Unit-4

Compensation

Workers render their services for wages and salary, also called, ‗compensation‘. In other words,
workers exchange their work for compensation. The term compensation is an embracing word
that comprises cash payments, which in addition to wages and salary includes pensions, bonus
and shared profits. There are other aspects of compensation which an employee looks for, such
as promotion, words of praise, job satisfaction, job content, creativity, and so on. It is, in fact,
difficult to outline and explain all aspects of compensation at one place.

The term compensation is used to indicate the employee‘s gross earnings in the form of financial
rewards and benefits.

Compensation can also be defined as follows:

1. A system of rewards that can motivate the employees to perform.

2. A tool that is used to foster values and culture.
3. An instrument that enables an organization to achieve its objectives.

The management should ensure that compensation structure is designed after taking into account
certain factors such as qualification, experience, attitude and prevailing rates in the markets.
Compensation means the reward that is received by an employee for the work performed in an
organization. It is an important function of human resource management. Employees may
receive financial and non-financial compensations for the work performed by them.
Financial compensation includes salary, bonus, and all the benefits and incentives, whereas non-
financial compensation includes awards, rewards, citation, praise, recognition, which can
motivate the employees towards highest productivity.

Compensation System:
Compensation is a tool used by management for safeguarding the existence of the company.
Compensation can be of two types—direct and indirect.

Direct Compensation:
1. Basic pay, dearness allowance, cash allowance
2. Incentive pay, bonus, commission, profit sharing, stock option

Indirect Compensation:
1. Legal requirement
a. Provident fund
b. Gravidity
c. Pension
d. Insurance
e. Medical leave
f. Accident benefits
g. Maturity leave
2. Optional sick leave
3. Casual leave
4. Travelling allowance
5. Telephone bills
6. Canteen allowance
7. Club membership

CHARACTERISTICS OF THE COMPENSATION SYSTEM

The main characteristics of the compensation system are as follows:

1. A hierarchy of pay levels
2. A hierarchy of jobs
3. A set of rules and procedures
4. Qualities required for movement from one level to other
An organization‘s compensation system usually consists of three separate components. Each
element of the compensation package has a link with an individual need hierarchy. All allowance
are linked to basic pay. In order to motivate the employees when they achieve objectives,
rewards and incentives are incorporated along with basic pay. To retain the employees and to get
long-term commitments, stock option plan, annual increments and promotion are provided.

Objectives of Compensation:

1. The compensation should be paid to each employee on the basis of their abilities and training.
2. Compensation should be in the form of package.
3. It should motivate the employees towards increasing productivity.
4. It should be capable of taking care of employees for safety and security needs also.
5. It should be flexible and clear.
6. It should not be excessive.
7. Compensation should be decided by the management as per the norms fixed by the legislations
in consultation with the union.
Components of Employee Compensation:
Components of employee compensation could be divided into two categories viz. basic
compensation and supplementary compensation. Again supplementary compensation comprises
allowances and perquisites or perks.

Let us describe the various components of employee compensation:

(a) Basic Compensation:

Basic compensation refers to the basic pay of an employee which is usually expressed in terms of
a pay scale e.g. 5,000-200-10,000- 500 -20000 etc. This pay scale implies that an employee will
get a basic pay of Rs. 5000 per month on joining the organization.
The employee will get an increment of Rs. 200 per year till he/ she reaches the basic pay of Rs.
10,000 and after wards will be entitled to an increment of Rs.500 per year till he / she reaches the
pay of Rs. 20,000 per month and so on. Basic pay for a job is decided though a process of
systematic job evaluation. In many cases, Government fixed pay scales apply which employers
have to accept and implement.

(b) Supplementary Compensation:

Supplementary compensation refers to payment of allowances and provision of perks or
perquisites. Allowances refers to amounts of money which are given to employees regularly for
particular purposes; while perks refer to privileges enjoyed by a person because of his/her
organizational status and paid/provided in addition to wages/ salaries.

