Final-Varda-Compensation-and-Benefits-MMS-HR-Sem-III-1-munotes

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1 1
HUMAN RESOURCES PHILOSOPHY AND
APPROACH FOR AN ORGANIZATION
Unit Structure
1.0 Objectives
1.1 Human Resource Management
1.1.1 Introduction
1.1.2 Definition
1.1.3 Conceptual Framework
1.1.4 Nature of Human Resource Management
1.2 Human Resources Philos ophy
1.2.1 Overview
1.2.2 Approaches to Human Resource Philosophies
1.2.3 Factors Influencing HR Philosophies
1.3 Human Resources Approaches
1.4 Summary
1.5 Self Assessment Test
1.0 OBJECTIVES After studying this module, you should be able to:
 Understan d the nature and relevance of HRM
 Importance of HRM
 Changing Philosophies of HRM
 Various Approaches to HRM
 Relevance of these Philosophies and Approaches for an Organization
1.1 HUMAN RESOURCE MANAGEMENT 1.1.1 Introduction:
Human resource management deals with the overall functions of
procuring, hiring, training, motivating and maintaining the human
resources of the organization. The operative functions of HRM includes
procurement, development, compensation, motivation, maintenance and
integration and emerg ing trends. The management functions of human
resource management includes planning, organizing, directing and
controlling.
Human resource management also deals with the management of change.
Though, management of change is a pure management concept. When a munotes.in

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Compensation and Benefits
2 manager plans for change, communicate the need of change to the people,
assure them about the positive aspects of change and implement the same
with the support of the people. This process is called change management.
It is like managing those things wh ich are inevitable, consistent and create
fear in the mind of the people. The concept of change management plays a
vital role in any organization. The task of managing change is not an easy
task.
Manpower planning is also an integral part of human resourc e
management. It deals with the difference between acquired people and
required people. Effective manpower planning helps an organization to
achieve goals and objectives. No product or service can be produced
without manpower.
Out of the resources of manag ement, man is the living and the most
important resource of the organization. The main objective of human
resource management is to manage the people at the workplace. From
their acquisition to their exit, the subject matter of human resource
management de als with the overall functions related to the people of the
organization.
1.1.2 Definition:
The concept of Human Resource Management is concerned with hiring,
promoting, maintaining and controlling the human resource of the
organization. Different authors have given different definitions of the term
-Human Resource Management‖. Some of the important definitions are
given below -
According to Edwin B. Flippo, “The personnel function is concerned with
the procurement, development, compensation, integration and
maintenance of the personnel of an organization for the purpose of
contributing toward the accomplishment of that organization„s major goals
or objectives.”
According to the American Society for Personnel Administration,
“Personnel administration is the art of acquiring, developing and
maintaining a component work force in such a manner as to accomplish
maximum efficiency and economy in the functions and objectives of the
organization. ”
In the words of Dale Yoder, “Manpower management effectively
describ es the process of planning and directing the application,
development and utilization of human resources in employment.”
According to the Indian Institute of Personnel Management, “Personnel
Management is the part of the management function which is primar ily
concerned with human relationships within an organization. Its objective
is the maintenance of those relationships on a basis which, by considering
the well -being of Human Resource Management.” munotes.in

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Human Resources Philosophy and Approach for an Organization
3 According to Pigors and Myres, “Personnel administration i s a method of
developing the potentialities of employees so that they get maximum
satisfaction out of the work and give their best effort to the organization.”
From the above definitions, it can be defined that human resource
management is concerned with m anaging people at work. It effectively
describes the process of planning and directing the application,
development and utilization of human resources.
1.1.3 Conceptual Framework:
With the help of the following diagram, we can better understand the
concep t of human resource management -

Fig. 1.1: Human Resource Management

Fig. 1.2: Conceptual Framework of Human Resource Management
1.1.4 Nature of Human Resource Management:
Human Resource Management is concerned with managing and
controlling people at work place. The following points reveals the nature
of human resource management - munotes.in

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Compensation and Benefits
4

Fig. 1.3: Nature of Human Resource Management
1. Based on Principles and Policies :
The field of human resource management is based on certain principles
and policies. The philosophy of being focused on the people helps the
organization to achieve its objectives.
2. Pervasive Function :
The human resource management function is present everywhere. It is
pervasive in nature. It includes all the levels of the organization. The
function is not associated with a single department. It manages employees
from top to bottom.
3. Management Functions and Principles :
Human resource management is based on management functions and
principles. Managing people at the workplace is an import ant part of
human resource management. Management functions hiring, training,
development, compensation; motivation, communication, and
administration etc . of employees are taken care of by human resource
management.
4. Concerned with People :
The subject matter of human resource management is concerned with
people. The philosophies and approaches work with and for people. The munotes.in

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Human Resources Philosophy and Approach for an Organization
5 people are motivated, influenced and maintained at the workplace. The
center theme of this subject is people.
5. Integrating Functi on:
The function of human resource management deals with the integration of
all the personnel related functions. In the best possible manner, the human
resources of the organization are managed and integrated.
6. Action Oriented :
The focus of human resourc e management is not theoretical rather it is
practical and actionable in nature. The approach of human resource
management is action oriented. The problems and issues of employees are
solved promptly.
1.2 HUMAN RESOURCES PHILOSOPHIES 1.2.1 Overview:
The h uman resource philosophies play a vital role in determining the
overall policies of the organization related to the human resources. It is
related to the strategic approach related to human resources. For
competitive advantage and growth and development of the organization,
the human resources policies involve a set of interrelated policies with
ideological and philosophical approach.
The starting point of human resource management is to define the
philosophical approach which helps in defining the vision and mission
related to the human resources of the organization. The long term goal of
any organization is to grow and develop through the development of
human resources. Philosophies define the integrated set of beliefs and
assumptions about the way things are and should be. In the field of
management, there is a separation of ownership and management.
The people who create an organization are owners and the people who
manage are managers. The former one is responsible for the formation of
policies and pr ocedures while the latter one is responsible for the
execution function. In the minds of the decision makers, these policies and
philosophies are sometimes explicit, sometimes implicit. The human
resources policies revolve around the needs, values and appr oach of
people towards the work of the organization.
The growth and development of the human resources philosophies is a
long term process. The stakeholders should be considered first while
preparing the policies and philosophies of the organization. Thei r values
and opinions should be respected and considered. Human resources get
influenced and the human resource leader influences the philosophies
significantly.

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Compensation and Benefits
6 1.2.2 Approaches to Human Resource Philosophies :
“Polices define how the company will deal w ith stakeholders. Employees,
Customers, suppliers, distributors, and other important group employees
act consistently on important issues”
- Philip Kotler
The assumptions and beliefs determined by the human resources policies
are based on how people are treated and should be treated. There are three
approaches to treating people in an organization.
 Machine Approach
 Commodity Approach
 Humanistic Approach

Fig. 1.4: HR Philosophies

1. Machine Approach :
In this approach, a person is treated as a machine. The human resources
are treated as a part of the machine who can be fitted like any other part.
As machines require maintenance, human resources also need to be
maintained and preserved.
2. Commodity Approach :
The commodity approach is a very old approach of human resources
philosophies. The human resources under this approach are treated like a
commodity. Human resources can be bought and sold at a price . This
approach can be traced back to old slavery system.
3. Humanistic Approach:
This is the most hu mane and accepted approach of human resources
philosophies. In this approach, the human resources are treated as human
beings having physiology. This approach puts emphasis on treating
employees as human beings first.
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Human Resources Philosophy and Approach for an Organization
7 1.2.3 Factors Influencing HR Philoso phies :
The main factor which influences the human resources philosophies are :

Fig. 1.5: Factors Influencing HR Philosophies
1. Corporate Culture :
The corporate culture is an integral part of human resources philosophies.
The philosophies and policies are influenced because of corporate culture.
The corporate culture defines the boundaries for the policies. The culture
defines how the people should behave commonly and the work of the
organization should be done.
2. Style of Leadership :
Leadership is an act ivity of influencing people to get the work done. The
leadership style is extremely important. The act of influencing is an art.
Managers always try to act as a leader. The manager usually acts as a
leader to start the change or re -design the human resourc es philosophies.
3. Corporate Values :
The corporate values also act as an influencing factor. The human
resources philosophies in the context of management takes into
consideration the values of the corporate as well. The philosophy revolves
around the vi sion. Mission and goals of the organization. These factors
help to set the values of the organization.
4. Market Competition :
Market competition also has an influence on human resources
philosophies. The competition in the form of direct and indirect has a great munotes.in

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Compensation and Benefits
8 influence on the philosophies. The companies have to change their
working style while taking into consideration the level of competition.
5. Corporate Strategy :
Human resource strategy deals with the long term practices of the
organization. The cor porate strategy greatly influences the philosophies of
human resources. They have a major impact when it comes to dealing with
people. If the strategy mainly focuses on humans, the philosophies will
have a major impact because of this strategy.
1.3 HUMAN RESOURCE APPROACHES The following are the various approaches to human resources :

Fig. 1.6: Approaches to Human Resources
1. Commodity Approach :
The commodity approach is a very old approach of human resources
philosophies. The human resources under this approach are treated like a
commodity. Human resources can be bought and sold at a price . This
approach can be traced back to old slavery system. The people can be
hired and fired through money.
2. Management Approach :
In management approach, the PODC sta nds for :
 P - Planning
 - Organizing munotes.in

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Human Resources Philosophy and Approach for an Organization
9  D - Directing
 C - Controlling
The management approach of human resources deals with managing
people at work. Managers at all levels are responsible for managing their
people in a group.
3. System Approach :
Organization w orks as a system to achieve the common goals of the
organization. The system approach deals with the set of interrelated but
separate elements or parts for a common goal.

Fig. 1.7: System Approach
4. Strategic Approach :
The strategic approach to human r esources can be defined as the strategy
to develop proper planning to hire & manage employees for fulfilling the
long-term goals of the company. This strategy deals with the long term
needs of the organization. The way of tackling problems for a long term is
also included in this approach.
5. Reactive Approach :
Reactive approach is based on the response to the current situation. It
occurs when the response is given after the problem arises. In this
approach, the problems may be compounded. Organizations may suffer
losses due to missed opportunities. If an organization takes a reactive
approach, they may lose money and time.
This approach is opposite to the proactive approach. Experts from the
management field strongly recommend avoiding this approach.
6. Proactive Approach :
This approach is based on the philosophy that prevention is better than
cure. It is advocated that the HR managers should identify the challenges
and problems before they start. It will save the considerable time and
money of the companie s in the long run and short run.
1.4 SUMMARY  Human resource management deals with the overall functions of
procuring, hiring, training, motivating and maintaining the human
resources of the organization. The operative functions of HRM
includes Procurement , development, compensation, motivation, munotes.in

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Compensation and Benefits
10 maintenance and integration and emerging trends. The management
functions of human resource management includes planning,
organizing, directing and controlling.
 The concept of Human Resource Management is concerne d with
hiring, promoting, maintaining a nd controlling the human resource of
the organization. Different authors have given different definitions of
the term ―Human Resource Management‖.
 The human resource philosophies play a vital role in determining the
overall policies of the organization re lated to the human resources. It
is related to the strategic approach related to human resources. For
competitive advantage and growth and development of the
organization, the human resources policies involve a set of
interrelated policies with ideological and philosophical approach.
 The assumptions and beliefs determined by the human resources
policies are based on how people are treated and should be treated.
There are three approaches to treating people in an organization -
Machine Approach, Commodity A pproach and Humanistic Approach.
 There are various approaches to human resources like commodity
approach, reactive approach, proactive approach, strategic approach
etc.
1.5 SELF ASSESSMENT TEST 1. Classify the various HR functions in an organization.
2. Write a note on Personnel Management Versus Human Resource
Management.
3. Explain the nature and scope of human resource management.
4. Explain the various approaches to the philosophies of HRM.
5. Explain the various approaches of human resource management.
6. Describe the system approach in detail.
7. Highlights the various factors which influence the approaches of
human resource management.


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11 2
REWARD STRATEGIES
Unit Structure
2.0 Objectives
2.1 Overview
2.1.1 Introduction
2.1.2 Conceptual Framework
2.2 Reward Strategy
2.2.1 Introduction
2.2.2 Definition
2.2.3 Features of Reward Strategy
2.2.4 Components of Reward Strategy
2.3 Developing an d Implementing the Reward Strategy
2.4 Articulating and Understanding Business Context for Reward
Strategies
2.4.1 Overview
2.4.2 Articulating the Business Context
2.4.3 Understanding the Business Context for Reward Strategies
2.5 Summary
2.6 Self Assess ment Test
2.0 OBJECTIVES After studying thi s module, you should be able to :
 Understand the nature and relevance of reward
 Importance of reward strategy
 How to develop and implement the reward strategy
 How to articulate and understand business context for r eward
strategies
 Relevance of reward strategies for an Organization
2.1 OVERVIEW 2.1.1 Introduction :
The concept of reward strategies comes under the subject matter of reward
management. The subject matter of reward management deals with the
strategies, po licies and processes required to ensure that the contribution munotes.in

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Compensation and Benefits
12 of people to the organization is recognized by both financial and non -
financial means. The reward systems of the organization are designed,
maintained and implemented.
The main objective of rewa rd strategy is to motivate the people by fairly,
equitable distributing the reward to them. The scope of reward
management not only deals with the pay but also it covers employees
benefits and non -financial rewards. The term ‘Non -financial’ covers -
 Recogn ition
 Learning
 Growth and development
 Career planning discussion
 Increased job opportunity
 Training
The reward strategy helps an organization to achieve its objectives for the
long term. It ensures that the proper system is designed and implemented
to rewa rd policies and practices that support the organization’s objectives,
delivering a motivated and effective workforce. There are few important
points to be considered while designing and implementing a total rewards
strategy requires a large -scale approach that drives organizational change.
2.1.2 Conceptual Framework :
The following pictures depict the conceptual framework of the concept of
reward strategy :

Fig. 2.1: Designing and Implementing the Reward Policies for an
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Reward Strategies
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Fig. 2.2 Aspects of Re ward Strategy
2.2 REWARD STRATEGY 2.2.1 Introduction :
Reward strategy can be defined as the strategy of an organization
designing and implementing reward policies and practices that support the
objectives. Reward strategy is an important aspect of reward
management. It sets out what the organization intends to do in the long
term to develop and implement the reward policies, practices and
processes. This will help the organization to achieve the organizational
goals.
The term “Reward Strategy” is a compre hensive term and deals with the
long term strategy of the organization. The strategy provides monetary,
beneficial and developmental rewards to employees. The reward strategy
is a performance based strategy. It includes those employees who help
organizatio ns to achieve business goals. Reward is a positive term and it
deals with combining the compensation and benefits for an employee.
It requires a large -scale approach that drives organizational change and
development. For the success of reward strategy, the involvement of top
executives and management is required. The approach of the reward
strategy should be well rounded.
2.2.2 Definition :
Reward strategy can be defined as setting out what the organization
intends to do in the longer term to develop and im plement reward policies,
practices and processes which will further the achievement of its business
goals.
2.2.3 Features of Reward Strategy :
The following are the important features of reward strategy : munotes.in

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14

Fig. 2.3: Features of Reward Strategy
1. Deals with Long Term:
The reward strategy deals with the long term business achievements and
goals of the organization. Reward strategy is a comprehensive term and
deals with the long term strategy of the organization. The long term goals
of the organization should be taken into consideration.
2. Developing the strategy:
The reward strategy deals with developing the strategy for the long term in
an organization. It requires a large -scale approach that drives
organizational change and development. The large scale app roach
involves the process of designing and implementing the strategy.
3. Implementing the Strategy:
Designing and developing the strategy plays a vital role for the long term
benefits and survival of the employees of the organization. The
implementation of strategy is more important. The process includes the
development and implementation of strategy. The reward strategy is a
performance based strategy.
4. Reward Policies, Practices and Processes:
Reward strategy is an important aspect of reward manageme nt. It sets out
what the organization intends to do in the long term to develop and
implement the reward policies, practices and processes. This will help the
organization to achieve the organizational goals.
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Reward Strategies
15 5. Important Part of Reward Management:
The c oncept of reward strategies comes under the subject matter of reward
management. The subject matter of reward management deals with the
strategies, policies and processes required to ensure that the contribution
of people to the organization is recognized by both financial and non -
financial means. The reward systems of the organization are designed,
maintained and implemented.
2.2.4 Components of Reward Strategy :
The following are the important components of reward strategy :

Fig. 1.3: Components of Reward Strategy
1. Reward Policy :
Reward policy refers to the policy of the organization related to the
employees benefits of the organization. The policy of the organization
differs. The reward policy covers the following issues :
 Shaping employees behavior
 Promotion of work ethics
 Comparison between market rate and internal rate
 Achieving equal pay
 Contingent rewards related to performance, competence, contribution
or skill
 The role of managers
2. Reward Practice:
The reward practice comes under the concept of reward system. The
reward practices involves the following components :
 Monetary benefits like bonus, stock options, profit sharing plans,
reimbursement etc. munotes.in

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Compensation and Benefits
16  Non-monetary benefits like work from home, recognition, opportunity
to leave work early, flexible working hours etc.
 Assistance
 Recognition of the work
3. Reward Process :
The reward process of the organization deals with the procedure of giving
rewards to the employees in a systematic way. The following are the
important aspects of the reward process :
 Analysis
 Strategy
 Activity
 Reward
2.3 DEVELOPING AND IMPLEMENTING THE REWARD STRATEGY Reward strategy is an important aspect of reward management. It sets out
what the organization intends to do in the long term to develop and
implement the reward polici es, practices and processes. This helps the
organization to achieve the organizational goals. Development and
implementation of reward strategy is an important aspect because it
requires a large -scale approach that drives organizational change.

Fig. 1.4 : Developing and Implementing the Reward Strategy munotes.in

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Reward Strategies
17 1. Diagnosis Phase :
The first step is the diagnosis step. In this step, a team diagnoses current
benefits and compensation systems and determines the effectiveness of
those systems in helping companies to r each their goals. In this step, the
reward goals are diagnosed and assessed properly.
The current policies and practices assessed against them. The options for
improvements are considered. If any changes are required, the team agrees
upon them.
2. Pilot Testing Phase :
The second step deals with the design phase. In this stage, the design in
detail is analyzed. The improvements and changes required in the current
strategy are analyzed thoroughly. The team identifies and analyzes various
reward strategies t o determine what would work best in their workplace.
The team will also determine the additional benefits that can be given to
employees under the section of reward strategy :
 Flexible Work Schedule
 Additional Time Off
 Developmental Opportunities
 Training
3. Final Testing Phase :
This is the third stage of developing and implementing strategy for an
organization. In this stage, the preparation phase before the
implementation of the strategy will take place. This stage will determine
whether the strategists re sponded to changes in organizational
requirements or not?
4. Implementation Phase :
In this stage, the reward strategy’s implementation takes place. The HR
department implements the new reward strategy for the organization. The
HR department will be respon sible for communicating the new strategy to
the employees of the organization by keeping in view the current changes
and needs of the business enterprise. The implementation phase will be
followed by ongoing review and modification.
2.4 ARTICULATING AND U NDERSTANDING BUSINESS CONTEXT FOR REWARD STRATEGIES 2.4.1 Overview :
The term “Reward Strategy” is a comprehensive term and deals with the
long term strategy of the organization. The strategy provides monetary,
beneficial and developmental rewards to employ ees. The reward strategy munotes.in

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Compensation and Benefits
18 is a performance based strategy. It includes those employees who help
organizations to achieve business goals. Reward is a positive term and it
deals with combining the compensation and benefits for an employee.
It requires a large -scale approach that drives organizational change and
development. For the success of reward strategy, the involvement of top
executives and management is required. The approach of the reward
strategy should be well rounded. It is important to articulate and
understand the business context for reward strategies. By keeping in view
the needs and importance of reward strategy in the context of business, it
is important to consider the internal and external factors of the business.
Defining the context of bu siness is needed to prepare and implement the
plans strategically related to the reward management. It also defines the
circumstances in which the exceptions for the business can be set.
Managers are required to understand what works in an organization as far
as the context of business is concerned. Some literature was reviewed
while developing and implementing the reward strategy. Many
contributors think that the reward strategy should deal with the
organization perspective, not with the big things that ma y not work for the
organization.
The business context involves the study of:
 Internal Context: It is within the organization and controllable in
nature.
 External Context: It is outside the organization and uncontrollable in
nature.
2.4.2 Articulating the Business Context :
It is very important to understand the business context in order to survive
and develop in this competitive world. Articulating the business context is
all about understanding it before it can go into effect. The team working
under this h ead will identify what are the goals and how the success will
be measured. In terms of doable and action, the employees can take part in
this practice.
The goals of the organization must be communicated, clear and attainable
for the employees. The focus on the business context is important, not the
unrealistic things can be done for an organization. The things are not about
the revolution, but about the evolution.
The following are the simple guidelines that can be followed:
1. Articulate the business strat egy in terms of actions.
2. Give employees clear and measurable goals.
3. Measure the progress. munotes.in

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Reward Strategies
19 4. Keep it simple.
5. Manage the balance between policies and implementation
6. Think about the implementation
2.4.3 Understanding the Business Context for Reward Strategies :
Context is everything for modern business. The Greek philosopher
Socrates said “In the world of knowledge the idea of the good appears last
of all, and is seen only with effort”. It is important to understand the
context in every possible way. For reward strategies, understanding the
business context is important.
The following steps can be followed to understand this topic thoroughly:

Fig. 1.5: Process of Understanding Business Context and Developing
Strategy
1. Analyze the Business Context :
Analyzing business context is the first step in understanding the whole
process. It is very important to understand the business context in order to
survive and develop in this competitive world. Articulating the business
context is all about understanding it befor e it can go into effect. The team
working under this head will identify what are the goals and how the
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Compensation and Benefits
20 2. Develop Strategy :
This is the preparation stage of developing the strategy by keeping in view
the business context. Reward i s a positive term and it deals with
combining the compensation and benefits for an employee. Managers are
required to understand what works in an organization as far as the context
of business is concerned. Developing strategy on the basis of guiding
princ iples is important in this stage. This is a preparation stage of
developing strategy for reward management.
3. Develop and Justify the Reward Strategy :
Business context guides the strategy. In this stage, the team develops and
justify the reward strategy. In this stage, the design in detail is analyzed.
The improvements and changes required in the current strategy are
analyzed thoroughly.
The team identifies and analyzes various reward strategies to determine
what would work best in their workplace. The t eam will also determine
the additional benefits that can be given to employees under the section of
reward strategy like Flexible Work Schedule, Additional Time Off,
Developmental Opportunities etc.
4. Test Plan :
In this stage, the pilot testing can be do ne by the team. This is the stage of
developing and implementing strategy for an organization. In this stage,
the preparation phase before the implementation of the strategy will take
place. This stage will determine whether the strategists responded to
changes in organizational requirements or not?
5. Implementation :
In this stage, the team will implement the new reward strategy for the
organization. The team will be responsible for communicating the new
strategy to th e employees of the organization by ke eping in view the
current changes and needs of the business enterprise. The implementation
phase will be followed by ongoing review and modification.
6. Review and Modify :
A top manager with his team is responsible for developing the reward
strategy for th e organization. In this stage, after reviewing the whole
process and implementation part the things can be taken into consideration
again for modification if needed.
2.5 SUMMARY  The concept of reward strategies comes under the subject matter of
reward mana gement. The subject matter of reward management deals
with the strategies, policies and processes required to ensure that the
contribution of people to the organization is recognized by both munotes.in

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Reward Strategies
21 financial and non -financial means. The reward systems of the
organization are designed, maintained and implemented.
 The reward strategy helps an organization to achieve its objectives for
the long term. It ensures that the proper system is designed and
implemented to reward policies and practices that support the
organi zation’s objectives, delivering a motivated and effective
workforce. There are few important points to be considered while
designing and implementing a total rewards strategy requires a large -
scale approach that drives organizational change.
 The term “Rewa rd Strategy” is a comprehensive term and deals with
the long term strategy of the organization. The strategy provides
monetary, beneficial and developmental rewards to employees. The
reward strategy is a performance based strategy. It includes those
employ ees who help organizations to achieve business goals. Reward
is a positive term and it deals with combining the compensation and
benefits for an employee.
 Reward policy, reward practice and reward process are the important
components of reward strategy.
 Reward strategy is an important aspect of reward management. It sets
out what the organization intends to do in the long term to develop
and implement the reward policies, practices and processes. This
helps the organization to achieve the organizational g oals.
Development and implementation of reward strategy is an important
aspect because it requires a large -scale approach that drives
organizational change.
 Context is everything for modern business. The Greek philosopher
Socrates said “In the world of kn owledge the idea of the good appears
last of all, and is seen only with effort”. It is important to understand
the context in every possible way. For reward strategies,
understanding the business context is important.
2.6 SELF ASSESSMENT TEST 1. What are t he key areas in which reward policies need to be
formulated? Illustrate your answer with examples from your own
organization.
2. What is a reward strategy? Explain the various components of reward
strategy.
3. Explain the concept of reward strategy as an import ant aspect of
reward management.
4. Describe the procedure of developing and implementing the reward
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Compensation and Benefits
22 5. Why is business context vitally important?
6. Write a note on articulating and understanding business context for
reward strategies.
7. Explain the compo nents of understanding business context for reward
strategies.
8. Elaborate the important features and components of a reward system.

