in a given
time period. When the productivity exceeds the standard set, then a portion of the savings made is shared
with the employees.
These gains are shared on a monthly or quarterly basis on the extent to which the standard is exceeded.
 4> Employee Stock Ownership Plan
Components of Salary Structure This plan was originated in the U.S.A but has still not gained so much popularity in India. Under this
plan, eligible employees are allowed to buy the shares of a company at a reduced rate.
The employees can pay for the shares in instalments or they can be paid in advance as deductions from
their salary every month.

C> III: BONUS

DIRECT PAY Bonus is the extra payment or incentives made to the workers over and above their standard wages after
a specific time period. It is given in the form of gifts to employees or workers. Many firms declare
(Direct Compensation) bonuses at some special time period like at the time of Diwali, at the time of New Year or any other
special occasion.

Payment of Bonus Act, 1965

This act was introduced to provide the payment of bonus to the persons who are employed in a certain
establishment on the basis of profit or productivity and the matters concerned there with.
 Applicability
 The act is applied to every factory where 20 or more persons are employed on any day in an
Components of Salary Structure accounting year, which is established under the Factories Act, 1948.

 Any employee receiving salary or wages up to 10,000 p.m. (for calculation purpose Rs. 3500/month
maximum will be taken) is eligible for Bonus.

C>  The employee should have worked in an establishment for not less than 30 days in an accounting year.

DIRECT PAY  An employee is entitled to get maximum 20% and minimum 8.33% of bonus of salary and wages.

(Direct Compensation)  An employee will not be entitled to get the bonus if he is dismissed from his job because of reasons
like conduct of fraud, misbehaving in the office premises, theft etc.

Mode & Time of Payment

Bonus will be paid in cash and within 8 months from the close of an accounting year. Bonus is Payable
only annually.
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