Compensation management1

COMPENSATION MANAGEMENT- I
MEANING OF WAGE/ COMPENSATION PAYMENT:
Wage is a monetary payment made by the employer to his employee for
the work done or services rendered. It is a monetary compensation for the
services rendered. A worker may be paid Rs. 100 per day or Rs. 4500 per
month. This is wage payment. The worker gives his services and takes payment
called wage payment. Industrial workers are paid remuneration for their services
in terms of money called wage payment. Wages are usually paid in cash at the
end of one day, one month or one week. Money wage is the monetary
compensation or price paid by the employer to his employee for the services
rendered. Such compensation is also called wage or salary or reward given by
an organisation to a person in return to a work done.
Generally, compensation payable to an employee includes the following
three components:
 Basic compensation for the job (wage/salary)
 Incentive compensation for the employee on job
 Supplementary compensation paid to employees (fringe benefit and
employee services)
IMPORTANCE OF WAGE PAYMENT:

1. To worker:
Wage payment is important to all categories of workers. Wage is a
matter of life and death to workers/employees. Their life, welfare and even social
status depend on wage payment. It is only source of income to large majority of
workers. They and their unions always demand higher wages and other
monetary benefits.
Majority of labour problems and disputes are directly related to wage
payment. The efficiency of workers and their interest and involvement in the work
depend on wage payment. Even their attitude towards employer depends on
wage payment. In brief, wage payment is a matter of greatest importance to
workers. Wage problem is the most pressing and persistent problem before the
entire labour force.

2. To employer:
Wage payment is equally important to employers as their profit depend
on the total wage bill. An employer in general is interested in paying low wages
and thereby controls the cost of production. However, low wages are not
necessarily economical. In fact they may prove to be too costly to the employer
in the long run. E.g. In garment manufacturing company if tailors are not paid
properly then it is difficult for the company to retain them. An employer has a
moral and social responsibility to pay fair wages to his worker as they are equal
partners in the production process. He should give fair wages which will benefit
to both the parties. Employees will offer full co-operation to the management
when they are paid attractive wages. On the other hand, strikes and disputes are
likely to develop when workers are paid low wages or when they are dissatisfied
and angry due to low wage rates. It is possible to earn more profit by paying
attractive wages to workers. E.g. Reliance, Citi Bank, Motorola are earned huge
profits because of their higher pay packages.

3. To government:
Government also give special importance and attention to wages paid
to industrial workers as industrial development, productivity, industrial peace and
cordial labour- management relation depend on the wage payment to workers.
Government desires to give protection to the working class and for this minimum
wages act and other Acts are made. In India, wages are now link with the cost of
living. This is for the protection of workers. Government is the biggest employer
in India and the wage rates of government servant and employees of public
sector organisations are decided by government only. Revision of pay scale of
government employees made for adjusting their wages as per the cost of living.
For this, “Pay Commission” is appointed and pay scale is adjusted as per the
recommendations made.
In India, wage payment is very critical, controversial and delicate issue
for all categories of work force. This is due to poverty, rising prices, mass
unemployment and rising population. Wage payment indeed a vexatious
problem and needs to be tackled from economic, social and humanistic angles.

CONCEPT OF FAIR WAGES:
Fair wages is the wage which is above the minimum wage but below the
living wage. Obviously the lower limit of the fair wage is the minimum wage and
the upper limit is set by the ability of the industry to pay. Between these two
limits, fair wages should depend on the factors like –
1. Prevailing rates of wages in the same occupation
2. Prevailing rates of wages in the same region or neighbouring areas
3. Employers ability to pay
4. Level of national income and its distribution
5. Productivity of labour
6. Status enjoyed by the industry in the economy
Hence it can be said that fair wages are determined on industry cum
region basis. When fair wages are paid employees enjoy higher standard of
living. It is accepted fact that wages must be fair and reasonable. Wages is fair
when the employee is able to meet its essential needs and enjoy reasonable
standard of living. ”Equal pay for equal work” serves as base of fair wage.
According to Encyclopaedia of social science,”Fair wages are equal to
those received by the workers performing work of equal skill, difficulty or
unpleasantness.”

Factors Influencing Wage And Salary Structure
•

The organization’s ability to pay:
Wage increases should be given by those organizations which can afford
them. Companies that have good sales and therefore high profits tend to pay
higher wages than those which are running at a loss or earning low profits
because of the high cost of production or low sales.

•

Supply and demand of labour:
If the demand and certain skills are high and the supply is low the result is
rise in the price to be paid for these skills. The other alternative is to pay
higher wages if the labour supply is scarce and lower wages when it is
excessive.

•

The cost of living:

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 with this argument as a
reason for wage reduction.
•

The living wage:
Employers feel that the level of living prescribed in workers budget is opened
to argument since it is based on subjective opinion.

