UNIT 8 PAY STRUCTURE Pay Structure
Objectives
After going through this unit, you should be able to understand:
• the philosophy of pay-packet;
• the concept of wages, salary and pay-packet;
• the concept of basic wage;
• the concept of dearness allowance;
• the concept of payment by result;
• the concept of annual bonus;
• the concept and practices of fringe-benefits; and
• the trends of pay packet.
Structure
8.1 Introduction
8.2 The concept of Wages, Salary and Pay-Packets
8.3 Basic Wage Component of Pay Packet
8.4 Dearness Allowance Component of Pay-Packet
8.5 Payment by Result or Incentive Payment
8.6 Statutory Bonus
8.7 Allowances, Fringe Benefits and Social Security
8.8 Understanding the Trends of Pay-Packets
8.9 Self-Assessment Questions
8.1 INTRODUCTION
You are aware that man does not work for monetary compensation alone, still
financial compensation remains the most important purpose of his working.
Various methods of compensation have been evolved over a period of time
with view to satisfy the employee. Various components were introduced to
make the pay-packet to retain and motivate employees. Thus management
pay packet remains the important element of human resource management.
A number of considerations like public policy, legal framework, Labour
market situation, pressure from the unions and competitions etc. impinge on
evolution of pay-packets. It needs to be evolved carefully to provide for
meaningful wage- differentials and salary progression. Certain parts of pay-
packet bears no relation to performance. Therefore, organisations are finding
the need to develop various incentive schemes and payment by results
systems to make pay directly related with performance.
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Compensation Employees Pay packet began on a voluntary note at employers' instance. To-
Management
day involuntarism has set in its place, with many benefits becoming
entitlement either because of legislation or wage settlements, competitive
pressures and the need to attract and retain the right people. Organisations are
searching for means to find innovative approaches to make pay packet
performance oriented and attractives.
8.2 THE CONCEPT OF WAGES, SALARY AND
PAY-PACKETS
Concept of wage
Payment made to labour is generally referred to as wages. It can be time-
rated or piece-rated. It can be rate per hour, per day, per week, per month or
per year. In Price-rated system, it can be by completion of job-task and wages
fixed for per unit of performance.
Concept of Salary
Money paid periodically to persons whose output can not easily be measured,
such as clerical staff as well as supervisory and managerial staff, is referred
to generally as salaries. Concept of Pay-Packet Pay-packet is a
comprehensive term and consists of several elements like basic wage,
dearness allowance, house rent allowance, city compensatory allowance,
annual statutory bonus, incentive bonus and various other perks and benefits
etc. etc.
8.3 BASIC-WAGE COMPONENT OF PAY
PACKET
The basic wage provides and stable base to the wage structure. It is the price
to be paid to get a given job done. This could be on monthly, weekly or daily
basis.
Basic wages is built upon the statutory minimum wage, through the awards
of the Industrial Tribunals and directives of the Pay Commission at National
and State Levels and the collective bargaining. The minimum wages,
according to the recommendations of the 1949 Report of the Fair Wages
Committee appointed by the Government of India, should provide not merely
for bare subsistence of life but for the preservation of efficiency of workers
by providing some measure of education, medical requirements and
amenities.
It was after the end of the second world war that the Industrial Tribunals and
Courts have set the pattern of basic wages in Industries through awards. Basic
wage of Industrial worker is based on a "Standard-Budget" concept or a
family of four, should include food, clothing, housing and fuel.
This is also known as Need Based Minimum Wage. The underlying
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assumptions behind the basic wage legislation is that the industry does not Pay Structure
have the right to exist unless the minimum needs of workers are met.
The Committee on Fair-Wages (1947) and 15th session of I.L.C. (1954)
propounded certain wage concepts such as minimum wages, fair wages,
living wages, and need based minimum wages.
Minimum wages - not merely for bare subsistence but also for the
preservation of efficiency and providing some measure of education; medical
etc.
Fair-wage - while the lower level of fair wage is the minimum wage the
upper-limit is the capacity of the industry to pay. Between these two limits,
the actual wage can depend on (I) the productivity of labour (ii) the
prevailing wage rate (iii) National income (iv) the place of industry in
national economy.
Living-wages - It represents and inclinds decency, protection against ill
health, requirements of essential social heads and insurance against some
future misfortune etc.