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23 3
ELEMENTS OF REWARD STRATEGY
Unit Structure
3.0 Objectives
3.1 Overview
3.2 Reward Management
3.2.1 Overview
3.2.2 Definition
3.2.3 Conceptual Framework
3.2.4 Objectives of Reward Management
3.2.5 Different Types of Rewards
3.3 Elements of Reward Stra tegy
3.4 Understanding the Elements of Reward Management
3.5 Summary
3.6 Self Assessment Test
3.0 OBJECTIVES After studying this module, you should be able to:
 Understand the nature and relevance of reward management
 Importance of reward strategy
 Eleme nts of reward strategy
 Understand the Elements of Reward Management
 Relevance of reward strategies for an Organization
3.1 OVERVIEW The term “Reward Strategy” is a comprehensive term and deals with the
long term strategy of the organization. The strategy p rovides monetary,
beneficial and developmental rewards to employees. The reward strategy
is a performance based strategy. It includes those employees who help
organizations to achieve business goals. Reward is a positive term and it
deals with combining th e compensation and benefits for an employee.
The reward strategy helps an organization to achieve its objectives for the
long term. It ensures that the proper system is designed and implemented
to reward policies and practices that support the organization ’s objectives,
delivering a motivated and effective workforce. There are few important munotes.in

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Compensation and Benefits
24 points to be considered while designing and implementing a total rewards
strategy requires a large -scale approach that drives organizational change.
The concept of rewar d strategies comes under the subject matter of reward
management. The subject matter of reward management deals with the
strategies, policies and processes required to ensure that the contribution
of people to the organization is recognized by both financi al and non -
financial means. The reward systems of the organization are designed,
maintained and implemented. The main objective of reward strategy is to
motivate the people by fairly, equitable distributing the reward to them.
The scope of reward managemen t not only deals with the pay but also it
covers employees benefits and non -financial rewards.
The concept of reward management is concerned with analyzing and
controlling worker remuneration, benefits, reimbursement and all the
different advantages for th e employees. The following elements are
required to keep the value of the organization -
 Fairness
 Equity
 Consistent
The factors like compensation, benefits, work life, performance,
recognition, development, growth and career opportunities are the key
eleme nts of reward management. The financial and non -financial rewards
can have a significant impact on the performance and productivity of the
workforce.
3.2 REWARD MANAGEMENT 3.2.1 Overview:
Reward management emphasizes the importance of considering all aspec ts
of reward. It is designed to achieve the motivation, commitment,
engagement and development of employees through monetary and non -
monetary initiatives. The concept of reward management is based on a
well defined philosophy. It is based on this aim to r eward employees
according to what the organization values and wants to pay for. The
working of reward management is strategic in nature.
It deals with rewarding people who truly work well for the organization. It
covers the aspect that the people should b e rewarded for the value they
create for the organization. They should be respected for their right
behavior and work outcomes. The main essence is to convey the right
message that organizations believe in rewarding the right people for the
right things. D eveloping a performance culture is a key ingredient for the
success and survival of any organization. It can be achieved with the help
of a proper system of reward management.
The aim of reward management in the field of human resource
management is to at tract and retain the high quality people for the munotes.in

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Elements of Reward Strategy
25 organization. These people help organizations to achieve common goals.
The people who are treated fairly provide value through their work to the
organization. Reward management deals with the inclusion,
implementation and adaptation of various strategies, procedures and
policies in an organization related to providing the incentives and benefits
to the employees for their work towards the enterprise.
The term “Reward” can be described as an incentive or appr eciation in the
form of monetary or non -monetary value to the people for their
contribution in an organization. According to Dessler, “Reward is an
award as employee compensation for all types of salary employees receive
and arises from their employment”. According to Bratton and Gold,
“Rewards are all forms of financial returns, and tangible service and
benefits employees receive as part of an employment relationship”.
3.2.2 Definition :
According to Perkinson and White, “Reward management is the
combined action an employer may take to specify what levels of employee
rewards will be offered based on what criteria and data available and how
the offer will be regulated over time.”
The concept of reward management helps employees to attract and retain
the new and existing employees in an organization. It also helps
organizations to avoid the cost of hiring and training. Developing a good
organizational culture also comes under the objectives of reward
management. In an organization, the reward management may i nclude -

Fig. 3.1: Aspects of Reward Management
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Compensation and Benefits
26 3.2.3 Conceptual Framework :
With the help of the following diagram, we can better understand the
concept of reward management :

Fig. 3.2: Concept of Reward Management

Fig. 3.3: Aspects of a Good Reward Management System
3.2.4 Objectives of Reward Management :
The following are the main objectives of reward management:
1. To attract and retain the high performing employees.
2. To motivate the employees to perform better in an organization.
3. To enhance the organization’s corporate reputation.
4. To ensure the fairness for the contributions that people make to the
organization.
5. To stimulate and implement change management. munotes.in

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Elements of Reward Strategy
27 6. To support the organization's strategy.
7. To avoid the cost of hiring and tr aining the new employees.
8. To encourage the positive attitude and behavior among employees.
9. To give reward to the people for the value they create for the
organization.
10. To channelize the efficient and productive administration.
3.2.5 Different Ty pes of Rewards :
There are two types of rewards - extrinsic rewards and intrinsic rewards :

Fig. 3.4: Types of Reward Management
1. Intrinsic Rewards:
These rewards are internal to the organization. It helps employees to feel
good and better in an organizat ion. These are the rewards that deal with
monetary and non -monetary nature and form a soft nature of motivation.
The intrinsic rewards includes :
 Recognition
 Personal attention
 Bonuses
 Pay raise
 Gifts
 Promotion munotes.in

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Compensation and Benefits
28 2. Extrinsic Rewards :
Extrinsic rewards are those rewards which are given to employees to offer
personal satisfaction to the employees. They are aimed at satisfying
fundamental needs of recognition. The extrinsic rewards focus on
improving the behavior of the employees. The extrinsic rewards are in the
form of :
 Base pay for performance
 Feedback
 Information
 Putting Trust
 Empowerment
3.3 ELEMENTS OF REWARD STRATEGY As mentioned earlier, reward strategy can be defined as the strategy of an
organization designing and implementing reward policies and pra ctices
that support the objectives. Reward strategy is an important aspect of
reward management. It sets out what the organization intends to do in the
long term to develop and implement the reward policies, practices and
processes. This will help the org anization to achieve the organizational
goals.
The term “Reward Strategy” is a comprehensive term and deals with the
long term strategy of the organization. The strategy provides monetary,
beneficial and developmental rewards to employees. The reward stra tegy
is a performance based strategy. It includes those employees who help
organizations to achieve business goals. Reward is a positive term and it
deals with combining the compensation and benefits for an employee.
Reward strategy can be defined as setti ng out what the organization
intends to do in the longer term to develop and implement reward policies,
practices and processes which will further the achievement of its business
goals.
The reward strategy helps an organization to achieve its objectives fo r the
long term. It ensures that the proper system is designed and implemented
to reward policies and practices that support the organization’s objectives,
delivering a motivated and effective workforce. There are few important
points to be considered whil e designing and implementing a total rewards
strategy requires a large -scale approach that drives organizational change.
The reward strategy deals with the long term business achievements and
goals of the organization. The large scale approach involves the process of
designing and implementing the strategy. It sets out what the organization
intends to do in the long term to develop and implement the reward
policies, practices and processes. munotes.in

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Elements of Reward Strategy
29 The following are the important elements of reward strategy :

Fig. 3.4: Elements of Reward Strategy
Learning and Development :
The first element of reward strategy focuses on people’ aspirations and
achievements. Once an individual meets his/her monetary expectations,
he/she will turn their focus on personal growth and d evelopment
opportunities. They think about their career choices and advancement.
The term “Learning and Development” enables organizations to constantly
work towards the growth and development of employees. An organization
at their level prepare a strategy for -
 Training courses
 Development programs
 Online programs
 Development courses
 Learning culture
Pension and Benefits :
A pension is a type of monetary plan offered to an employee after he/she
retires from his/her job. A pension is a type of retirement p lan that
provides monthly income after a person retires from a job position. This
element adds additional triggers for people to work in an organization.
Safety after retirement is a need of an individual. The company offers
various types of benefits to at tract and retain the new and present
respectively. munotes.in

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Compensation and Benefits
30 Organizational Culture :
Organizational Culture is an important element of a reward strategy. In
common parlance, organizational culture is generally understood as all of
a company’s beliefs, values and a ttitudes, and how these influence the
behavior of its employees. It is a pervasive underline set of beliefs,
assumptions, values shared and perceptions, the actions and decisions
taken by the organization.
In an organization, people share culture. It den otes the morals, value
systems, behavioral norms and ways of doing business that are unique to
each operation. There are different perspectives of culture in
organizations. People come into contact with organizations, Organisation
transform their behavio r and influences their thinking as per the
organizational culture.
The organizational culture is a summation of a company's beliefs, policies,
goals and objectives of the organization. It also covers the working style,
way of communication and pattern des cribed by the given group. It is
expected from every new member to work in accordance with the culture
of the organization.
There is a clear difference between the mission and vision of the
organization and the organizational culture. The mission and visio n of the
organization clarify the road map to the people to work in that direction
while organizational culture is a summation of a company's policies and
beliefs which they expect to be transformed into the behavior of their
employees.
Base and Variable Pay:
Base pay is a fixed amount while variable pay as the name suggests, is the
portion of sales compensation determined by employee performance.
When employees hit their goals, variable pay is provided as a type of
bonus , incentive pay, or commission. The companies pay in line with the
market. The element of fairness and just is required to keep this element
effective as a part of reward strategy.
To remain the base and variable pay a hygiene f actor, it needs to be in line
with market expectations.
3.4 UNDERSTANDING THE ELEMENTS OF REWARD MANAGEMENT As mentioned earlier, r eward management emphasizes the importance of
considering all aspects of reward. It is designed to achieve the motivation,
commitment, engagement and development of employees through
monetary and non -monetary initiatives. The concept of reward
management is based on a well defined philosophy. It is based on this aim
to reward employees according to what the organization values and wants
to pay for. The working of reward management is strategic in nature. munotes.in

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Elements of Reward Strategy
31 The elements of reward management include programs, practices,
elements that define an organization's strategy to attract and motivate
employees. The following are the importa nt elements of a reward
management :

Fig. 3.5: Elements of Reward Management
1. Development and Career Opportunities :
The first most important element of reward management is development
and career opportunities. Human resource is the most important resou rce
of an organization. An organization succeeds best when it guides and
motivates its employees in the best possible way. In a country like India,
we have an extensive availability of manpower. It is up to the style of a
manager, how he/she is able to tak e the best from his/her team.
When the organization provides development and career opportunities to
the workforce, it ultimately becomes the best thing an organization can do
for the people. People feel they can work for this organization for the
long-term and they always try to give their best when they realize this.
2. Compensation :
Compensation is a systematic approach of providing monetary value to
employees in exchange for the work or services they performed. The term
compensation denotes all forms of financial returns and tangible benefits
that an employee receives for the work performed in an organization.
Compensation management is also known as salary and profits
administration, remuneration control, or reward management.
The main objective of comp ensation management is to recruit and retain
the qualified employees. A proper system of compensation and sure that
the employer is willing to pay and the employees are going to perform in munotes.in

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Compensation and Benefits
32 the best way. A good compensation system represents the most impor tant
element in the employment relationship between the employer and
employee. It also helps to motivate employees for better performance and
maintain morale.
3. Benefits
In attracting and retaining an employee, benefits are considered to be the
major f actor. Benefits are group membership rewards that provide security
for employees and their family members. The employee receives all
financial rewards indirectly if eligible. The benefits provide coverage for -
 Sickness
 Injury
 Old age
 Death
 Health insuranc e
 Life insurance
 Pensions
 Child care facilities
According to Belcher, “any wage cost which is not directly connected
with employees’ productivity, effort, performance, service or sacrifice.”
According to Cockman , “those benefits which are supplied by an
employer to or for the benefits of an employee, and which are not in the
form of wages, salaries and time rated payments.”
Benefits represent increased earnings to employees. Benefits help to
reduce employed dissatisfac tion, absenteeism and turnover. The ben efits
like vacations , family and medical leave, and sick leave helps the
managers to eff ectively manage work schedules. benefits also help to
improve the organizational image.
4. Work -life:
Maintaining a work -life is not an easy task. People overlap their work with
their personal life. Work life balance is a term which denotes a condition
where a person tries to establish an equilibrium between work life and
personal life. Work life balance ensures that the employee is giving
importance to his family life a s well.
Increased responsibilities at work, working longer hours and increased
responsibilities at home are some of the common reasons that lead to a
poor work -life balance. Paying attention to the emotions is an important
activity but as a human being we avoid and mix personal life and work
life. When work life balance becomes an important aspect of a reward munotes.in

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Elements of Reward Strategy
33 management system, it helps organizations to attract and retain new and
existing talent.
The following benefits are found after studying the aspects of work -life
balance for an organization :
 More engagement of employees
 Creates sense of belongingness among employees
 Reduces employees absenteeism and turnover
 More mindfulness
 Fewer health problems
The following ways can be adopted to improve work life :
 Prioritizing health
 Vacationing
 Unplugging
 Making time for oneself
 Asking employees about their problems
 Practicing
5. Performance and Recognition :
Recognizing someone’s performance is the best way to boost the morale
and motivation of an employee. Evalu ating performance and recognizing
is an important element of reward management. Exceptional performance
can be rewarded to set an example for other employees as well. People
who reach some specific goals can be offered recognition and a round of
applause i n front of everyone.
3.5 SUMMARY  Reward management deals with rewarding people who truly work
well for the organization. It covers the aspect that the people should
be rewarded for the value they create for the organization. They
should be respected for t heir right behavior and work outcomes. The
main essence is to convey the right message that organizations believe
in rewarding the right people for the right things. Developing a
performance culture is a key ingredient for the success and survival of
any o rganization. It can be achieved with the help of a proper system
of reward management.
 The concept of reward management helps employees to attract and
retain the new and existing employees in an organization. It also helps
organizations to avoid the cost of hiring and training. Developing a
good organizational culture also comes under the objectives of reward munotes.in

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Compensation and Benefits
34 management. In an organization, the reward management may
include pay practices, minimum wages, base pay etc.
 There are two types of rewards - extrinsic rewards and intrinsic
rewards. These rewards are internal to the organization. It helps
employees to feel good and better in an organization. These are the
rewards that deal with monetary and non -monetary nature and form a
soft nature of motivation. E xtrinsic rewards are those rewards which
are given to employees to offer personal satisfact ion to the employees.
They are aimed at satisfying fundamental needs of recognition. The
extrinsic rewards focus on improving the behavior of the employees.
 Learnin g and development, base and variable pay, pensions and
benefits, organizational culture are important elements of reward
strategy.
 Performance and recognition, benefits, compensation, development
and career opportunities, work life are important elements o f reward
management.
3.6 SELF ASSESSMENT TEST 1. What are the key areas in which reward policies need to be
formulated? Illustrate your answer with examples from your own
organization.
2. What is a reward strategy? Explain the various components of reward
strategy.
3. Explain the concept of reward strategy as an important aspect of
reward management.
4. What is reward management? Explain the various types of rewards.
5. What is a reward strategy? Describe the various elements of reward
strategy.
6. Write a detailed on unde rstanding the elements of reward
management
7. Explain the important features of reward management. How the
system works in an organization.

*****

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35 4
COMPENSATION: AN INTRODUCTION
Unit Structure
4.0 Objectives
4.1 Introduction
4.1.1 Overview
4.1.2 Meaning
4.1.3 Definition
4.1.4 Conceptual Framework
4.1.5 Nature of Compensation
4.2 Objectives of Compensation
4.3 Importance of Compensation
4.4 Factors Affecting Employee’s Compensation
4.5 Compensation / Remuneration place in Reward Strategy
4.5.1 What is Reward?
4.5.2 What is Compensation?
4.5.3 Compensation Place in Reward Strategy
4.6 Summary
4.7 Self Assessment Test
4.0 OBJECTIVES After studyi ng this module, you should be able to:
 Understand the nature and relevance of compensation
 Importance of compensation
 Know about the objectives of compensation
 Know the role of Compensation / Remuneration place in Reward
Strategy
 Study the factors which affects employee’s compensation
 Relevance of reward strategies for an Organization
4.1 INTRODUCTION 4.1.1 Overview :
Compensation is one of the most important human resource functions of
an organization. The concept of compensation represents the most munotes.in

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Compensation and Benefits
36 impor tant element in the employment relationship. For many
organizations, the compensation factor is the biggest single cost of running
a business. The 21st century economy is a knowledge based and
performance driven economy. A businessman drives his business w ith the
help of innovations and technology to transform it as per the customer
expectations.
In a course of time, every business develops with complexities. Beyond a
level, managing alone becomes a difficult task for a person. The need for
management has increased tremendously. So is the need for organizational
development. The compensation management helps organizations to
develop and grow. In a changing business climate, it is important to
understand the structural, cultural and strategic reality of work .
To facilitate organizational success, organizational development plays an
important role. The existence and application of management is not only
essential for growth and development but also it is essential for the
survival of business organizations. T here are several types of groups.
Every human being has needs and desires. Organizations understand and
work in this direction to provide better goods and services to the
customers. These needs and wants can be satisfied by working and living
together in a n organized group of organizations.
A good compensation model can help to reinforce the key corporate
values and facilitate the achievement of organizational objectives. In the
globalization era, where the business environment has become
increasingly chal lenging, an effective compensation system helps to attract
the talent candidates for the organization. The concept of compensation
can be divided into three types - direct compensation, indirect
compensation and non -monetary compensation.
4.1.2 Meaning :
Compensation is a systematic approach of providing monetary value to
employees in exchange for the work or services they performed. The term
compensation denotes all forms of financial returns and tangible benefits
that an employee receives for the work pe rformed in an organization.
Compensation management is also known as salary and profits
administration, remuneration control, or reward management.
Compensation is a monetary payment given to an individual in exchange
for their services. It may be defined as money received in performance of
work and many kinds of services and benefits. An organization provides
many kinds of services and benefits to their employees. This all comes
under compensation management. In simple words, we can say that
compensation i s the remuneration received by an employee in return for
their contribution to the organization.
The main objective of compensation management is to recruit and retain
the qualified employees. A proper system of compensation ensure that the
employer is wi lling to pay and the employees are going to perform in the
best way. A good compensation system represents the most important munotes.in

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Compensation: An Introduction
37 element in the employment relationship between the employer and
employee. It also helps to motivate employees for better performa nce and
maintain morale.
4.1.3 Definition :
According to Milkovitch and Newman, “Compensation is all forms of
financial returns, tangible services and benefits employees receive as part
of an employment relationship.” The phrase “financial returns” refers to
an individual's base salary, as well as short - and long -term incentives.
“Tangible services and benefits” are such things as insurance, paid
vacation and sick days, pension plans, and employee discounts.
In the words of Cascio, “Compensation includes direct cash payments and
indirect payments in form of employees benefits and incentives to
motivate employees to strive for higher levels of productivity”
According to Tapomoy Deb, "Compensation management is a system
compensating individuals for the work they perform in such a way that the
organization is able to attract, retain, and motivate them to perform well
keeping in view organizational and market factors".
According to I. Kessler, "Compensation management refers to payment
systems which determine e mployee wages or salary, direct and indirect
rewards".
From the above definitions, compensation may be defined as money
received in performance of work and many kinds of services and benefits.
4.1.4 Conceptual Framework :
The following pictures depict the conceptual framework of the
compensation -

Fig. 4.1: Compensation: A Concept

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Compensation and Benefits
38 4.1.5 Nature of Compensation :
The following point explains the nature of compensation :

Fig. 4.2: Nature of Compensation
1. Integral Part of HRM :
Compensation management is a n integral part of human resource
management. It is a tool used by management for a variety of purposes to
further the existence of the company. Compensation management consists
of a number of activities pertaining to job evaluation, market rate analysis,
job analysis, pay structure design and maintenance, etc. Compensation is
one of the most important human resource functions of an organization.
2. Systematic Approach :
Compensation is a systematic approach of providing monetary value to
employees in exchan ge for the work or services they performed. The term
compensation denotes all forms of financial returns and tangible benefits
that an employee receives for the work performed in an organization.
3. Monetary Values to Employees :
Compensation is a monetary payment given to an individual in exchange
for their services. It may be defined as money received in performance of
work and many kinds of services and benefits. An organization provides
many kinds of services and benefits to their employees.
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Compensation: An Introduction
39 4. Determi ne the Employees Wages and Salary :
Compensation helps to determine the employees wages and salary. A good
compensation model can help to reinforce the key corporate values and
facilitate the achievement of organizational objectives. In the globalization
era, where the business environment has become increasingly challenging,
an effective compensation system helps to attract the talent candidates for
the organization.
5. Organized Practice :
Compensation is an organized practice and it also represents the mo st
important element in the employment relationship. The structure
comprises a number of different elements that may be cash and non -cash
payments.
4.2 OBJECTIVES OF COMPENSATION The following are the main objectives of compensation management:
1. To attra ct and retain the high performing employees.
2. To motivate the employees to perform better in an organization.
3. To enhance the organization’s corporate reputation.
4. To ensure the fairness for the contributions that people make to the
organization.
5. To stimulate and implement change management.
6. To support the organization's strategy.
7. To avoid the cost of hiring and training the new employees.
8. To encourage the positive attitude and behavior among employees.
9. To give reward to the people fo r the value they create for the
organization.
10. To channelize the efficient and productive administration.
4.3 IMPORTANCE OF COMPENSATION The term compensation denotes all forms of financial returns and tangible
benefits that an employee receives for the work performed in an
organization. Compensation is one of the most important human resource
functions of an organization. It is the most element of an organization and
denotes the following points as importance of this topic : munotes.in

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Compensation and Benefits
40

Fig. 4.3 Importance of Com pensation
1. Increases Employees Performance :
Compensation is the most important element in the employment
relationship. For the employees, a proper compensation system raises his
standard of living. Compensation is a systematic approach of providing
monet ary value to employees in exchange for the work or services they
performed. If they receive good remuneration, it increases their
performance and productivity.
2. Increases Competitiveness :
From the employer’s point of view, the compensation model represe nts a
significant part of his cost. As mentioned earlier, a good compensation
model increases the productivity and performance of an employee.
Ultimately, their increased performance and productivity contributes to
increasing the competitiveness of the org anization.
3. Attract Top Talent :
A good compensation model helps organizations to attract and retain the
new talent. It attracts the best candidates for the organization. People
before joining any organization always give first preference to salary and
goodwill of the company. munotes.in

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Compensation: An Introduction
41 4. Increases Productivity and Profitability :
It is observed that the contented employees are the most productive
employees. When the organization, through a good compensation model,
pays a sufficient amount for the work of employees , they automatically
feel motivated and perform well. Thus, it increases the overall productivity
and performance of the organization.
5. Boosts Employee Loyalty :
When employees get good pay, they like to stay in an organization. The
proper compensation m odel helps them to stay with the employer for the
long term or may be forever. It boosts employee loyalty towards
organization as they don ’t leave and employers don't need to continue to
spend time, money and energy on recruiting new candidates.
6. Helpfu l for Government :
Organizations stay in compliance with the Federal and State government
agencies with the help of a legal compensation system. Many acts have
been passed to ensure that the employees are getting sufficient payment to
run their family and t o fulfill their basic needs.
4.4 FACTORS AFFECTING EMPLOYEE’S COMPENSATION Compensation is a tool used by management for a variety of purposes to
further the existence of the company. Compensation management consists
of a number of activities pertaining t o job evaluation, market rate analysis,
job analysis, pay structure design and maintenance, etc. Compensation in
any organization is highly affected by numerous factors. The
compensation at an organizational level can be classified into two
categories - Internal factors and External factors.