•

Job requirements:
Jobs are graded according to the relative skill responsibility and job conditions
required.

•

Trade unions bargaining power:
Trade unions do affect the rate of wages. Generally the stronger and more
powerful trade union, higher the wages.

•

Productivity:
Productivity is another criterion and is measured in terms of output man-hour.
It is not due to labour efforts alone. Technological improvements, greater
ingenuity and skill by the labour are all responsible for the increase in
productivity.

•

Prevailing market rate:
This is also known as ‘comparable wages’ or ’going wage rate’. Reason
behind this is competition demand that competitors adhere to the same
relative wage level.

•

Skill levels available in the market:
With the rapid growth of industries, business trade there is shortage of skilled
resources. The technological development, automation has been affecting the
skilled levels at a faster rate.

•

Psychological and social factors:
This determine in a significant measure how hard a person will work for the
compensation received or what pressures he will exert to get his
compensation increased.

Components Of Employee Remuneration
The remuneration packet of an employee includes wage/salary, incentives,
fringe
benefits,
perquisites
and
finally
non-monetary
benefits.
This is made clear in the following chart:

Remuneration Packet of an employee

Wage/ Salary

Incentives

Fringe benefits

Perquisites

Non-monetary
benefits

Total
compensation
payable

1. Wages and salary:
Wages represent hourly rates of pay, and salary refers to the monthly rate
of pay, irrespective of the number of hours put in by the employee. Wages
and salaries are subject to the annual increments. They differ from
employee to employee, and depend upon the nature of job, seniority, and
merit.
2. Incentives:
Incentives are paid in addition to wages and salaries and are also called
‘payments by results’. Incentives depend upon productivity, sales, profit, or
cost reduction efforts.
There are: (a) Individual incentive schemes, and (b) Group incentive
programmes. Individual incentives are applicable to specific employee
performance. Where a given task demands group efforts for completion,
incentives are paid to the group as a whole. The amount is later divided
among group members on an equitable basis.
3. Fringe benefits:
These are monetary benefits provided to employees. They include the
benefit of: (a) Provident fund, (b) Gratuity, (c) Medical care, (d)
Hospitalization payment, (e) Accident relief, (f) Health and Group insurance,

(g) Subsidized canteen facilities, (h) Recreational facilities, and (i) Provision
of uniforms to employees.
4. Perquisites:
There are special benefits offered to managers/executives. The purpose is
to retain competent executives. Perquisites include the following: (a)
Company car for traveling, (b) Club membership, (c) Paid holidays, (d)
Furnished house or accommodation, (e) Stock option schemes, etc.
5. Non-monetary benefits:
These benefits give psychological satisfaction to employees even when
financial benefit is not available. Such benefits are: (a) Recognition of merit
through certificate, etc. (b) Offering challenging job responsibilities, (c)
Promoting growth prospects, (d) Comfortable working conditions, (e)
Competent supervision, and (f) Job sharing and flexi-time.

SYSTEMS OF WAGE PAYMENT
A)
B)

TIME RATE SYSTEM
PIECE RATE SYSTEM

Time rate system:
It is the oldest and simplest method of wage payment used extensively in
the industrial as well as government departments. Wages are paid as per the
time spent by the workers in the factory. The production given by them is not
taken into consideration. The employer buys the hours of the workers and pays
them accordingly. Time rate system is also called as day wage system. In the
time rate system, efficiency, sincerity, ability is not given attention and all the
workers are paid at one and the same rate as per the period spent in the factory.
ADVANTAGES OF TIME RATE SYSTEM:
1)

Easy and simple: Time rate is easy to understand and simple to follow and
calculate. Wage calculations are also easy and quick. Each worker knows how
much wage payment he is entitled to at the end of the month. This gives
convenience to employer and employees.

2)

Guarantee of minimum wage: It gives the guarantee of certain minimum
wage payment to every worker irrespective of their working capacity. Workers get
a regular and stable income and this gives a sense of security to all workers as
regards wage payment.

3)

Maintains quality of production:
Quality of production is maintained here
as the workers are not in a hurry to complete the work. They do not rush the job

and spoil the quality because of the temptation to earn more. Workers tend to
work slowly and with care. Even accidents are less as workers use the machines
in a careful manner.
4)

Support from trade unions: Workers and trade unions accept and support
time rate system as all workers are placed in one category as regards wage
payment. This ensures unity among workers. Trade unions normally prefer time
rate system of wage payment.

5)

Avoids quarrels among workers: Time rate avoids heart burning and
quarrels among the workers as uniform wages are paid to all. Here efficiency,
honesty and sincerity of workers are not given any special weightage. Wage rate
is the same for sincere and lazy workers.

