BHARATHIAR UNIVERSITY

MBA (HR)

COURSE 2.5

COMPENSATION
MANAGEMENT
(Notes For Examination)

Prepared By
Dr Abbas T. P
drtpabbas@gmail.com

1|Page 2.5 – Compensation Management

 2.5. COMPENSATION MANAGEMENT
UNIT I
Q.1. WAGE DETRMINATION PROCESS
Compensation is the direct and indirect monetary and non-monetary
rewards given to employees on the basis of the value of the job, their
personal contributions, and their performance.
Basically there are two types of compensation:
 Direct compensation and
 Indirect compensation.
Direct compensation refers to the monetary benefits provided to employees
in return of the services they provide to the organization. The monetary
benefits include wage/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.
Indirect compensation refers to non-monetary benefits provided to
employees in return 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.
Wage Determination Process
Determination of an equitable wage and salary structure is one of the most
important phases of employer-employee relations.
For good industrial relations, each employee should
1. Receive sufficient wages and salaries to sustain himself and his
dependents.
2. Feel satisfied with a relationship between his wages and wages of
other people performing the same type of work in some other
organization.
The primary objective of wage and salary administration program is that
each employee should be equitably compensated for the services rendered
by him to the enterprise on the basis of
 The nature of the job.
 The present worth of that type of job.
 The effectiveness with which the individual performs the job.

2.5 – Compensation Management 2|Page

A sound wage and salary administration tries to achieve these objectives:
a. For employees
1. Employees are paid according to requirements of their jobs, i.e.,
highly skilled jobs are paid more compensation than low skilled jobs.
2. The chances of favoritism are greatly minimized.
3. Job sequences and lines of promotion are established wherever they
are applicable.
4. Employees’ morale and motivation are increased.
b. To Employers
1. They can systematically plan for and control their labor costs
2. In dealing with a trade union, they can explain the basis of their
wage programme
3. Reduces the likelihood of friction and grievances over wage
inequities.
4. It enhances an employee’s morale and motivation.
5. It attracts qualified employees
Steps in Wage Determination Process
The steps involved in determining wage rates are:
1.The Process of Job Analysis: Job Analysis is the process of gathering
information about the job. Job analysis describes the duties, responsibilities,
working conditions and inter-relationships between the job and the other
jobs with which it is associated. It also attempts to record and analyze
details concerning the training, skills, required efforts, qualifications,
abilities, experience, and responsibilities expected of an employee. Job
analysis results in job descriptions which lead to job specifications.
2.Wage Surveys: Once the relative worth of jobs has been determined by
job evaluation, the actual amounts to be paid must be determined. This is
done by making wage or salary surveys in the area concerned. Such surveys
seek to answer questions like:
 What are other firms paying?
 What are they doing by way of social insurance?
 What is the level of pay offered by other firms for similar
occupations?
etc, by gathering information about ‘benchmark jobs’, which are usually
known as good indicators.
3.Relevant Organizational Problems: In addition to the results of job
analysis and wage surveys, several other variables have to be given due

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consideration in establishing wage structure. For example,
 Whether there exists a well-established and well-accepted
relationship among certain jobs,
 Whether the organization would recruit new employees after
revised wage structure
 Are the prevailing rates in industry inconsistent with the results of
job evaluation?
 What will be the result of paying lower or higher compensation; and
 What should be the relationship between the wage structure and the
fringe benefit structure?
4.Preparation of Wage Structure: The next step is to determine the wage
structure. While determining pay ranges the following consideration should
be attended to
1. It is important to keep in mind that there is an adequate differential
between superiors and subordinates
2. When the pay-range of one group is changed, equal attention must
be given to the pay-level of the other.
3. Because of the continuous rise in wage and salary levels,
considerable attention must be given to handling upward changes
in wage-structure.
4. The existing pay structure should be regularly reviewed and
revised.
5. Regional differences in wages should invariably be maintained.
5.Assigning grades and price to each job: The next step in the wage
determination process is to create appropriate differentials between
different levels of jobs in accordance with their relative value. Any wage
structure has a number of rate ranges and pay grades.
6.Differential employee appraisal for fixing the wage: Job evaluation
helps to establish satisfactory wage differentials among jobs. Performance
appraisal helps award pay increases to employees who show improved
performance. 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.

2.5 – Compensation Management 4|Page

Q.2. FACTORS AFFECTING WAGE
Wage/compensation are the direct and indirect monetary and non-monetary
rewards given to employees on the basis of the value of the job, their
personal contributions, and their performance.
Basically there are two types of compensation:
 Direct compensation and
 Indirect compensation.
Direct compensation refers to the monetary benefits provided to employees
in return of the services they provide to the organization. The monetary
benefits include wage/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.
Indirect compensation refers to non-monetary benefits provided to
employees in return 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
Factors Affecting Wage/Compensation Levels in an Org
The main factors affecting salary levels within an organization are:
1.External relativities: The market rates for a job are affected by supply
and demand and general movements in pay levels. If the salary system does
not maintain external equity with market rates, the organization may not
be able to attract and retain good quality personnel.
2.Internal relativities: The values of jobs within an organization is
relative and the pay levels will be affected by differences between the values
of jobs. The ideal salary structure should establish and maintain
appropriate differentials based on an objective system of measuring relative
internal values..
3.Individual worth: The salary of an individual is also influenced by the
performance of the individual. The salary system should reward the
individuals according to the contribution and not restricted by the artificial
barriers contained in a rigid salary structure.
Factors Affecting Wage Administration: The factors that affect the
wage and salary administration are:
1. The organization’s ability to pay: The wages and salaries paid to
employees must meet both the organization's ability to pay and any
governing legal regulations. All employers, irrespective of their profits

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 or losses, must pay no less than their competitors. During the time of
prosperity, employers pay high wages to carry on profitable operations
and because of their increased ability to pay. But during a period of
depression, wages are cut because funds are not available.
2. Supply and Demand of Labour: The supply and demand forces
operate at the national, regional and local levels determine
organizational wage structure and level. If the demand for certain
skills is high and the supply is low, the result is a rise in the price to
be paid for these skills. The strategy usually employed is to pay higher
wages if the labour supply is scarce; and lower wages when it is
excessive. Similarly, if there is great demand for labour expertise,
wages rise; but if the demand for manpower skill is minimal, the
wages will be relatively low.
3. Prevailing Market Rate: Conformance to the prevailing market rate
is the most widely used strategy for fixing an organization’s
compensation policies. This is done for several reasons:
a. Competition demands that competitors adhere to the same
relative wage level.
b. Various government laws and judicial decisions make the
adoption of uniform wage rates.
c. Trade unions encourage this practice so that their members can
have equal pay, equal work and geographical differences may be
eliminated.
d. Results in uniformity in wage and salary rates among the
functionally related firms requiring essentially the same quality
of employees.
e. If 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 a sufficient quantity and quality of
manpower
4. The Cost of Living: The cost-of living pay criterion is usually
regarded as an auto minimum equity pay criterion. This criterion calls
for pay adjustments based on increases or decreases in an acceptable
cost of living index. 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.
5. The Living Wage: This criterion states that wages paid should be