Living wage is a concept enshrined in our constitution and state will make all
efforts to attain it.
Need-based Minimum Wages has been explained above.
The concepts of Nominal/Money wage and Real Wage also require explain in
brief.
• Nominal/Money wage is the earning in cash or its equivalent
• Real wage is the money wages discounted by cost of living index to
denote the pruchasing power of the wages.
Differentials in basic wages are normally based on a set of criterion which the
Fair Wages Committee suggested. They are as follow:
• The degree of skill
• The strain of work
• The experience involved
• The training required
• The responsibilities undertaken
• The mental and physical requirements
• The disagreeableness of the task
• The hazard on the work
• The fatigue involved
Basic wage is generally practised through scales of pay. An employee draws
his basic pay in a range provided in the scales. He also gets increments on
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Compensation periodical basis.
Management
Basic pay generally remain static, unless an employee moves upward (gets
promotion) or downward. (gets demotion).
8.4 DEARNESS ALLOWANCE COMPONENT OF
PAY PACKET
The words dearness allowance primarily suggest and refer to allowance paid
to employees in order to enable them to face the increasing dearness of
essential commodities. The system of D.A. for employees began during
second world war when Government sanctioned a scheme of grain allowance
to their lowest paid employees. Gradually, it was extended to all classes of
employees as a means to protect, to some extent, the real income of wage-
earners and salaried employees from the effect of price-rise and inflation.
Instead of increasing wages, DA is paid to neutralise the rise in prices. The
assumption behind DA rise is that if the prices go back to the earlier level, the
DA can be reduced or withdrawn.
In other countries, where similar practice exists, it is known as a practice of
inflation adjustment or cost of living allowance (COLA). Even in India, Sec.-
3 of Minimum Wages Act, refers to it as cost of Living Allowance.
DA forms a variable component of Pay-Packet, since rate of dearness
increases more than once every year, whereas the basic pay scales are revised
after longer spells of time.
The scheme of DA is having usually three parameters - (I) Index factor (ii)
the time factor (iii) the point factor. The Index is usually the All India
Consumer Price Index (AICPI) Number for Industrial Workers (Base 1960 =
100 AICPI). The allowance may go up with the revision in the index based
on average for a selected period to off-set the temporary fluctuations in the
index.
Also, a doze of DA is related to certain prescribed increase in the number of
the Index points.
There are different patterns of calculating DA, using the above parameters -
• The Central DA - Applicable to Central Government employees and
employees of certain central PSUs. In this pattern incidents of
neutralisation goes upto 100% for lower slabs.
• The Industrial Pattern - Applicable to most of the PSUs and also some
private sectors. The DA is paid at the the rate certain rupees (say Rs.3)
for per point increase in the Price Index.
• DA system in Banks and LIC is yet another pattern which is different
than above types. It has better benefits than IDA pattern.
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Pay Structure
Activity 1
Interview 10 persons each from Central Government organisations who are
drawing central DA, the employees from Industrial Sector and 10 employees
from Banks and LIC and find out the strengths and weaknesses of all the
three patterns of DA by comparing with each other.
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8.5 PAYMENT BY RESULT INCENTIVE
PAYMENT
Wage is "a fair day's remuneration for a fair day's work", i.e. standard
performance. An incentive wage is described as "a method of payment for
work of an acceptable quality produced over and above a specified quantity
or standard". Payment-by- Result (PBR) refers to a method which provides,
for the "direct linking of workers earnings to a measure of their
performance".
Where pay is the contingent upon performance, employees give their best
under incentive conditions rather than non-incentive conditions. The
incentives can be be financial or non-financial and both types of their role
under certain conditions.
PBR system (wage-incentive being one) can be distinguished on the basis of
unit of accountability for performance and classified into three categories (i)
individual performance (ii) group performance (iii) enterprise performance.
• Individual Payment-by-result - The purpose is to accomplish higher-level
of performance with promise of extra remuneration for extra effort over
the standard. Several individual PBR systems are in vague. Some of the
well known systems are price-rated system, premium bonus system
(standard hour/measured work day plans) or work-improvement system.
• Group payment by result scheme - The PBR schemes discussed above
can be applied on group basis also. Group PBR is, appropriate where jobs
are interdependent; where it is difficult to measure individual
performance separately and where group pressures influence the output
of the members of the group. There should be objective system of
measurement of the group performance and members must be aware of
it.