6)

Convenient in modern factory system: Time rate payment is convenient in
modern factory system where production process is continuous and integrated. It
is not possible to measure the work completed by one individual worker and
hence time rate system is convenient.
DISADVANTAGES OF TIME RATE SYSTEM:

1)

Not scientific: Time rate is not scientific system of wage payment as there is
no direct linking between wages and production/productivity. Wages bill may
increase without corresponding increase in the production. This will bring loss to
the employer / management.
2) Absence of positive encouragement: In the time rate system, there is no
positive encouragement to workers to improve their efficiency/ performance as
the wage rate is uniform to all workers; efficient and inefficient.

3)

No distinction between workers: In the time rate system no distinction is
made between efficient and lazy workers, both are paid at one rate which is
unfair. This system gives punishment to sincere and efficient workers. They are
discouraged as they are paid less than what they deserve. They may even leave
the job.

4)

No initiative to workers: Time rate fails to encourage workers to take more
interest and initiative in their work. In fact, it encourages them to follow “go slow”
policy. This is because wage payment is not linked with the production given.

5)

Labour cost may increase: In the time rate system, there is a possibility of
increase in the labour cost without corresponding increase in the production.
Workers may work with slow speed, give less production but collect the wage as
per time or day fixed.

6)

Strict supervision: In the time rate strict supervision on the workers is
essential as payment is for period and not production. This raises the
expenditure on supervision.

7)

No effect on productivity/ efficiency: Time rate fails to raise productivity and
efficiency of labour force. It is not an incentive system of wage payment.

Piece rate system:
This is another basic system of wage payment. It is just opposite to the
time rate. It is also treated as an incentive wage system as it encourages workers
to produce more and also to earn more. In the piece rate system, wages are paid
as per the output or production given by the worker and not as per the time spent
by the worker in the factory. Payment is by results in terms of output given. Wage
rate is fixed per piece of work or for certain quantity of production. The production
given by a worker at the end of the day is counted and payment is made
accordingly.
MERITS/ ADVANTAGES OF PIECE RATE SYSTEM:
1) Linking of wages with production: Here wages are linked with production or
productivity. It raises the productivity of labour. Workers work with speed and use
their capacity fully as the wage payment is
directly related to the quantity of
production given by a worker.
2) Distinction is made between efficient and inefficient workers: Distinction is
made between efficient and inefficient worker and full justice is done to efficient
worker as he gets payment in proportion to the production given. Efficient
workers support the piece rate system but it is not preferred by unskilled and
inefficient workers. They get less payment under this method as their capacity to
produce is less.
3) Encourages workers to take initiative in the work: Piece rate system
encourages workers to take more interest and initiative in the work as every
worker gets full reward of his efforts. There is direct efforts-reward relationship in
the piece rate system.
4) Fair to employer and employees: This system is fair to employers as well as
employees. The employees get income in proportion to production given by them
and the employer gets production in proportion to the wage paid.
5) Incentive system: This system serves as the incentive system. Workers work
efficiently and take interest in the work due to corresponding benefit/ reward in
the form of higher wage payment.

6) Limited supervision adequate: In this system strict supervision on the workers
is not necessary as workers work sincerely. This is because their wage payment
is directly linked with their sincerity and ability.
7) Freedom of work to workers: Workers get more freedom of work and there is
effective control on the cost of production in the piece rate system.
8) Brings cordial relations: Piece rate brings cordial labour- management
relations and industrial peace.
DEMERITS/LIMITATION OF PIECE RATE SYSTEM
1) No guarantee of minimum wage payment: There is no guarantee of certain
minimum wage payment to a worker. This may prove to be dangerous
particularly to a newly recruited worker and workers who are below average
2) Workers suffer even when they are not at fault: Sometimes workers suffer
in wage payment even when they are not fault. Due to power failure, etc they
may not be able to give production and naturally they will not be eligible for wage
payment even when they remain present in the factory for the whole day.
3) Complicated system: Piece rate system is complicated and difficult as it is
difficult to understand by ordinary workers. Management will have to keep
elaborate records of production given by each worker. Workers also make
complaints as regards wage payment when they feel that due payment is not
made to them.
4) Disturbs unity of workers: Piece rate affects the unity among workers as wage
payment will not be uniform to all workers. This will lead to quarrel among
workers. Trade unions oppose piece rate system on the ground that it will lead to
rivalry among workers and destroy unity among them.
5) Not fair to trainees: Piece rate system is not fair to trainees, as their capacity to
produce is less and naturally they will get less wages.
6) Quality of production is adversely affected: It affects the quality of production
as workers may work with speed and this may bring down the quality of
production. In addition the wastages and spoiled work are likely to increase due
to haste on the part of the workers to labour hard and over strain themselves in
order to earn more. This affects the health of workers.
TIME RATE V/S PIECE RATE SYSTEMS
Meaning:
Wages are paid as per the time spent