2.5 – Compensation Management 6|Page

 adequate to enable an employee to maintain himself and his family at
a reasonable level of existence. However, employers prefer to base the
wages of an employee on his contribution rather than on his need.
6. Productivity: Productivity 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 management, greater
skill by labour are all responsible for the increase in productivity. Also,
productivity can be measured at several levels - job, plant, industry or
national, economic level. Thus, although theoretically it is a sound
compensation criterion, operationally many problems and
complications arise.
7. Trade Union’s Bargaining Power: Trade unions do affect rate of
wages. Generally, the stronger and more powerful the trade union, the
higher the wages. A trade union’s bargaining power is often measured
in terms of its membership, its financial strength and the nature of its
leadership.
8. Job Requirements: Generally, the more difficult a job, the higher are
the wages. Jobs are graded according to the relative skill, effort,
responsibility, and job conditions required.
9. Managerial Attitudes: These have a decisive influence on the wage
structure and wage level since managerial decisions on whether the
firm should pay below or above average rates, the weight to be given
for performance or length of service, desires to attract high-caliber
employees, etc., are bound to be affected by these decisions.
10. Psychological and Social Factors: These factors determine in a
significant way how hard a person will work for the compensation
received or what pressures he will exert to get his compensation
increased.
11. Skill Levels Available in the Market: With the rapid growth of
industries, there is shortage of skilled resources. The wage levels of
skilled employees are constantly changing and an organization has to
keep its level up to suit the market needs.

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Q.3. TYPES OF WAGES
A wage is a compensation workers receive in exchange for their labour. In
labour and finance settings, a wage may be defined to include cash paid for
some specified quantity of labour.
Determinants of Wage Rates
The following are the major kinds of wage and salary payment plans:
1. Time Rate
This is the oldest and the most common method of fixing wages under which
remuneration does not vary with output or the quality of output. Under this
system, workers are paid according to the work done during a certain period
of time, at the rate of so much per hour, per day, per week, per fortnight or
per month or any other fixed period of time.
Time plans are non-incentive in the sense that earnings during a given time
period do not vary with the productivity of an employee during that period
Circumstances where Time Rate is Suitable:
(a) Where work is not tangibly measurable.
(b) Where the time is entirely governed by the speed of operation.
(c) Where quality of work is main consideration.
(d) Where work is extremely unskilled.
(e) In a small plant where work of each employee can be identified.
(f) Where workers are under training
(g) Where measuring of work is comparatively costly.
Advantages: The main advantages of time-rate pay are:
(1) Time rates are simple for a business to calculate and administer
(2) They are suitable for businesses that wish to employ staff to provide
general roles where employee productivity is not easy to measure
(3) It is easy to understand from an employee's perspective
(4) There is no need of job evaluation and merit rating for fixation of rate.
(5) It is most suitable where work cannot be measured
(6) It is suitable where the quality of work and not the quantity of work
is of prime importance.
(7) The employee can budget personal finance with some certainty

2.5 – Compensation Management 8|Page

 (8) Makes it easier for the employer to plan and budget for employee costs
Drawbacks: The main drawbacks of this system are:
(1) Time rate prevents the workers from doing more work and earning
more through higher output.
(2) It deprives the employer of the opportunity of lowering the cost of
production by means of higher productivity.
(3) Time rate method provides no incentive to increase individual
efficiency.
(4) It does not take into account the fact that men are of different abilities
(5) The labour charges for a particular job do not remain constant.
2. Piece Rate Pay: In piece-rate pay or payment by results system,
remuneration varies with output or some other measure of productivity
during a given period of time. To earn more, an employee is required to put
in more labour and produce more. It is a direct financial incentive plan.
This system ensure that employees are paid for the amount of work they do.
Piece-rate pay encourages effort, but may be at the expense of quality.
The following are the circumstance favouring this method of wage payment:
(1) Operations should be independent and capable of being steadily
continued by a single operator,
(2) There should be steady supply of work.
(3) There should be proper maintenance of tools and equipment.
(4) The quantity is more important and quality being insured by a proper
supervision and inspection.
(5) Where job time has been standardized.
Advantages: This system has many advantages:
(1) It pays the workman according to his efficiency.
(2) The total unit cost of production comes down
(3) Plan is simple and easy to understand by the workers.
(4) Direct incentives to increase output.
(5) Wages are easy to calculate.
(6) Fixed manufacturing overheads are lowered per unit.
(7) Provides opportunity to earn more by increasing efficiency.

9|Page 2.5 – Compensation Management

 (8) Discourages inefficiency.
(9) The benefit of increased efficiency is wholly received by the worker.
Demerits: The demerits of the system are:
(1) Not suitable to beginners whose production is naturally low.
(2) Suitable on group basis, but not on individual basis.
(3) Not suitable to tasks where standard time cannot be fixed.
(4) Not suitable where supply of work is not guaranteed.
(5) Consume more power, results in overwork the machines and wastage
of materials.
(6) There is a greater chance of deterioration in the quality of work.
(7) Excessive speeding of work may result in frequent wear and tear of
plant and machinery and frequent replacement.
3. Balance or Debt Method: This method is a combination of time wage
and piece wage methods. In this method, a worker is paid a fixed wage based
on the time rate with a provision of piece wage method.
The worker is guaranteed an hourly or a day-rate with an alternative piece
rate. If the earnings of a worker calculated at the piece rate exceed the
amount, which he would have earned if paid on time basis, he gets credit for
the balance, i.e., the excess piece rate earnings over the time rate earnings.
4. Differential Piece-Work System:
In this method, wage is paid in relation to wages per unit of production
decreases with increase in production. But, wage rate per hour still
increases of course, not in proportion to the increased output. This method
is applicable where efforts can be related to production and work is
standardised, repetitive, and measurable.