Following is an account of popular types of allowances and perks:

Allowances:
(i) House Rent Allowances (HRA):
HRA is given by the employers to the employee to meet the expenses in connection with the rent
of the accommodation, which the employee might have to take.
(ii) Dearness Allowances (DA):
DA is paid to employees to compensate them, at least partially, against the phenomenon of rising
prices. DA is decided as per an agreed formula, taking into account the increase, in the cost of
living.
(iii) City Compensatory Allowance (CCA):
CCA is paid to employees to compensate them partly for higher cost of living in cities, which
differs from one type of city to another.
(iv) Conveyance Allowance:
Conveyance allowance is an allowance granted to employees to meet the expenditure incurred on
conveyance in performance of duties of job; when free conveyance is not provided by the
employer.
(v) Uniform Allowance:
It is an allowance which is granted to meet the expenditure incurred on the purchase or
maintenance of uniform for wear during the performance of duties of job.
(vi) Children Education Allowance:
Amount paid at the rate of certain amount per child to meet the cost of education of children
(subject to a maximum of two children or more as per rules of the organisation) is called children
education allowance.,
(vii) Underground Allowance:
This allowance is granted to an employee who is working in uncongenial, unnatural climate in
underground coal mines.
(viii) Miscellaneous Allowances:

Some other allowances payable to employees may be:

1. Medical allowance
2. Lunch / Tiffin allowance
3. Overtime allowance
4. Non-practicing allowance (in case of doctors)
5. Servant allowance etc.

Perquisites/Perks:
(i) Rent free accommodation or accommodation provided to employees at concessional rate. The
accommodation may be furnished or unfurnished.
(ii) Gas, electricity bill of employees paid or reimbursed.
(iii) Interest free or concessional loans to employees.
(iv) Leave Travel Concession (LTC) to employees.
(v) Free meals, tea and snacks, provided to employees.
(vi) Payment or reimbursement by the employer of club membership of the employee and
expenses incurred in a club by the employee.
(vii) Use of laptops and computers by employees, belonging to the employer.
(viii) Motor car/ other vehicles, provided by the employer to specified employees.
(ix) Provision by the employer of services of a sweeper, a gardener, a watchman or a personal
attendant to specified employees.
(x) Re-imbursement of medical treatment expenses, incurred on employee or members of his /
her family.
(xi) Contribution by the employer to recognized provident fund, kept for the benefit of
employees
7 Factors affecting compensation
Factors affecting wages or compensation or determinants of wages or compensation:

1) Productivity of workers: to get the best results from the employees and to increase the
productivity compensation has to be productivity based.

2) Ability to pay: it depends upon the employer‘s ability to pay wages to the workers. This
depends upon the profitability of the firm. If the firm is marginal and can‘t afford to pay higher
than the competitors then the employees will go to other firms while if the company is successful
then they can easily pay their employees as they wish.

3) Government: government has also fixed the rules for protecting the interest of the employees.
The organizations are liable to pay as per the government instructions. Wages cannot be fixed
below the level prescribed by the government.

4) Labor union: labor union also helps in paying better wages to the workers. Higher wages
have to be paid by the firm to its workers under the pressure of the trade unions.

5) Cost of living: wages depends upon the cost of living if it is high wages will also hike.

6) Demand and supply of labor: it is one of the important factors affecting wages. If the
demand of labor is more they will be paid high wages otherwise vice versa. If the supply of the
employees is more than they will be paid less and vice versa.

7) Prevailing wage rate: wages also depends upon the prevailing wage rate as the organizations
have to pay accordingly to keep the employees with them.
Incentives

Anything that can attract an employee’s attention and motivate them to work can be called
as incentive. An incentive aims at improving the overall performance of an organization.

Incentives can be classified as direct and indirect compensation. They can be prepared as
individual plans, group plans and organizational plans.

Incentives refer to rewards given to employees in monetary on non-monetary form in order

to motivate them to work more efficiently. It is also known as payment by results (PBR) as
they are paid in lieu of outstanding performance by an employee.

An incentive program is a formal scheme used to promote or encourage specific actions or

behavior by a specific group of people during a defined period of time.
Incentive scheme is a plan to motivate individual or group performance. An incentive scheme
basically involves monetary rewards, i.e., incentive pay but also includes non-monetary rewards.
Incentives are variable rewards granted according to level of achievement of specific results.
Incentives are payment for performance or payment by results.
In other words, an incentive plan must include in its purview the characteristics of time-based
and output-based systems of wage payment.

Definition:
1. According to Milton L. Rock, incentives are defined as ‗variable rewards granted according to
variations in the achievement of specific results‘.
2. According to K. N. Subramaniam, ‗incentive is system of payment emphasizing the point of
motivation, that is, the imparting of incentives to workers for higher production and
productivity‘.
3. The National Commission of Labour defines incentive as follows: ‗wage incentives are extra
financial motivation. They are designed to stimulate human effort by rewarding the person, over
and above the time rated remuneration, for improvements in the present and targeted results.