Wages are paid as per the output or

by workers.
Old/new system:
Oldest and simplest method of wage
payment.
Guarantee of wages:
Gives guarantee of certain minimum
wage payment to every worker.
Support:
Employees and trade unions support
time rate system.
Understanding of system :
Easy to understand and simple to
administer.
Distinction between workers:
Distinction is not made between
efficient and inefficient workers as all
are paid at one and same rate.

production given by workers.
Modern and incentive system of wage
system.
Fails to give guarantee of minimum wage
payment to every worker.
Employers and efficient workers prefer
piece rate system.
Complicated system as various recorded
and registers are required to be
maintained
Distinction is made between efficient and
inefficient workers. Efficient worker is
paid more while an inefficient worker is
paid less.

Effect on production:
Encourages workers to follow go-slow Encourages workers to take more interest
policy and naturally production suffers. in the work and naturally production
increases.
Quality of production:
Quality, workmanship of production are Quality, workmanship of production may
not affected, raw materials, machinery suffer. Increase in spoiled work and
are utilised properly. The spoiled work wastage of raw materials.
is also negligible.
Supervision:
Strict supervision is necessary as
Strict supervision is not necessary as
workers are paid as per the period
workers are paid in proportion to the
spent.
production given.
Suitability:
Suitable to manufacturing units, also
Suitable when contribution of individual
suitable when individual contribution is worker is measurable and work is
not easily measurable.
standardised and repitive in character.

INCENTIVE SYSTEMS OF WAGE PAYMENT
The wage plan should be highly incentive means it should encourage workers to
take more initiative and interest in the work, produce more and also earn more.
The wage plan which serves all these purposes is called incentive wage plan.
Such an incentive plan is beneficial to both - employers and employees as well
as it is useful for the rapid industrial growth.

Incentives include monetary as weft as non-monetary benefits offered. There is
motivation to work hard and to earn more. In every incentive plan, wages are
linked with the given output. Incentives are not fixed like wages and salaries.
They vary from individual to individual and from period to period.
ILO defines incentives as "payment by results". Incentives can also be described
as "incentive systems of payment".
According to Dale Yoder, “Incentive wages relate earnings to productivity and
may use premiums, bonuses, or a variety of rates to compensate for superior
performance” Piece rate system is the oldest incentive wage plan which is also
useful for attracting and retaining qualified personnel in the organisation and for
motivating personnel to higher levels of performance. In many incentive plans, a
combination of time rate and piece rate systems is used. Such combination
creates an ideal incentive plan.
TYPES OF INCENTIVE PLANS:
There are two types of incentive plans:
(a) Individual incentive plans, and
(b) Group incentive plans.
Individual incentive plan is meant for individual employees. He has to work hard
i.e. efficiently, produce more and share the monetary benefits for himself. The
benefit is directly linked with his ability, efficiency and capacity.
In the group incentive plan, the incentive is not for individual employee but for the
group of employees working in one department or section. Such group incentive
plan may cover the entire labour force of a production unit. The group will work
collectively, give more production and share the benefit. Initially the benefit will be
given to the group and thereafter, it will be divided among the members of the
group.
Management is interested in group incentive plan while employees are interested
in individual incentive plans. Production activities are now conducted in an
integrated manner and naturally incentives should be offered to the employees.
Group incentive plans are better as they encourage team spirit and develop
cooperation and understanding among the employees. This avoids wastages and
promotes productivity.
FEATURES/REQUISITES OF A GOOD INCENTIVE PLAN:
Simplicity:
A good incentive plan is one which is easy to understand and simple to
operate. An average worker must be able to know the incentive offered and what

he is expected to do. The monetary as well as non-monetary benefits offered
must be made clear to all workers.
Encourage initiative:
A good incentive plan should create initiative among workers to work
more and to earn more. It must offer more income to workers and more
profit/production to the firm or company.
Definiteness and flexibility:
A good incentive plan should be definite. This means frequent changes
should not be made as regard rates, etc. as such changes create confusion and
doubts in the minds of workers. Such plan must give clear benefits to workers
In addition, an ideal incentive plan should be flexible. It should take care
of technological and other changes taking place from time-to-time. There should
be suitable provision for such adjustment. Flexibility makes incentive plan
adaptable.
Wide coverage and equitable:
A good incentive plan should not be for employees in certain departments
only. It should have a wide coverage and almost all employees should be
covered in such plan. Such wide coverage makes the plan popular at all levels
and among all categories of workers.
An incentive plan should be equitable. This means it should provide equal
opportunity to all employees to show efficiency and earn more. This avoids
dissatisfaction among employees and makes the plan just and fair to all
employees.
Guarantee of minimum wage payment:
An incentive wage plan should include certain minimum wage payment to
every worker per month. This should be irrespective of the production he gives.
Such provision of guarantee payments creates a sense of security and
confidence among workers.
Scientific fixation of standard workload:
Under the incentive plan, extra payment is given for the extra work i.e.
work which is over and above certain quality. Such standard work-load must be
clear, specific and fixed with scientific time studies so that majority of employees
will be able to give extra production for extra payment.
Justice to employer and employees:
A good incentive plan should do justice to both parties. The employer
must get additional production along with extra profit and the workers must get
extra payment for extra production.