Fig. 4.4: Classification of Factors Affecting Employee’s Compensation munotes.in

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Compensation and Benefits
42 Further, the internal and external factors have various sub -factors affecting
the employee's compensation at the workplace. The description of the
same is given below :
1. Internal Factors :
Internal factors are also known as controllable factors. As the name
suggests these factors are internal to an organization and controllable in
nature. The impact of these factors affecting the compensation of the
compensation is specific and direct. Internal factors have a great influence
on the pay structure of the organization. The following are the internal
factors which affect compensation at organizational level .
 Employer’s Ability to Pay
 Job Status and Wort h
 Compensation Policy of the Organization
 Performance and Productivity Level of an Employee
 Job Analysis
 Job Description
 Job Specification
 Employee Related Factors
 Business Strategy
 Experience of an Employee
Compensation is the most important element in th e employment
relationship. For the employees, a proper compensation system raises his
standard of living. The factors which are mentioned above can affect the
employee’s performance and productivity. As these factors are internal to
an organization, an emp loyer can take care of these factors.
2. External Factors :
External factors are also known as uncontrollable factors. As the name
suggests these factors are external to an organization and uncontrollable in
nature. The impact of these factors affecting th e compensation of the
compensation is not specific and is indirect. External factors have a great
influence on the pay structure of the organization. The following are the
external factors which affect compensation at industry level -
 Demand and Supply of Labour
 Government Control
 Inflation Level
 Globalization munotes.in

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Compensation: An Introduction
43  Privatization Policy
 Cost of Living
 Economic Conditions
 Society
 Labour Unions
 Legislation
 Cross Sector Mobility
 Labor Laws and Legislation
 Ongoing Rate/Prevailing Wage Rate
4.5 COMPENSATION / REMUNER ATION PLACE IN REWARD STRATEGY 4.5.1 What is Reward?
The term “Reward” can be described as an incentive or appreciation in the
form of monetary or non -monetary value to the people for their
contribution in an organization. Reward management deals with the
inclusion, implementation and adaptation of various strategies, procedures
and policies in an organization related to providing the incentives and
benefits to the employees for their work towards the enterprise.
According to Dessler, “Reward is an award as employee compensation for
all types of salary employees receive an d arises from their employment.”
According to Bratton and Gold, “Rewards are all forms of financial
returns, and tangible service and benefits employees receive as part of an
employment re lationship. ”
The main objective of reward strategy is to motivate the people by fairly,
equitable distributing the reward to them. The scope of reward
management not only deals with the pay but also it covers employees
benefits and non -financial rewards. The term ‘Non -financial’ covers :
 Recognition
 Learning
 Growth and development
 Career planning discussion
 Increased job opportunity
 Training
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Compensation and Benefits
44 4.5.2 What i s Compensation?
Compensation is a monetary payment given to an individual in exchange
for their services . It may be defined as money received in performance of
work and many kinds of services and benefits. An organization provides
many kinds of services and benefits to their employees. This all comes
under compensation management. In simple words, we can say that
compensation is the remuneration received by an employee in returns of
their contribution to the organization
A proper system of compensation and sure that the employer is willing to
pay and the employees are going to perform in the best way. A good
compensation system represents the most important element in the
employment relationship between the employer and employee. It also
helps to motivate employees for better performance and maintain morale.
In the words of Cascio, “Compensation includes dire ct cash payments and
indirect payments in form of employees benefits and incentives to
motivate employees to strive for higher levels of productivity”
According to Tapomoy Deb, "Compensation management is a system
compensating individuals for the work they perform in such a way that the
organization is able to attract, retain, and motivate them to perform well
keeping in view organizational and market factors".
According to Milkovitch and Newman, “Compensation is all forms of
financial returns, tangible ser vices and benefits employees receive as part
of an employment relationship.”
Compensation is one of the most important human resource functions of
an organization. The term compensation denotes all forms of financial
returns and tangible benefits that an employee receives for the work
performed in an organization.
4.5.3 Compensation Place i n Reward Strategy :
The term “Compensation” is a vital part of human resource management.
The present area of human resource management is of competitive nature.
It is mo re important to manage and sustain the most important resource of
the organization. Human resource management deals with the overall
functions of procuring, hiring, training, motivating and maintaining the
human resources of the organization.
The operativ e functions of HRM includes Procureme nt, development,
compensation, motivation, maintenance and integration and emerging
trends. The management functions of human resource manag ement
includes planning, organizing, directing and controlling.
Compensation i n the high performance organization needs to reinforce the
directions set by the leadership. Compensation strategy issued to guide the
design of specific compensation decisions. Compensation strategy plays
an important role in the strategic decision making of the organization. munotes.in

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Compensation: An Introduction
45

Fig. 4.5: Concept of Compensation and Strategy in Human Resource
Management
In reward strategy, compensation holds a significant place. Compensation
is a key issue for the employees. It is significant to approach compensation
strategically by developing a philosophy towards compensation along with
a set of objectives. Methods of delivery and number of levels plays a vital
role determining the compensation level of an organization.
An organization can include the following types of compensation in their
strategy :
 Base pay
 Bonus
 Commission
 Overtime pay
 Paid time off
 Flexible schedules
4.6 SUMMARY  In a course of time, every business develops with complexities.
Beyond a level, managing alone becomes a difficult task for a person.
The need for management has increased tremendously. So is the need
for organizational development. The compensation management helps
organizations to develop and grow. In a changing business climate, it
is important to understand the structural, cultural and s trategic reality
of work.
 Compensation is a monetary payment given to an individual in
exchange for their services. It may be defined as money received in
performance of work and many kinds of services and benefits. An
organization provides many kinds of services and benefits to their
employees. This all comes under compensation management. In munotes.in

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Compensation and Benefits
46 simple words, we can say that compensation is the remuneration
received by an employee in return for their contribution to the
organization.
 The main objective of co mpensation management is to recruit and
retain the qualified employees. A proper system of compensation and
sure that the employer is willing to pay and the employees are going
to perform in the best way. A good compensation system represents
the most imp ortant element in the employment relationship between
the employer and employee. It also helps to motivate employees for
better performance and maintain morale.
 Compensation is a tool used by management for a variety of purposes
to further the existence of the company. Compensation management
consists of a number of activities pertaining to job evaluation, market
rate analysis, job analysis, pay structure design and maintenance, etc.
Compensation in any organization is highly affected by numerous
factors. The compensation at an organizational level can be classified
into two categories - Internal factors and External factors.
 In reward strategy, compensation holds a significant place.
Compensation is a key issue for the employees. It is significant to
approach compensation strategically by developing a philosophy
towards compensation along with a set of objectives. Methods of
delivery and number of levels plays a vital role determining the
compensation level of an organization.
4.7 SELF ASSESSMENT TEST 1. Define the term Compensation. Explain the various objectives of
compensation management.
2. Identify the major components of compensation management.
3. Outline the various factors which affect employee compensation in an
organization.
4. Explain the nee d and importance of compensation in an organization.
5. Bring out the difference between m anager’s remuneration and wages
of workers.
6. Justify the high remuneration paid to executives. Also explain the role
of compensation management in this area.
7. Write a detailed on place of compensation in reward strategy.
8. Explain the various components of reward strategy.
*****
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47 5
UNDERSTANDING THE ELEMENTS OF
COMPENSATION/STOCK OPTION
Unit Structure
5.0 Objectives
5.1 Introduction
5.2 Importance of Compensation Programs
5.3 Elements of Compensation
5.4 Concept of Stock Option
5.4.1 Meaning
5.4.2 Conceptual Framework
5.5 Understanding the Elements of Stock Option
5.6 Summary
5.7 Self Assessment Tests
5.0 OBJECTIVES After studying thi s module, you should be able to :
 Understand the nature and relevance of compensation
 Study the importance of compensation programs
 Know about t he Elements of compensation
 Understand the Concept of Stock Option
 Understand the Elements of Stock Option
5.1 INTRODUCTION Compensation is a systematic approach of providing monetary value to
employees in exchange for the work or services they performed. The term
compensation denotes all forms of financial returns and tangible benefits
that an employee receives for the work performed in an organization.
Compensation management is also known as salary and profits
administration, remuneration control, or re ward management.
The main objective of compensation management is to recruit and retain
the qualified employees. A proper system of compensation and sure that
the employer is willing to pay and the employees are going to perform in
the best way. A good com pensation system represents the most important
element in the employment relationship between the employer and
employee. It also helps to motivate employees for better performance and
maintain morale. munotes.in

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Compensation and Benefits
48 According to Milkovitch and Newman, “Compensation is a ll forms of
financial returns, tangible services and benefits employees receive as part
of an employment relationship.”
The phrase “financial returns” refers to an individual's base salary, as well
as short - and long -term incentives. “Tangible services an d benefits” are
such things as insurance, paid vacation and sick days, pension plans, and
employee discounts.
Compensation helps to determine the employees wages and salary. A good
compensation model can help to reinforce the key corporate values and
facilitate the achievement of organizational objectives. In the globalization
era, where the business environment has become increasingly challenging,
an effective compensation system helps to attract the talent candidates for
the organization. Compensation is an organized practice and it also
represents the most important element in the employment relationship.
The structure comprises a number of different elements that may be cash
and non -cash payments.
5.2 IMPORTANCE OF COMPENSATION PROGRAMS The term compens ation denotes all forms of financial returns and tangible
benefits that an employee receives for the work performed in an
organization. Compensation is one of the most important part of human
resource functions of an organization. It is the most element of an
organization and denotes the following points as importance of this topic -
Compensation is the most important element in the employment
relationship. For the employees, a proper compensation system raises his
standard of living. Compensation is a sys tematic approach of providing
monetary value to employees in exchange for the work or services they
performed. If they receive good remuneration, it increases their
performance and productivity.
From the employer’s point of view, the compensation model re presents a
significant part of his cost. As mentioned earlier, a good compensation
model increases the productivity and performance of an employee.
Ultimately, their increased performance and productivity contributes to
increasing the competitiveness of th e organization.
A good compensation model helps organizations to attract and retain the
new talent. It attracts the best candidates for the organization. People
before joining any organization always give first preference to salary and
goodwill of the comp any.
It is observed that the contented employees are the most productive
employees. When the organization, through a good compensation model,
pays a sufficient amount for the work of employees, they automatically
feel motivated and perform well. Thus, it increases the overall
productivity and performance of the organization. munotes.in

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Understanding the Elements of Compensation/Stock Option
49 When employees get good pay, they like to stay in an organization. The
proper compensation model helps them to stay with the employer for the
long term or may be forever. It boosts em ployee loyalty towards
organization as they dont leave and employers don't need to continue to
spend time, money and energy on recruiting new candidates.
Organizations stay in compliance with the Federal and State
government agencies with the help of a le gal compensation system. Many
acts have been passed to ensure that the employees are getting sufficient
payment to run their family and to fulfill their basic needs.
5.3 ELEMENTS OF COMPENSATION As mentioned many times, compensation is the most important human
resource function of an organization. There are various important elements
of compensation. While designing a successful compensation package,
one must consider the following elements :

Fig. 5.1 Elements of a Successful Compensation Programs
1. Dire ct Compensation :
Direct compensation is a form of compensation an employer pays to his
employee directly for his/her services rendered for the work in an
organization. It can be paid in the form of wages, salaries, commissions
and bonuses that an employer provides regularly and consistently. The
following are the elements of direct compensation : munotes.in

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Compensation and Benefits
50

Fig. 5.2: Elements of Direct Compensation
1) Base Pay :
The first component of direct compensation is base pay. It is the first
element of executive remuneration. The base pay is determined through
the evaluation of the job. Job evaluation is a process through which the job
of a person is evaluated through the level of skills,efforts and
responsibility required to perform the jobs.
The subject matter of base pay i ncludes :
Salary :
Salary is a term used to indicate a fixed amount of money or compensation
paid to an employee by an employer in return for work performed.
Wages :
Wages is a term used to indicate an amount of money or compensation
paid to a labor/worker by an employer in return for work performed.
2) Commissions :
Commissions form another important element of compensation
management. Commissions are a sum of money paid to an employee upon
completion of a task, usually selling a certain amount of goods or s ervices.
Commission along with salary or alone are often considered as an
allowance paid to the employees for the sales target or the work which is
commission based. munotes.in

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Understanding the Elements of Compensation/Stock Option
51 Direct compensation can be in the form of commissions that an employer
provides regularly and consistently
3) Bonus :
Bonus is a gift paid to an employee occasionally to reward the exceptional
performance or for some special occasions. The concept of bonus plays a
vital role in today’s competitive executive payment program. In the form
of bonus es, an employer appreciated his/her employees. This type of
incentive is special and occasionally given to the employees.
According to the definition of Cambridge Dictionary, “ Bonus is an
amount of money given to an employee in addition to their salary as a
reward for working well.
The following are the types of bonuses namely,
a. Production Bonus
b. Profit Bonus
c. Customary Bonus
d. Implied Bonus (Bonus as an implied term)
4) Stock Options :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period. There are two types of stock option -
 Call Option
 Put Option
5) Profit Sharing :
Profit sha ring is a plan in which an employer gives the right to an
employee to be a part of profit sharing of the organization. It is a type of
pre-tax contribution plan for employees that gives workers a certain
amount of a company’s profits. The amount of profit sharing is up to the
company how much they would like to share with the employees.
The profit sharing depends on the following elements :
 Amount set by the Employer
 Profitability of the Business
 Working Capital Needs of the Business
 Amount of Wages and Sala ries
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Compensation and Benefits
52 6) Piece Rate :
When the workers are paid by the units performed, this system is known
as Piece rate. The Piece Rate is also known as Piece Work Pay.
Understanding what Piece rate is important. Complying with the wages
and overtime allowances is also a part of the Piece Rate system. The
system to be effective must be transparent.
7) Perks:
Perks or Perquisites constitute a major source of income for the
executives. The perks like vacations, club membership, well furnished
accommodation, vehicle facili ties are some direct form of compensation
which comes under the category of perks.
The scope of direct compensation does not include :
 Benefits
 Retirement plans
 Leaves
 Employee services
 Education
2. Indirect Compensation :
As the name suggests, indirect co mpensation is a type of compensation an
employer pays to his/her employees indirectly. It is important to pay
indirect compensation because in a tight labor market, it has become
increasingly significant to attract and retain the talent. Some of the indire ct
compensation alternatives are :

Fig. 5.3 Alternatives of Indirect Compensation munotes.in

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Understanding the Elements of Compensation/Stock Option
53 Apart from the alternatives mentioned in the diagram, an organization
adopts the following types as an indirect compensation :
 Flexible working schedules
 Moving expenses
 Paid leaves
 Subsidized utilities
 Events tickets
 Magazines subscription
 Boots and clothing
 Laundry services
 Use of machineries
 Cellular phones etc.
5.4 CONCEPT OF STOCK OPTION 5.4.1 Meaning :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period.
There are two types of stock option :
 Call Option
 Put Option
A seller is paid a premi um from the contract purchased by the buyer and
known as option writer. He is the one who sells the stock option to the
employees. This practice of compensation is also known as equity option.
Many companies are offering equity to their employees. As the n ame
suggests, it is an option not an obligation on the part of the investor.
The employee stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than granting sha res of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises.
It also contributes in increasing the worth of the employees in t erms of the
stocks they have in their names. It provides an opportunity to employees
to share directly in the company’s success through stock holdings. As the
employees own a stake in the company, they feel more productive and munotes.in

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Compensation and Benefits
54 motivated. From the employer’ s point of view, it is understood that a
productive employee produces more. The employee stock option boosts
job satisfaction. It also helps them to boost their financial strength. It is a
key tool to recruit the best and retain the best.
5.4.2 Conceptual Framework :
The following pictures depict the conceptual framework of the
compensation :

Fig.5.4: Interrelationship Between HRM, CM and ESOS

Fig. 5.5: Concept of Stock Option munotes.in

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Understanding the Elements of Compensation/Stock Option
55 5.5 UNDERSTANDING THE ELEMENTS OF STOCK OPTION To understand the elements of t he stock option, it is important to
understand the fol lowing features of stock option:

Fig. 5.6: The Key Features/Elements of Stock Option
1. Understanding the Concept :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period. There are two types of stock options - Call Option
and Put Option.
The employee stock option is a t ype of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than granting shares of stock directly, the company
gives derivative options on the stock instead. The great benefit of this t ype
of compensation can be determined when the stock prices of the company
rises. It also contributes in increasing the worth of the employees in terms
of the stocks they have in their names.
2. Right to Buy Companies Share :
The employees of the organizati on get rights to buy the companies share at
a fixed price. A seller is paid a premium from the contract purchased by
the buyer and known as option writer. He is the one who sells the stock munotes.in

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Compensation and Benefits
56 option to the employees. This practice of compensation is also know n as
equity option. Many companies are offering equity to their employees. As
the name suggests, it is an option not an obligation on the part of the
investor.
3. Working of Stock Option :
The option value can go up and down. It is not easy to understand th e
working of a stock option. One must have some knowledge of finance
when it comes to understanding this topic. The option can go up and
down. The great benefit of this type of compensation can be determined
when the stock prices of the company rises.
4. Vesting Period :
Vesting is a word which deals with acquiring the stock option of a
company. It is a process by which an employee acquires a “vested
interest” or “stock option” in their company. It is a process of earning like
an asset.
5. Two Types of Sto ck Option :
Companies can offer or grant two types of stock option :
a. Non-qualified Stock Option
b. Incentives Stock Options
Non-qualified stock options do not qualify for special tax treatment.
While, incentives stock options qualify for special tax treatment.
6. Expiration Feature :
The term of the stock option is limited. If it is not exercised within the
time limit, it may expire. Stock options always have a limited term during
which they can be exercised. The most common term is 10 years from the
day of gran t.
5.6 SUMMARY  Compensation helps to determine the employees wages and salary. A
good compensation model can help to reinforce the key corporate
values and facilitate the achievement of organizational objectives. In
the globalization era, where the busine ss environment has become
increasingly challenging, an effective compensation system helps to
attract the talent candidates for the organization. Compensation is an
organized practice and it also represents the most important element
in the employment rela tionship. The structure comprises a number of
different elements that may be cash and non -cash payments.
 As mentioned many times, compensation is the most important human
resource function of an organization. There are various important
elements of compens ation. While designing a successful munotes.in

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Understanding the Elements of Compensation/Stock Option
57 compensation package, one must consider the following elements -
Direct Compensation and Indirect Compensation.
 Direct compensation is a form of compensation an employer pays to
his employee directly for his/her services rendered for the work in an
organization. It can be paid in the form of wages, salaries,
commissions and bonuses that an employer provides regularly and
consistently.
 As the name suggests, indirect compensation is a type of
compensation an employer pays t o his/her employees indirectly. It is
important to pay indirect compensation because in a tight labor
market, it has become increasingly significant to attract and retain the
talent.
 Stock options are popularly known as Employee Stock Option.
Employee Stoc k Option is a contract between two parties that gives
the buyer the right to buy or sell underlying stocks at a predetermined
price and within a specified time period. There are two types of stock
options - Call Option and Put Option.
 It is important to u nderstand the elements of stock options.
5.7 SELF ASSESSMENT TESTS 1. Identify the major components of compensation management.
2. Explain the various types of Compensation. Describe the types in
detail.
3. Distinguish between direct compensation and ind irect compensation.
4. Explain the various important elements of direct compensation? How
do they affect the employees performance and productivity?
5. Explain the various important elements of indirect compensation?
How do they affect the employees perfo rmance and productivity?
6. Describe the concept of Stock Option. Explain the salient features of
stock options.
7. Write a note on understanding the elements of stock options.


*****
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58 6
COST TO COMPANY (CTC)
Unit Structure
6.0 Objectives
6.1 Introduction
6.2 Elements of Compensation
6.3 Compensation Structure
6.4 Concept of CTC
6.4.1 Overview
6.5 Costing the CTC of each element of Compensation Structure
6.6 Summary
6.7 Self Asse ssment Tests
6.0 OBJECTIVES After studying this module, you should be able to :
 Understand the nature and relevance of compensation
 Know about the Elements of compensation
 Understand the Concept of CTC
 Know about the Compensation Structure
 Understand Costi ng the CTC of each element of Compensation
Structure
6.1 INTRODUCTION Compensation is the most important element in the employment
relationship. For the employees, a proper compensation system raises his
standard of living. Compensation is a systematic app roach of providing
monetary value to employees in exchange for the work or services they
performed. If they receive good remuneration, it increases their
performance and productivity.
The concept of Cost to Company is not a new term. In the field of human
resource management, it plays a vital role. Cost to company is a term
which denotes the total cost a company bears for an employee. The
components of CTC are monetary and non -monetary. When a company
bears any kind of cost on employees, it comes under the section of Cost to
Company.
It is basically calculated yearly. Employees may not directly receive CTC
in cash. Candidates often come across this term when they negotiate with munotes.in

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Cost to Company (CTC)
59 the company about their salary. CTC and Take Home Salary are some
basic terms w hich a candidate needs to understand before applying or
joining any organization. If an organization is paying on any facility, it
will come under CTC.
Every organization calculates CTC. It is also known as gross salary. Cost
To Company is calculated by a dding Basic Salary and other additional
benefits that employees receive such as Gratuity, Employees Provident
Fund, House Rent Allowance, Travel Allowance, Food coupons, and so
on.
In the salary description of the organization. Many elements are listed in
the salary package of an employee. Compared to the CTC, there is one
term: Take Home Salary. Take Home Salary is the exact thing is the exact
amount an employee takes home. It means it is the amount which gets
deposited in the account of the employees afte r all the necessary
deductions like :
 Tax Deducted at Source
 Provident Fund Etc.
6.2 ELEMENTS OF COMPENSATION As mentioned many times, compensation is the most important human
resource function of an organization. There are various important elements
of com pensation. While designing a successful compensation package,
one must consider the following elements -
1. Direct Compensation
2. Indirect Compensation
1. Direct Compensation :
Direct compensation is a form of compensation an employer pays to his
employe e directly for his/her services rendered for the work in an
organization. It can be paid in the form of wages, salaries, commissions
and bonuses that an employer provides regularly and consistently. The
following are the elements of direct compensation -
1) Base Pay :
The first component of direct compensation is base pay. It is the first
element of executive remuneration. The base pay is determined through
the evaluation of the job. Job evaluation is a process through which the job
of a person is evaluated through the level of skills, efforts and
responsibility required to perform the jobs.

munotes.in

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Compensation and Benefits
60 The subject matter of base pay includes :
Salary :
Salary is a term used to indicate a fixed amount of money or compensation
paid to an employee by an employer in retur n for work performed.
Wages :
Wages is a term used to indicate an amount of money or compensation
paid to a labor/worker by an employer in return for work performed.
2) Commissions :
Commissions form another important element of compensation
management. Com missions are a sum of money paid to an employee upon
completion of a task, usually selling a certain amount of goods or services.
Commission along with salary or alone are often considered as an
allowance paid to the employees for the sales target or the w ork which is
commission based.
Direct compensation can be in the form of commissions that an employer
provides regularly and consistently.
3) Bonus :
Bonus is a gift paid to an employee occasionally to reward the exceptional
performance or for some special occasions. The concept of bonus plays a
vital role in today’s competitive executive payment program. In the form
of bonuses, an employer appreciated his/her employees. This type of
incentive is special and occasionally given to the employees.
According t o the defini tion of Cambridge Dictionary, “ Bonus is an
amount of money given to an employee in addition to their salary as a
reward for working well.
The following are the types of bonuses namely,
a. Production Bonus
b. Profit Bonus
c. Customary Bonus
d. Implied Bonu s (Bonus as an implied term)
4) Stock Options :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period. There are two types of stock option -
 Call Option
 Put Option munotes.in

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Cost to Company (CTC)
61 5) Profit Sharing :
Profit sharing is a plan in which an employer gives the right to an
employee to be a part of profit sharing of the organization. It is a type of
pre-tax contribution plan for employees that gives workers a certain
amount of a company’s profits. The amount of profit sharing is up to the
company how much they would like to share with the employees.
The profit sharing depends on the following element s:
 Amount set by the Employer
 Profitability of the Business
 Working Capital Needs of the Business
 Amount of Wages and Salaries
6) Piece Rate :
When the workers are paid by the units performed, this system is known
as Piece rate. The Piece Rate is also known as Piece Work Pay.
Understanding what Piece rate is important. Complying with the wages
and overtime allowances is also a part of the Piece Rate system. The
system to be effective must be transparent.
7) Perks:
Perks or Perquisites constitute a major sou rce of income for the
executives. The perks like vacations, club membership, well furnished
accommodation, vehicle facilities are some direct form of compensation
which comes under the category of perks.
The scope of direct compensation does not include :
 Benefits
 Retirement plans
 Leaves
 Employee services
 Education
2. Indirect Compensation :
As the name suggests, indirect compensation is a type of compensation an
employer pays to his/her employees indirectly. It is important to pay
indirect compensation bec ause in a tight labor market, it has become
increasingly significant to attract and retain the talent. Some of the indirect
compensation alternatives are : munotes.in

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Compensation and Benefits
62

Fig. 6.1: Alternatives of Indirect Compensation
Apart from the alternatives mentioned in the diagra m, an organization
adopts the following types as an indirect compensation :
 Flexible working schedules
 Moving expenses
 Paid leaves
 Subsidized utilities
 Events tickets
 Magazines subscription
 Boots and clothing
 Laundry services
 Use of machineries
 Cellular pho nes etc.
6.3 COMPENSATION STRUCTURE A compensation structure helps to determine the level of compensation an
organization is ready to pay to employees. A compensation structure
includes all the items which are the elements of compensation. Most
people thin k the pay and compensation is the same, but the fact is
compensation is a comprehensive term and covers all the monetary and
non-monetary rewards provided by an employer to an employee.
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Cost to Company (CTC)
63 While determining the compensation structure, the few points have to
consider :

Fig. 6.2: Components of Salary Structure
1. The most important goal in designing a compensation structure is
supporting the strategic objectives of the organization.
2. Determining the number of pay structures is another important
component. Depen ding upon the market rate and the structure of the
organization, many firms decide more than one pay structure.
3. Determining the internal pay equity is another component of a
compensation structure. The internal pay equity determines the
fairness within th e organization.
4. Determining the external pay equity is another component of a
compensation structure. The external pay equity is the perceived munotes.in