Types of incentives:

Incentives can be classified into three categories:

1. Financial incentives:
Some extra cash is offered for extra efficiency. For example, profit sharing plan and group
incentive plans.
2. Non-financial incentives:
When rewards or prizes are provided by the organization to motivate the employees it is known
as non-financial incentives.
3. Monetary and non-monetary incentives:
Many times, employees are rewarded with monetary and non-monetary incentives that include
promotion, seniority, recognition for merits, or even designation as permanent employee.

Advantages of incentive Plan:

1. Incentive plans motivate workers for higher efficiency and productivity.
2. It can improve the work-flow and work methods.
3. Incentive plans make employees hardworking and innovative.
4. When employees are dedicated, supervision costs can be reduced.
5. The National Commission on Labour says that under our conditions, wage incentives are the
cheapest, quickest, and sure means of increasing productivity.
6. Incentive plans help establish positive response in an organization.
7. It helps workers improve their standard of living.
8. The other benefits offered by incentive plans are reduced turnover, reduced absenteeism, and
reduced lost time.

Disadvantages of Incentive Plan:

1. Incentive plans can lead to disputes among workers, since some earn more than others.
2. Hunger for money among the workers forces them to overwork, which may affect their heath.
3. Some workers may involve in malpractices in order to earn more money.
4. For enhanced incentives, they may sacrifice quality.
5. It also leads to corruption by falsifying the production records.
6. Incentive plans can create tensions among different personnel

Types of Incentives Provided to Employees: Monetary and Non-Monetary Incentives

Type # 1. Monetary or Financial Incentives:

Money is the determinant factor of all incentives. In order to increase the efficiency of the
labourers, various financial incentives such as good wage, bonus, dearness allowance, and
money related income items (free uniform, free medical assistance, free education, etc.) are very
essential. Financial incentives impart self-confidence and give sense of security to the workers.
They take more interest in work and produce more in the hope of getting still more monetary
benefits.
These financial incentives also include such economic incentives as are given collectively to the
employees. For example, dearness allowance, profit-sharing, bonus, equal wage rates, pension
and annual increment based on ability, etc.
I. Dearness Allowance:

Payment of dearness allowance is made to the employees under wages/pay packet. It is paid by
the employers to the employees in order to provide relief to the latter against ever rising prices of
consumer goods. Thus dearness allowance is given to the employees by way of compensation for
rising prices or consumer price index.

This compensation is called dearness allowance. It is an important part of the wages paid to the
employees. To-day, dearness allowance is given to all government and most of the private sector
employees.

Initially dearness allowance was kept separate from the basic salary. The main reason for it was
that rise in consumer goods prices was temporary and it was hoped that in future prices will
revert back to their normal level. But prices went on rising and all measures to control them
failed miserably. In this way, the system of payment of dearness allowance, whose initial nature
was purely temporary, has to-day become an integral part of wages. System of payment of
dearness allowance in different industries and sectors is different from one another.

In India, the system of payment of wages is not very old. Prior to World War-II, system of
dearness allowance was restricted to cotton textile industries of Mumbai and Ahmedabad. It was
during World War I that payment of dearness allowance was first made in India in Cotton Textile
Industries. In 1939, the system gained importance.

Initially, dearness allowance used to be treated as an additional income of the workers.

Gradually, this system was introduced in all industries (private and public) of India. Presently,
payment of dearness allowance has become an integral part of wage payment.

II. Profit Sharing:

Inspite of several schemes providing incentives with regard to payment of wages, differences
still persist between the workers and the employers. With the development of Industrial
Democracy, profit-sharing and co-partnership have been accepted as motivational forces for the
workers. Profit-sharing and co-partnership have come into being in order to create a sense of
satisfaction among the workers and to elicit co-operation from them in the field of industrial
production.

This concept was first of all introduced in the Metropolitan Gas Company of America. Some
scholars are of the view that this concept was put to practice for the first time in France. In 1840,
French Painter Laclaire calculated that if a part of the profit is distributed among the workers,
there will be economy in the use of raw material and tools and equipments used in production
will be handled with care.
Meaning and Definitions of Profit Sharing:
Under Profit-sharing scheme, in addition to their regular wages workers are given a certain
percentage of share out of profit.