• Enterprise-level schemes - These schemes emphasis gain sharing arising
through redirection in labour and other costs. The gains arising out of
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Compensation improvements in performance over and above the base or norm is shared
Management
between the employees and the organisation according to pre-determined
ratio.
Managerial Incentive Plans
Managerial employees get the following types of additional incentives –
• Commission on a percentage of profit
• Company's share on concessional rates
• Bonuses in cash or kind (discount coupons, paid holidays, etc.)
8.6 STATUTORY BONUS
Payment of Bonus Act, 1965 ensures payment of bonus. each year. This
ranges from 7.33% to 20% of wages. The Act compels even the loss-making
industries to pay 7.33%. For profit-making companies, the Act provides
formula to declare annual bonus, which has to have the ceiling of 20%. In
this sense, the annual bonus has become a sort of "deferred-wage" every
employee gets its.
The method of calculation of annual bonus is given below:
1. First gross profit is to be calculated in the manner specified in the First
and Second Schedule of the Act.
2. From the gross profit so worked out the available surplus is to be
computed by deducting prior changes, such as (a) depreciation
admissible under Section 32(1) of the Income Tax (b) development
rebate, or investment allowance, or development allowance deductable
by employer from his income under the Income Tax Act (c) direct taxes
payable by the employer on income, profits, and gains during accounting
year (d) actual dividend payable on the preference share capital, and (e)
7.5 return on paid-up capital and 6% return on reserve shown in the
balance sheets at the commencement of the accounting year. In the case
of banking company the return on paid-up capital and reserves to be
deducted is to be i % less and (go such further sums as are specified in
respect of the employer in the Third Schedule of the Act.
3. From the "Available Surplus" so computed, 67% of it in case of foreign
companies and 60% in case of other companies, is to be constituted as
"Allocable Surplus" for payment of bonus to the employees covered by
the Act.
4. Every employer whose establishment is covered by the Act, has to pay a
minimum bonus equivalent 7.33% of the salary and wages including
dearness allowance during the accounting year, or Rs.100 to all eligible
workers over 15 years of age, and Rs.60 in case of workers below 15
years of age, whichever is higher, irrespective of the fact whether there is
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any allocable surplus or not. Minimum amount of bonus is to be paid in Pay Structure
proportion to the number of days actually worked.
5. If in any accounting year the allocable surplus exceeds the amount of
minimum bonus payable to the employees, the employer shall pay to
every employee in respect of that accounting year bonus which shall be
an amount in proportion to the salary or wage earned by the employee
during the accounting year subject to a maximum of 20% of such salary
or wage. In computing the allocable surplus for this purpose the amount
of set on and set off from the previous years will be taken into account.
6. Although this Act is applicable to all those persons who receive monthly
pay upto Rs.3500, but in the case of person with monthly pay between
Rs.1600 and Rs.3500 only pay of Rs.1600 is to be taken into account for
working out the amount of bonus payable to them, for this purpose the
term pay includes basic pay and dearness allowance.
The employee not covered by the Act, also get an amount equivalet to bonus
either on Ex-gratia or Reward or by any other name. Therefore, bonus has
become an integrated part of pay-packet.
8.7 ALLOWANCES, FRINGE BENEFITS AND
SOCIAL SECURITY
The Pay Packet includes, such extra benefits, in addition to the normal wages
or salary compensation or incentive payment etc., are referred to loosely as
Allowances and Fringe benefits. They form substantial part of pay-packet and
an employee decides his employment keeping the allowances and fringe
benefits also in view.
Allowances
Successive wage settlement/awards have brought of a number of allowances
which form integrated part of pay-packet.
Fringe-Benefits
The general objective of the organisation for offering fringe benefits to the
employee is to attract, retain and motivate him. The specific objectives are
related to the nature of each benefit. For example, extra-increments and
accelerated promotions on acquiring higher and relevant qualification is
intended to enhance qualifications and skill mix of the employees. Similarly
nutricious food (milk etc. is given to make good of the efficiency losses and
restore stemina to work.