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Compensation and Benefits
64 fairness in pay relative to what other employees are paying for the
same type of labor.
5. Determining a market pa y line is another important component of
compensation structure. Market pay line is a rate which the market
offers and is considered as a prevailing pay rate in the market.
6. Designing pay grades and salary structure is another important part of
compensatio n structure. Different pay for different level jobs is an
important task to be determined under this section.
7. Computing the pay grades for each pay also constitutes the important
element of a compensation structure.
8. Once all the homework is done, designi ng of salary structure takes
place.
6.4 CONCEPT OF CTC 6.4.1 Overview :
Cost to company is a term which denotes the total cost a company bears
for an employee. The components of CTC are monetary and non -
monetary. When a company bears any kind of cost on emp loyees, it comes
under the section of Cost to Company.
It is basically calculated yearly. Employees may not directly receive CTC
in cash. Candidates often come across this term when they negotiate with
the company about their salary. CTC and Take Home Sal ary are some
basic terms which a candidate needs to understand before applying or
joining any organization. If an organization is paying on any facility, it
will come under CTC.
Every organization calculates CTC. It is also known as gross salary. Cost
To Company is calculated by adding Basic Salary and other additional
benefits that employees receive such as Gratuity, Employees Provident
Fund, House Rent Allowance, Travel Allowance, Food coupons, and so
on.
In the salary description of the organization. Ma ny elements are listed in
the salary package of an employee. Compared to the CTC, there is one
term: Take Home Salary. Take Home Salary is the exact thing is the exact
amount an employee takes home. It means it is the amount which gets
deposited in the acc ount of the employees after all the necessary
deductions like Tax Deducted at Source, Provident Fund Etc.
CTC is calculated as,
CTC = Gross salary + Allowances + Deductibles

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Cost to Company (CTC)
65 1. Basic Salary :
Basic salary is the amount payable to the employees for the se rvices they
render to an organization. The basic salary is deducted under the head of
income tax. It forms a part of their take home salary.
2. Allowances :
Allowances are all the perks and benefits (direct and indirect) that the
company offers to the emplo yee. The perks and benefits includes :
 Dearness Allowance
 Medical Allowance
 Entertainment Allowance
 Conveyance Allowance
 House Rent Allowance
 Other Allowances
3. Compulsory Deductibles :
The final component of CTC is compulsory deductibles. These deductions
are Provident Fund, Professional Tax and Income Tax.
CTC is the cost an employer bears to hire and sustain its employees.
6.5 COSTING THE CTC OF EACH ELEMENT OF COMPENSATION STRUCTURE The components of CTC are monetary and non -monetary. The following
are the components of CTC :
 Basic Pay
 Dearness Allowance (DA)
 Incentives or bonuses
 Conveyance allowance
 House Rent Allowance (HRA)
 Medical allowance
 Leave Travel Allowance or Concession (LTA / LTC)
 Vehicle Allowance
 Telephone / Mobile Phone Allowance
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66 1. Basic Pay :
Basic pay or basic salary is a fixed amount paid to employees by their
employers in return for the work performed or performance of
professional duties by the employee. It is the amount apart from surplus or
additional factors, such as bonuses, benefits or compensation from an
employer's end. Basic Pay includes :
Gross Pay : Total allowances (Medical Insurance, HRA, DA, Conveyance,
etc.)
Or
Basic Salary = Percentage of the CTC or Gross Pay
2. Dearness Allowances :
Dearness allowance is a component of salary which is some fixed
percentage of the basic salary, aimed at hedging the impact of inflation. It
is paid by the government to its employees as well as pensioners to offset
the impact of inflation. It is calculated as -
For the employee s of Central Government
% of DA = {(Average of the All -India Consumer Price Index (Base year -
2001 =100) for the last 12 months -115.76)/115.76} x 100
For Central Public Sector Employees
% of DA = {(Average of the All -India Consumer Price Index (Base yea r -
2001 =100) for the last 3 months -126.33)/126.33} x 100
3. Incentives or Bonuses :
Incentives are rewards and benefits used to motivate positive behaviors in
your workforce. Incentives in the form of compensation, reimbursement,
recognition, and rewards are given to employees to motivate and boost
their morale.
Bonus is a financial compensation an employer pays to his/her employees.
Bonus is a gift paid to an employee occasionally to reward the exceptional
performance or for some special occasions. The c oncept of bonus plays a
vital role in today’s competitive executive payment program. In the form
of bonuses, an employer appreciated his/her employees. This type of
incentive is special and occasionally given to the employees.
According to the definition of Cambridge Dictionary, “ Bonus is an
amount of money given to an employee in addition to their salary as a
reward for working well.
The following are the types of bonuses namely, Production Bonus, Profit
Bonus, Customary Bonus and Implied Bonus.
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Cost to Company (CTC)
67 4. Conveyance Allowance :
As the name suggests, conveyance allowance is paid to an employee to
compensate for the travel they have to undertake from their residence to
the workplace. It is also called a transport allowance. Conveyance
allowance is paid by an emp loyer only if there is no transportation
provided by the employer. In case an employer offers transport,
conveyance allowance will not be provided to employees.
5. House Rent Allowance :
House Rent Allowance is popularly known as HRA. House Rent
Allowance a n amount that an employer pays an employee to compensate
for rent paid to live in the place of employment. In Income Tax, HRA
means house rent allowance which is paid by an employer to the
employee.
6. Medical Allowance :
A medical allowance is a fixed pay ment that employers provide to
employees to cover their medical expenses. The Owner provides this
benefit to promote staff health and support medical expenses that workers
incur in a financial year. As per the Income Tax rules, No tax is levied on
medical reimbursement up to Rs. 15,000 if all bills are furnished by an
employee to his or her employer as per clause (b) of Section 17 (2) of the
IT Act, 1961.
7. Leave Travel Allowance or Concession (LTA / LTC) :
Leave Travel Allowance is a form of stipend give n by an employer to an
employee who is on leave from work to fund his or her travel.
Leave Travel Concession (LTC) is granted to Central Government
employees for travel to various parts of the country and home as well.
Leave Travel Allowance is one of the best tax -saving tools that an
employee can avail.
8. Vehicle Allowance:
Vehicle allowance is also a transport allowance. It is an allowance given
to meet commuting expenses between place of residence and office or to
meet personal expenditure of employee s of transport business. Few
companies pay car maintenance allowance to their employees.
9. Telephone/ Mobile Phone Allowance :
As the name suggests, Telephone/Mobile allowance is an allowance which
The company pays monthly to employees as compensation for the use of
mobiles or telephones for office or personal use.
10. Special Allowance :
Companies pay these allowances which are special and not general in
nature. Special allowance is a sum of money that an organization pays its
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68  Tuition fees allowance for children
 Children Education Allowance
 Hostel Allowance
 Underground Allowance
6.6 SUMMARY  Compensation is the most important element in the employment
relationship. For the employees, a proper compensation sys tem raises
his standard of living. Compensation is a systematic approach of
providing monetary value to employees in exchange for the work or
services they performed. If they receive good remuneration, it
increases their performance and productivity.
 Ever y organization calculates CTC. It is also known as gross salary.
Cost To Company is calculated by adding Basic Salary and other
additional benefits that employees receive such as Gratuity,
Employees Provident Fund, House Rent Allowance, Travel
Allowance, F ood coupons, and so on.
 Direct compensation is a form of compensation an employer pays to
his employee directly for his/her services rendered for the work in an
organization. It can be paid in the form of wages, salaries,
commissions and bonuses that an em ployer provides regularly and
consistently.
 As the name suggests, indirect compensation is a type of
compensation an employer pays to his/her employees indirectly. It is
important to pay indirect compensation because in a tight labor
market, it has become increasingly significant to attract and retain the
talent.
 A compensation structure helps to determine the level of
compensation an organization is ready to pay to employees. A
compensation structure includes all the items which are the elements
of compens ation. Most people think the pay and compensation is the
same, but the fact is compensation is a comprehensive term and
covers all the monetary and non -monetary rewards provided by an
employer to an employee.
 Cost to company is a term which denotes the to tal cost a company
bears for an employee. The components of CTC are monetary and
non-monetary. When a company bears any kind of cost on employees,
it comes under the section of Cost to Company.
 It is basically calculated yearly. Employees may not directly receive
CTC in cash. Candidates often come across this term when they
negotiate with the company about their salary. CTC and Take Home
Salary are some basic terms which a candidate needs to understand munotes.in

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Cost to Company (CTC)
69 before applying or joining any organization. If an org anization is
paying on any facility, it will come under CTC.
 The components of CTC are monetary and non -monetary. The
following are the components of CTC - Basic Pay, Dearness
Allowance (DA), Incentives or bonuses, Conveyance allowance,
House Rent Allowan ce (HRA), Medical allowance, Leave Travel
Allowance or Concession (LTA / LTC), Vehicle Allowance,
Telephone / Mobile Phone Allowance and Special Allowance.
6.7 SELF ASSESSMENT TESTS 1. Identify the major components of compensation management.
2. Explain the va rious types of Compensation. Describe the types in
detail.
3. Distinguish between direct compensation and indirect compensation.
4. Explain the various important elements of direct compensation? How
do they affect the employees performance and productivity?
5. Explain the various important elements of indirect compensation?
How do they affect the employees performance and productivity?
6. Explain the concept of CTC. How is it calculated?
7. What is CTC? Explain the various elements which an employer
considered while cal culating CTC.
8. What comes under the scope of CTC? Explain the various
components of CTC.

*****


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70 7
UNDERSTANDING INFLATION
Unit Structure
7.0 Objectives
7.1 Introduction
7.2 Meaning of Inflation
7.2.1 What Is Inflation?
7.2.2 Definition
7.2.3 Conceptual Framework
7.3 Theories of Inflation
7.4 Causes of Inflation
7.5 Impact of Inflation
7.6 Meas ures to Control Inflation
7.7 Summary
7.8 Self Assessment Test
7.0 OBJECTIVES After studying thi s module, you should be able to :
 Understand the meaning and concept of inflation.
 Know about the causes of inflation.
 Understand the impact of inflation.
 Know the measures to control inflation.
7.1 INTRODUCTION The term “Inflation” is associated with the excessive money supply. It is a
monetary phenomenon which denotes a condition of an economy of rising
prices with a reduction in the purchasing power of money. Inflation is the
result of disequilibrium between demand and supply forces and is
attributed to increase in the demand for goods and services and a decrease
in the supply of goods in the economy.
In relation to the aggregate supply, the excess aggregate d emand of goods
and services is the essence of inflation. Many modern and old countries
have suffered from inflation. The most famous and remarkable inflation
was the hyperinflation of Germany, Zimbabwe and Sri Lanka. During the
year of 1932, the people in Germany went to the market with
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71 The term ‘Inflation’ implies a reduction in the purchasing power of money
with the increase in general price level. It reflects a loss of value in the
medium of exchange. T he situation denotes a condition where there is a
sustained increase in the general price level of goods and services. It refers
to a specific period of time. In inflation, the money supply exceeds in the
market due to increasing general price levels.
With the decrease in purchasing power of money, people tend to buy
fewer goods and services. The money chases the goods in more quantity
as it denotes a situation where values of money also diminishes. It always
denotes a upward trend in the general price lev el and downward trend in
calculating the value of money. While measuring the level of inflation, a
large number of goods and services used by the people of a country is
taken into consideration while calculating the inflation rate.
Deflation is opposite to inflation. As inflation is a state of rising prices,
deflation is a state of falling prices.
7.2 MEANING OF INFLATION 7.2.1 What Is Inflation?
In simple words, inflation is a phenomenon of rising prices with the falling
value of money. It is a conditio n where the general price level increases
with the fall in the value of money. When the people get the things more
expensive compared to the normal level, this condition is said to be
inflation. It is a state at which the purchasing power of people decreas es.
They remain in a situation to buy fewer goods in terms of more money.
The condition is inflation beyond the limit is not considered good for any
economy. The hyperinflation of Germany is famous in this regard. A small
or sudden rise in prices is not c onsidered inflation. A general increase in
prices with a reduction in the purchasing power of money is called
inflation. The general price level tends to rise during inflation with a
reduction in the purchasing power or value of money.
During inflation, t he following aspects of economy tends to increase:
 Money supply
 Public expenditure
 Amount of black money
 Investment
 Profits of business class
 Factors prices
There are numerous reasons which contribute to increasing inflation in an
economy. Due to increasin g population, the demand for goods is higher
than the growth rate of output in the country. This also causes the prices to
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72 7.2.2 Definition :
Let's have a look in understanding few definitions of inflation -
According to Coulborn, “Inflation is the s tage of too much money
chasing too few goods.”
G. Ackley defined inflation as “a persistent and appreciable rise in the
general level or average of prices.”
In the words of Johnson, “Inflation is an increase in the quantity of money
faster than real nation al output is expanding.”
According to Sameulson, “By inflation, we mean a time of generally
rising prices.”
In the words of Peterson, “The word inflation in the broadest possible
sense refers to any increase in the general price -level which is sustained
and non -seasonal in character.”
According to Keynes, “True inflation is the one in which the elasticity of
supply of output is zero in response to increase in supply of money.
From the above definitions, we can say that inflation means a general
price rise a gainst a standard level of purchasing power. When the people
get the things more expensive compared to the normal level, this condition
is said to be inflation. It is a state at which the purchasing power of people
decreases.
7.2.3 Conceptual Framework :
The following pictures depict the conceptual framework of the
compensation :

Fig. 7.1: Concept of Inflation munotes.in

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73

Fig. 7.2: Concept of Inflation
7.3 THEORIES OF INFLATION There are two theories of Inflation :
1. Demand Pull Inflation
2. Cost Push Inflation

Fig. 7.3: Theories of Inflation
1. Demand Pull Inflation :
Demand pull inflation is considered as the oldest theory of price rise. It is
a situation in which the aggregate demand exceeds the aggregate supply of
goods and services. In this situation, the dem and grows at an unstoppable
rate. This theory is also known as excess demand inflation. This denotes a
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Compensation and Benefits
74 2. Cost Push Inflation :
Cost push inflation is a situation in which aggregate demand is falling but
the cost of production is rising. The rise in cost of production leads to
increase in price level. The rise in cost of production could be due to -
 Rise in the prices of raw material
 Labor
 Increase in profit
 Increase in the price of any other factor of pro duction
7.4 CAUSES OF INFLATION Inflation is the result of disequilibrium between demand and supply
forces. The forces are attributed to :

Fig. 7.4: Causes of Inflation
1. Demand Side :
An increase in the demand for goods and services in the country is one of
the main causes of inflation. The demand is increasing due to following
reasons :
i) Increase in Money Supply :
The first cause of increasing demand is an increase in money supply in an
economy. An increase in the money supply leads to an increase in mo ney
income. More quantity of money raises the monetary value of goods and munotes.in

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Understanding Inflation
75 services and thus it reduces the value of money in terms of purchasing
power.
ii) Increase in Public Expenditure :
One of the major causes of inflation is increase in public expendit ure.
Increase in public expenditure leads to an increase in the purchasing
power. The increase in the purchasing power leads to more increase in
demand for goods and services.
iii) Increase in Population :
Though the prices are rising, with the increasing p opulation the demand
for the products is also rising. The demand for goods is higher than the
rate of output in the country. This is also one of the reasons that the
demand for the goods is rising and due to increasing demand, this causes
prices to rise.
iv) Black Money :
The money which is not authorized or accounted for is known as black
money. It is not the color but the feature which calls the unaccounted
money as black money. Black money is the outcome of tax evasion. Tax
evasion money is flaunted and spended by people unconsciously.
2. Supply Side :
A decrease in the supply of goods in the economy is one of the main
causes of inflation. The supply is decreasing due to following reasons -
i) Production Lags :
The delay or lag in production is one of the fundamental reasons from the
supply side of inflation. When the production falls due to strikes, lockouts,
scarcity of raw material etc. leads to the reduction in the supply of goods.
Demand for the goods is increasing or the same but supply is not
increa sing due to multiple factors. This causes inflation to rise.
ii) Natural Calamity :
Due to natural calamities like flood, drought, earthquake, the production
of agricultural goods get affected. Agricultural production occurs
occasionally and it is affected by the multiple factors of nature.
Sometimes, heavy rainfall destroys crops. Sometimes, no rainfall or low
rainfall destroys crops.
iii) War :
During war, the production of consumer goods get affected. During
wartime, the production of consumer goods fall s heavily. The productive
resources are diverted and become unproductive due to war. The scarcity
of consumer goods leads to inflation.
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Compensation and Benefits
76 iv) Taxation Policy :
The taxes like sales tax, excise duty, corporation tax discount \get the
money flow of a businessm an. It results in discouragement of production.
This fall in production results in scarcity and price rise.
7.5 IMPACT OF INFLATION The following are the effects of inflation on the various parameters :

Fig. 7.5: Impact of Inflation
1. Effects on Product ion:
In the initial stages, the mild inflation has a favorable effect on production.
When the level of inflation stimulates, it has an unfavorable effect on
production such as :
 The quality of goods gets reduced.
 Businesses start hoarding goods to earn more profit by certain
artificial scarcity.
 Savings and capital accumulation gets affected adversely.
 It discourages foreign capital.
 Businesses change their pattern of production
2. Effects on Distribution :
The effect of inflation is different on the differen t sections of the society.
The effects of distribution in terms of losing and gaining are as follows :
 The creditors lose as they receive money when the purchasing power
of money is low. munotes.in

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Understanding Inflation
77  The debtors gain because when they repay the purchasing power of
money is low.
 The farmers gain because the prices of agricultural products increase.
 The business community gains as they earn more profit from the
rising prices.
 The fixed income group is worst affected because expenses increase
but the income stands the sa me.
 The impact on balance of payment is also adverse.
 The shareholders gain as companies earn profit.
 The debenture holder loses as the interest amount is fixed and the
purchasing power of money is low.
3. Political Effects :
Inflation gives discontentm ent in the public. They lose their faith in the
government. They feel the government is unable to control inflation. It
results in social degradation as well.
4. Social Effects :
Socially, inflation is always considered unjust. It increases the inequalities
between the rich and poor. The morality of businesses are affected. People
do get involved in black marketing. It results in moral degradation. The
activities like profiteering, adultering, hoarding increases.
7.6 MEASURES TO CONTROL INFLATION The follow ing are the measures to control inflation :

Fig. 7.6: Measures to Control Inflation munotes.in

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78 1. Monetary Policy :
Monetary policy is the policy of the central bank regarding the control and
regulation of money supply in the economy. To control the inflation, the
following measures are taken under this head :
 The Central Bank increases bank rate to raise the market rate of
interest.
 Under the open market operations, the Central Bank sells the
government securities.
 The Central bank increases the cash reserve ratio.
2. Fiscal Policy :
The policy of the government relating to taxation, public borrowings and
public expenditure is known as fiscal policy. Under fiscal policy, the
following methods are adopted :
 Government increase taxes
 Government reduces its expenditure
 Government incurs public debt
 Government repay the old debts
3. Other Measures :
Under this head, the following measures are adopted to control inflation :
 Production is regulated to avoid the situation of underproduction.
 Quotas are getting fixed.
 Price cont rol
 Exports is reduced
7.7 SUMMARY  The term ‘Inflation’ implies a reduction in the purchasing power of
money with the increase in general price level. It reflects a loss of
value in the medium of exchange. The situation denotes a condition
where there is a sustained increase in the general price level of goods
and services. It refers to a specific period of time. In inflation, the
money supply exceeds in the market due to increasing general price
levels.
 In simple words, inflation is a phenomenon of rising prices with the
falling value of money. It is a condition where the general price level
increases with the fall in the value of money. When the people get the
things more expensive compared to the normal level, this condition is
said to be inflation. It i s a state at which the purchasing power of munotes.in

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Understanding Inflation
79 people decreases. They remain in a situation to buy fewer goods in
terms of more money.
 Demand pull inflation is considered as the oldest theory of price rise.
It is a situation in which the aggregate demand exce eds the aggregate
supply of goods and services. Cost push inflation is a situation in
which aggregate demand is falling but the cost of production is rising.
 Inflation is the result of disequilibrium between demand and supply
forces. The forces are attribu ted to demand side and supply side.
 The impact of inflation adversely affects the production, distribution,
political conditions and the social status.
 With the help of monetary and fiscal policy, inflation can be
controlled.
7.8 SELF ASSESSMENT TEST 1. Define inflation. Explain the theories of inflation.
2. What is inflation? What are the causes of inflation? Suggest measures
to control it.
3. Give the remedies to control inflation.
4. Write the effects of inflation.
5. What is inflation and deflation? How does the eco nomy get affected?
6. Explain the various causes of inflation.

*****
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80 8
UNDERSTANDING VARIOUS ACTS
Unit Structure
8.0 Objectives
8.1 Introduction
8.2 The Employees Provident Fund Act and Miscellaneous Provisions
Act, 1952
8.2.1 Overview
8.2.2 Objectives of the Act
8.2.3 Scope and Applicability of the Act
8.2.4 Important P rovisions of the Act
8.3 ESIC
8.4 Payment of Gratuity Act
8.4.1 Overview
8.4.2 Objectives of the Act
8.4.3 Scope and Applicability of the Act
8.4.4 Important Provisions of the Act
8.5 Concept of Superannuation
8.6 Payment of Bonus Act
8.6.1 Overview
8.6.2 Objectives of the Act
8.6.3 Scope and Applicability of the Act
8.6.4 Important Provisions of this Act
8.7 Workmen’s Compensation Act 1923
8.7.1 Overview
8.7.2 Objectives of the Act
8.7.3 Scope and Applicability of the Act
8.7.4 Important Provisions of the Act
8.8 Summary
8.9 Self Assessment Tests
8.0 OBJECTIVES After studying thi s module, you should be able to :
 Understand the nature and relevance of social security legislations.
 Importance of social security legislations in India.
 Know the relevance of Gratuity Act 1972. munotes.in

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Understanding Various Acts
81  Assess the objectives of Provident Fund Act and Miscellaneous
Provisions Act.
 Understand the important provisions of the Workmen's Compensation
Act 1923.
8.1 INTRODUCTION The regulative laws of labor establish a legal system that fa cilitates
productive individual and collective employment relationships and hence a
productive economy. It helps to regulate the various aspects of the factory
and industries. The Central and State Government is empowered to enact
laws and regulation for t he betterment of workers and employees. The
Constitution of India has empowered the Central and the State
Government to take care of and to protect the interest of the workers. The
Ministry of Labor and Employment is responsible to protect and safeguard
the interest of workers. They are also responsible for safeguarding the
interest of poor, marginal and disadvantaged sections of the society.
Social security legislations are essential because it is the security that
society furnishes, through appropriate o rganization, against certain risks to
which its members are exposed. The concept of social security is
essentially related to the higher ideals of human dignity and social justice.
The term social security came into general use after the year 1935. In th e
same year, the US passed the social security act introducing the old age
pension scheme. The scheme was administered by the Federal
Government and paid for by employers and employees.
The International Labor Organization plays an important role in socia l
security legislation. In 1919, the formation of the International Labour
Organisation to promote the concept of Social Justice through
International standards, by providing information, technical assistance
and guidance and most important through coope ration with other
international organizations was promoted to ensure this concept for
laborers.
India was a founder member of the ILO. The Social Security (Minimum
Standards) Convention No. 102, adopted by the International Labour
Conference on 28th June, 1952, defines the nine branches of social
security benefit. Th e benefits for the laborers are:
1. Medical Care
2. Sickness benefit
3. Unemployment Benefit
4. Old-age Benefit
5. Employment Injury Benefit
6. Family Benefit
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82 8. Invalidity Benefit
9. Survivors B enefit
The evolution of social security provisions, acts and measures in India had
been rather slow. The state bears the primary responsibility for developing
the correct system for providing protection and assistance to its workforce.
In India, the schem es are designed to guarantee the long -term substance to
families when the earning member retires and dies and suffers a disability.
The social security system acts as a facilitator and helps the workers to
plan their own future through insurance and assis tance.
According to the Inter national Labour Organisation, “ social security is the
security that society furnishes, through appropriate organization, against
certain risks to which its members are exposed. These risks are essentially
contingencies agains t which the individual of a small means cannot
effectively provide by his own ability of foresight alone or even in private
combination with his fellows.”
Social security legislation in India in the industrial sector cons ists of the
following important enactments:
1. The Workmen’s Compensation Act 1923
2. The Employees State Insurance Act, 1948
3. The Gratuity Act, 1972
4. The Provident Fund Act and Miscellaneous Provisions Act, 1952
5. The Maternity Benefit Act, 1961
In a country like India the problem of poverty is com monly seen.
Illiteracy and unemployment is another problem our country is facing.
The problem of unemployment is in practice and the population is ever
increasing. As of today, social security seems to be the need of the hour
because the only resource that is available in ample in India is labor. The
above acts Important provisions to provide the social security in terms of
compensation, insurance, gratuity provident fund and maternity benefits to
the labor.
The main objective of social security legisl ations are to protect the poor
and the vulnerable and to ensure that they have an acceptable standard of
living. The aim of the social security legislation is three fold. To provide
compensation, to restore the sick and to prevent the loss of a labor.
8.2 THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952 8.2.1 Overview :
Employees provident fund is a welfare scheme for the benefits of
employees. In this scheme, the contribution is made by employer and munotes.in