(1) In the words of H.R. Seager, ―Profit sharing is an arrangement entered into by which the
employees review a share, fixed in advance of profits.‖

(2) According to International Conference on Profit Sharing, Paris, 1899, ―Profit Sharing is an
agreement (formal or informal) freely entered into by which the employees receive a share fixed
in advance of the profit.‖

(3) In the words of Dr. Kimball 8c Kimball, ―Profit sharing is a scheme, whereby a certain
percentage of the profits is distributed at fixed intervals, usually annually or semi-annually, in
some definite ratio to all employees who have been in employment of the firm for a stated term.‖
(4) According to International Co-operative Congress, 1897, ―Profit sharing is an agreement
freely entered into by which the employees receive a share fixed in advance, of the profits.‖

(5) According to I.L.O. wages a General Report, 1948, ―Profit-Sharing is a method of industrial
remuneration under which an employer undertakes to pay his employees a share in the net profits
of the enterprise, in addition to their regular wages.‖

(6) According to Robert, Profit-sharing is an independent agreement which may be written or

oral and according to which the employed workers are given the right to get a share in the profit
in addition to their ordinary wages, but not in loss.

Characteristics of Profit-Sharing:

Main characteristics of Profit-sharing arrangement are as under:

(i) Profit is shared between the workers and the employers in accordance with an agreement.
(ii) Share out of profit is in addition to the normal market rate of wages and is intended to
provide inducement to the workers.
(iii) Preparation of the profit to be shared is pre-determined; the employer cannot change it later
on.
(iv) Share of the profit paid to the workers is based on the net profit or dividend of the industrial
unit.
(v) It is the profit that is shared between the workers and the employer and not the loss.
(vi) Labour-class alone is entitled to it and not the managerial-class.
(vii) Each worker, without any discrimination, gets share out of profit.
(viii) Individual ability of the worker is not taken into consideration while sharing profit.
(ix) Distributed share amount is either paid in cash or credited to the provident fund of the
workers.
(x) All workers know their share in advance.

Forms of Profit Sharing:

Following method are used as basis for determining profit-sharing:
(1) On the Basis of Industry:
Under this system, surplus profit of different units of a given industry is collected and distributed
equally among all the workers of that industry.
(2) On the Basis of Locality:
All units operating at one place collect their profits and distribute a given percentage of it among
the workers of all units.
(3) On Industry cum Locality Basis:
Units of a given industry operating in a particular locality distribute pre-determined proportion of
their profits among the workers.
(4) On Unit Basis:
Under this arrangement, profit of different units is worked out separately. Each unit distributes
pre-determined share of its profit among the labourers.
(5) On Departmental Basis:
Under this arrangement profit of different departments of the industrial unit is worked out
separately and distributed among the concerned departments.
(6) On Individual Basis:
Of the total profit, pre-determined share is taken out and distributed among the workers on the
basis of their efficiency.

III. Co-Partnership:

Co-partnership is, in fact, a developed form of profit-sharing. Co-partnership is based on the

establishment of industrial democracy and workers participation in management. Under this
scheme, in addition to profit sharing, workers also have their share in management and control.
In the words of Chapman, ―Co-partnership implies both profit sharing and control sharing‖.
In short, it can be said that co-partnership is the scheme by virtue of which workers become
partners of the industry. It improves the status of the workers and they begin to take more interest
naturally in the management of the organisation. As a consequence, operational efficiency of the
workers increases and a sense of responsibility develops in them.

Objectives:
(i) To promote increasing productivity in the interest of industry, workers and society.
(ii) To make workers realize their importance in production and industry.
(iii) To meet the desire of self-satisfaction and self-identity of the workers.
(iv) To create a situation of industrial peace, good relations between the employees and the
employer, and more co-operation between management and workers.

Characteristics of Co-Partnership:
(i) In addition to normal wages, the workers have the right to get share out of net profit of the
enterprise.
(ii) The profit that the workers get in addition to their normal wages the same can be invested as
capital in the industry.
(iii) Workers get the right to participate in management. Workers get this right either – (a) by
purchasing share capital or (b) by forming workers co-partnership committee.

Type # 2. Non-Monetary/Non-Financial Incentives:

Non-monetary incentives include all those non-financial, social and psychological factors for
which employees get incentives for maximum and outstanding work. Non-monetary incentives
play an important role in getting work with greater efficiency from the worker. For the workers
monetary reward has great significance but of still greater importance is their interest in
satisfying social and psychological needs.
Scholars are of the view that non-monetary incentives are as important as monetary incentives.
For building up favorable production environment it is essential therefore to make increasing use
of non-monetary incentives.