PROFIT-SHARING
Profit-sharing is regarded as a steppingstone to industrial democracy.
Prof. Seager observes: "Profit-sharing is an agreement by which employees
receive a share, fixed in advance of the profits."
Profit-sharing usually involves the determination of an organisation's profit
at the end of the fiscal year and the distribution of a percentage of the profits to
the workers qualified to share in the earnings. The percentage to be shared by
the workers is often predetermined at the beginning of the work period and IS
often communicated to the workers so that they have some knowledge of their
potential gains. To enable the workers to participate in profit-sharing, they are
required to work for certain number of years and develop some seniority. The
theory behind profit-sharing is that management feels its workers will fulfill their
responsibilities more diligently if they realise that their efforts may result in higher
profits, which will be returned to the workers through profit-sharing.
FEATURES OF PROFIT-SHARING:
The main features of the profit-sharing schemes are:
(a)
(b)
(c)
(d)
(e)
(f)

The agreement is voluntary and based on joint consultation made
freely between the employers and the employees.
The payment may be in form of cash, stock of future credits of
some amount over and above the normal remuneration that
would otherwise be paid to employees in a given situation.
The employees should have some minimum qualifications, such
as tenure or satisfy some other conditions of the service which
may be determined by the management.
The amount to be distributed among the participants is computed
on the basis of some agreed formula, which is to be applied in
all circumstances.
The amount to be distributed depends on the price earned by the
enterprise.
The proportion of the profits distributed among the employees is
determined in advance.

Objectives of Profit-sharing:
1) To supplement the regular earning of the workers,

2) To create a sense of partnership among the workers and the
management,
3) To enable the workers to participate in the prosperity of their company,
4) To develop cordial labour-management relations and to improve employee
morale.
5) To introduce incentive wage plan
6) To raise productive efficiency by reducing costs and increasing output
7) To reduce labour turnover and to improve public relations.
8) To provide for employee security in the event of death, retirement or
disability
ADVANTAGES OF PROFIT-SHARING:
1) Extra income to workers: Workers get extra cash payment due to profitsharing arrangement. This money is useful for raising their welfare. Workers
can purchase costly consumer durables out of this money available at one
time. Thus, profit-sharing provides better life and welfare to workers. It
creates contended labour force with higher standard of living. Profit-sharing
plan acts as a good supplement to regular wages paid to employees. In fact,
profit-sharing is aptly described as a form of added remuneration.
2) Workers take more initiative and interest in the work: Due to profitsharing arrangement, workers/ employees take more interest in the work.
This develops team spirit among the employees because their share in the
profit depends on their collective initiative, efforts and hard work. In this
sense, profit-sharing is useful for motivating employees. It encourages
employees to be regular, stable and efficient as the benefits of these
elements are offered to them through profit-sharing. Here, efforts and
reward are directly and proportionately linked. This encourages employees
to take keen interest in the work and develops team spirit.
Profit-sharing acts not only as supplement to regular wages (i.e. as an
incentive wage plan) but also as a motivating factor to all employees. It
creates common objective before employer and employees and diverts their
energies for achieving one common objective.
3) Increase in production and productivity: Profit- sharing acts as a
driving force for more production and productivity. It motivates workers for
raising production as they get direct and immediate benefit of additional
efforts on their part. The benefits of increase in production are available to
employer and employees.
4) Fair to employer and employees: Profit-sharing gives mere
remuneration to workers along with more profit to employer. Employer pays
a part of profit to workers but he is not adversely affected as profit is paid