2.5 – Compensation Management 10 | P a g e

Q.4. THE THEORY OF WAGES
Wages in the widest sense mean any financial or non-financial
compensation paid by the employer to his workers for the services rendered
by them.
There are different theories for the determination of wages. Wage theory
has gone through three stages of development since the middle ages:
 Economic Theory of Wages
 Behavioural (Motivational) Theories
 Process theories
Economic Theory of Wages
a) Subsistence Theory: The theory was based on the assumption that
if the workers were paid more than subsistence wage, their numbers
would increase as they would procreate more; resulting in spurt in
supply of labour and this would bring down the rate of wages. If the
wages fall 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 that happened the wage rates would
go up.
b) Wages Fund Theory: This theory is based on the assumption that
the wages are paid out of predetermined fund. If the fund is large,
wages would be high and if the fund is small, wages would be reduced
to the subsistence level. The demand for labourer depends upon the
size of the fund and wages depends upon the demand of labour.
c) Residual Claimant Theory: According to this theory there are four
factors of production land, labour, capital and entrepreneur. Wages
are paid to the labours after paying of the land, capital and
entrepreneur, that is why they are called residual claimant. The
wages are equal to production minus rent, interest, and profit.
d) Surplus Value Theory of Wages: This theory was developed by Karl
Marx. As per this theory the price of the product is determined by the
labour time needed to produce it and the surplus goes to be utilized
for paying other expenses.
e) Marginal Productivity Theory: According to this theory, wages
depend upon the demand and supply of labour. Consequently, workers
are paid what they are economically worth.
f) Bargaining Theory of Wages: According to this theory, wages are
determined by the relative bargaining power of workers or trade
unions and of employers.
g) Employment Theory: According to this theory, unemployment would
disappear, if workers were to accept a voluntary cut in wages. These

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 wage cuts would bring down costs and thereby fall in price. This
lowering in prices would cause additional demand, which will increase
production. This will increase employment of workers.
h) Competitive Theory: The basic assumption of competitive theories of
pay is that employers compete among themselves by offering a higher
wage to attract employees; while the employees compete with one
another for jobs by offering their services for a lower wage.
Behavioural (Motivational) Theories
There are two groups of motivation theories. These are:
 Content Theories,
 Process Theories.
Content Theories: Content theories include
a. Need Hierarchy: Needs hierarchy theory holds that humans are
“wanting” animals motivated to satisfy their want or needs. Once a need has
been fulfilled, it is no longer a source of motivation until the need arises
again.
b. Motivation-Hygiene Theory: According to motivation-hygiene theory
factors contributing to job satisfaction are called motivators. Good feelings
about work result when needs are met by the job. Job satisfaction may come
from intrinsic or extrinsic job motivators.
c. ERG Theory: ERG Theory identifies three levels of needs E, R & G – ‘E’
for existence; ‘R’ for relatedness; ‘G’ for growth. ‘Existence’ needs comprise
physiological as well as safety and security. ‘Relatedness’ needs affection.
‘Growth’ needs desire for personal development.
d. Equity Theory: Equity theory observes that a major input into job
performance and satisfaction is the degree of equity that people perceive in
their work situation.
Equity occurs when
Person’s outcomes = Other’s outcomes
Person’s inputs = Other’s inputs
e. Goal-Setting Theory: Advocates of this theory maintain that all
individuals have values and goals. These goals then determine behaviour
and performance
f. Agency Theory: Employers and employees are the two stakeholders of a
business unit, the former assuming the role of principals and the latter the
role of agents. The remuneration payable to employees is the agency cost.
Process theories
Various process theories are:
 Expectancy Theory

2.5 – Compensation Management 12 | P a g e

  Equity Theory
 Reinforcement Theory
According to Process Theories, in order to be effective in influencing
behaviour, reward systems should satisfy three key design requirements:
1. Contingency (Reinforcement Theory): The first requirement is
that appropriate behaviour-reward contingencies be established i.e.
rewards should be made contingent upon specific behaviours that
are of importance to the organization. Reinforcement theory
suggests that a response followed by a reward is more likely to occur
in the future. Applied to organizational settings, the theory implies
that employees learn to behave in ways that get rewarded and avoid
behaviour that does not get rewarded.
2. Equitable (Equity Theory): The second requirement for designing
effective reward systems is that employees should perceive their
rewards to be equitable. In employment relationship, the employee
provides inputs to the organisation and in return receives outcomes
(rewards) from the organisation. The employee judges the fairness
of this exchange by comparing the ratio of his/her outcomes to inputs
of some other relevant person. If the comparison reveals the two
ratios to be equal, the employee experiences equity which in turn
contributes to his/her job satisfaction. If the comparison shows the
ratios to be unequal, the employee will experience inequity, which
will cause him/her to take corrective action.
3. Value (Expectancy Theory): The third requirement for designing
effective reward systems is that the rewards provided by the
organization should be of value to the employees. Only then, will
rewards satisfy employees and influence their organization
behaviour. The logic of this requirement is derived from need theory
and expectancy theory. These theories argue that individuals
engage in behaviours which produce outcomes (rewards) that satisfy
their salient needs.

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UNIT 2
Q.5. BENCHMARKING
Benchmarking is a process used in strategic management, in which
organizations evaluate various aspects of their processes in relation to best
practice, usually within their own sector. This then allows organizations to
develop plans on how to adopt such best practice, usually with the aim of
increasing some aspect of performance.
Advantages of Benchmarking
Benchmarking is a powerful management tool because it overcomes
"paradigm blindness." Paradigm Blindness is the mode of thinking, "The
way we do it is the best because this is the way we've always done it."
Benchmarking opens organizations to new methods, ideas and tools to
improve their effectiveness.
Collaborative Benchmarking
Benchmarking is usually carried out by individual companies. Sometimes it
may be carried out collaboratively by groups of companies.
Benchmarking Procedure
In any benchmarking process, it is essential to follow a systematic and
structured approach. Four phases are involved in a normal benchmarking
process
1. Planning,
2. Analysis,
3. Integration and
4. Action.
And in the four phases, there are 10 practical steps as explained below.
1. Planning Phase: Planning phase involves the following steps:
Step 1: Identify Opportunities and Prioritize (What to
Benchmark) – Top management must decide which processes are
critical to the success of the company. Once a shortlist of processes
to be benchmarked is ready, the processes need to be prioritized
as per a predetermined set of criteria.
Step 2: Deciding the Benchmarking Organization (Whom to
Benchmark) – The next step in the process is to decide the
organization whose processes will serve as the benchmark.
Several organizations should be selected for study. Information on
their processes should be gathered and the most suitable
organization is selected.
Step 3: Studying the Superior Process –The preparation for
collecting necessary information has to be planned in such a way
that either one visit or a proper authentic data collection source