These non-monetary incentives are as under:

(i) Job Security:

Every employee wants his job to be stable and secure. Security of service inspires him to
perform his duty efficiently.
(ii) Competition:
By encouraging spirit of competition among the employees, production can be increased.
Competition is a non-monetary incentive. In order to activate it, some economic incentives are
required e.g., bonus or rewards, etc. Competition should be encouraged among persons of equal
capability.
(iii) Opportunity of Progress:
Every employee looks for an opportunity to make progress. It is therefore essential that
everybody should get ample opportunities for advancement. It is possible that he may not be able
to take advantage of the opportunity when it comes his way but he does hope for the opportunity.
Every one prefers working on higher post to financial gain.
(iv) Justice:
An employee expects justice and fair treatment at the band of the employer. In matters of
promotion or transfer etc., the management must play fair. Workers lose confidence in
management when the latter exercises discrimination. Besides, their enthusiasm for work
becomes weak.
(v) Workers Participation in Management:
Workers should have the right to participate in management of industry or to conduct the
business and to give advice in matters of mutual interests. This will make them realize their
importance and develop in them sense of responsibility. It has effect both on industry and
production.
(vi) Praise: Everybody likes that his good works be appreciated. It is the weakness of an
ordinary person that he feels greatly flattered at his praise. It satisfies his ego. Praise has great
motivational force. It constantly inspires the worker to take keen interest in the work and adds to
his productivity.
(vii) Knowledge of Results:
On research Lindsley has concluded that acquired skill comes to a halt if follies and virtues are
not brought to the notice of the persons concerned. Thus, the workers must be made aware of the
results of the work being done by them so as to motivate them to produce still more.
(viii) Leadership:
Skillful leadership by the management in industrial establishment improves labour-capital
relationship and arouse a sense of confidence among the workers. Feeling of respect towards
workers, showing interest in their personal problems, joining their social functions etc. by the
management provide impetus to them. Consequently, workers get inspired to do more work
diligently.
(ix) Paid Vacations:
Provision is made for paid vacations to the workers for excursion. It also adds to the efficiency of
the workers.
(x) Lack of Fear:
More work can be extracted from the workers for some time by frightening them, but sometimes
the situation takes an ugly turn. Fear gets transformed into opposition and opposition into
retaliation. Spirit of retaliation culminates into unjust treatment which is detrimental to workers,
employers and the nation. It is therefore necessary that workers must always remain free from a
sense of fear.
(xi) Joint Consultation:
There should be liberal exchange of views and information between labourers and management.
It makes employees aware of their responsibility, they have a feeling of co-partnership and they
realize that their views and opinions carry weight. As a consequence, their devotion to work goes
on increasing.
(xii) Constructive Tendency:
Management should create such situations as encourage the workers to show their constructive
tendencies. Thus taking full advantage of the ability and skill of the workers, profits of the
enterprise can be multiplied.
(xiii) Recognition:
Every employee wishes that his work be fully recognized, it should be useful and he should be
indispensable to production process. It makes him conscious of his ability, efficiency, position
and responsibility. Management should therefore give due recognition to all kinds of work
performed by the worker so that they are inspired to do work with greater zeal.
(xiv) Delegation of Authority:
Workers get lot of impetus if given full responsibility and delegated authority to accomplish a
given task. Delegation of authority reflects confidence of the management in the employees. This
feeling inspires them to do more work qualitatively and quantitatively.
(xv) Pride in Work:
Those workers who have a sense of pride in work and in their organisation, they do their work
with utmost diligence and integrity.