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83 employee. Later on, the whole of th e amount is contributed by the
employer. The statutory rate of contribution is prescribed by the act. The
employee share is deducted from the salary of the employee and it is
deducted by the employer. The interest on this provident fund account is
credited to the account of the employee.
If the certain conditions are satisfied, at the time of retirement the
accumulated amount of provident fund is given to the employee. In India,
the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
came int o effect from 1st March, 1971. The act was further amended in
1976. The Act was passed with a view to introducing the Employees
Deposit Linked Insurance Scheme. The Employees Deposit Linked
Insurance Scheme is a measure to provide an insurance cover to the
members of the provident fund.
Further, the Act wa s enacted to provide a kind of social security to the
industrial workers. This act is an important labor legislation which came
into existence in 1952 to ensure compulso ry provision of Provident Fund,
Family Pension Fund and Deposit Linked Insurance in factories and other
establishments for the benefits of employees.
8.2.2 Objectives of the Act :
1. To provide a kind of social security to the industrial workers.
2. To provide provident fund to the employees afte r their service.
3. To introduce the Employees Deposit Linked Insurance Scheme.
4. To cultivate the spirit of saving something for the future among
employees.
5. To make provision for the future of the work man after his retirement
or for his dependents in case of early death.
8.2.3 Scope and Applicability of the Act :
The act is applicable :
1. to every establishment which is a factory engaged in any industry
specified in Schedule I and in which twenty or more persons are
employed, and
2. to any other establishment employ ing twenty or more persons or class
of such establishments which the Central Government may, by
notification in the Official Gazette, specify in this behalf:
3. The Central Government may, after giving not less than two months’
notice of its intention to do so, by notification in the Official Gazette,
apply the provisions of this Act to any establishment employing such
a number of persons less than twenty as may be specified in the
notification.
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84 8.2.4 Important Provisions of the Act :
1. Section 2A lays down the provisions related to an establishment to
include all departments and branches under this scheme.
2. Section 3 lays down the provisions related to the Power to apply Act
to an establishment which has a common provident fund with another
establishment.
3. Secti on 4 empowers the Central Government to add any industry in
Schedule I. The Central Government may, by notification in the
Official Gazette, add to Schedule -I any other industry in respect of the
employees whereof it is of opinion that a Provident Fund Sch eme
should be framed under this Act, and thereupon the industry so added
shall be deemed to be an industry specified in Schedule -I for the
purposes of this Act.
4. Section 5 of the act lays down provisions related to Employees’
Provident Fund scheme. The Cent ral Government may, by
notification in the Official Gazette, frame a Scheme to be called the
Employees' Provident Fund Scheme for the establishment of
provident funds under this Act for employees or for any class of
employees and specify the establishments or class of establishments
to which the said scheme shall apply 4[and there shall be established,
as soon as may be after the framing of the scheme, a fund in
accordance with the provisions of this Act and the Scheme.
5. Section 6 lays down the provisions re lated to the Contribution and
matters which may be provided for in Schemes. The statutory rate of
provident fund by the employee and the employer as prescribed in the
act is 10% of the pay/ wages of the employees.
6. Section 7 lays down the provisions related to the modification of
scheme. The Central Government may, by notification in the Official
Gazette, add to amend or vary, either prospectively or retrospectively,
the Scheme, the Pension Scheme, or the Insurance Scheme as the case
may be. Some 7 of the ac t is very comprehensive and covers many
provisions.
7. Section 8 of the act lays dow n the provisions related to the mode of
recovery of money due from employers.
Apart from these provisions, the Employees’ Provident Funds and
Miscellaneous Provisions Act, 19 52 covers many other provisions related
to withdrawals, offenses, obligations of employers etc.
8.3 ESIC ESIC Stands for Employees’ State Insurance Corporation. The Central
Government may, by notification in the Official Gazette, appoint on this
behalf, t here shall be established for the administration of the scheme of
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85 Corporation to be known as the Employees' State Insurance Corporation.
The Corporation shall be a body corporate by the name of Employees'
State Insurance Corporation having perpetual succession and a common
seal and shall by the said name sue and be sued.
The employees State Insurance Corporation shall consist of the following
members, namely:
 The Director -General o f the Corporation
 A Chairman, appointed by the Central Government
 A Vice -Chairman appointed by the Central Government.
 Not more than 5 persons nominated by the Central Government.
 1 person to represent each state.
 1 person representing the Union Territorie s.
 10 persons representing employers.
 10 persons representing employees.
 2 persons representing the medical profession.
 3 members of parliament (2: Lok Sabha and 1: Rajya Sabha).
The Director -General of the Corporation, the Chairman, the Vice -
Chairman, the five people nominated by the Central Government, the
members representing each State and the members representing each
Union Territory shall hold the office for up to four years.
8.4 PAYMENT OF GRATUITY ACT 8.4.1 Overview :
Gratuity is an amount which is paid by the employer to the employee for
the services rendered by him or her towards the organization. It refers to
the additional retirement benefit to be secured to the laborers for the
contribution of their services towards the organization. The amount paid
by the employer is in lump sum in consideration of the past service of the
laborer. The amount is given as a token of appreciation towards the years
contributed by the laborer to the organization.
In India, this benefit is governed by the Payment of G ratuity Act, 1972.
The Payment of Gratuity Act, 1972 came into force from 16th September
1972. The act provides for rewarding employees who have served a long
career in the organization.
8.4.2 Objectives of the Act :
1. To provide for a scheme for the payment of gratuity to employees
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86 companies, shops or other establishments and for matters connected
therewith or incidental thereto.
2. To provide a reward to employees who have served a long caree r in
the organization.
3. To provide the benefits to the employees as a token of appreciation
for his/her services.
8.4.3 Scope and Applicability of the Act :
1. The act extends to the whole of India.
2. The act is applicable to every shop or establishment in which 10 or
more persons are employed or were employed on any day of the
preceding 12 months.
3. It shall apply to -
(a) every factory, mine, oilfield, plantation, port and railway company;
(b) every shop or establishment within the meaning of any law for the
time being in force in relation to shops and establishments in a State,
in which ten or more persons are employed, or were employed, on any
day of the preceding twelve months;
(c) such other establishments or class of establishments, in which ten or
more employees are employed, or were employed, on any day of the
preceding twelve months, as the Central Government may, by
notification, specify in this behalf.
4. It shall come into force on such date as the Central Government may,
by notification, appoint.
8.4.4 Important Provisions of the Act :
Controlling Authority [Section 3] :
The appropriate Government may, by notification, appoint any officer to
be a controlling authority. The officer shall be responsible for the
administration of this act. The appropri ate government may appoint
different controlling authority for different areas.
Payment of Gratuity [Section 4] :
Gratuity shall be payable to an employee on the termination of his
employment after he has rendered continuous service for not less than five
years, :
(a) on his superannuation, or
(b) on his retirement or resignation, or
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87 Powers to Exempt [Section 5] :
The appropriate Government may, by notification, and subject to such
conditions a s may be specified in the notificat ion, exempt any
establishment, in receipt of gratuity or pensionary benefits not less
favorable than the benefits conferred under this Act.
Nomination [Section 6] :
Section 6 of the act deals with the provisions relating t o the nomination.
An employee may in his nomination, distribute the amount of gratuity
payable to him or may nominate one or more members of the family.
Determination of the Amount of Gratuity [Section 7] :
Section 7 of the act, lays down the rules for the determination of amount
of gratuity. The person who is entitled to receive the gratuity is required to
apply to an employer by writing an application. The employer shall
calculate the amount of gratuity to be paid. He shall provide notice to the
concerned employee and the controlling authority after calculating the
amount to be payable. The payment of gratuity should be made within 30
days from the date it is due.
Inspectors [Section 7 A]:
The appropriate G overnment may, by notification, appoint as many
inspectors, as it deems fit, for the purposes of this act. While Section 7B
deals with the Powers of Inspectors under this act.
Recovery of Gratuity [Section 8] :
If the amount of gratuity is not paid by the employer, the controlling
authority should give the employer a reasonable opportunity to show the
cause of such an Act. The amount of interest to be paid should not exceed
the amount of gratuity under this Act
Penalties [Section 9] :
(1) Whoever, for the purpose of avoiding any payment to be made by
himself unde r this Act or of enabling any other person to avoid such
payment, knowingly makes or causes to be made any false statement
or false representation shall be punishable with imprisonment for a
term which may extend to six months, or with fine which may exten d
to ten thousand rupees or with both.
(2) An employer who contravenes, or makes default in complying with,
any of the provisions of this Act or any rule or order made there under
shall be punishable with imprisonment for a term which shall not be
less t han three months but which may extend to one year, or with fine
which shall not be less than ten thousand rupees but which may
extend to twenty thousand rupees, or with both:
Provided that where the offense relates to non -payment of any gratuity
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88 imprisonment for a term which shall not be less than Six months but
which may extend to two years unless the court trying the offense, for
reasons to be recorded by it in writing, is of opinion that a les ser term of
imprisonment or the imposition; a fine would meet the ends of justice.
8.5 CONCEPT OF SUPERANNUATION The dictionary meaning of the word ‘superannuation’ or ‘superannuate’ is
to become retired, to retire because of age or infirmity.
Superannuat ion benefit is a scheme designed for the welfare of the
organization’s workers in the form of a pension plan. Superannuation
scheme is also known as pension plan. A superannuation benefit is a type
of retirement pension that is provided by a company to its employees.
8.6 PAYMENT OF BONUS ACT 8.6.1 Overview :
The Payment of Bonus Act was passed in 1965. The act was passed to
regulate the amount of bonus to be paid to the persons employed in
establishments. The amount of bonus is calculated on the basis of
employee’s salary and profit of the establishments. The productivity of the
employees largely depends on this factor. The term ‘Bonus’ means
something given in addition to salary. The Payment of Bonus
(Amendment) Bill, 2015 was introduced in Lok Sabha on Dec ember 7,
2015. The bill seeks to amend the Payment of Bonus Act, 1965.
8.6.2 Objectives of the Act :
1. To provide for the payment of bonus to the person employed in
certain establishments on the basis of profit or productivity.
2. To regulate the amount of bonu s to be paid,
3. To prescribe the minimum and maximum percentage of calculating
bonus.
4. To share the prosperity of the establishment in terms of profit.
8.6.3 Scope and Applicability of the Act :
1. This act extends to the whole of India.
2. This act is applicable to every factory and every establishment in
which twenty or more persons are employed on any day during an
accounting period.
3. The act has laid down a detailed procedure for calculating the amount
of bonus payable to employees.
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89 8.6.4 Important Provisions of this Act :
1. Section 4 deals with the computation of Gross profit derived by an
employer from an establishment in respect of any accounting year.
2. Section 5 deals with the provisions related to computation of
available surplus in respect of any accounting year.
3. Section 6 deals with the deduction part from the gross profit. Any
amount by way of depreciation, development rebate, investment
allowance and development allowance admissible in accordance with
the Income Tax Act.
4. Subject to the provisions of Section 7 and direct tax, the employer is
liable to pay for the accounting year in respect of his income, profits
and gains during that year.
5. Section 8 deals with the provisions related to eligibility of bonus. A
person is entitled to get the bonus if he/she has worked in the
establishment for less than thirty working days in that year.
6. Section 9 deals with the provisions related to disqualification of an
employee for bonus. If a person due to fraud, riotous or violent
behavior, theft, misappropriation or sa botage of any property is
dismissed from service is disqualified to receive bonus.
7. Section 10 deals with the minimum amount of bonus to be paid to the
eligible person.
8. Section 11 deals with the maximum amount of bonus to be paid to the
eligible person.
9. Section 15 deals with the set -on and set -off of allocable surplus.
10. Section 19 deals with the provisions of time limit for the payment of
bonus. The bonus shall be paid within a period of 8 months from the
close of the accounting year.
8.7 WORKMEN’S COMPEN SATION ACT 1923 8.7.1 Overview :
The work man compensation act is an important a ct of social security in
India. The beginning of social security in India was made with the passing
of this act 1923. B efore the passing of this act, the government formulated
some proposals for the grant of compensation. These proposals were
circulated for opinion among them. T he proposals for the grant of
compensation received g eneral support. Subsequently, the workmen's
compensation Act was passed in March 1923. The act came into force on
July 1st 1924.
The Workmen's Compensation Act is administered by the government.
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90 of disablement, employers liability for compensation, amount of
compensation, compensa tion to be paid when due and penalty for default
and appointment of Commissioner by the government. It helps the parties
to get relief from a necessary litigation bring about the relations between
employers and workmen.
8.7.2 Objectives of the Act :
1. To prov ide employment injury compensation to industrial workers.
2. To provide for the payment of certain classes of employers to their
workmen compensation for injury by accident at the workplace.
3. To provide a simple and economical mechanism for the recovery of
compensation in case of personal injury.
4. To provide a quick mechanism for the recovery of compensation in
case of occupational diseases.
5. To protect workmen from uncertainty and emergency in the course of
employment.
6. To impose an obligation upon employers to p ay compensation to
employees for accidents rising out of and in the course of
employment.
8.7.3 Scope and Applicability of the Act :
1. The act extends to the whole of India.
2. The act is applicable to workmen employed in factories, mines,
plantations, mechanica lly propelled vehicles, construction works and
certain other hazardous occupations in any such a capacity as is
specified in schedule II.
3. Under sub -section (3) of section 2 of the act, the state governments
are empowered to extend the scope of the act to a ny class of persons
whose occupations are considered hazardous after giving three
months notice in the Official Gazette.
4. The act, however, does not apply to members serving in the armed
forces of the Indian Union.
5. The compensation is related to the exten t of the injury or death rising
out of and in the course of employment.
6. The employer is not responsible if a workman sustains his injuries
under the influence of drugs, drinks etc.
8.7.4 Important Provisions of the Act :
Employer’s Liability for Compensati on [Section 3] :
Under this section, the act imposes the liability to pay compensation to
workmen if a personal injury is caused to him arising out of and in the munotes.in

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91 course of employment. Workmen are entitled to receive compensation
from the employer if the per sonal injury is caused to him or her by
accident at the workplace or arising out of or in the course of his
employment.
Amount of Compensation [Section 4] :
The Section 4 of the workmen's compensation act deals with the
provisions relating to the amount of compensation to be paid to workmen
if the personal injury is caused by accident or arising out of and in the
course of his employment. Subject to the provisions of this Act, the
amount of compensation shall be as follows, namely -
(a) where death results in from the injury : an amount equal to fifty per
cent. of the monthly wages of the deceased employee multiplied by
the relevant factor; or an amount of one lakh and twenty thousand
rupees, whichever is more;
(b) where permanent total disablement results from the injury : an amount
equal to sixty per cent. of the monthly wages of the injured employee
multiplied by the relevant factor; one lakh and twenty thousand
rupees, whichever is more;
Compensation to Be Paid When Due and Penalty for Default [Section
4A]:
Under this act, if the employer is under fault in paying the compensation
due within one month from the date it fell due, The Commissioner shall
direct that the employer in addition to the amount of areas pay simple
interest of 12% per annum or on su ch higher rates. The Commissioner has
the power to impose the penalty and the interest on the cleared amount it
Appointment of Commissioner [Section 20] :
The State Government may, by notifi cation in the Official Gadget, appoint
any person to be a Commissio ner for workmen compensation for such
areas as may be specified in the notification.
8.8 SUMMARY  In India, the Employees’ Provident Funds and Miscellaneous
Provisions Act, 1952 came into effect from 1st March, 1971. The act
was further amended in 1976. Th e Act was passed with a view to
introducing the Employees Deposit Linked Insurance Scheme. The
Employees Deposit Linked Insurance Scheme is a measure to provide
an insurance cover to the members of the provident fund.
 In India, this benefit is governed by the Payment of Gratuity Act,
1972. The Payment of Gratuity Act, 1972 came into force from 16th
September 1972. The act provides for rewarding employees who have
served a long career in the organization. munotes.in

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92  ESIC Stands for Employees’ State Insurance Corporati on. The
Central Government may, by notification in the Official Gazette,
appoint on this behalf, there shall be established for the administration
of the scheme of employees' state insurance in accordance with the
provisions of this Act a Corporation to be known as the Employees'
State Insurance Corporation.
 In India, this benefit is governed by the Payment of Gratuity Act,
1972. The Payment of Gratuity Act, 1972 came into force from 16th
September 1972. The act provides for rewarding employees who have
served a long career in the organization.
 Superannuation benefit is a scheme designed for the welfare of the
organization’s workers in the form of a pension plan. Superannuation
scheme is also known as pension plan. A superannuation benefit is a
type of retir ement pension that is provided by a company to its
employees.
 The Workmen's Compensation Act is administered by the
government. The extent of the act is very comprehensive as it covers
the various types of disablement, employers liability for
compensatio n, amount of compensation, compensation to be paid
when due and penalty for default and appointment of Commissioner
by the government. It helps the parties to get relief from a necessary
litigation bring about the relations between employers and workmen.
8.9 SELF ASSESSMENT TESTS 1. Explain the scope and applicability of the Employees Provident Fund
and Miscellaneous Provisions Act, 1952.
2. Discuss the important provisions of the Workmen's Compensation
Act, 1923.
3. Discuss the important provisions of the Paymen t of Gratuity Act.
4. What are the applications of the employer under Payment of Gratuity
Act?
5. What are the important provisions of the Employees Provident Fund
and Miscellaneous Provisions Act, 1952.
6. Explain the concept of provident fund. How are the contri butions
drawn from the employer and employee?
7. What are the important provisions under the Payment of Bonus Act,
1965.
8. Who is eligible to get a bonus?
*****
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93 9
VARIABLE PAY
Unit Structure
9.0 Objectives
9.1 Variable Pay
9.1.1 Introduction
9.1.2 Meaning
9.1.3 Conceptual Framework
9.1.4 Assumptions
9.2 Types of Variable Pay
9.3 Advantages of Variable Pay
9.4 Disadvantages of Variable Pay
9.5 Summary
9.6 Self Assessment Tests
9.0 OBJECTIVES After studying this module, you should be able to :
 Know the concept of variable pay
 Understand then various forms/types of variable pay
 Study the advantages of Variable Pay
 Know the disadvantages of Variable Pay
9.1 VAR IABLE PAY 9.1.1 Introduction :
The concept of variable pay has its origin from western nations. In the last
decade, this concept started gaining importance in the last decade. The
variable pay concept migrated from the Multinational Companies. It came
into Asia and other emerging markets. The variable pay is performance
based pay. Indian companies are progressing at par with the West.
Along with Private Companies, many Public Sector Units are working in
this direction. In the form of incentives and Commiss ions, the variable pay
can take many forms for the employees. It covers paying commissions to
sales representatives depending on the sales or paying annual bonuses to
the managers for their performance.
The concept of variable pay is not confined to only top and middle level. It
is spreading its wings to cover the lower level as well. Companies are munotes.in

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94 using stock options throughout the organization. The typical incentives are
changed with the stock option and other modern forms of variable pay.
Variable pay is linked to:
 Individual Performance
 Group Performance
 Organizational Performance
9.1.2 Meaning :
Variable pay is a performance based pay given to the employees by the
organization in the form of bonuses, stock options, incentives etc. It is a
form of compe nsation linked to individual or group performance. The
organizational performance is another important parameter of variable
pay. Variable pay is also known as incentives in many organizations.
Variable pay is based on employee’s performance, group perfo rmance and
organizational performance. When an employee achieves their goals,
variable pay is provided as a type of bonus or incentives along with the
basic salary. The basic pay is determined through the evaluation of the job.
Job evaluation is a process through which the job of a person is evaluated
through the level of skills, efforts and responsibility required to perform
the jobs.
The subject matter of base pay includes :
Salary :
Salary is a term used to indicate a fixed amount of money or compensatio n
paid to an employee by an employer in return for work performed.
Wages :
Wages is a term used to indicate an amount of money or compensation
paid to a labor/worker by an employer in return for work performed.
Variable pay is also known as pa mix where al ong with the basic pay, an
employee gets incentives, commission, bonuses for the work he performed
for the organization. Variable Pay is basically employee compensation that
changes.
9.1.3 Conceptual Framework :
The concept of variable pay can be understoo d with the help of the
following figures : munotes.in

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Variable Pay
95

Fig. 9.1 Concept of Variable Pay

Fig. 9.2: Components of Variable Pay
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96 9.1.4 Assumptions :
The working of variable pay in an organization relies on several basic
assumptions :
1. Variable pay is a compensation link ed to individual, team, and/or
organization performance.
2. Some people perform better than others.
3. Some jobs and works of the organization contribute more to the
organizational success.
4. Employees who perform better should receive more compensation.
5. Above satisfactory or outstanding performance should be encouraged
and recorded.
9.2 TYPES OF VARIABLE PAY Variable pay is based on employee’s performance, group performance and
organizational performance. When an employee achieves their goals,
variable pay is provided as a type of bonus or incentives along with the
basic salary. The basic pay is determined through the evaluation of the job.
Job evaluation is a process through which the job of a person is evaluated
through the level of skills, efforts and respon sibility required to perform
the jobs.

Fig. 9.3: Types of Variable Pay
1. At Individual Level :
At an individual level, an employee according to the performance gets
many types of variable pay. Piece rate, sales commission, bonuses,
special recognition, safety awards and attendance bonuses are some forms
of variable pay paid to the employees as per their work performance and
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97

Fig. 9.4: Forms of Variable Pay at Individual Level
1) Piece Rate :
When the workers are paid by the units pe rformed, this system is known
as Piece rate. The Piece Rate is also known as Piece Work Pay.
Understanding what Piece rate is important. Complying with the wages
and overtime allowances is also a part of the Piece Rate system. The
system to be effective mu st be transparent.
2) Bonuses :
Bonus is a gift paid to an employee occasionally to reward the exceptional
performance or for some special occasions. The concept of bonus plays a
vital role in today’s competitive executive payment program. In the form
of bonuses, an employer appreciated his/her employees. This type of
incentive is special and occasionally given to the employees.
According to the defini tion of Cambridge Dictionary, “ Bonus is an
amount of money given to an employee in addition to their salar y as a
reward for working well.
The following are the types of bonuses namely,
a. Production Bonus
b. Profit Bonus
c. Customary Bonus
d. Implied Bonus (Bonus as an implied term)
3) Pay Commissions :
Commissions form another important element of compensation
management . Commissions are a sum of money paid to an employee upon
completion of a task, usually selling a certain amount of goods or services.
Commission along with salary or alone are often considered as an
allowance paid to the employees for the sales target or the work which is
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98 Direct compensation can be in the form of commissions that an employer
provides regularly and consistently
4) Safety Recognition :
Safety measures play a vital role in the performance of an employee.
Safety recognition r efers to the acknowledgment of safety as a priority
within an organization. The idea of safety recognition lies on both
employer and employees. A safety incentive program is formal workplace
safety programs that center on acknowledging safety performance v ia
rewards.
5) Safety Awards :
Safety awards are given to employees to promote competitive spirits
among employees to boost and promote the safety measures in an
organization. These awards are given to those employees who follow all
safety norms and help o thers to promote safety at the workplace.
6) Attendance Bonuses :
Attendance bonuses are given to those employees as an incentive used to
boost employee attendance rates by rewarding employees who have
excellent attendance and are not frequently absent or w ere on leaves in an
organization.
2. At Group Level :
At a group level, an employee in a group according to the performance
gets many types of variable pay. Gain Sharing, quality improvement and
labor cost reduction are some forms of variable pay paid to t he employees
as per their work performance and target achievement.

Fig. 9.5: Forms of Variable Pay at Group Level munotes.in

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Variable Pay
99 1) Gain/Profit Sharing :
Gain/Profit sharing is a plan in which an employer gives the right to an
employee to be a part of profit sharing of the organization. It is a type of
pre-tax contribution plan for employees that gives workers a certain
amount of a company’s profits. The amount of profit sharing is up to the
company how much they would like to share with the employees.
The profit sharing depends on the following elements:
 Amount set by the Employer
 Profitability of the Business
 Working Capital Needs of the Business
 Amount of Wages and Salaries
2) Quality Improvement:
This approach is based on a quality model. Establishing a culture of
quality in a practice. Quality improvement (QI) is a systematic, formal
approach to the analysis of practice performance and efforts to improve
performance. It includes the following parameters :
 Establishing a culture
 Identifying key areas
 Communicating resul ts
 Ongoing evaluation
3) Labor Cost Reduction :
Labor cost reduction is also a type of variable pay. Labor costs are often
one of the largest line items on your company balance sheet. When it is
reduced due to the efficient work of employees, it helps to co ntrol costs.
The same benefit received by the organization can be distributed in the
form of benefits to the group members.
3. At Organizational Level:
At an organizational level, an employee in a group according to the
performance gets many types of vari able pay. Profit Sharing, employees
stock options, executive stock options and deferred compensation are
some forms of variable pay paid to the employees as per their work
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100

Fig. 9.6: Forms of Variable Pay at Organizatio nal Level
1) Profit Sharing :
Profit sharing is a plan in which an employer gives the right to an
employee to be a part of profit sharing of the organization. It is a type of
pre-tax contribution plan for employees that gives workers a certain
amount of a c ompany’s profits. The amount of profit sharing is up to the
company how much they would like to share with the employees.
The profit sharing depends on the following elements :
 Amount set by the Employer
 Profitability of the Business
 Working Capital Needs o f the Business
 Amount of Wages and Salaries
2) Employee Stock Options :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period.
There are two types of stock option :
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101 A seller is paid a premium from the contract purchased by the buyer and
known as option writer. He is the one who sells the stock option to the
employees. This practice of compensation is also known as equity option.
Many companies are offering equity to their employees. As the name
suggests, it is an option not an obligation on the part of the investor.
The employee stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than granting shares of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises.
3) Executive Stock Options :
Executive Stock Option is a contract between two parties that gives the
buyer the right to buy or sell underlying stocks at a predetermined price
and wi thin a specified time period. There are two types of stock options -
Call Option and Put Option.
The executive stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation ra ther than granting shares of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises. It also contributes in increasing the worth of the employees in terms
of the stocks they have in their names.
4) Deferred Compensation :
Deferred compensation refers to the part of one’s contribution that is with
held and paid at a future date. It is an arrangement in which a portion of an
employee' s income is paid out at a later date after which the income was
earned. The deferred compensation includes -
 Insurance Schemes
 Contingency Plans
 Stock Option Plans
9.3 ADVANTAGES OF VARIABLE PAY As mentioned earlier, the concept of variable pay is not conf ined to only
top and middle level. It is spreading its wings to cover the lower level as
well. Companies are using stock options throughout the organization. The
typical incentives are changed with the stock option and other modern
forms of variable pay.
The following advantages can be drawn from variable pay :
1. It helps to control costs. munotes.in

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Compensation and Benefits
102 2. It emphasizes the use of metrics to track performance.
3. It helps to engage and retain the key employees.
4. It helps to attract and retain valuable employees.
5. It helps to en courage managers to define success and communicate
that to team members
6. It encourages productivity and helps employees to work more
efficiently.
9.4 DISADVANTAGES OF VARIABLE PAY The following are the disadvantages of variable pay :
1. If the parameters of va riable pay are not defined clearly, it may result
in the improper implementation of the pay structure.
2. An increase in the variable pay may increase the cost of running an
organization.
9.5 SUMMARY  Variable pay is a performance based pay given to the emplo yees by
the organization in the form of bonuses, stock options, incentives etc.
It is a form of compensation linked to individual or group
performance. The organizational performance is another important
parameter of variable pay. Variable pay is also kno wn as incentives
in many organizations.
 Variable pay is based on employee’s performance, group performance
and organizational performance. When an employee achieves their
goals, variable pay is provided as a type of bonus or incentives along
with the basi c salary. The basic pay is determined through the
evaluation of the job. Job evaluation is a process through which the
job of a person is evaluated through the level of skills, efforts and
responsibility required to perform the jobs.
 At an individual leve l, an employee according to the performance gets
many types of variable pay. Piece rate, sales commission, bonuses,
special recognition, safety awards and attendance bonuses are some
forms of variable pay paid to the employees as per their work
performanc e and target achievement.
 At a group level, an employee in a group according to the
performance gets many types of variable pay. Gain Sharing, quality
improvement and labor cost reduction are some forms of variable pay
paid to the employees as per their w ork performance and target
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Variable Pay
103  At an organizational level, an employee in a group according to the
performance gets many types of variable pay. Profit Sharing,
employees stock options, executive stock options and deferred
compensation are some for ms of variable pay paid to the employees
as per their work performance and target achievement.
9.6 SELF ASSESSMENT TESTS 1. Explain the concept of variable pay in detail.
2. Describe the concept of Stock Option. Explain the salient features of
stock options.
3. Write a note on understanding the elements of stock options.
4. Explain the various forms of variable pay.
5. Explain the various types of variable pay. Also add examples in your
answer.