only when it exceeds a particular limit agreed by both the parties. This
arrangement is, certainly fair to both parties. There is an element of social
justice in it.
5) Ensures cordial industrial relations: Profit-sharing creates cordial
labour-management relations. It. reduces industrial disputes, strikes and
lock-outs. This is because both have common objective and both are likely to
suffer due to industrial disputes, strikes and lock-outs. Thus, profit-sharing
reduces industrial disputes and leads to friendly relations between employer
and employees. It certainly acts as a tool for reducing industrial disputes and
also for creating industrial peace.
Thus, profit-sharing agreement encourages workers to work efficiently and
also avoid dispute and quarrels with the employer. It acts as a natural and
self-imposed check on industrial disputes. Profit-sharing creates team spirit in
the higher cadres of management as well as in the rank and file of workers.
6) Less supervision required: Profit-sharing reduces the expenditure on
supervision of workers as they take interest in the work on their own.
Moreover, wastage of' materials, volume of spoiled work, etc. are also
reduced.
7) Stability to labour force: Profit-sharing brings stability to labour force as
the benefit of profit-sharing is usually given only to those who work in the
company for the whole year. Thus, profit-sharing brings down the rate of
labour turnover and this gives benefit to the employer/ management.
8) Promotes social justice: Profit-sharing is a method of social justice. It is
a method by which workers are given the reward of their hard work and also
allowed to participate in the progress and prosperity of their company. Profitsharing introduces industrial democracy as workers are treated not only as
wage earners but also as partners for sharing the profits of the company.
DISADVANTAGES OF PROFIT-SHARING:
1) Uncertainty: There is high degree of uncertainty in the profit-sharing
scheme/plan. Profit-sharing is uncertain because it will be paid only when the
profit exceeds a particular limit. The profit may not cross a particular limit due
to market forces and the workers will suffer. Thus, profit-sharing does not
give full guarantee of extra payment to workers. It acts like a fair weather
plan.
2) Unfair to efficient workers: Profit-sharing is a group incentive plan. It
gives equal benefit to all workers. Distinction is not made between good and

bad workers. As a result sincere and efficient workers get less than what they
deserve while insincere and inefficient get more than what they deserve.
3) Opposition from trade unions: Trade unions and workers feel that
bonus payment is better than profit:-sharing. They generally oppose to
profit-sharing and demand bonus from the employer as it is a cheap
alternative to profit-sharing.
4) Disputes on calculation of net profit: In profit-sharing, the net profit is
to be calculated at the end of the financial year. There is a possibility of
difficulties as regards the calculation of the net profit. The employer may like
to manipulate the accounts and show less profit while workers may
calculate it as high. Such quarrel affects both the parties as it leads to
dispute and delay in payment. In brief, ascertaining net profits is one
sensitive problem in profit-sharing.
5) Adverse effects on labour-management relations: Sometimes,
relations between labour and management are adversely affected on the
point of profit-sharing agreement. This defeats the very purpose of profitsharing. Disputes are possible as regards the profit-sharing agreement
itself.
6) Not useful during depression: Profit-sharing as a method of extra
remuneration to workers can be used during the period of prosperity when
profits are high. It cannot be used during the years of depression. Even
newly established companies are not in a position to introduce profit-sharing
scheme for their employees.
7) Opposition from conservative employers: The concept of profitsharing is not fully acceptable to conservative employers. They feel that
profit is the reward for the risks and uncertainties. They also argue that
workers must be prepared to share profit as well as loss in the business.

COMPENSATION MANAGEMENT II
MEANING OF FRINGE BENEFITS:
Fringe benefits may be defined as wide range of benefits and services that
employees receive as an integral part of their total compensation package. They
are based on critical job factors and performance. Fringe benefits constitute
indirect compensation as they are usually extended as a condition of
employment and not directly related to performance of concerned employee.
Fringe benefits are supplements to regular wages received by the workers at a
cost of employers. They include benefits such as paid vacation, pension, health
and insurance plans, etc. Such benefits are computable in terms of money and
the amount of benefit is generally not predetermined.

The purpose of fringe benefits is to retain efficient and capable people in the
organisation over a long period. They foster loyalty and acts as a security base
for the employees.
FEATURES OF FRINGE BENEFITS:
•

Different from regular wages : Fringe benefits are different from regular
wages as such benefits are those payments, which an employee enjoys in
addition to wages he receives. It is a supplementary payment and
provides support to an employee.

•

Employee motivation: Fringe benefits are not given to employees for
performing certain jobs. The purpose is to encourage them to take more
interest in the assigned work.

•

Useful but avoidable expenditure: Fringe benefits constitute a labour cost
for the employer.

•

Not directly linked with efforts: Fringe benefits are not direct reward for the
efforts made or the production given by an employee.

•

Beneficial to all employees : Fringe benefits are a labour cost but its
benefits should be made available to the entire labour force and not to a
small group of employees.