Types of Incentive Plans

I. Individual Incentives are offered to reward the effort and performance of individuals.
II. Group Incentive plans reward team members with incentive bonus when agreed targets are
achieved.
III. Organisation-wide incentives reward people for the performance of the entire organisation.
In many organisations, managers are paid incentives based on individual performance and
corporate results. The incentives are higher for senior manager and lower for executives.
Type # I. Individual Incentive Plans:
Individual incentive plans are widely used for pay for performance plans in the organisations.
The employee has to produce more, earn monetary benefits and kept it to himself.
Types of individual incentive plans are given below:
1. Taylor’s Differential Piece Rate System – F.W. Taylor, the father of Scientific Management,
came out with the system.
The objectives are:
(a) To provide incentives to workers to produce more
(b) To remove the fear of wage cut
In the system, there are two work rates, one is lower and the other is higher. Those who reach the
standard output are given a higher piece rate. The lower rate is applicable to those workers
whose output is below standard. The standard is determined by time and motion study.
Example:
Standard output 50 units per day. The piece rates will be Rs.1.50 and Rs.1.40 per unit. Those
who produce 50 units or more will be paid @ Rs.1.50 per unit, while those producing less than
50 units will be paid Rs.1.40 per unit. The worker who produces 50 units will get Rs.75 per day
and another worker who produces only 40 units per day will get Rs.56.00 per day.
Comments:
a. The system penalise the slow worker and rewards an efficient worker.
b. It also provides an opportunity to the slow worker to increase production and earn higher
income.
c. It is easy to understand the system.
d. There are number of minimum wage payment to employees.
e. It treats employees as machines and not as human beings.
f. Trade unions do not approve of such payment system.
2. Merrick’s Multiple Piece Rate System – The system is also based on the principle of low
piece rate for slow worker and higher piece rate for higher production, but it offers three grade
piece rates instead of two. As per the scheme, up to 83% of standard output, workers are paid at
the ordinary piece rate, 83% to 100% at 110% of ordinary piece rate and above 100% at 120% of
the ordinary piece rate.
3. Halsey Plan (Standard Hour Plan) – The plan developed by F.S. Halsey recognises
individual productivity and pays incentive on the basis of the time saved. Standard time is fixed
for each job. Time rate is guaranteed and the worker receives guaranteed wages irrespective of
whether he completes the job in the time allowed. If the job is completed in less than the
standard time, the workers are paid incentive of 33 1/3% of time saved in addition to his normal
time wages.
The system guarantees minimum wages and provides incentives to efficient workmen. The
worker may overlook quality of production to save more time and earn higher incentive. Further,
fixation of standard is not easy.
4. Rowan Plan – The plan is similar to Halsey plan and only difference is in the method of
determination of incentive. The time saved is expressed as a percentage of the time allowed and
hourly rate of pay is increased by that percentage so that the total earnings of the worker are the
total number of hours multiplied by the increased hourly wages.
5. Gantt Task and Bonus Plan – The plan combines time, piece and bonus systems. Fixed time
rates are guaranteed. Standard time for task is fixed and both time wages as well as high rate per
piece are determined. A worker who cannot finish the work within the standard time is paid on
time basis. If the worker reaches the standard he will be paid time wage plan bonus as fixed
percentage of normal wage rate. If the worker exceeds the standards, he is paid a higher piece
rate.
The systems guarantee time wages to ordinary workers. It makes distinction between efficient
and inefficient workers. Labour cost per unit comes down with increase in production.
6. Bordeaux Plan – Under the plan, every job is expressed in terms of standard minutes known
as Bordeaux units. Upto 100% performance, i.e., upto standard units, a worker is paid time
wages without incentive. If actual performance exceeds the standard performance in terms of
standard minutes, then 75% of the wages of the time saved is paid to the worker as bonus and
25% is earned by foreman.
7. Haynes’ Manit Plan – The plan is similar to Bordeaux plan with the difference, i.e., the
bonus is only 50% and out of the remaining 50%, 10% is paid to supervisors and 40% retained
by employer.
8. Emerson‘s Efficiency Plan – When the efficiency of the worker reaches 67%, he gets bonus at
the given rate. The rate of bonus increases gradually from 67% to 100% efficiency. Above 100%
efficiency, the bonus is 20% of the guaranteed wage.
Type # II. Group or Team-Based Incentive Plan:
The plan rewards all team members equally based an overall performance of the team members.
Performance is evaluated using an objective standard. Payments to team members may be made
in the form of cash bonus or non-cash rewards such as luxury goods or pleasure trips. Team
based incentives can motivate the members to work as a team rather than brilliant individuals. It
is relatively easy to measure team performance.
A few of the important team-based incentive plans are given below:
1. Production bonus – Under the plan, standard is fixed in terms of units or points. If the actual
output exceeds the standard, the workers will receive bonus in proportion to the increase.

2. If the actual cost of production is lower than the standard cost, a bonus whose money value is
a percentage of the cost reduction is paid. Here, the workers should be able to influence such cost
reduction by working hard, saving in materials, fuels, lubricants, etc.