2.5 – Compensation Management 14 | P a g e

 can provide all the details, within a reasonable time period.
2. Analysis Phase: This phase involves the analysis of all the
information and data collected in the Planning phase.
Step 4: Finding Reasons and Devising Improved Processes – The
project team should find out the reasons for better results from
the benchmarked processes. This has to be done after the
information from the best-in-class organization has been collected
and analysed. Based on the analysis, an improved process should
be developed.
Step 5: Goal Setting for Improved Processes – The project team’s
next step is to set goals for the improvement of the company’s
existing process. These goals can stretch goals that will result in
a process even better than the other organization’s best-in-class
process.
3. Integration Phase: This phase is a connector between the earlier two
stages - planning and analysis. This phase moves forward only if the
results of earlier phases have been accepted by management.
Step 6: Communicate Findings and Gain Acceptance – The
proposals for the improved processes should be presented to senior
management and the head of the departments to gain approval of
the proposed changes.
Step 7: Establish New Functional Goals – When the proposed
revisions to the processes are accepted, the acceptance of the
revised functional goals is the next big logical step.
4. Action Phase: This phase is where the improvement parts have been
taken into consideration.
Step 8: Develop Action Plan for Implementation – After the
improved process is accepted by all concerned, a detailed action
plan is drawn with all key activities taken as inputs. The detailed
action plan should carry the important things like a time line,
individuals responsible for carrying out the tasks, any short-fall
in the completion of tasks, etc.
Step 9: Implement Specific Actions and Monitor Progress – The
senior management must be committed enough to ensure proper
coordination of various activities, monitor the progress of
implementation of the plan and work as a barrier-remover in the
implementation process.
Step 10: Keep the Process Continuous – The successful completion
of one project would results in additional and more ambitious
projects and benchmarking with the best approach.

15 | P a g e 2.5 – Compensation Management

Types of Benchmarking: There are different types of benchmarking.
1. Process benchmarking: It requires to look at other companies that
engage in similar activities and to identify the best practices that can
be applied to the initiating firm’s processes in order to improve them.
2. Financial benchmarking: This includes performing a financial
analysis and comparing the results in an effort to assess initiating
firm’s overall competitiveness.
3. Performance benchmarking: It allows the initiator firm to assess
their competitive position by comparing products and services with
those of target firms.
4. Product benchmarking: It is the process of designing new products
or upgrades to current ones.
5. Strategic benchmarking: During the process, the companies
identify the winning strategies that successful companies use and
apply them to their own strategic process.
6. Functional benchmarking: A company will focus its benchmarking
on a single function in order to improve the operation of that
particular function.
Advantages of Benchmarking
 Easy to understand and use.
 If done properly, it is a low cost activity that offers huge gains.
 Brings innovative ideas to the company.
 Provides with insight of how other companies organize their
operations and processes.
 Increases the awareness of costs and level of performance compared
to the rivals.
 Facilitates cooperation between teams, units and divisions.
Disadvantages of Benchmarking
 Need to find a benchmarking partner.
 It is sometimes impossible to assign a metric to measure a process.
 Often needs to hire a consultant.
 If the organization is not experienced at it, the initial costs could be
huge.
 Managers often resist the changes that are required to improve the
performance.
 All best practices may not applicable to initiating firm’s context.

2.5 – Compensation Management 16 | P a g e

UNIT III
Q.6. INCENTIVES
Incentives are variable monetary or non-monetary rewards granted to
employees as per the variations in their performance. Incentives are
provided beside wages and salaries so that the level of motivation and job
satisfaction can be enhanced.
There are two forms of incentives:
 Individual incentive plans and
 Organizational incentive plans.
Individual Incentive Plans
This is a most popular form of incentive in the industry under which
employees are rewarded individually on the basis of individual performance
that can be measurable in quantitative terms. Performance appraisal of
each employee is prepared and only those employees who perform above the
target standard get the incentive.
Popular financial individual incentive plans include:
1. Time Rate Plan: According to this simplest wage scheme, a worker is
paid on the basis of the number of hours he works and the hourly rate fixed
for the job arbitrarily or negotiated with the Union. Using this method of
payment a worker's daily earnings would be:
E = RH * HW
Where E = earnings (Rs./day), RH = hourly rate (Rs./hr) and HW = hours
worked (hours/day)
2. Measured Day Work Plan: This is very similar to the time rate plan
except that the hourly rate is fixed using work measurement techniques
instead of fixing it arbitrarily. Further, the rate is revised from time to time
on the basis of the number of units produced per past period of time.
3. Straight Piece Rate Plan: Payment is made at a constant amount per
unit of output. Piece rate is set on the basis of the standard time determined
using work measurement techniques, the type of work and its worth.
Standard time has been defined as the time required by an average worker,
working at a normal pace, to complete a specific task, using a defined
method, under specified working conditions, with adequate allowance for
personal fatigue, and delay times.
The method in symbolic form is explained below
E= RP*O
E = (RH* std. time per unit)*O
Where RP= piece rate (Rs./ piece), O = number of units produced, E =
earnings (Rs./day) and RH = hourly rate (Rs./hr)

17 | P a g e 2.5 – Compensation Management

If this income comes out to be lesser than the minimum compulsory wage,
set by the law, then that minimum shall be paid to the worker.
4. Standard Hours Plan: As in piecework, the employee is paid according
to output. However, in the standard hour plan a standard time is allowed to
complete a job and the employee is paid a set amount for the job if completed
within that time. For instance, an auto mechanic may be assigned to tune
an automobile, a task for which the standard time is two hours. If the
mechanic completes the task in an hour and a half, he or she is paid for two
hours. If the job takes two and a half hours, the mechanic is paid for that
time. Continually failing to make the standard time would result in
examination of either the time standard or the employee.
5. Gain Sharing Plan: A gain-sharing or bonus incentive plan determines
earnings using a variable rate - one base rate for production up to standard,
and another higher rate for production over standard. This way the gain in
production over standard is shared between the worker and the
management. The equations generally used for calculating the earnings is
given below:
E = (SRP*SO)+(O-SO)*IRP
Where SRP = standard rate per piece (Rs), SO = standard output per shift
(units), O = actual output per shift (unit) and IRP = increase rate per piece
(Rs)
Organizational Incentive Plans
When the incentives are provided to all employees of the organization, it is
called organizational incentives. The primary goal of organizational
incentive is to direct the efforts of all employees toward achieving
organizational mission, vision and objectives. This incentive plan produces
reward for all employees working in a particular organization.
The organizational incentive systems involve cooperation among employees,
management and the union and it proposes to accomplish broader objectives
such as an organization wide reduction in labour, material and supply costs,
strengthening of employee loyalty to the company, harmonious labour-
management relations and decreased turn over and absenteeism.
There are three types of organization-wide incentive systems:
(1) The Scanlon Plan:
The most popular gain sharing plan is the Scanlon Plan. In this plan
employees are paid a bonus on the basis of a pre-established formula if costs
remain below pre-established standards. This type of plan is ordinarily tied
into a retirement plan.
(2) The Kaiser Plan
Kaiser-United plan was devised in I963. The plan is characterized by