There are many other considerations for instituting and expanding employees
fringe- benefits. For example paternalistic or humanistic considerations,
statutory requirements, concern for security hazard of industrial life, tax
considerations, utilisation of leisure time, incalcating some of involvement,
competitive market conditions to attract and retain good performers:
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Compensation a) Patternalistie or Humanistic consideration - Basically voluntary with
Management
welfare orientation to supplement wage compensation with certain
infrastructures or facilities to provide for health; education, and housing
as also social, cultural, religion, recreational activities, etc.
b) Statutory requirements - Since 1940s social welfare provisiopsi have
been incorporated in different legislations - canteens, rest-sheds,
cretches, maternity and paternity provisions etc.
c) Concern for security - The need for catering to the social security needs
of the employees, specially after retirement, come under this - Provident
Fund, Gratuity and Pension Schemes are the main Housing-Scheme,
Medicare after retirement and many other security schemes are coming
in this area.
d) Hazard of Industrial Life - To avoid depletion of saving in illness,
accident etc. certain provisions have been made - workmen
compensation Act, and the ESI Act etc. are the examples. Large
organisations have gone for normal health care service of their
employees and their family. Some have made good hospitals, some have
gone for dispensaries and some for medicare shcmes.
e) Tax Considerations - Organisations develop tax planning to avoid tax
obligations by restructuring the pay packet - A significant portion of the
remuneration is split into variety of expenses like house-rent, medical,
transport enterainment, education, interest-free loans, loans at
concesssional rate, etc. The purpose is to enable the employee to have
maximum value for a given remuneration package. The tax-free extra list
is ever expanding more prominently in Private Sectors and MNCs for
their managerial staff. But tax authorities are taking exception of going
beyond certain limit.
f) Utilisation of leisure time - Besides shortening of working hours and
the phenomenon of extended week-ends the importance of leave and
holidays for rest and recreation to maintain agile body and creative mind
is on increase. In view of this, organisation are not only providing for
paid leaves of different kinds (casual, privilege, sick, special casual
leave, etc.) but also granting facilities for leave travel (usually in form of
reimbursement of travel expenses for holiday travel in a year to two). To
make it convenient and cheap, organisations have gone for constructing
holidays homes at resorts or hire hotel or guest houses etc, for their
employees and their families. Some of the private sectors and MNCS,
organise foreign trips for holiday along with family.
g) Incalcating sense of involvement - organisations have gone for novel
fringe benefits to elicit employees sense of involvement. Most of them
have been modelled on pattern with Japanese organisations - company's
uniform (clothes, shoes, tie, watches, etc.), concessional lunch for every
one in company's canteen, subsidised picnics etc. are the examples.
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Competitive considerations - competitive pirating is common phenomenon. Pay Structure
Organisations face problem of attracting and retaining. Also, organisations
located in backward areas may face additional problems. Hence, a variety of
incentives and benefits are offered - township, reimbursement of educational
expense of children, self-lease houses, special allowances or pay (disturbed
area allowance, construction allowance, difficulty allowance, etc.) are given.
In addition, membership of clubs, professional associations, sponsorship for
training and conferences abroad, buy back of company's houses, car,
furnitures at discounted rate etc. are also given.
8.7 UNDERSTANDING THE TRENDS OF PAY-
PACKET
In this competitive-age, where job-hopping, is very frequent, the
organisations are realising the need to be sensitive to mould the pay and
fringe-benefits to suit the needs of the individual employees rather than offer
a common, standard pay package with the result, flexible compensation
packages (known as Ala Carta or In-Basket) are gaining widespread
acceptance among managerial employees. Such practices are very much
prevalent in MNCs and some big private sectors. But such flexible pay-
package is still to be common practice in India.
In flexible compensation package, the total pay-packet is decided or
negotiated and employee is given option to distribute it under different items
like pay, house-rent, conveyance, entertainment, journal/book allowance,
membership in club/professional India, furnishing allowances, drivers' salary
etc. Most of the items constitute expenses that do not form the part of taxable
income: there are some items which a particular employee may need and a
particular employee may not need. He has a range of choice and he plans his
choosing keeping his needs and tax-element in view. Flexible compensation
often extends and goes beyond fringe benefits in traditional sense.
8.9 SELF-ASSESSMENT QUESTIONS
i) What do you understand by the concept of wages, explain the concept of
basic wage through examples?
ii) Why is dearness allowance an integral part of pay packet, explain how is
it administered?
iii) Define and differentiate between bonus and fringe benefits, how are they
Iinked to social security.
iv) What are the hazards of industrial life, explain with examples?
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