OBJECTIVES OF FRINGE BENEFITS:
• To supplement direct remuneration : Fringe benefits supplement regular
pay of employed. It raises the total earnings of an employee and provides
better life and welfare to him.
• Employers prefer fringe benefits: employers prefer this indirect
remuneration to direct pay increase.
• To retain competent employees: Fringe benefits create satisfied labour
force. In addition, the management can attract and retain competent
personnel in the organisation by offering liberal packet of fringe benefits.
• To develop good corporate image: Fringe benefits help to develop a good
corporate image.
• To raise employee morale: Liberal package of Fringe raises the morale of
employees.
LIMITATIONS OF FRINGE BENEFITS:
There are some limitations of Fringe Benefits. These are:

•
•
•

Fringe Benefits may lead to unhealthy competition among employees
The expected benefit may not be available if the monetary benefits are
not adequately attractive to employees.
The motivation may not be as per expectation if the implementation of
the benefits scheme is not transparent.

ADVANTAGES OF FRINGE BENEFITS
There are certain advantages of Fringe benefits. These are:
• Fringe benefits provide support to remuneration paid to employees.
• Fringe benefits improve efficiency and productivity of employees.
• Fringe benefits act as an added attraction to the employees.
• Fringe benefits reduce monotony and fatigue of employees. They make
employees efficient and co-operative for whatever organisational changes
required to be introduced.
• Fringe benefits raise morale of the employees. They develop affinity for
the organisation.
• Fringe benefits develop good corporate image and raise market standing
of the organisation.
• Fringe benefits act as a motivating force. They motivate employees and
induce them to work for the progress and prosperity of the organisation.

TYPES OF FRINGES/ FRINGE BENEFITS:
(1) Payment for time not worked by the employee:
• Holidays.
• Vacations.
• Leave with pay and allowances.
(2) Contingent and deferred benefits:
• Pension payment.
• Group life insurance benefit.
• Group health insurance.
• Sick leave, maternity leave, child care leave, etc.
• Suggestion/service award
• Severance pay.
(3) Legally required payments:
• Old age, disability and health insurance
• Unemployment compensation
• Worker's compensation.
(4) Misc. benefits:
• Travel allowances.

•
•
•
•

Company car and membership of clubs, etc
Moving expenses.
Child care facilities.
Tool expenses and meal allowances, etc

JOB EVALUATION
DEFINITION:
According to Edwin b. Flippo, “Job evaluation is a systematic and orderly
process of determining the worth of job in relation to other jobs”.
Job evaluation means determining the relative worth of a job in an organization
by comparing it with other jobs within an organization and with job market outside
jobs are evaluated on the basis of their content and are placed in the order of
their importance. In this way, job evaluation helps in establishing job hierarchy. It
is a process by which jobs in an organization are appraised. It suggests
comparative importance of different jobs. A wage structure hierarchy is based on
such job evaluation.
In job evaluation the jobs are ranked on the basis of their relative importance and
not the job holders. They are rated through performance appraisal. Job
evaluation is the output provided through job analysis.
Features:
1. It determines the relative worth of jobs in an organization. Jobs are evaluated
as per their content and place in the order of their importance.
2. It is based on the analysis of the facts about the job collected through job
analysis.
3. It helps to bring a balanced wage structure in an organization. This is possible
as job hierarchy is established. The purpose is fixation of satisfactory wage
differentials among various jobs.
Objectives:
1. To establish by impartial judgement the logical and accurate relationship
of each job to other jobs within the firm.
2. To establish satisfactory wage and salary differentials.
3. To select employees more accurately and train, promote or transfer them
within the firm objectively and impartially.
4. To provide them information for work organization, employees selection,
placement and other similar problems.

5. To promote employee goodwill, strengthen and maintain morale and
loyalty and provide an incentive for efficiency.
6. To determine the rate of pay for each job that is fair and equitable in
relation to other jobs in the plant.
Advantages / Importance:
1. Job evaluation clearly indicates the relative worth of different jobs in the
organization.
2. It establishes a hierarchy of jobs and evolves a graduated wage scale for
employees.
3. It is useful for introducing a satisfactory, rational and balanced wage
structure in an organization. It is also useful for simplifying wage
administration.
4. It promotes employees goodwill, strengthens and maintains high morale
and loyalty of workers and also provides incentives for raising efficiency.
5. It provides a scientific base for promotions and transfers of workers in an
organization.
6. It avoids injustice to workers as regards wage payment, promotions and
transfers.
7. It simplifies wage administration and facilitates merit rating and training
programmes for employees.
8. It removes grievances and disputes among employees over relative
wages and makes the wage system acceptable to all employees.
Methods of job evaluation:
1. The Ranking or grading method:
This method is considered to be the simplest and the last formal of all the
job evaluation methods. Here the aim is to judge the job as a whole and
determine its relative value by ranking one whole job as against another whole
job. Under this method, the jobs are arranged in order to their importance with
the most important job at the highest end and the least important job at the
lowest end. The remaining jobs are arranged as per their relative importance
through suitable evaluation techniques. The ranking is conducted through a
committee of experts’ job raters. The committee is supplied with the necessary
information (job description and job specification) for the ranking of available
jobs. The ranking is done at the departmental level and for every department, the
jobs are ranked I order of importance. This creates a hierarchy of jobs within the
department. In this method which is non analytical, the ranking of jobs is based
on the nature and importance of the job, responsibilities involved, qualities and
qualifications required and the working conditions connected with the job.