2.5 – Compensation Management 18 | P a g e

  Guaranteed employment to workers,
 Sharing of the gains resulting from cost reduction
 Increases in wage rates and fringe benefits and
 A scheme for gradually eliminating direct wage incentives.
(3) Profit Sharing:
Under the scheme of profit sharing a certain percentage of profit is
distributed at fixed ratio among some categories of employees annually.
The basis of profit sharing is decided on the length of service or the number
of working days in a year or the wages earned by a worker during a year.
The main types of profit sharing schemes are:
1. Cash: A proportion of the profit is paid in cash direct to employees.
2. Stock: A proportion of profit is paid in shares.
3. Approved Profit Sharing Share Schemes (PSSS): The Company
allocates a proportion of profit to a trust fund, which acquires shares
in the company on behalf of the employees.
4. Mixed schemes: A PSSS scheme is sometimes offered in addition to
a cash scheme, or the latter is made available to staff before they are
eligible for PSSS shares, or as an alternative to PSSS shares.
Merits:
(1) Creation of industrial peace because workers are satisfied.
(2) The bonus is paid only when the amount of profit exceeds the set
target.
(3) Profit sharing scheme is based on the basic pay of the employees.
(4) Workers have share in profit and not losses incurred by the employer.
(5) It represents a reward for group effort and group efficiency.
(6) It brings about team spirit among the employees.
(7) Profit sharing results into equitable distribution of the profit.
Demerits:
(1) Employees do not get bonus when company recur losses.
(2) It is not possible for newly established company to pay bonus.
(3) There is no distinction between efficient and inefficient employees.
(4) Bonus is paid to the employee once in a year. This does not motivate
them for better performance.

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Q.7. FRINGE BENEFITS
Fringe benefits are on-the-job benefits that come in a form other than
money. Normally, these are the benefits given to an employee in addition to
his wages or salary.
Common examples of fringe benefits include medical insurance, use of a
company car, housing allowance, educational assistance, vacation pay, sick
pay, meals and employee discounts.
Purpose
(1) To invite or maintain highly qualified workforce
(2) To create and improve sound industrial relations
(3) To boost up employee morale.
(4) To motivate the employees.
(5) To provide qualitative work environment and work life.
(6) To provide security to the employees against social risks.
(7) To provide safety to the employees against accidents.
(8) To promote employees welfare by providing welfare measures.
(9) To create a sense of belongingness among employees.
(10)To meet requirements of various legislations.
Types of Fringe Benefits
Organizations provide a variety of fringe benefits. The fringe benefits are
classified under four heads as given here under:
1. For Employment Security:
Physical and job security to the employee must be provided with a
view to promoting security to the employee and his family members.
Benefits under this head include insurance, technological adjustment
pay, leave travel pay, overtime pay, level for negotiation, leave for
maternity, leave for grievances, holidays, cost of living bonus, call-
back pay, lay-off, retiring rooms, jobs to the sons/daughters of the
employees and the like.
2. For Health Protection:
Employee’s safety and health should be taken care of in order to
protect the employee against accidents and unhealthy working
conditions.
Benefits under this head include accident insurance, disability
insurance, health insurance, hospitalization, life insurance, medical
care, sick benefits, sick leave, etc.
3. For Old Age and Retirement:

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 Benefits under this category include: deferred income plans, pension,
gratuity, provident fund, old age assistance, old age counselling,
medical benefits for retired employees, traveling concession to retired
employees, jobs to sons/daughters of the deceased employee and the
like.
4. For Personnel Identification, Participation and Stimulation:
This category covers the following benefits: anniversary awards,
attendance bonus, canteen, cooperative credit societies, educational
facilities, beauty parlour services, housing, income tax aid,
counselling, quality bonus, recreational programs, stress counselling,
safety measures etc.
Non-Taxable Fringe Benefits
There are many types of non-taxable fringe benefits that may be offered to
employees without increasing their tax burden.
Some of the most common tax-free types of fringe benefit are:
1) Insurance Coverage: Insurance coverage may include employer-
paid life insurance, health insurance and short or long-term disability
insurance.
2) Childcare Assistance: Childcare assistance is one fringe benefit
that comes in handy for many families, and may increase attendance
at work, as well as productivity. Many large employers are offering
on-site childcare, either free of charge, or at a discounted price.
3) Physical Fitness: Some employers make it a priority to ensure their
employees have access to gyms or fitness centres in order to promote
a healthy lifestyle, which in turn increases attendance and
productivity. Some companies maintain on-site fitness centres, where
employees can work out on breaks or other off times, while others offer
paid gym memberships, or memberships at a discounted price.
4) Education Assistance: Education assistance in the form of tuition
reimbursement, or other assistance in adding to an employee’s
education or skillset is one of the more popular types of fringe benefit
offered by employers. Helping an employee gain new job-related skills
or knowledge helps the company, as the employee is then able to work
at a different level in his current position, or may become able to
advance into new areas of the business.
5) Qualified Employee Benefits: Employers may offer certain
employees, referred to as “qualified employees,” benefits in the form
of profit sharing plans, stock bonus plans or stock options, and money
purchase plans. Qualified employee benefits are generally made
available only to employees who have worked for the employer for a
specified minimum time period.