3. The Scanlon Plan developed by Joseph Scanlon is designed to involve the workers in making
suggestions for reducing the cost of operations and sharing the gains of increased productivity.
The plan has two components, i.e., financial incentive aimed at cutting cost and increasing
efficiency and suggestion scheme. The suggestion received from employees is screened and
evaluated by a committee. If the suggestion is implemented and successful, the employees
usually share 75% of the savings and the balance is set aside for the months in which labour
costs exceed standard cost.

4. Reduction in labour cost – The main objective is to bring about cost reduction by supervisors
and workers. Bonus is paid upon reduction in labour cost alone

Requirements of an Effective Incentive Plan:

1. The incentive plan should reward employee in direct proportion to their performance and
increased productivity.
2. The monetary earnings must have the potential to satisfy the existing needs of the employees.
3. The policies and procedures for granting incentives should be clear to the employees.
4. The standard should be fair, specific and complete and the focus should be on quantity as well
as quality of output.
5. The plant employees should be guaranteed base rate.
6. The reward must be given promptly without delay.
7. The incentive plan must be within the financial capacity of the firm.
8. The plan must motivate workers and encourage teamwork.
9. The incentive plan must be beneficial to the organisation by increasing output and profits.
10. The incentive plan should be in line with government regulations.
Advantages and Limitations of Incentive Plans:
Advantages:
1. A well-designed incentive plan generally leads to increased output, lowers the cost of
production and brings a higher income to employees.
2. Labour and total costs per unit of output can be estimated more accurately in advance goods.
3. To attract and retain employees and reduce turnover.
4. Less direct supervision is needed to keep output at a reasonable level.
5. Provides additional income, over and above wages, to employees.
6. Promotes industrial harmony and stabilization of workforce.

Limitations:
Many incentive plans aimed at increasing the motivation of employees often fail to have the
desired impact due to the following reasons:
1. Very often, management keeps unfair standards and they are a great hindrance in the way of
motivating employees.
2. There is fear in the mind of employees that the management will keep on increasing the targets
or rates will be reduced if they earn too much. 3. Difficult to understand incentive plan. If the
employees cannot understand how performance will lead to rewards, they may not put efforts to
achieve targets.
4. The incentive plan differentiates between good and poor performances. It is harsh on labour
average worker.
5. Workers are affected if the production or sale is affected due to certain reasons beyond their
control.
6. Trade union may oppose such plan.

Bonus:
A bonus is an incentive payment that is given to an employee beyond one‘s normal standard
wage. It is generally given at the end of the year and does not become part of base pay. It is extra
payment to workers, over and above normal wage.
In India, the law relating to profit sharing is known as Payment of Bonus Act and sharing of
profit is not linked to performance but to the level of profit made by the company. The Bonus
Act defines an employee who is covered by it as one earning basic salary of 2500/- (effective
April 1993) plus dearness allowance.
The minimum bonus to be paid has been increased to 8.33 per cent of salary. The Act applies to
every factory or establishment in which 20 or more are employed in an accounting year. Even if
there is a loss, a minimum bonus needs to be paid, treating the same as deficit to be carried
forward and set off against profits in subsequent years.
Merit Pay:
Merit pay is a reward based on how well an employee has done the assigned job. The payment is
based on individual employee‘s performance. Rewarding the best performer with merit pay is a
powerful motivation. Merit pay motivates the employees to work hard and achieve the assigned
tasks. Merit pay may be in the form of lumpsum amount or as a percentage base pay.

Some of the problems in designing a merit pay scheme are:

1. It is difficult to measure performance objectively.
2. Employees, very often, fail to understand the connections between merit pay and performance.
3. Bias in assessing performance.
4. The superior may not be a competent evaluator.

Compensation Plan for Salespeople:

Compensation plan for salespeople consist of a straight salary plan, a straight commission plan
or a combination of salary and commission plan.
1. Straight Salary Plan – It provides stable income and provides freedom from financial
uncertainties. But there is no additional incentive for good performance. Example- Straight
salary plan can be used in jobs where non-selling activities are more in the total times spent by
the salesperson like sales and service engineers. Also in the case of salespersons, who do more of
sales promotion activities in the field.
2. Straight Commission Plan – Here, payment is made as per sales productivity. The person
receives no compensation if sales are not made. A high performing salesperson can earn very
high commission based on business generated. Example- Selling insurance and financial
products.
The disadvantages of the system are:
a. The person may be careless in sending reports on market situation, competition and
performance of products.
b. The person may consider individual accounts as private property.
c. May shade prices to make sales.
d. Use high pressure tactics to sell.
e. May push easy-to-sell products.
f. May not focus on new products or difficult to sell products.