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104 10
UNDERSTANDING INCOME TAX
Unit Structure
10.0 Objectives
10.1 Introduction
10.2 Basic Concepts
10.2.1 What is Income Tax?
10.2.2 Important Definitions
10.3 Heads of Income
10.4 Deductions
10.5 Summary
10.6 Self Assessment Tests
10.0 OBJECTIVES After studying this module, you should be able to:
 Understand the nature and relevance of Income Tax
 Importance of Income Tax
 Know about the various sources of Income Tax
 Understand the basic concepts of Tax
10.1 INTRODUCTION Public finance is the study of finance of the country’s government. The
public authority requires a huge amount of resources to finance its
operations. The public authority raises revenue and meets expenditure. It
refers to the revenue which can be fetched by the public authority in a
given period, usually a year.
The concept of public finance deals with the public and management of
the finance raised from the public in the name of revenue. Public finance
is also known as Government’s finance. The area of public finance covers
the incom e and expenditure of public authorities in a manner in which one
is adjusted with the other.
Fiscal policy plays an important role for the development of the economy
by ensuring the proper money supply. The money is supplied to required
sectors. Thus, the basic objective of finance is to promote the economic
growth and development of the country by optimizing the use of finance
for the welfare of the general public.
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Understanding Income Tax
105 The main sources of public revenue are :
1. Fees
2. Taxation
3. Prices
4. Fines
5. Penalties
6. Special Asse ssment
7. Public Debts
8. Public Borrowings
Out of these public revenue sources, taxation is an important tool of
raising finance in order to meet the expenses for the assessment year. The
money through taxation is raised to meet expenditure on various public
services. It is the legal duty of a citizen to pay taxes. The taxes can be
levied on property, income, wealth or at the time of purchasing a
commodity. It is the most important source of revenue for the
government. Income tax is charged on the annual income of an individual.
10.2 BASIC CONCEPTS 10.2.1 What i s Income Tax?
Income tax is a type of direct tax. Direct tax refers to that type of tax
where the impact and incidence of tax fall on the same person. The burden
of direct taxes cannot be shifted to othe r people. The domain of taxation
system in India basically falls into two categories - direct tax and indirect
tax. To understand the term ‘Tax’, let's have a look in some definitions
given by the experts :
According to Tausing, “The essence of the test is distinguished from ot her
charges by the government, is the absence of a direct quid -pro-quo
between the taxpayer and the public authority.
According to Hugh Dalton, “ A tax is the compulsory contribution imposed
by the public authority irrespective of the exact amount of services
rendered to the tax year in return and not imposed as a penalty for any
legal offense.”
Income tax is a compulsory payment that governments impose on income
generated by businesses and individuals. It is the legal duty of a citize n to
pay taxes. When the tax is levied on the income of a person and if his
income falls under the preview of income tax, he/she is bound to pay
taxes. Tax is not a voluntary contribution. It is a compulsory payment
which is not considered a legal offense or penalty. No one has any right to
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Compensation and Benefits
106 Many economists have propounded many principles regarding a good
taxation sy stem. The father of Economics, Adam Smith has mentioned
four principles of taxation which must be considered while designing a
system. The first principle talks about the certainty regarding taxation.
The second principle states that people should pay taxes according to their
capacity. The third principle states that the state should collect taxes w ith
minimum expenditure and the Fourth principal deals with the convenience
of the taxpayer.
10.2.2 Important Definitions :
In India, the tax system of our country is administered by the Income Tax,
1961. The Act came into force from 1st April 1962. The ac t extends to the
whole of India. Income Tax Act, 1961 is an act to levy, administrate,
collect & recover Income -tax in India. As per this act, so me important
terms are defined. -
Assessee :
According to Section 2(7), Assessee means a person by whom any tax or
any other sum of money is payable under this Act, and includes
(a) every person in respect of whom any proceeding under this Act has
been taken for the assessment of his income or assessment of fringe
benefits or of the income of any other person in re spect of which he is
assessable, or of the loss sustained by him or by such other person, or
of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of
this Act;
(c) every person wh o is deemed to be an assessee in default under any
provision of this Act;
Assessment Year :
According to Section 2(9), Assessment year means the period of twelve
months commencing on the 1st day of April every year;
Income :
According to Section 2(24), Incom e includes :
(i) profits and gains;
(ii) dividend;
(iia) voluntary contributions received by a trust created wholly or partly
for charitable or religious purposes or by an institution established
wholly or partly for such purposes or by an association or institution
referred to in clause (21) or clause (23), or by a fund or trust or
institution referred to in sub -clause (iv) or sub -clause (v) or by any
university or other educational institution referred to in sub -clause
(iiiad) or sub -clause (vi) or by any hospital or other institution munotes.in

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107 referred to in sub -clause (iiiae) or sub -clause (via) of clause (23C),
of section 10 or by an electoral trust.
Explanation. For the purposes of this sub -clause, trust includes any other
legal obligation;
(iii) the value of any perquisite or profit in lieu of salary taxable under
clauses (2) and (3) of section 17;
(iiia) any special allowance or benefit, other than perquisite included
under sub -clause (iii), specifically granted to the assessee to meet
expenses wholly, ne cessarily and exclusively for the performance of
the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment
of profit are ord inarily performed by him or at a place where he
ordinarily resides or to compensate him for the increased cost of
living;
(iv) the value of any benefit or perquisite, whether convertible into
money or not, obtained from a company either by a director or b y a
person who has a substantial interest in the company, or by a relative
of the director or such person, and any sum paid by any such
company in respect of any obligation which, but for such payment,
would have been payable by the director or other perso n aforesaid;
(iva) the value of any benefit or perquisite, whether convertible into
money or not, obtained by any representative assessee mentioned in
clause (iii) or clause (iv) of sub -section (1) of section 160 or by any
person on whose behalf or for who se benefit any income is
receivable by the representative assessee (such person being
hereafter in this sub -clause referred to as the beneficiary) and any
sum paid by the representative assessee in respect of any obligation
which, but for such payment, wou ld have been payable by the
beneficiary;
(v) any sum chargeable to income -tax under clauses (ii) and (iii) of
section 28 or section 41 or section 59;
(va) any sum chargeable to income -tax under clause (iiia) of section 28;
(vb) any sum chargeable to inc ome-tax under clause (iiib) of section 28;
(vc) any sum chargeable to income -tax under clause (iiic) of section 28;
(vd) the value of any benefit or perquisite taxable under clause (iv) of
section 28;
(ve) any sum chargeable to income -tax under clause (v ) of section 28;
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Compensation and Benefits
108 (vii) the profits and gains of any business of insurance carried on by a
mutual insurance company or by a co -operative society, computed in
accordance with section 44 or any surplus tak en to be such profits
and gains by virtue of provisions contained in the First Schedule;
(viii) the profits and gains of any business of banking (including providing
credit facilities) carried on by a co -operative society with its
members;
(ix) any winni ngs from lotteries, crossword puzzles, races including
horse races, card games and other games of any sort or from
gambling or betting of any form or nature whatsoever.
Explanation. For the purposes of this sub -clause,
(i) lottery includes winnings from p rizes awarded to any person by
draw of lots or by chance or in any other manner whatsoever, under
any scheme or arrangement by whatever name called;
(ii) card game and other game of any sort includes any game show, an
entertainment programme on television or electronic mode, in which
people compete to win prizes or any other similar game;
(x) any sum received by the assessee from his employees as
contributions to any provident fund or superannuation fund or any
fund set up under the provisions of the Empl oyees State Insurance
Act, 1948 (34 of 1948), or any other fund for the welfare of such
employees;
(xi) any sum received under a Keyman insurance policy including the
sum allocated by way of bonus on such policy.
Explanation. For the purposes of this clau se, the expression Keyman
insurance policy shall have the meaning assigned to it in the Explanation
to clause (10D) of section 10;
(xii) any sum referred to in clause (va) of section 28;
(xiia) the fair market value of inventory referred to in clause (via ) of
section 28;
(xiii) any sum referred to in clause (v) of sub -section (2) of section 56;
(xiv) any sum referred to in clause (vi) of sub -section (2) of section 56;
(xv) any sum of money or value of property referred to in clause (vii)
114 or clause ( viia) of sub -section (2) of section 56;
(xvi) any consideration received for issue of shares as exceeds the fair
market value of the shares referred to in clause (viib) of sub -
section (2) of section 56;
(xvii) any sum of money referred to in clause (ix) of sub -section (2) of
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Understanding Income Tax
109 (xviia) any sum of money or value of property referred to in clause (x) of
sub-section (2) section 56;
(xviib) any compensation or other payment referred to in clause (xi) of
sub-section (2) of section 56;
(xviii) assistan ce in the form of a subsidy or grant or cash incentive or
duty drawback or waiver or concession or reimbursement (by
whatever name called) by the Central Government or a State
Government or any authority or body or agency in cash or kind to
the assessee 12 0 other than,
(a) the subsidy or grant or reimbursement which is taken into account
for determination of the actual cost of the asset in accordance with
the provisions of Explanation 10 to clause (1) of section 43; or
(b) the subsidy or grant by the Cent ral Government for the purpose of
the corpus of a trust or institution established by the Central
Government or a State Government, as the case may be;
Previous Year :
According to Section 3 of the Act, “previous year” means the financial
year immediately p receding the assessment year:
Provided that, in the case of a business or profession newly set up, or a
source of income newly coming into existence, in the said financial year,
the previous year shall be the period beginning with the date of setting up
of the business or profession or, as the case may be, the date on which the
source of income newly comes into existence and ending with the said
financial year.
Resident :
According to Section 2(42), resident means a person who is resident in
India within the meaning of section 6;
According to Section 6, For the purposes of this Act, -
(1) An individual is said to be resident in India in any previous year, if
he-
(a) is in India in that year for a period or periods amounting in all to one
hundred and eighty t wo days or more; or
*Sub -clause
(b) omitted by Act 14 of 1982
(c) having within the four years preceding that year been in India for a
period or periods amounting in all to three hundred and sixty -five
days or more, is in India for a period or periods a mounting in all to
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Compensation and Benefits
110 10.3 HEADS OF INCOME The income of the individual can be traced from the various sources. As
per the Income Tax Act, 1961, the income of the individuals can be
classified under the various heads -

Fig. 10.1: Various Heads of Income
1. Income from Salary :
Under a contract of employment, a salary means any remuneration an
individual receives in exchange for services rendered. The term “Salary”
is a wide term and includes advance compensation, pension, com mission,
gratuity, perquisites, and annual bonus. It also includes -
 Conveyance Allowance
 House Rent Allowance
 Medical Allowance
 Leave Travel Allowance
According to Section 15 of the Act,
The following income shall be chargeable to income -tax under the he ad
“Salaries” -
(a) any salary due from an employer or a former employer to an assessee
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Understanding Income Tax
111 (b) any salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer though not du e or before it
became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or
on behalf of an employer or a former employer, if not charged to
income -tax for any earlier previous year.
According to Section 17(1) of the Inco me Tax, 1961, Salary means -
1. Wages;
2. Annuity or pension;
3. Gratuity;
4. Fees, commissions, perquisites or profits in lieu of or in addition to
any salary or wages;
5. Advance of salary;
6. Payment received by an employee in respect of any period of leave
not availed b y him/her;
7. The portion of annual accretion in any previous year to the balance at
the credit of an employee participating in a recognised provident fund
to the extent it is taxable;
8. Transferred balance in a recognised provident fund to the extent it is
taxable;
9. Contribution by the Central Government to the account of an
employee under a pension scheme referred to in section 80CCD.
Table 10.1: Taxability of Various Salary Components Salary Component Taxability under Income Tax Act Basic salary Taxable Dearness allowance Taxable Advance salary Taxable in the year received Arrears of salary Taxable in the year received, if not taxed on due basis Leave encashment at time of retirement Taxable – Exempt in some scenarios Salary in lieu of notice Taxable on receipt munotes.in

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Compensation and Benefits
112 Salary to partner Taxable under the head of “Profits and gains of business or profession” Fees and commission Taxable Bonus Taxable Gratuity Taxable – Exempt in some scenarios Pension Taxable – Exempt in some scenarios Annuity from Employer Taxable Retrenchment compensation Exempt from tax to a certain extent Remuneration for extra work Taxable Salary to Foreign Citizens Taxable – Exempt in some scenarios
Source: https://www.indiafilings.com
2. Income from House Property :
According to Sect ion 22 of the Act, the annual value of property
consisting of any buildings or lands appurtenant thereto of which the
assessee is the owner, other than such portions of such property as he may
occupy for the purposes of any business or profession carried o n by him
the profits of which are chargeable to income -tax, shall be chargeable to
income -tax under the head “Income from house property”.
Income from house property refers to the income generated from buildings
or land. This includes any income an individ ual may generate from renting
an owned property. The following factors are considered while
determining the annual value :
 Actual rent received
 Municipal value
 Fair rent of the property
 Standard Rent
The following incomes are exempted from the Income of Hou se Property :
 Farm House
 Property held for Charitable Purpose
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Understanding Income Tax
113  Self-occupied house
 Palace of Ex -ruler
 Property income from hospital, approved scientific research
association, university, statutory corporation etc.
3. Inco me from Profit or Gains of Business or Profession :
The income from profit or gains of business or profession is an important
head of Income tax. Any profit earned from the business or profession
comes under this head. As per Section 28 of the Income Tax Ac t, 1961,
the income from profits or gains of business or profession covers -
 Any profit from any business/profession
 Any perquisite/benefit arising from a business
 Interest/Salary/Remuneration/Commission/Bonus received by Partner
of a firm
 Sums received under an agreement for forbearance, i.e., agreement for
not doing something
 Sums received under Keyman Insurance Policy
According to Section 31 of the Income Tax Act, 1961, in respect of repairs
and insurance of machinery, plant or furniture used for the purposes of the
business or profession, the following deductions shall be allowed -
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of insurance against risk
of damage or destruction thereof.
4. Income from Capital Gains :
The gain or income that arises from capital is known as Capital Gains.
When an individual sells or transfers his/her capital asset and obtains gains
or profits, the profit or gain earned from that income is known as capital
gain. It is earned on an investment made by an individual for a business or
profession. This term includes earnings from -
 Investment in Equities
 Investment in Mutual Funds
 Investment in Real Estate
 Investment in Other Assets
When a person sells any capital ass ets, he/she can generate loss as well.
There are total two types of gains, short term gains and long term gains -
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Compensation and Benefits
114 Short Term Capital Gains :
Short -term capital gains are profits earned when an individual sells an
asset within 36 months of acquiring it.
Long Term Capital Gains:
Long Term Capital Gains are the profits made on an asset transfer after 36
months from the day of acquiring it.
5. Income From Other Sources:
Income from other sources is the fifth and last head of income under
which the total income of a person is computed and assessed. income
from other sources is a residuary head of income. It includes all other
types of income that do not fit into the above four categories. The income
earned from various sources comes under this head. This head i ncludes
interest income in a savings account or interest income from deposits with
the bank, gifts, etc. This head is also known as the residual head.
This head includes income from -
 Interest on bank deposits
 Prize Money
 Income from card games
 Income fro m gambling
 Income from other sports
 Income from other games or prizes
 Interest on Fixed Deposit
 Interest on Securities
 Dividend
 Winnings from Lottery
10.4 DEDUCTIONS Deductions are helpful in reducing the taxable income of an individual. A
deduction can be considered as a tax benefit that can be used to decrease
your taxable income. It can be calculated as,
Taxable Income = Gross Income - Deductions
If the deductions are high, lower will be the tax liability. It is said that 80C
is the best friend of any t axpayer. It helps to reduce the tax liability by
making the taxpayer aware about doing investment in -
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Understanding Income Tax
115  Insurance premium
 Public Provident Fund
 Employee Provident Fund
 Tax saving fixed deposit
An individual can save up to 1,50, 000 rupees from the gross income and
claim deduction under this act.
10.5 SUMMARY  Fiscal policy plays an important role for the development of the
economy by ensuring the proper money supply. The money is
supplied to required sectors. Thus, the basic obje ctive of finance is to
promote the economic growth and development of the country by
optimizing the use of finance for the welfare of the general public.
 Income tax is a compulsory payment that governments impose on
income generated by businesses and indi viduals. It is the legal duty of
a citizen to pay taxes. When the tax is levied on the income of a
person and if his income falls under the preview of income tax, he/she
is bound to pay taxes. Tax is not a voluntary contribution. It is a
compulsory payment which is not considered a legal offense or
penalty. No one has any right to challenge the tax levied by the
government.
 Many economists have propounded many principles regarding a good
taxation sys tem. The father of Economics, Adam Smith has
mentioned f our principles of taxation which must be considered while
designing a system. The first principle talks about the certainty
regarding taxation. The second principle states that people should pay
taxes according to their capacity. The third principle sta tes that the
state should collect taxes with minimum expenditure and the Fourth
principal deals with the convenience of the taxpayer.
 The income of the individual can be traced from the various sources.
As per the Income Tax Act, 1961, the income of the individuals can
be classified under the various heads like income from salary, house
property, income from business or procession, capital gains and other
sources.
 Under a contract of employment, a salary means any remuneration an
individual receives in e xchange for services rendered. The term
“Salary” is a wide term and includes advance compensation, pension,
commission, gratuity, perquisites, and annual bonus. It also includes
Conveyance Allowance, House Rent Allowance, Medical Allowance
and Leave Trave l Allowance.
 Income from house property refers to the income generated from
buildings or land. This includes any income an individual may
generate from renting an owned property. munotes.in

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Compensation and Benefits
116  The income from profit or gains of business or profession is an
important hea d of Income tax. Any profit earned from the business or
profession comes under this head. As per Section 28 of the Income
Tax Act, 1961, the income from profits or gains of business or
profession covers any prof it from any business/profession .
 The gain or income that arises from capital is known as Capital Gains.
When an individual sells or transfers his/her capital asset and obtains
gains or profits, the profit or gain earned from that income is known
as capital gain. It is earned on an investment made by an individual
for a business or profession.
 Income from other sources is the fifth and last head of income under
which the total income of a person is computed and assessed. income
from other sources is a residuary head of income. It includes all other
types of income that do not fit into the above four categories. The
income earned from various sources comes under this head. This head
includes interest income in a savings account or interest income from
deposits with the bank, gifts, etc.
 Deductions are helpful in reducing the taxable income of an
individual. A deduction can be considered as a tax benefit that can be
used to decrease your taxable income.
10.6 SELF ASSESSMENT TEST 1. Explain the basic concepts of income tax in detail.
2. “Income tax is charged on total income”. Explain this statement.
3. Explain the terms “Assessment Year” and “Previous Year”.
4. Define income as per Income Tax Act. Describe the important rules of
income.
5. Explain the various heads of income.
6. What are the various types of deductions admissible under this act?
7. What is the meaning and concept of income from salary? Explain the
various components of this head.
8. Describe the income specifically included under the head of income
from other sources.


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117 11
PREPARING THE CTC OF AN
EMPLOYEE/ CANDIDATE
Unit Structure
11.0 Objectives
11.1 Concept of CTC
11.1.1 Introduction
11.1.2 Meaning
11.1.3 Conceptual Framework
11.2 Costing the CTC of each element of Compensation Structure
11.3 Arriving/Preparing at th e CTC of an employee/ candidate
11.4 Employee Understanding Salary Ranges
11.5 Summary
11.6 Self Assessment Tests
11.1 OBJECTIVES After studying this module, you should be able to:
 Understand the Concept of CTC
 Know about the Compensation Structure
 Unde rstand Costing the CTC of each element of Compensation
Structure
 Know about the preparation of CTC of an Employee
 Understand the Salary Ranges
11.1 CONCEPT OF CTC 11.1.1 Introduction :
The concept of Cost to Company is not a new term. In the field of human
resource management, it plays a vital role. Cost to company is a term
which denotes the total cost a company bears for an employee. The
components of CTC are monetary and non -monetary. When a company
bears any kind of cost on employees, it comes under the section of Cost to
Company.
It is basically calculated yearly. Employees may not directly receive CTC
in cash. Candidates often come across this term when they negotiate with
the company about their salary. CTC and Take Home Salary are some
basic terms wh ich a candidate needs to understand before applying or munotes.in

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Compensation and Benefits
118 joining any organization. If an organization is paying on any facility, it
will come under CTC.
Every organization calculates CTC. It is also known as gross salary. Cost
To Company is calculated by ad ding Basic Salary and other additional
benefits that employees receive such as Gratuity, Employees Provident
Fund, House Rent Allowance, Travel Allowance, Food coupons, and so
on.
In the salary description of the organization. Many elements are listed in
the salary package of an employee. Compared to the CTC, there is one
term: Take Home Salary. Take Home Salary is the exact thing is the exact
amount an employee takes home. It means it is the amount which gets
deposited in the account of the employees after all the necessary
deductions like -
 Tax Deducted at Source
 Provident Fund Etc.
11.1.2 Meaning :
Cost to company is a term which denotes the total cost a company bears
for an employee. The components of CTC are monetary and non -
monetary. When a company bear s any kind of cost on employees, it comes
under the section of Cost to Company.
It is basically calculated yearly. Employees may not directly receive CTC
in cash. Candidates often come across this term when they negotiate with
the company about their sala ry. CTC and Take Home Salary are some
basic terms which a candidate needs to understand before applying or
joining any organization. If an organization is paying on any facility, it
will come under CTC.
Every organization calculates CTC. It is also known as gross salary. Cost
To Company is calculated by adding Basic Salary and other additional
benefits that employees receive such as Gratuity, Employees Provident
Fund, House Rent Allowance, Travel Allowance, Food coupons, and so
on.
In the salary descriptio n of the organization. Many elements are listed in
the salary package of an employee. Compared to the CTC, there is one
term: Take Home Salary. Take Home Salary is the exact thing is the exact
amount an employee takes home. It means it is the amount which gets
deposited in the account of the employees after all the necessary
deductions like Tax Deducted at Source, Provident Fund Etc.
CTC is calculated as,
CTC = Gross salary + Allowances + Deductibles
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119 1. Basic Salary :
Basic salary is the amount payable to the employees for the services they
render to an organization. The basic salary is deducted under the head of
income tax. It forms a part of their take home salary.
2. Allowances:
Allowances are all the perks and benefits (direct and indirect) that the
company offers to the employee. The perks and benefits includes -
 Dearness Allowance
 Medical Allowance
 Entertainment Allowance
 Conveyance Allowance
 House Rent Allowance
 Other Allowances
3. Compulsory Deductibles :
The final component of CTC is compulsory deduc tibles. These deductions
are Provident Fund, Professional Tax and Income Tax.
CTC is the cost an employer bears to hire and sustain its employees.
11.1.3 Conceptual Framework :
With the help of the following diagram, we can understand the conceptual
framew ork of CTC -