21 | P a g e 2.5 – Compensation Management

 6) Moving Expenses: When an employer hires an employee who is then
expected to move from his current home to another city, state, or even
country, it may provide reimbursement for the employee’s moving
expenses. This is usually only seen in larger companies, and with
high-level employees.
Taxable Fringe Benefits
Any fringe benefit provided by an employer may be taxable, unless it is
specifically excluded from taxation. These include:
1) Excessive Moving Expenses – if an employer reimburses or pays
for an employee’s moving expenses, when the move was less than 50
miles from the employee’s current residence, may be taxed.
2) Excessive Mileage Reimbursement – employer reimbursement for
business-related driving of the employee’s private vehicle may be
taxable if the total exceeds the standard mileage rate.
3) Expense Reimbursement – expense amounts reimbursed to an
employee with the employee’s sufficient accounting may be taxable.
4) Clothing Reimbursement – employer reimbursement for clothing
that is not strictly for work on the job, but which is suitable for
everyday wear, is taxable.
5) Working Condition Benefits – any equipment or supplies
purchased by an employee that is used for any personal purpose is
taxable.
6) Excessive Education Expenses – Educational assistance for
education that is not job-related, or which the amount exceeds the
allowable amount is taxable.
7) Awards and Prizes – Employee awards and prizes that are given in
cash, are taxable, unless they are given to charity in the employee’s
name.
8) Retirement Plan Contributions: Retirement plan contributions
are an important and popular fringe benefit offered to employees.
While some companies match the employee’s contribution, made
directly from his pay check, others contribute a specified amount to
the plan without requiring the employee to do so himself.

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UNIT IV
Q.8. TOTAL COMPENSATION
The term “compensation” refers to the combination of wages, salaries and
benefits an employee receives in exchange for work.
Compensation may include hourly wages or an annual salary, plus bonus
payments, incentives and benefits, such as group health care coverage,
short-term disability insurance and contributions to a retirement savings
account.
Total compensation package is a combination of salary, benefits,
opportunities and other employee programs
One way an employer can show employees the total value of their benefits
and compensation package is to present a total compensation statement.
Total compensation statements give employees information on the complete
pay package awarded to them on an annual basis, including both direct and
indirect compensation.
Some common items to include in a total compensation statement are:
 Base salary/hourly rate
 Overtime paid
 Bonus compensation paid
 Paid holidays
 Sick days issued
 Vacation days issued
 Other forms of paid leave (personal, medical, military, etc.)
 Medical insurance
 Dental insurance
 Vision insurance
 Disability insurance
 Life insurance
 Retirement contributions
 Tuition assistance
 Training courses paid for by the employer
 Non-cash compensation — gifts, travel, meals, tickets, etc.
 Employee assistance programs offered and
 Relocation expenses.
Finally, add up how much you paid out in each of these categories and list
it under “total compensation.”

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Q.9. COST OF LIVING ADJUSTMENT (COLA)
Cost of living is the cost of maintaining a certain standard of living. Inflation
causes cost of living expenses to regularly increase. As the price of everyday
items such as food, housing, gas, clothing, and utilities rises, employees are
made to spend more. To remain in a consistent financial situation, employee
wages must go up as living expenses go up.
The Cost of Living Adjustment (COLA) is an increase in income that keeps
up with the cost of living.
A COLA results in a wage or benefit increase that is designed to help
employees keep pace with increased living costs that result from inflation.
Need for COLA Raise
The main reason to give a cost of living raise is to keep employee wages
reasonable compared to living expenses. As the cost of basic items increases,
employees need more money to pay for things.
Regular raises also encourage employees to stay at the business. When the
wages an organization pay keep up with living expenses, employees are not
forced to look elsewhere for higher paying work. COLA might also attract
new employees by showcasing organization’s COLA raises as an added job
benefit.
COLA Calculation
COLAs are usually attached to increases in the consumer price index (CPI).
COLAs are generally equal to the percentage increase in the CPI for urban
wage earners and clerical workers for a specific period.
CPI determines the rate of inflation and is compared monthly. When
consumer prices drop or if inflation has not been high enough to
substantiate a COLA increase, recipients do not receive COLA. If there is
no CPI increase, there is no COLA increase.
Dearness Allowance
In India, Dearness allowance is the Cost of Living Adjustments paid to
enable the workers to meet the steep rise in prices of essential commodities
and aimed at neutralizing the increasing cost of living due to inflation.
Usually, the Consumer Price Index (CPI) is used to link DA with the cost of
living. In some cases, it will be at flat rate and will be to all employees
irrespective of their wages whereas in some other cases, it varied according
to wage or salary slabs.
In India, Dearness Allowance (D.A.) is part of a person's salary. D.A. is
calculated as a percent of the basic salary. This amount is then added to the
basic salary along with other allowances to get the total salary. Rates vary
as per rural/urban areas etc.

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Q.10. DEARNESS ALLOWANCE
Dearness allowance also known as Cost of Living Adjustments is paid to
enable the workers to meet the steep rise in prices of essential commodities
and aimed at neutralizing the increasing cost of living due to inflation.
Usually, the Consumer Price Index (CPI) is used to link DA with the cost of
living. In some cases, it will be at flat rate and will be applicable to all
employees irrespective of their wages whereas in some other cases, it varied
according to wage or salary slabs.
In India, Dearness Allowance (D.A.) is part of a person's salary. D.A. is
calculated as a percent of the basic salary. This amount is then added to the
basic salary along with other allowances to get the total salary. Rates vary
as per rural/urban areas etc.
The payment of dearness allowance facilitates employees and workers to
face the price increase or inflation of prices of goods and services consumed
by them. The increasing prices reduce the compensation to nothing and the
money’s worth is coming down based on the level of inflation. The payment
of dearness allowance enables the employees to face the increasing prices.
The following methods are used to calculate dearness allowance:
1. Flat Rate: According to this method, DA is paid at a flat rate to all
workers irrespective of their wage levels and regardless of changes in
consumer price index. This method was used in jute, cotton and
engineering industries in west Bengal in the early days of
adjudication.
2. Graduated Scale: Under this method, DA increases with each slab
of salary. Therefore, DA, as a percentage of basic pay decreases
steadily.
3. Index Based D.A: In this method a flat rate per point of index is
prescribed so that all workers determine the same amount of DA
irrespective of their pay scale. For example, if Rs 1.50 is the rate, Rs
15 will be paid as DA whenever the All India Consumer Price Index
(AICPP) increases by 10 points. This method is in force in the cotton
mills of Bombay and Madras and in many central government
undertakings.
4. DA Linked to Index and Pay Scale: Under this method, a higher
rate of DA is prescribed for lower pay scales and a lower rate for higher
pay scales. This method is used to pay DA to employees in
Government offices and in many central public sector undertakings.