Advantages:
1. Simplicity - it is easily understood to all the concerned and also to operate/
administer.
2. It is inexpensive.
3. It can be used conveniently in small establishments.
Disadvantages:
1. It does not indicate the degree of difference between the jobs. It merely
shows that one job is more or less important than other job.
2. In most cases, the rankings are not based on job description but on the
rater’s general knowledge of the jobs.
3. It is complex for a large firm with a complex organization structure.
2. The factor comparison or weight in money method:
It is an analytical method. The rating process consists of delineation of
common key factors of different jobs and assessment of monetary values
thereto with a view to assessing their relative worth on the basis of sum total of
the monetary values. Job description provides the data required for indicating
the major job elements or factors found in greater or lesser degree in the
activities of the entire enterprise.
It is a qualitative method of job rating involving complicated procedure.
As a result, the services of experts are required for actual job rating.
This method begins by selecting the crucial or critical components or
elements characterizing the business operations of the firm. In other words, a
schedule of job factors is drawn up by careful analysis of the operations.
The factors under this method are:
1. Mental requirements
2. Skill requirements
3. Physical requirements
4. Responsibility range
5. Working conditions.
After the key elements are selected for analyzing the jobs, the weights
are applied tot job elements. Assessment of weights is done by an expert
committee. As per such weights, the jobs are ranked. A monetary value is
assigned to each factor of all jobs. All these values of individual jobs are
weighted and then the total value of each job is arrived at or is readily available.
Advantages:
1. It is more accurate and systematic than the simple ranking method. The
dissimilar jobs can be rated on the basis of common factors.
2. The services of experts are used and this makes the system realistic and
accurate.
Disadvantages:

1. It is complicated, expensive, laborious and not easily explainable to
employees.
2. Application of weightages and monetary values may involve the bias of
experts.
3. This method is difficult to install and is not used extensively.
3. The point rating method:
This method is one popular and extensively used method of job
evaluation. In this method, each job is evaluated separately, appraising each of
the factors such as skill, effort, responsibility and working conditions and
combining the separate evaluations into a single point score for each job.
In this method a series of rating scales is constructed one for each of the factors
which have been selected as important in the work of the position. A certain
number of points are allowed for each scale. In this way, differences among jobs
are reflected in the different values which are assigned to the factors. By the use
of point rating method, each job is reduced to a numerical value so that similarity
and differences in work and difficulty are discovered.
The straight point system in which each factor has the same number of degrees
and corresponding points is indicated in the following chart:
FACTORS

EDUCATION
EXPERIENCE
PHYSICAL DEMAND
RESPONSIBILITY FOR PROCESS
RESPONSIBILITY FOR SAFETY
RESPONSIBILITY FOR MATERIALS
WORKING CONDITIONS
HAZARDS

DEGREES
1
2

10
10
10
10
10
10
10
10

20
20
20
20
20
20
20
20

3

4

5

30
30
30
30
30
30
30
30

40
40
40
40
40
40
40
40

50
50
50
50
50
50
50
50

The weighted point system the number of degrees is shown in the chart given
below:
FACTORS
EDUCATION
EXPERIENCE
PHYSICAL DEMAND
RESPONSIBILITY FOR PROCESS
RESPONSIBILITY FOR SAFETY

DEGREES
1
2
10
20
30
60
20
40
10
20
5
10

3
30
90
60
30
15

4
40
120
80
40
20

5
50
150
100
60
25

RESPONSIBILITY FOR MATERIALS
WORKING CONDITIONS
HAZARDS

10
10
5

20
20
10

30
30
15

40
40
20

50
50
25

Advantages:
1. This method is analytical in its approach.
2. It gives a quantitative value for each job. This makes it easy to explain to a
worker who has some doubt in his mind about the absolute and relative
wages fixed for his job.
3. The outstanding feature of this method is the use of a manual. Basis and
guidelines of valuation are standardized by experts and are codified in this
manual.
Limitations:
1. This method may suffer from inequities if listing and weighting of points
are defective due to indifference on the part of rater.
2. The manual used for ranking the jobs needs periodical revision. If not
revised it may become outmoded and evaluation based thereon would be
out of tune with the changed trends.
3. It is difficult for application and may prove to be unintelligible to the
workers.

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