Fig. 11.1: Concept of CTC munotes.in

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120

Fig. 11.2: Components of CTC
11.2 COSTING THE CTC OF EACH ELE MENT OF COMPENSATION STRUCTURE The components of CTC are monetary and non -monetary. The following
are the components of CTC :
 Basic Pay
 Dearness Allowan ce (DA)
 Incentives or bonuses
 Conveyance allowance
 House Rent Allowance (HRA)
 Medical allowance
 Leave Travel Allowance or Concession (LTA / LTC)
 Vehicle Allowance
 Telephone / Mobile Phone Allowance
 Special Allowance
1. Basic Pay :
Basic pay or basic salary is a fixed amount paid to employees by their
employers in return for the work performed or performance of
professional duties by the employee. It is the amount apart from surplus or
additional factors, such as bonuses, benefits or compensation from an
empl oyer's end. Basic Pay includes -
Gross Pay - Total allowances (Medical Insurance, HRA, DA, Conveyance,
etc.)
Or
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121 2. Dearness Allowances :
Dearness allowance is a component of salary which is some fixed
percen tage of the basic salary, aimed at hedging the impact of inflation. It
is paid by the government to its employees as well as pensioners to offset
the impact of inflation. It is calculated as -
For the employees of Central Government
% of DA = {(Average of the All -India Consumer Price Index (Base year -
2001 =100) for the last 12 months -115.76)/115.76} x 100
For Central Public Sector Employees
% of DA = {(Average of the All -India Consumer Price Index (Base year -
2001 =100) for the last 3 months -126.33)/126 .33} x 100
3. Incentives or Bonuses :
Incentives are rewards and benefits used to motivate positive behaviors in
your workforce. Incentives in the form of compensation, reimbursement,
recognition, and rewards are given to employees to motivate and boost
their morale.
Bonus is a financial compensation an employer pays to his/her employees.
Bonus is a gift paid to an employee occasionally to reward the exceptional
performance or for some special occasions. The concept of bonus plays a
vital role in today’s co mpetitive executive payment program. In the form
of bonuses, an employer appreciated his/her employees. This type of
incentive is special and occasionally given to the employees.
According to the definition of Cambridge Dictionary, “ Bonus is an
amount of money given to an employee in addition to their salary as a
reward for working well.
The following are the types of bonuses namely, Production Bonus , Profit
Bonus, Customary Bonus and Implied Bonus.
4. Conveyance Allowance :
As the name suggests, conveya nce allowance is paid to an employee to
compensate for the travel they have to undertake from their residence to
the workplace. It is also called a transport allowance. conveyance
allowance is paid by an employer only if there is no transportation
provided by the employer. In case an employer offers transport,
conveyance allowance will not be provided to employees.
5. House Rent Allowance:
House Rent Allowance is popularly known as HRA. House Rent
Allowance an amount that an employer pays an employee to com pensate
for rent paid to live in the place of employment. In Income Tax, HRA
means house rent allowance which is paid by an employer to the
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122 6. Medical Allowance:
A medical allowance is a fixed payment that employers provide to
employees to cover their medical expenses. The Owner provides this
benefit to promote staff health and support medical expenses that workers
incur in a financial year. As per the Income Tax rules, No tax is levied on
medical reimbursement up to Rs. 15,000 if all bills are furnished by an
employee to his or her employer as per clause (b) of Section 17 (2) of the
IT Act, 1961.
7. Leave Travel Allowance or Concession (LTA / LTC):
Leave Travel Allowance is a form of stipend given by an employer to an
employee who is on leave f rom work to fund his or her travel.
Leave Travel Concession (LTC) is granted to Central Government
employees for travel to various parts of the country and home as well.
Leave Travel Allowance is one of the best tax -saving tools that an
employee can avail .
8. Vehicle Allowance:
Vehicle allowance is also a transport allowance. It is an allowance given
to meet commuting expenses between place of residence and office or to
meet personal expenditure of employees of transport business. Few
companies pay car ma intenance allowance to their employees.
9. Telephone/ Mobile Phone Allowance:
As the name suggests, Telephone/Mobile allowance is an allowance which
The company pays monthly to employees as compensation for th e use of
mobiles or telephones for office or p ersonal use.
10. Special Allowance:
Companies pay these allowances which are special and not general in
nature. Special allowance is a sum of money that an organization pays its
employees for various reasons. The examples are -
 Tuition fees allowance for children
 Children Education Allowance
 Hostel Allowance
 Underground Allowance
11.3 ARRIVING AT THE CTC OF AN EMPLOYEE / CANDIDATE Arriving or preparing the CTC of an employee is not an easy task. The
components of CTC are monetary and non -monetary. It is im portant to
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123 employee. The following number of steps can be performed while arriving
at the final CTC of an employee :

Fig. 11.3: Arriving at the CTC of an Employee
1. Understand the Components of CTC :
The first step is to understand the components of CTC. Cost to company is
a term which denotes the total cost a company bears for an employee. The
components of CTC are monetary and non -monetary. When a company
bears any kind of cost on employees, it comes under the section of Cost to
Company. The following components has to consider the following
elements while understanding the components of CTC -
 Basic Pay
 Dearness Allowance (DA)
 Incentives or bonuses
 Conveyance allowance
 House Rent Allowance (H RA)
 Medical allowance
 Leave Travel Allowance or Concession (LTA / LTC)
 Vehicle Allowance
 Telephone / Mobile Phone Allowance
 Special Allowance
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124 2. Performing Research :
The second step is crucial as research will be performed on the following
components of C TC. The company has to see the salary trends as it may
vary from location to location. If a company works only at one location,
the variation will not be considered. But, with the changing surroundings
of business, research is important to perform.
3. Com municate the Salary Range to Employee :
After selecting a candidate, it is important to communicate the salary to
the employee. The final component of CTC is compulsory deductibles.
These deductions are Provident Fund, Professional Tax and Income Tax. It
is important to communicate the same to employees.
CTC is calculated as,
Gross salary + Allowances + Deductibles
Basic pay or basic salary is a fixed amount paid to employees by their
employers in return for the work performed or performance of
professiona l duties by the employee. Companies pay these allowances
which are special and not general in nature.
11.4 EMPLOYEE UNDERSTANDING SALARY RANGES In the salary description of the organization. Many elements are listed in
the salary package of an employee. Co mpared to the CTC, there is one
term: Take Home Salary. Take Home Salary is the exact thing is the exact
amount an employee takes home. It means it is the amount which gets
deposited in the account of the employees after all the necessary
deductions like T ax Deducted at Source and Provident Fund Etc.
It is important for an employee to understand the various salary ranges. An
employee can understand the difference between the CTC and the Take
Home Salary. The Take Home Salary can be calculated by understandi ng
the following steps -
Step I - Calculate the Gross Salary
Step II - Calculate the Taxable Income
Step III - Calculate the Income Tax
Step IV - Calculate the Take Home Salary
Step I:
In this step, an employee after knowing is expected to calculate his/h er
gross salary. Basic pay or basic salary is a fixed amount paid to employees
by their employers in return for the work performed or performance of
professional duties by the employee. It includes various types of
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125 Step II:
In this step, an employee is expected to calculate his/her taxable income.
Taxable income is calculated by subtracting the deductions from the
salary. The deductions like allowances (LTA, Conveyance Allowance,
HRA), professional tax, med ical bills, medical insurance, tax saving
investments, if any and other deductions from the gross salary.
As per the Income Tax Act, 1961 the following deductions are
allowed :
1. 80 C deals with the basic deductions from total income. The
maximum amount is Rs . 1,50,000.
2. 80 TTA deals with the interest from deposits. The maximum amount
which can be excluded is Rs. 10,000.
3. 80 G deals with the donations to charity. 50% of the amount of
donation is allowed to be deducted.
4. 80 E deals with the Education Loan. The d eductions are allowed on
the total EMI part and there is no limit.
5. 80 EE deals with the home loan interest. The maximum amount is Rs.
50,000.
6. 80 D deals with medical insurance premiums. Rs. 25,000 for family
and self, Rs. 50,000 for family, self and pare nts, Rs. 80,000 family,
self and senior citizens parents.
Step III :
The third step deals with the calculation of the amount of income tax. One
can refer to the income tax slab and the current income tax rate. The
income tax slabs are revised every year. F or the reference, the following is
the tax slab for the current assessment year - Existing Tax Regime New Tax Regime u/s 115 BAC Income Tax Slab Income Tax Rate Income Tax Rate Up to 2,50,000 Nil Nil 2,50,001 - 5,00,000 5% above 2,50,000 5% above 2,50,000 5,00,001 - 10,00,000 12,500 + 20% above 5,00,000 12,500 + 10% above 5,00,000 Source: https://www.incometax.gov.in/

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126 Step IV :
The last step is to calculate the in -hand or take home salary. It is
calculated as,
Take Home Salary = Basic Pay + House Rent Allowance + Allowances -
Income Tax - EPF
11.5 SUMMARY  Cost to company is a term which denotes the total cost a company
bears for an employee. The components of CTC are monetary and
non-monetary. When a company bears any kind of c ost on employees,
it comes under the section of Cost to Company.
 It is basically calculated yearly. Employees may not directly receive
CTC in cash. Candidates often come across this term when they
negotiate with the company about their salary. CTC and Tak e Home
Salary are some basic terms which a candidate needs to understand
before applying or joining any organization. If an organization is
paying on any facility, it will come under CTC.
 The components of CTC are monetary and non -monetary. The
following are the components of CTC - Basic Pay, Dearness
Allowance (DA), Incentives or bonuses, Conveyance allowance,
House Rent Allowance (HRA), Medical allowance, Leave Travel
Allowance or Concession (LTA / LTC), Vehicle Allowance,
Telephone / Mobile Phone Allowa nce and Special Allowance.
 Arriving or preparing the CTC of an employee is not an easy task.
The components of CTC are monetary and non -monetary. It is
important to understand the components of CTC before preparing the
CTC of an employee. The following nu mber of steps can be
performed while arriving at the final CTC of an employee -
Understand the components of CTC, perform research and
communicate the salary range to employees.
 In the salary description of the organization. Many elements are listed
in the salary package of an employee. Compared to the CTC, there is
one term: Take Home Salary. Take Home Salary is the exact thing is
the exact amount an employee takes home. It means it is the amount
which gets deposited in the account of the employees after all the
necessary deductions like Tax Deducted at Source and Provident
Fund Etc.
 It is important for an employee to understand the various salary
ranges. An employee can understand the difference between the CTC
and the Take Home Salary. The Take Home Sala ry can be calculated
by understanding the following steps - Calculate the Gross Salary,
Calculate the Taxable Income, Calculate the Income Tax and
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127 11.6 SELF ASSESSMENT TEST 1. Explain the concept of CTC. How is it calculated?
2. What is CTC? Explain the various elements which an employer
considered while calculating CTC.
3. What comes under the scope of CTC? Explain the various
components of CTC.
4. Write a detail on arriving at the CTC of an employee.
5. How can an employee understan d the salary ranges? Support your
answer with the help of some examples.

*****

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128 12
REMUNERATION SURVEY
Unit Structure
12.0 Objectives
12.1 Introduction
12.1.1 Overview
12.1.2 Meaning
12.1.3 Definition
12.2 Remuneration Survey
12.2.1 Introduction
12.2.2 Sample Questions
12.3 Market Data
12.4 Remuneration Survey result in a Salary Proposal
12.5 Summary
12.6 Self Assessment Tests
12.0 OBJECTIVES After studying this module, you should be able to :
 Understand the nature and relevance of Remuneration
 Importance of Remuneration
 Know about the Remuneration Survey
 How can Remuneration Su rvey result in a Salary Proposal
12.1 INTRODUCTION 12.1.1 Overview:
Remuneration is one of the most important human resource functions of
an organization. The concept of remuneration represents the most
important element in the employment relationship. For many
organizations, the remuneration factor is the biggest single cost of running
a business. The 21st century economy is a knowledge based and
performance driven economy. A businessman drives his business with the
help of innovations and technology to tr ansform it as per the customer
expectations.
In a course of time, every business develops with complexities. Beyond a
level, managing alone becomes a difficult task for a person. The need for
management has increased tremendously. So is the need for organ izational
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Remuneration Survey
129 develop and grow. In a changing business climate, it is important to
understand the structural, cultural and strategic reality of work.
To facilitate organizational success, organiz ational development plays an
important role. The existence and application of management is not only
essential for growth and development but also it is essential for the
survival of business organizations. There are several types of groups.
Every human be ing has needs and desires. Organizations understand and
work in this direction to provide better goods and services to the
customers. These needs and wants can be satisfied by working and living
together in an organized group of organizations.
A good remu neration model can help to reinforce the key corporate values
and facilitate the achievement of organizational objectives. In the
globalization era, where the business environment has become
increasingly challenging, an effective compensation system helps to attract
the talent candidates for the organization. The concept of remuneration
can be divided into three types - direct remuneration, indirect
remuneration and non -monetary remuneration.
12.1.2 Meaning:
Remuneration is a systematic approach of providi ng monetary value to
employees in exchange for the work or services they performed. The term
remuneration denotes all forms of financial returns and tangible benefits
that an employee receives for the work performed in an organization.
Remuneration managem ent is also known as salary and profits
administration, remuneration control, or reward management.
Remuneration is a monetary payment given to an individual in exchange
for their services. It may be defined as money received in performance of
work and man y kinds of services and benefits. An organization provides
many kinds of services and benefits to their employees. This all comes
under remuneration management. In simple words, we can say that
remuneration is the remuneration received by an employee in re turn for
their contribution to the organization.
The main objective of remuneration management is to recruit and retain
the qualified employees. A proper system of remuneration and sure that
the employer is willing to pay and the employees are going to pe rform in
the best way. A good remuneration system represents the most important
element in the employment relationship between the employer and
employee. It also helps to motivate employees for better performance and
maintain morale.
12.1.3 Definition :
Section 2(78) of the the Companies Act, 2013 defines ‘remuneration’ as
follows: “means any money or its equivalent given or passed to any person
for services rendered by him and includes perquisites as defined under the
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130 Remuneration re fers to the money or the value equivalent like perquisites
paid to any person for the services rendered by him / her to the Company.
The term ‘perquisites’ refers to the benefits as defined under the Income
Tax Act, 1961.
According to section 17(2) of the Income Tax Act, 1961, ‘perquisite’
includes the following: “perquisite” includes :
(i) the value of rent -free accommodation provided to the assessee by his
employer;
(ii) the value of any concession in the matter of rent respecting any
accommodation pr ovided to the assessee by his employer;
Remuneration management is an integral part of human resource
management. It is a tool used by management for a variety of purposes to
further the existence of the company. Compensation management consists
of a numb er of activities pertaining to job evaluation, market rate analysis,
job analysis, pay structure design and maintenance, etc. Compensation is
one of the most important human resource functions of an organization.
Remuneration is a systematic approach of pr oviding monetary value to
employees in exchange for the work or services they performed. The term
remuneration denotes all forms of financial returns and tangible benefits
that an employee receives for the work performed in an organization.
Remuneration i s a monetary payment given to an individual in exchange
for their services. It may be defined as money received in performance of
work and many kinds of services and benefits. An organization provides
many kinds of services and benefits to their employees.
Remuneration helps to determine the employees wages and salary. A good
remuneration model can help to reinforce the key corporate values and
facilitate the achievement of organizational objectives. In the globalization
era, where the business environment has become increasingly challenging,
an effective compensation system helps to attract the talent candidates for
the organization. Remuneration is an organized practice and it also
represents the most important element in the employment relationship.
The s tructure comprises a number of different elements that may be cash
and non -cash payments.
12.2 REMUNERATION SURVEY 12.2.1 Introduction :
Remuneration survey is a tool used to determine the median or average
compensation paid to employees in one or more jobs . Remuneration data,
collected from several employers, is analyzed to develop an understanding
of the amount of remuneration paid. The survey data of compensation is
often time sensitive and may become out -of-date quickly. The
remuneration survey may focus on:
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Remuneration Survey
131  Geographic regions
 Employer size
 Industries
Remuneration surveys are analyses of the data. The data of remuneration
survey may include the following aspects:
1. Basic salaries
2. Working hours
3. Work profile
4. Increase amounts
5. Range of salary
6. Initial salary
7. Bonuses
8. Incentives
9. Benefits
10. Allowances
11. Educational qualifications
12. Location of the work
13. Hiring source
14. Recruitment process
12.2.2 Sample Questions :
The following questions can be taken as a survey for the remuneration
survey:
1. Name of the Respondent
…………………………………………………………………..
…………………………………………………………………..
2. Employment Status
 Full Time Employed
 Part Time Employed
 Self-employed
 Hourly Contract
 Retired
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132 3. Gender
 Male
 Female
 Third Gender
4. Years of Experience
 Fresher
 1-4 Years
 5-10 Years
 11-15 Years
 16-20 Years
 More than 20 years
5. Type of Work
 Manual
 Computer Based
 Machine Based
 Professional
 Other …………………….
6. My organization believe in gender equality
 Strongly Agree
 Partly Agree
 Disagree
 No opinion
7. My organization is culturally and et hnically diverse -
 Strongly Agree
 Partly Agree
 Disagree
 No opinion
8. My organization has a career plan for my future -
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133 9. While considering a job, which factor is more important?
 Salary
 Working conditions
 Work life balance
 Opportunities to progr ess career
 Flexible working conditions
 Job satisfaction
 Reputation at work
 Reputation of company and job
10. Please mark the non -cash benefits offered by the company -
 Health Insurance
 Transport facility
 Annual Leaves
 Vacation Leaves
 No benefits
11. What is the most important factor for your well being?
 Health
 Finances
 Insurance
 Work life balance
 Workload
 Personal relations
 Worklife relations
 Flexible work
 Job security
 Employment
12. Is your employer concerned about your wellbeing?
 Yes
 No
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134 While partici pating in a survey, the following steps can be considered:

Fig. 12.1: Steps for Participating in a Survey
1. Identify the Deadline:
It is important to identify the last date or deadline for submitting any
survey. The remuneration survey data is collected for and during a specific
time frame. Respondents while participating should identify the deadline
for the remuneration survey.
2. Match the Jobs:
The second step is based on matching the jobs with the survey
questionnaire. Matching the jobs with the su rvey questionnaire should
consider several factors like job title, the structure of the organization and
duties required for a particular job.
3. Determining the Type of Data Required:
The third step requires the data determination process. In this step, it is
important to determine the type of data required for the remuneration
survey. If the things are not clear to the respondents, the data required for
the remuneration survey may get deviated and will not meet the purpose.
This step should match the:
 Salary ranges
 List of employees
 Job titles etc.
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135 4. Backup of Responses:
In this step, a respondent can keep a copy of responses before submitting
the remuneration survey.
12.3 MARKET DATA In the 21st century, meeting the challenges of recognising and rewa rding
employees will be the cornerstone of business success in the long term.
Most of the organizations have not anticipated the resources which are
required to meet the challenges of retaining and motivating the employees.
When an organization works in a competitive market, it becomes essential
for them to understand the kind of employees employed in their
organization and the compensation required to keep and maintain them.
It is important to consider that the successful management of
compensation survey s should be based on the knowledge of the
employment and taxation laws, customs, environment and employment
practices of many companies. While designing a compensation survey, it
is important to you the market data. Market data also deals with the
curren cy fluctuation and the effect of inflation on compensation. It also
helps to understand why the special allowances are necessary in any
country.
Market data also helps to understand the:
 Grading system
 Salary ranges
 External factors
 Performance management system
 Guidelines
 Economic factors etc.
Market data also helps organizations to control the labor cost. While
designing a remuneration survey, one must understand that the
compensation management should focus on the objective of increasing
productivity a nd enhancing quality and customer service. The present
competitive environment requires new strategies towards employees.
While designing a survey, it is important to keep such kind of things in
mind
12.4 REMUNERATION SURVEY RESULT IN A SALARY PROPOSAL Remuneration surveys are tools used to determine the median or average
remuneration paid to employees in one or more jobs. Remuneration data,
collected from several employers and respondents , is analyzed to develop
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Compensation and Benefits
136 convert the data into a salary proposal. An employee receives
compensation from a company and in return for the work performed.
Most people think that compensation and payment are the same concept.
The fact is compensation is much more than just the payment provided by
an employer.
The key in designing any remuneration survey into a salary proposal
requires the study of multiple factors of the organization. The study states
that if the compensation and remuneration management m odel is properly
designed, it helps an organization to take the best from the employees in
terms of productivity and performance. On the basis of remuneration
survey, the people were involved in the committee of designing a
compensation system can work on the following steps -
Step I - Putting focus on the strategy objectives and goals
Step II - Ensuring the participation and commitment through
communication
Step III - Analyzing the job functions
Step IV - Writing the job description
Step V - Determination of internal pay equity
Step VI - Determination of External pay equity
Step VII - Designing the salary and remuneration structure
Step I - Putting focus on the strategy objectives and goals:
The first step in designing a remuneration system i s to focus on the
strategy objectives and goals. Before designing a compensation strategy,
focusing on designing a compensation system to support the strategic
objectives of the organization has to be taken into consideration. The
following factors need to be determined -
 Vision and mission of the organization
 Strategic goals and objectives
 Cost to replace employees
 Designing the total compensation package
 External market equity and internal worth etc.
Step II - Ensuring the participation and commitment thr ough
communication:
Communication is one of the most important management functions. It
also helps organizations to run. Ensuring the commitment and
participation of employees through communication is an important
element of the remuneration system. Befor e beginning to tackle
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Remuneration Survey
137 to the process. This step involves following components to be worked
upon :
 Techniques of participation
 Current issues with the remuneration
 Job clarification
 Salary administration
 Feedback collection
 Reviews and ideas collection
Step III - Analyzing the job functions:
Analyzing the job functions is the third step while preparing a salary
proposal for the candidate. An executive must develop a current and
thorou gh understanding of the work that will be performed by the
employee in future. While analyzing a job, it is important to collect the
relevant information like -
 Type of the job
 Scope of the job
 Duties to be performed
 Responsibility of the job
This step is the foundation for job description and also enables the
organization to establish the information about the type and level of
responsibility along with the qualification required to perform the work in
an organization.
Step IV - Writing the job descripti on:
A job description explains the tasks, duties, function and responsibilities
of a position. Once the information is collected and analyzed, it can be
used for job description. To perform any job, the general nature of the
work, tasks, responsibilities a nd duties need to be communicated to the
employees. Before that, the pay structure should be finalized on the basis
of the work to be performed by the employee. That’s why this process is
considered important.
Step V - Determination of internal pay equity :
The internal pay equity determines the fairness within the organization. It
can be determined by the job evaluation techniques. When the pay is
equitable, it is considered fair and just for an employee to work in an
organization.
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138 The techniques like:
 Job ranking method
 Factor comparison technique can be used to evaluate the job.
Step VI - Determination of external pay equity:
After determining the internal pay equity, the determination of external
pay equity is also required. It is the perceived fairne ss in pay relative to
what other employees are paying for the same type of labor. Market price
if recommended to stand in this competitive world while designing a pay
structure.
Step VII - Designing the salary and remuneration structure:
On the basis of t he above steps, the final step deals with designing the
salary and remuneration structure. In this step,
 Salary structure is designed
 Pay structure is designed
 Remuneration and compensation system is established
 Pay ranges
 Positions are assigned to grades
 Minimum, midpoint and maximum salary range is discussed.
12.5 SUMMARY  A good remuneration model can help to reinforce the key corporate
values and facilitate the achievement of organizational objectives. In
the globalization era, where the business enviro nment has become
increasingly challenging, an effective compensation system helps to
attract the talent candidates for the organization. The concept of
remuneration can be divided into three types - direct remuneration,
indirect remuneration and non -monet ary remuneration.
 Remuneration is a monetary payment given to an individual in
exchange for their services. It may be defined as money received in
performance of work and many kinds of services and benefits. An
organization provides many kinds of services and benefits to their
employees. This all comes under remuneration management. In
simple words, we can say that remuneration is the remuneration
received by an employee in return for their contribution to the
organization.
 Remuneration survey is a tool use d to determine the median or
average compensation paid to employees in one or more jobs.
Remuneration data, collected from several employers, is analyzed to
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Remuneration Survey
139 survey data of compensation is oft en time sensitive and may become
out-of-date quickly. The remuneration survey may focus on Job titles,
Geographic regions, Employer size and Industries.
 It is important to consider that the successful management of
compensation surveys should be based on t he knowledge of th e
employment and taxation laws, customs, environment and
employment practices of many companies. While designing a
compensation survey, it is important to you the market data. market
data also deals with the currency fluctuation and the effect of inflation
on compensation. It also helps to understand why the special
allowances are necessary in any country.
 Market data also helps to understand the - Grading system, Salary
ranges, External factors, Performance management system,
Guideline s, Economic factors etc.
 Remuneration surveys are tools used to determine the median or
average remuneration paid to employees in one or more jobs.
Remuneration data, collected from several employers and respondents
, is analyzed to develop an understandin g of the amount of
remuneration paid. It also helps to convert the data into a salary
proposal. An employee receives compensation from a company and in
return for the work performed. Most people think that compensation
and payment are the same concept. Th e fact is compensation is much
more than just the payment provided by an employer.
12.6 SELF ASSESSMENT TESTS 1. What is a remuneration survey? Explain in detail.
2. Explain the rationality of remuneration surveys.
3. Why is market data important? How does it help in designing a
remuneration survey?
4. “Remuneration surveys are essential in fixing pay” Explain this
statement in the light of the present remuneration system.
5. Explain various prerequisites and factors while designing a salary
structure.
6. How does a remune ration survey result in a salary proposal.