25 | P a g e 2.5 – Compensation Management

Q.11. RETIREMENT PLAN
A retirement plan (also known as pension scheme or superannuation plan)
is an arrangement to provide people with an income, or pension, during
retirement, when they are no longer earning a steady income from
employment.
Classification of Retirement Plans
Retirement plans may be classified as
1. Defined Benefit
2. Defined Contribution
3. Hybrid Plans
1.Defined Benefit
A defined benefit plan guarantees a certain pay-out at retirement, according
to a fixed formula which usually depends on the member's salary and the
number of years' membership in the plan.
A traditional form of defined benefit plan is the final salary plan, under
which the pension paid is equal to the number of years worked, multiplied
by the member's salary at retirement, multiplied by a factor known as the
accrual rate. The final accrued amount is available as a monthly pension or
a lump sum.
Defined benefit plans may be either funded or unfunded. In a funded plan,
contributions from the employer, and sometimes also from plan members,
are invested in a fund towards meeting the benefits. The future returns on
the investments, and the future benefits to be paid, are not known in
advance, so there is no guarantee that a given level of contributions will be
enough to meet the benefits.
Typically, the contributions to be paid are regularly reviewed in a valuation
of the plan's assets and liabilities, carried out by an actuary.
Advantages of Defined Benefit Plan
(a) Provides guaranteed lifetime income to retirees.
(b) It is less expensive to provide benefits through a defined benefit plan
than through a defined contribution plan.
(c) A defined benefit plan offers irreplaceable financial security.
(d) Provides more income for career employees. Motivates employees to
continue in service.
(e) Provides a benefit that bears an easily understandable relationship to
working pay just before retirement.
(f) Automatically provides inflation protection during the working career.

2.5 – Compensation Management 26 | P a g e

(g) Outside service credit may be recognized
(h) Cost-of-living protection after retirement may be provided through
automatic percentage increases, ad hoc increases, etc.
(i) Total investment management fees are typically lower than in defined
contribution plans.
(j) The employer bears the financial risks.
Disadvantages of Defined Benefit Plan
(a) Provides less income for non-career employees.
(b) Most DB plans were not designed with portability in mind.
(c) Cost of the plan will fluctuate from year to year as a result of plan
experience being different from actuarial projections.
(d) Difficult for employees to understand how much the employer is
contributing on their behalf.
(e) Usually more complicated to administer.
2.Defined Contribution Plans
In a defined contribution plan, contributions are paid into an individual
account for each member. The contributions are invested, for example in the
stock market, and the returns on the investment (which may be positive or
negative) are credited to the individual's account.
On retirement, the member's account is used to provide retirement benefits,
often through the purchase of an annuity which provides a regular income.
Defined contribution plans have become more widespread all over the world
in recent years, and are now the dominant form of plan in the private sector
in many countries.
Advantages of Defined Contribution Plan
(a) Contribution amount is easily determined, easy to understand and
usually constant from year to year.
(b) Provides more income for non-career employees.
(c) Account balances may be transferred to a terminating employee's next
retirement plan, and hence the plans are usually more portable.
(d) Contributions are allocated to individual accounts. Employees can easily
identify a specific amount that is earmarked just for them.
(e) Pension costs for service rendered to date are always fully funded.
(f) Cost of administration is generally less than for a defined benefit plan.

27 | P a g e 2.5 – Compensation Management

(g) Opportunity for higher benefits if financial experience is superior.
Disadvantages of Defined Contribution Plan
(a) Employee bears the financial risk of outliving accumulated assets.
(b) Provides less income for career employees.
(c) Benefits may not bear any relationship to pre-retirement working pay.
(d) A defined contribution plan in more expensive than a defined benefit
plan.
(e) Employee bears the financial risk of poor investment return.
(f) During periods of extended inflation, individual account accumulations
tend not to produce benefits that have kept pace with increases in the
cost of living.
(g) Loss of the financial security
(h) Retirees are more likely to take a lump-sum benefit than a periodic
payment for life.
(i) Outside service credit is not easily recognized.
(j) Does not motivate employees to continue in service
3. Hybrid Plans
Some types of retirement plans, such as cash balance plans, combine
features of both defined benefit and defined contribution plans. They are
often referred to as hybrid plans.
A cash balance plan is a defined benefit plan made by the employer, with
the help of consulting actuaries to appear as if they were defined
contribution plans.
They have notional balances in hypothetical accounts where, typically, each
year the plan administrator will contribute an amount equal to a certain
percentage of each participant's salary. A second contribution, called
interest credit, is made as well. These are not actual contributions.
Target Benefit plans are defined contribution plans made to match (or look
like) defined benefit plans. This would only work if all actuarial assumptions
are actually realized.

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UNIT V
Q.12. LAWS RELATING TO WORKMEN’S COMPENSATION
Factories Act, 1948
The Act covers areas including health, welfare, safety, working hours,
annual leave with wages and employment of women and children.
The welfare amenities provided under the Act include:
1. Washing facilities.
2. Facilities for storing and dry clothing.
3. Sitting facilities for occasional rest for workers who are obliged to work
standing.
4. First-aid boxes - one for every 150 workers, and ambulance facilities if
there are more than 500 workers.
5. Canteens if employing more than 250 workers.
6. Shelters, rest rooms and lunch rooms, if employing over 150 workers.
7. Creche, if employing more than 30 women.
8. Welfare officer, if employing more than 500 workers.
Mines Act, 1952
The mine owners should make provisions for:
1. Maintenance of crèches where 50 or more women workers are employed.
2. Shelters for taking food and rest if 150 or more workers are employed.
3. A canteen in mines employing 250 or more workers.
4. Maintenance of first-aid boxes and first-aid rooms in mines employing
more than 150 workers.
5. (i) Pit-head baths equipped with shower baths, (ii) sanitary latrines, and
(iii) lockers, separately for men and women workers.
6. Appointment of welfare officer in mines employing more than 500
persons to look after the matters relating to the welfare of the workers.
Plantation Labour Act, 1951
The following welfare measures are to be provided to the plantation
workers:
1. A canteen in plantations employing 150 or more workers.

29 | P a g e 2.5 – Compensation Management

2. Crèche in plantations employing 50 or more women workers.
3. Recreational facilities for the workers and their children.
4. Educational arrangements in the estate for the children of workers,
where there are 25 workers' children between the age of 6 and 12.
5. Housing facilities for every worker and his family residing on the
plantation. The standards and specifications of the accommodation,
procedure for allotment and rent chargeable from workers etc., are to be
prescribed in the rules by the State Government.
6. Medical aid to workers and their families. The workers are also entitled,
subject to any rules framed by the State Governments, to sickness
allowance and maternity allowance.
7. The State Government may make rules requiring every plantation
employer to provide the workers with prescribed number and type of
umbrellas, blankets, raincoats, or other such amenities for protection
from rain or cold.
8. Appointment of a welfare officer in plantations employing 300 or more
workers.
Motor Transport Workers Act, 1961
The motor transport undertakings are required to make the following
provisions in the areas of health and welfare:
1. Canteens of prescribed standard, if employing 100 or more workers.
2. Clean, ventilated, well-lighted and comfortable rest rooms at every place
where motor transport workers are required to halt at night.
3. Uniforms, raincoats to drivers, conductors and line checkers for
protection against rain and cold. A prescribed amount of washing
allowance is to be given to the above-mentioned categories of staff.
4. Medical facilities are to be provided to the motor transport workers at
the operating centres and at halting station as may be prescribed by the
State Governments.
5. First-aid facilities equipped with the prescribed contents are to be
provided in every transport vehicle.
Contract Labour (Regulation & Abolition) Act, 1970
The contractor is required to provide the following welfare and health
measures to the contract workers:
1. A canteen in every establishment employing 100 or more workers.