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140 13
EQUITY COMPENSATION PLANS
Unit Structure
13.0 Objectives
13.1 What is Equity Compensation?
13.1.1 Overview
13.1.2 Concept of Equity Compensation
13.1.3 Features of Equity Compensation Plans:
13.2 Types of Equity Compensation Plans
13.3 How does Equi ty Compensation Plans work?
13.4 Advantages of Equity Compensation Plans
13.5 Disadvantages of Equity Compensation Plans
13.6 Summary
13.7 Self Assessment Tests
13.0 OBJECTIVES After studying this module, you should be able to:
 Understand the nature an d relevance of Equity Compensation
 Know the various Types of Equity Compensation Plans
 Understand How does ESOP work?
 Understand the Advantages and Disadvantages of Equity
Compensation Plans
13.1 WHAT IS EQUITY COMPENSATION? 13.1.1 Overview :
Compensation h elps to determine the employees wages and salary. A good
compensation model can help to reinforce the key corporate values and
facilitate the achievement of organizational objectives. In the globalization
era, where the business environment has become incr easingly challenging,
an effective compensation system helps to attract the talent candidates for
the organization. Compensation is an organized practice and it also
represents the most important element in the employment relationship.
The structure compri ses a number of different elements that may be cash
and non -cash payments.
According to Milkovitch and Newman, “Compensation is all forms of
financial returns, tangible services and benefits employees receive as part
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Equity Compensation Plans
141 From t he employer’s point of view, the compensation model represents a
significant part of his cost. As mentioned earlier, a good compensation
model increases the productivity and performance of an employee.
Ultimately, their increased performance and productivi ty contributes to
increasing the competitiveness of the organization. A good compensation
model helps organizations to attract and retain the new talent. It attracts
the best candidates for the organization. People before joining any
organization always gi ve first preference to salary and goodwill of the
company.
When employees get good pay, they like to stay in an organization. The
proper compensation model helps them to stay with the employer for the
long term or may be forever. It boosts employee loyalt y towards
organization as they dont leave and employers don't need to continue to
spend time, money and energy on recruiting new candidates. It is observed
that the contented employees are the most productive employees. When
the organization, through a goo d compensation model, pays a sufficient
amount for the work of employees, they automatically feel motivated and
perform well. Equity compensation plans play a vital role in increasing
the overall productivity and performance of the organization.
13.1.2 Concept of Equity Compensation :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specifi ed time period.
There are two types of stock option :
 Call Option
 Put Option
A seller is paid a premium from the contract purchased by the buyer and
known as option writer. He is the one who sells the stock option to the
employees. This practice of compens ation is also known as equity option.
Many companies are offering equity to their employees. As the name
suggests, it is an option not an obligation on the part of the investor.
The employee stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than granting shares of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises.
It also contributes in increasing the worth of the employees in terms of the
stocks they have in their names. It provides an opportunity to employees
to share directly in the company’s success through stock holdings. As the
employees own a stake in the company, they feel more productive and
motivated. From the employer’s point of view, it is understood that a munotes.in

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142 productive employee produces more. The employee stock option boosts
job satisfaction. It also helps them to boost their financial strength. It is a
key tool to recruit the best and retain the best.
13.1.3 Features of Equity Compensation Plans :
To understand the elements of the stock option, it is important to
understand the following features of stock option :
1. Unde rstanding the Concept :
Stock options are popularly known as Employee Stock Option. Employee
Stock Option is a contract between two parties that gives the buyer the
right to buy or sell underlying stocks at a predetermined price and within a
specified time period. There are two types of stock options - Call Option
and Put Option.
The employee stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than granting shar es of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises. It also contributes in increasing the worth of the employees in te rms
of the stocks they have in their names.
2. Right to Buy Companies Share :
The employees of the organization get rights to but the companies share at
a fixed price. A seller is paid a premium from the contract purchased by
the buyer and known as option w riter. He is the one who sells the stock
option to the employees. This practice of compensation is also known as
equity option. Many companies are offering equity to their employees. As
the name suggests, it is an option not an obligation on the part of th e
investor.
3. Working of Stock Option :
The option value can go up and down. It is not easy to understand the
working of a stock option. One must have some knowledge of finance
when it comes to understanding this topic. The option can go up and
down. The g reat benefit of this type of compensation can be determined
when the stock prices of the company rises.
4. Vesting Period :
Vesting is a word which deals with acquiring the stock option of a
company. It is a process by which an employee acquires a “vested
interest” or “stock option” in their company. It is a process of earning like
an asset.
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143 5. Two Types of Stock Option :
Companies can offer or grant two types of stock option :
a. Non-qualified Stock Option
b. Incentives Stock Options
Non-qualified stock options do not qualify for special tax treatment.
While, incentives stock options qualify for special tax treatment.
6. Expiration Feature :
The term of the stock option is limited. If it is not exercised within the
time limit, it may expire. Stock options always have a limited term during
which they can be exercised. The most common term is 10 years from the
day of grant.
13.2 TYPES OF EQUITY COMPENSATION PLANS The following are the various types of equity compensation plans :

Fig. 13.1: Types of Equity Compensa tion Plans
1. Stock Options :
As mentioned earlier, stock options are popularly known as Employee
Stock Option. Employee Stock Option is a contract between two parties
that gives the buyer the right to buy or sell underlying stocks at a munotes.in

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144 predetermined price and within a specified time period. The employee
stock option is a type of equity compensation. It is granted by the
companies to their executives and employees. In this type of compensation
rather than granting shares of stock directly, the company gives derivative
options on the stock instead. The great benefit of this type of
compensation can be determined when the stock prices of the company
rises.
There are two types of stock option :
 Call Option
 Put Option
2. Non-qualified Stock Options :
Non-qualified stock option is an additional type of equity compensation. It
is a type of employee stock option wherein an employee pays ordinary
income tax on the difference between the grant price and the price at
which a person exercises the option. The non -qualified stock option gave
the right to employers. Employers do not have to report when they receive
this option or when it is exercised.
3. Incentive Stock Options :
Incentive stock options are favored because of tax. They offer special tax
advantages. This option is available only for employees. This stock option
provides an opportunity to employees to acquire shares at a set price at a
later date. The date on which given the options is known as the “grant
date” and the fixed price at which one can purchase shares is known as the
“strike price” or “exercise price.”
4. Performance Shares :
As the name suggests, performance shares are awarded to employees on
the basis of their performance. These shares are awarded to employees
only when specific metrics are fulfilled . The specific metrics are -
 Return on equity
 Earning per share
 total return of the company’s stock
5. Restricted Stock :
Restricted stocks do not provide any ownership to employees. Restricted
stocks are unfunded promises to issue shares in the future, and the
employee will not be able to vote the shares or have a right to dividends. munotes.in

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145 13.3 HOW DOES EQUITY COMPENSATION PLANS WORK? Employee stock ownership plan is a defined contribution benefit that
allows employees to become owners of stock in the company th ey are
working for. In an equity compensation plan, the organization distributes
shares of stock to its employees. After getting the stock, the employees
become owners of stock. The employees receive regular updates and
resorts on the value of the stock ow ned by them. When they leave the
organization, they may sell the stock to the organization or on the open
market.
In this section, we will also see how does equity compensation plans
work:

Fig. 13.2: Working of Equity Compensation Plan
1. Operates Throug h Trust :
Most of the equity compensation plans work through a trust. This trust is
set up by the company. The company accepts tax deductible contributions
from the company to purchase the stock of the company.
2. Contributions:
After arranging the contrib utions, the company distributed them among
individual employee’s accounts. The distribution takes place within the
trust.
3. Amount of Stock:
The amount of stock which was distributed by the company may vary. It
may vary according to pre -established formul as. The pre -established
formulas may be based on :
 Salary
 Position
 Service munotes.in

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146 4. Vesting Option :
After getting the stock the employee may cash out after vesting. When
they leave the company, they may do that. On the basis of their vesting
requirements, they m ay cash out the amount. Vesting is a word which
deals with acquiring the stock option of a company. It is a process by
which an employee acquires a “vested interest” or “stock option” in their
company. It is a process of earning like an asset.
5. Diversi fication Option:
When the employee age reaches the age of 55, a stockholder employee
who has at least ten years of participation must be given the option of
diversification. In this option, he/she can diversify the amount of stock up
to 25% of the value.
They can avail this option until they reach the age of sixty.
6. Vested Portion :
At the time of termination, disability, death or retirement, the employee
receives the vested portion of their accounts. The amount may be made in
lump sum or in installments over a period of years. In case of death or
disablement of an employee, his beneficiary may get the portion.
13.4 ADVANTAGES OF EQUITY COMPENSATION PLAN The equity compensation plans have proved to be very beneficial for the
organizations. The most popul ar among all is stock options. Stock options
are popularly known as Employee Stock Option. Employee Stock Option
is a contract between two parties that gives the buyer the right to buy or
sell underlying stocks at a predetermined price and within a specif ied time
period. There are two types of stock options - Call Option and Put Option.
The employee stock option is a type of equity compensation. It is granted
by the companies to their executives and employees. In this type of
compensation rather than gran ting shares of stock directly, the company
gives derivative options on the stock instead. The great benefit of this type
of compensation can be determined when the stock prices of the company
rises. It also contributes in increasing the worth of the employ ees in terms
of the stocks they have in their names.
The option value can go up and down. It is not easy to understand the
working of a stock option. One must have some knowledge of finance
when it comes to understanding this topic. The option can go up an d
down. The great benefit of this type of compensation can be determined
when the stock prices of the company rises.
Many retirement plans under the equity compensation plans have proved
to be effective. At the time of termination, disability, death or re tirement,
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Equity Compensation Plans
147 may be made in lump sum or in installments over a period of years. In
case of death or disablement of an employee, his beneficiary may get the
portion.
Apart from this in gen eral, the following points can be considered to
understand the advantages of equity compensation plan :

Fig. 13.3: Advantages of Equity Compensation Plan
1. Capital Appreciation :
The concept of equity compensation plan allows the owner to sell the
major p ortion or 100% of his company to get money. The money is tax
free and the owner still gets the control of the company though he enjoys
sharing the ownership of the company with others too to a limited extent.
Companies sell some of their equity to employe es. By selling their equity,
they convert the corporate and personal taxes into text free capital
appreciation. That's why it is considered as one of the advantages of an
equity compensation plan.
2. Tax Advantage :
Tax advantage is also one of the benef its a company draws by taking up
equity compensation plans. As mentioned earlier, companies sell some of
their equity to employees. By selling their equity, they convert the
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Compensation and Benefits
148 It enables tax advantage purchasing of stock of a retiring company owner.
A company owner may sell their shares to Employee Stock Ownership
Plan and incur no taxable gain on the sale of these shares.
3. Reduces Tax Liability :
The tax liability increases the expenditure pattern of a company. A
company can reduce corporate income taxes and increase its cash flows.
The corporate tax amount can be reduced with the help of equity
compensation plans.
4. Incentive Based Scheme :
Profit sharing is a plan in which an employer giv es the right to an
employee to be a part of profit sharing of the organization. It is a type of
pre-tax contribution plan for employees that gives workers a certain
amount of a company’s profits. The amount of profit sharing is up to the
company how much t hey would like to share with the employees.
Equity compensation plans are also termed as incentive based schemes
just like profit sharing. It helps employees to increase the worth of their
assets.
13.5 DISADVANTAGES OF EQUITY COMPENSATION PLAN Just like a dvantages, there are some disadvantages of equity compensation
plans. We will study these points one by one :

Fig. 13.4: Disadvantages of Equity Compensation Plans munotes.in

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Equity Compensation Plans
149 1. Improper Transactions :
If the company or the executive body of the equity compensation p lan are
knowingly participating in improper transactions, they can be held liable.
Sometimes, the executive members of the equity compensation plan are
deemed to be fiduciaries.
2. Performance of Stock :
Not every stock of the company performs well. If the value of the stock of
the company does not perform well, the employee may feel that the equity
compensation plan is less attractive than a profit sharing plan. Profit
sharing is a plan in which an employer gives the right to an employee to
be a part of pr ofit sharing of the organization. It is a type of pre -tax
contribution plan for employees that gives workers a certain amount of a
company’s profits.
3. Liquidity Issue :
The liquidity issue may rise due to the appreciation of the value of stock.
The optio n value can go up and down. It is not easy to understand the
working of a stock option. One must have some knowledge of finance
when it comes to understanding this topic. The option can go up and
down. The great benefit of this type of compensation can be determined
when the stock prices of the company rises.
At the time of termination, disability, death or retirement, the employee
receives the vested portion of their accounts. The amount may be made in
lump sum or in installments over a period of years. I n case of death or
disablement of an employee, his beneficiary may get the portion.
If the company will face the liquidity issues, they may not be in a solution
to repurchase stock upon employees retirement.
4. Defection :
There may be cases of defection, if the cash flow benefits are weighted
against the rate of dilution. Sometimes, companies use an equity
compensation plan to finance the operation to achieve company growth.
13.6 SUMMARY  A good compensation model increases the productivity and
performanc e of an employee. Ultimately, their increased performance
and productivity contributes to increasing the competitiveness of the
organization. A good compensation model helps organizations to
attract and retain the new talent. It attracts the best candidate s for the
organization. People before joining any organization always give first
preference to salary and goodwill of the company.
 The employee stock option is a type of equity compensation. It is
granted by the companies to their executives and employees . In this
type of compensation rather than granting shares of stock directly, the munotes.in

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Compensation and Benefits
150 company gives derivative options on the stock instead. The great
benefit of this type of compensation can be determined when the
stock prices of the company rises.
 Stock opti ons, NSOs, ISOs, Performance Shares, Restricted stock are
some important types of equity compensation plans. Among them,
stock options are the most popular tool.
 Employee stock ownership plan is a defined contribution benefit that
allows employees to beco me owners of stock in the company they are
working for. In an equity compensation plan, the organization
distributes shares of stock to its employees. After getting the stock,
the employees become owners of stock. The employees receive
regular updates and resorts on the value of the stock owned by them.
When they leave the organization, they may sell the stock to the
organization or on the open market.
 Capital appreciation, tax benefits, less tax liability and incentive based
schemes are some advantages of equity compensation plans.
 Improper transactions, performance of stock, liquidity issues and
defection are some disadvantages of equity compensation plans.
13.7 SELF ASSESSMENT TESTS 1. Describe the concept of Stock Option. Explain the salient features of
stock options.
2. Write a note on understanding the elements of stock options.
3. What is an equity compensation plan? Explain the important features
of an equity compensation plan.
4. How does Equity Compensation Plans work?
5. Explain the various types of Equity Compen sation Plans.
6. Write down the advantages of Equity Compensation Plans.
7. Highlight the disadvantages of Equity Compensation Plans.


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151 14
CASE STUDIES AND PRESENTATIONS
Unit Structure
14.0 Objectives
14.1 Case Study - I
14.2 Case Study - II
14.3 Case Study - III
14.4 Case Study - IV
14.5 Case Study - V
14.6 Case Study - VI
14.7 Case Study - VII
14.8 Case Study - VIII
14.9 Case Study - IX
14.10 Role Play
14.0 OBJECTIVES After studying this module, you should be able to:
 Understand the relevance of case studies.
 Know about the methodology to solve case studies.
 Understand how it helps to increase the intellectual ability among
students.
 Study how it helps to create a decision making skill among students.
14.1 CASE STUDY - I The Alpha Company Limited decided to open a new branch in Kanha,
Mandla District, Madhya Pradesh. Kanha is an exclusive tourist place.
People who love to see nature and visit the sanctuaries used to come
frequently to this place. There is no office of Alpha Company Limited at
present. The company has determined the appropriate salary for the
clerical staff it needs to recruit in the new office. The clerks who a re
employed in other offices receive a starting salary of Rs. 12,000 / - per
month. The pay scales have been fixed at par with other offices in the city.
A survey was taken to estimate the cost of living in a tourist place like
Kanha. The survey results sho wed that the salary at present being paid to
staff should be 14,000 / - due to high cost of living. Kanha is a tourist
destination and a limited number of people are employed like any other
city.
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152 Questions:
1. What are the issues involved in this case?
2. Is it justifiable to provide different pay scales for the same job at two
different locations? Give reasons.
3. Determine the appropriate salary structure for the staff of the
company.
14.2 CASE STUDY - II Mr. Atul is working as a Branch manager in Yes Bank. He is posted in the
East Mumbai branch. He along with his four clerks, one cashier and two
attendants works in a branch. Very often, he works alone after 5:00 PMfor
the bank work. He stays to tally accounts, day books and the other
formalities of the bank. 1st A pril is a holiday for banks. On the night of
31st March, he was completing his work as it was the last working day of
the financial year. He stayed in the bank till past 1:00 AM.
Unfortunately, Mr. Atul was attacked by a group of robbers. The robbers
not only attacked the branch manager but also looted Rs. 10 Lakhs cash
from the bank. Mr. Atul was admitted immediately as he was seriously
injured. After recovering, Mr. Atul applied for compensation. The bank
management was of the opinion that he violated t he job conditions by
working beyond the working hours and should not be compensated. In
fact, he was called for an explanation as to why the amount which the
bank lost in the form of cash cannot recovered from his salary or provident
fund.
After the accid ent, the FIR was lodged but even after his recovery, the
police was not able to arrest the culprits.
Questions:
1. Where do you see the position of Atul in this case?
2. How do you justify the bank management decision and explanation
they are demanding in this c ase?
3. Who is at fault in this case?
4. It is wrong to work beyond the working hours to complete the work in
time - Give your opinion
14.3 CASE STUDY - III The human resource Management team of the CB Company Limited
suggest to the management how to strategical ly manage people as business
resources. The team feels that the compensation is the most important
factor to run an organization. Miss Abha, the vice president of the
company, was addressing the meeting. In her address, She puts stress on
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153 She was asking for a suggestion from the executive team of the company.
During the discussion, Mr. Aditya , Human Resource Manager of the
company suggested to involve the employees directly in framing the
compensation policy of the company. As it was an open discussion,
everyone was free to share their opinion. After hearing this, Miss Abha
reacted negatively and left the meeting.
The people working in the company are generalists rather than specialists.
After the meeting, Mr. Aditya was blamed for spoiling the agendas of the
meeting. Soon, he was handed over the show cause notice for violating the
norms of the meeting.
Questions:
1. What impact will the above case leave in the mind of the remaining
executives?
2. Who is at fault in this case?
3. Why did Miss Abha react like this? If you were at her place, what
would be your reaction?
4. Is it wrong to involve people in compensation policy? Support your
answer from the point of view of Mr. Aditya.
14.4 CASE STUDY - IV Mr. Ravi, Human Resource Manager of ITC group contacted the
Managing Director and informed him about the absence of Mr. Ram, the
clerk of the office for the past 20 days. He requested him to approve the
show cause notice to be served to Mr. Ram for being abse nt for so long
from the office without intimation.
The Managing Director advised Mr. Ravi to find out the reason for his
absence from the office for so long. He instructed him to go or send
someone today and check him. Mr. Ravi personally went and found t hat
Mr. Ram was absent due to health issues. He has been trying to arrange
the money for his treatment and was unable to arrange the same. Mr. Ravi
after knowing and coming back to office reported his condition to the
Managing Director and told the reason for his distress and absenteeism
from the work.
The M.D. immediately instructed Mr. Ravi to provide the financial
assistance to Mr. Ram from the company’s fund. This news spread in the
entire company within no time.
Questions:
1. Which approach of human res ource management was used in this
case?
2. “Treating the employees as human beings is a fundamental theme of
human resource management” - Explain this statement. munotes.in

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154 3. What would have been your stand if you were at the place of Mr.
Ravi?
4. Who is the hero of this case ?
14.5 CASE STUDY - V While designing a CTC for an employee, Mr. Raj received a complaint
from the supervisor that the new employees are not following instructions
properly. Mr. Raj, the Human resource manager, thought to observe the
case first. He instruc ted the supervisor to determine the behavior of new
employees and prepare a simple checklist based on their behavior. The
checklist spud contain the following questions -
1. Are the employees satisfied with the present salary structure?
2. Do they follow the ins tructions of superiors?
3. Are they happy with the allowances?
4. Do they make mistakes unknowingly?
After observing the answers, Mr. Raj analyzed that the new employees are
not satisfied with the present salary structure. They feel the company is
giving them le ss and the comparative to that is more.
Questions:
1. What would you do if you were at the place of Mr. Raj?
2. What should be the stand of the supervisor in this case?
3. Is it possible to revise the present salary structure for the new
employees.
14.6 CASE STUDY - VI Naria Company is a pesticide manufacturing company. There are
extensive rules and regulations that employees are instructed to follow.
Every employee has specific work and objectives to achieve in his job.
Managers supervise employees closely to ensur e that there are no
deviations. People are allowed to do little deviations in doing their jobs.
The employees are allowed to bring and report any unusual problems to
communicate through normal channels. In this company, the management
has little confidenc e in the employees. The imposement of rules and
regulations is very tight. The job rotation is very common. All the
employees in their work are generalists rather than specialists. The
employees are not happy with the current reward strategy. Though, effor ts,
loyalty and cooperation are highly rewarded.
Questions:
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155 2. What impact will it have on the reward strategy?
3. Explore the role of allowances in reward strategy.
14.7 CASE STUDY - VII Vishal joined a pulp making plant l ocated in Punjab, as AGM material.
The plant which is a part of a huge conglomerate lured Vishal away from
his previous organization. When he joined the organization, he did not go
through any induction or orientation programme. In this organization, it
was important to take the prior permission before ordering the material.
Mr. Vishal was not aware of this rule.
In his previous organization, he was well inducted and oriented in the first
week of his joining. Though he was not satisfied with the salary, the rest
was good in the previous company. Before knowing, he placed the order.
Mr. Ram, his manager refused to sign the bill as his approval was not
taken by Mr. Vishal. Mr. Vishal for the first time felt humiliated at
workplace. He was told to read the rule s before doing anything in the
company. His Salary was good and allowances was better than the
previous organization.
Mr. Vishal after this incident decided to resign.
Questions:
1. What are the issues involved in this case?
2. Why the compensation structure o f the company did not convince Mr.
Vishal to stay in this organization?
3. Who is right in this case?
14.8 CASE STUDY - VIII The reward strategy of the RRR Tech. Limited is found to be attractive.
People working in the organization are happy with the current reward
strategy. While dealing with the customers, company put emphasis on the
following attributes:
 Ability to deal sensitively with customers.
 Not to threaten or talk arrogantly with the customers.
 Human skills like tolerance and patience should be pract iced
 Always display pride in working with RRR
While doing the appraisal, these key points were considered first. Oneday,
a customer created a problem. Miss Renu was the new joiner. During the
discussion, an argument took place between her and the customer . She
was fired immediately after this case.
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Compensation and Benefits
156 Questions:
1. What are the issues involved in this case?
2. A proper reward strategy should involve the strategy for the retention
of employees as well. - Discuss this statement in light of the above
case.
3. What was the fault of Miss Renu? Was she not aware about the policy
of the company?
14.9 CASE STUDY - IX Sachin is a dynamic young man. He got his diploma in management and
joined a Chennai based company as a management assistant. He pursued
his studies and obtaine d a degree in the field of management. After
obtaining the degree, he was promoted as the Sales Manager. He worked
hard and became senior sales manager. His compensation and allowances
increase by the time.
He was entrusted with one of the talented groups of the company. Issues
started when the coordination between the group members got disturbed.
He was agitated to receive new complaints everyday. He was in a thought
to provide training to employees about team building and group
cohesiveness. For that, he invited a few trainers from the different fields.
After evaluating their behaviors, he found that the main problem was
communication. He decided to have one to one talk with the employees to
understand the situation better.
Sachin was a part of the apprai sal committee. While evaluating the salary
structure of his subordinates, he found that Anil and Sunil were appointed
on the same post, same day but there is a deviation in their salary which
was unusual. He pointed out this matter to his superiors and not hing came
from them in the form of a response.
Anil whose pay was less resigned and joined the new organization. \
Questions:
1. Write the ethical issues involved in this case.
2. What do you feel about the role of Sachin in this case?
3. Why did the superiors no t give any response to Sachin when the
compensation deviation was informed to them?
4. Why did Anil leave the organization? Was he aware about this
deviation in pay?

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Case Studies and Presentations
157 14.10 ROLE PLAY Role play is an act where the participants are given some situations and
they are expected to act in the role. The following steps can be followed
for role play:
Step I - Introduce the Situation
Step II - Provide details
Step II - Assign Roles
Step III - Act
Step IV - Discuss the experience
Role Play - Situation I :
“I can't work with you anymore. It is getting unbearable to work under
you in this organization. The pay in this organization is less and the work
is more” Mr. Reddy said this to Mr. Rohan, hsi manager.
Kindly assign this role to two students and discuss th is statement in the
light of compensation and benefits.
Situation - II:
“I am amazed to hear this, the Board wishes to have residential quarters
built for our employees close to the factory and has provided crores of
rupees. And you are in an opinion and s aying don’t do it.” Mrs. Radha
Iyer said this to Miss Ramaiya, who works in an allowance department (A
sub-department of HR)
Kindly assign this role to two students and discuss this statement in the
light of compensation and benefits.


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