2.5 – Compensation Management 30 | P a g e

2. Rest rooms or other suitable alternative accommodation where the
contract labour is required to halt at night in connection with work of
an establishment.
3. Provision for washing facilities.
4. Provision for first-aid box equipped with the prescribed contents.
Canteen
In India, the Factories Act places the responsibility on State Governments
of making rules to ensure provisions of a canteen in any specified factory
with more than 250 workers. Workers should be provided representation in
the management of canteens. The Commission on Labour Welfare has
suggested that canteens should be run on cooperative basis and that
legislation should be amended to empower State Governments to make rules
to meet the objective of nutrition.
Crèches
The Factories Act lays down that in any factory with more than 50 women
workers a crèche should be provided and maintained for children under 6
years in clean and sanitary conditions. The crèche should be under the care
of women trained in child care. The crèche should have adequate
accommodation, should be properly lighted and ventilated. The State
Government is empowered to make rules in respect of standards, equipment
and facilities. Mothers should also be given time to feed their children at
necessary intervals.
Labour Officer
The Factories Act, 1948, provides for the statutory appointment of welfare
officer in a factory in which 500 or more workers are employed. The State
Government may prescribe the duties, qualifications and conditions of
service of officers employed. The functions of a welfare officer include the
broad areas of (i) labour welfare (welfare function), (ii) labour
administration (personnel function), and (iii) labour relations (conciliation
function).

31 | P a g e 2.5 – Compensation Management

Q.13. SOCIAL SECURITY LAWS
Social security programmes are primarily the instrument of social and
economic justice. It is increasingly being accepted as useful and necessary
instruments for the protection and stability of the labour force.
In India over the years, a number of legislative measures have been adopted
to ensure benefits to employees under the scheme of social security.
Some of these important rules and regulations include:
Workmens' Compensation Act, 1923
The Workmens' Compensation Act, 1923 is India's first social security
legislation. Its objectives was to provide injury compensation to industrial
workers. The Act imposes obligation on the employer to pay compensation
for accidents arising out of and in course of employment.
The compensation is related to the extent of the injury of circumstances of
death. However, the employee cannot claim any compensation if he sustains
injuries under the influence of drugs, alcohol, etc. The Act provides for half
the monthly wages. The Act is administered by a Commissioner appointed
by the Government.
If the employer does not pay the compensation within one month from the
date it fell due, the commissioner may order recovery of not only the amount
of arrears but also a simple interest at the rate of six per cent per annum on
the amount due.
Factories Act, 1948
The Act covers areas including health, welfare, safety, working hours,
annual leave with wages and employment of women and children.
The welfare amenities provided under the Act include:
1. Washing facilities.
2. Facilities for storing and dry clothing.
3. Sitting facilities for occasional rest for workers who are obliged to work
standing.
4. First-aid boxes - one for every 150 workers, and ambulance facilities if
there are more than 500 workers.
5. Canteens if employing more than 250 workers.
6. Shelters, rest rooms and lunch rooms, if employing over 150 workers.
7. Creche, if employing more than 30 women.

2.5 – Compensation Management 32 | P a g e

8. Welfare officer, if employing more than 500 workers.
Employees’ State Insurance Act, 1948
The Act covers smaller factories using power and employing 10 or more
persons and those not using power but employing 20 or more people. The
Act has also been extended to the new classes of establishments, shops,
hotels, restaurants, cinemas, theatres, motor transport, building
construction, and newspaper establishments employing 20 or more persons.
It covers all employees, manual, clerical and supervisory and employees
engaged through contractors.
The scheme is financed by contribution from employers and employees, with
the State Governments sharing one-eighth of the cost of medical care. The
employer pays 4.7% of the wage bill and the insured person pays about 2.3%
of his wage.
In order to qualify for the benefit, the worker should have contributed to the
scheme for a minimum period of 12 weeks. The benefits provided under the
scheme include:
(i) Sickness and extended sickness benefit
(ii) Maternity benefit
(iii) Disablement benefit
(iv) Dependent's benefit,
(v) Funeral benefit and
(vi) Medical benefit.
Employees’ Provident Funds and Miscellaneous Act, 1952
The Act was passed in 1952 with the objective of making some provisions
for the future of the industrial worker after he retires, for the dependents in
case of his early death and to cultivate a spirit of saving among the workers.
The Act applies to all factories and other establishments employing 20 or
more workers. The Act extends to the whole of India except Jammu &
Kashmir and the Assam.
Workers in establishments employing 20 persons pay 6.25 per cent of their
earnings and those with a larger strength pay 8 per cent. Employers make
an equal contribution. The Provident Fund is refunded with interest in the
event of death, permanent disability, superannuation, retrenchment,
migration or on leaving service. On retirement, or after 15 years of service
a worker receives his own share and the employer's contribution.
Maternity Benefit Act, 1961
The Maternity Benefit Act, aims to regulate of employment of women
employees in certain establishments for certain periods before and after

33 | P a g e 2.5 – Compensation Management

child birth and provides for maternity and certain other benefits.
The Act extends to the whole of India and is applicable all establishments
not covered under the ESI scheme. Under the Act, a woman can get
maternity leave up to 12 weeks. During the period of leave the employee is
entitled to full wages/salary. The employee is also entitled to a medical
bonus. To avail of the leave and benefits, the employee should have put in
160 working days of service in the 12 months immediately preceding the
date of expected delivery.
Payment of Gratuity Act, 1972
Gratuity is an additional retirement benefit. The Act is applicable to all
establishments in which 10 or more workers are employed. According to the
Act, an employee is entitled to 15 days wages for every continuance in
service. The total gratuity payable shall not exceed more than 20 months
wages. Gratuity is payable on termination of employment after the
completion of at least five years of continuous service. This is relaxable in
the case of death or disablement.

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