3. Salary plus Commission Plan – The plan provides security of stable income and additional
income through commission for achieving sales targets. The plan is very useful for maintaining
the morale of sales people. Therefore salary plus commission plan is being increasingly used by
most of the companies in our country.
Sales Incentives:
The objectives of sales incentive are:
1. Motivation of salesperson to achieve sales targets.
2. Increase selling effort (meeting more number of prospects/customer/extended working hours,
selling full range of products, conducting sales campaigns etc.).
3. Increase in sales, market share and profits.

Types of Sales Incentives:

1. Financial incentive – The salesperson is eligible for cash incentive for achievement of sales
target/exceeding the sales target. The sales target may be for a quarter or for the whole year.
2. Non-financial incentives – While financial reward is a powerful motivation, money is not the
sole motivator. Therefore, companies have come out with non-financial incentive such as
recognition of outstanding performance, annual conferences in hill stations/foreign countries,
membership in Achievers‘ Club, members of the task force, personal letters of commendations,
etc. to motivate sales people.
3. Combination of financial and non-financial incentives – Many companies dealing with pharma
products, consumer goods and durables are increasingly using a combination of financial and
non-financial incentive system to motivate sales people and achieve increase in sales, market
share and profits.

Industrial relations

According to Dale Yoder1, IR is a designation of a whole field of relationship that exists because
of the necessary collaboration of men and women in the employment processes of Industry‖.

Armstrong2 has defined IR as ― IR is concerned with the systems and procedures used by unions
and employers to determine the reward for effort and other conditions of employment, to protect
the interests of the employed and their employers and to regulate the ways in which employers
treat their employees‖.

In the opinion of V. B. Singh3, ―Industrial relations are an integral aspect of social relations
arising out of employer-employee interaction in modern industries which are regulated by the
State in varying degrees, in conjunction with organised social forces and influnced by the
existing institutions. This involves a study of the State, the legal system, and the workers‘ and
employers‘ organisations at the institutional level; and of the patterns of industrial organisation
(including management), capital structure (including technology), compensation of the labour
force, and a study of market forces all at the economic level‖.
Encyclopedia Britannica4 defined IR more elaborately as ―The concept of industrial relations has
been extended to denote the relations of the state with employers, workers, and other
organisations. The subject, therefore, includes individual relations and joint consultation between
employers and workers at their places of work, collective relations between employers and trade
unions; and the part played by the State in regulating these relations‖.

Thus, IR can now safety be defined as a coin having two faces co- operation and conflict. This
relationship undergoes change from thesis to antethesis and then to synthesis. Thus, the
relationship starting with co-operation soon changes into conflict and after its resolution again
changes into cooperation.

SCOPE OF IR

 Labour relations, i.e., relations between labour union and management.

 Employer-employee relations i.e. relations between management and employees.
 The role of various parties viz, employers, employees, and state in maintaining industrial
relations.
 The mechanism of handling conflicts between employers and employees, in case
conflicts arise.

The main aspects of industrial relations can be identified as follows:

 Promotion and development of healthy labour — management relations.

 Maintenance of industrial peace and avoidance of industrial strife.
 Development and growth of industrial democracy.

OBJECTIVES OF IR

The primary objective of industrial relations is to maintain and develop good and healthy
relations between employees and employers or operatives and management. The same is sub-
divided into other objectives. Thus, the objectives of IR are designed to:

1. Establish and foster sound relationship between workers and management by safeguarding
their interests.
2. Avoid industrial conflicts and strikes by developing mutuality among the interests of
concerned parties.
3. Keep, as far as possible, strikes, lockouts and gheraos at bay by enhancing the economic status
of workers.
4. Provide an opportunity to the workers to participate in management and decision making
process.
5. Raise productivity in the organisation to curb the employee turnover and absenteeism.
6. Avoid unnecessary interference of the government, as far as possible and practicable, in the
matters of relationship between workers and management.
7. Establish and nurse industrial democracy based on labour partnership in the sharing of profits
and of managerial decisions.
8. Socialise industrial activity by involving the government participation as an employer.

According to Krikaldy5, industrial relations in a country are influenced, to a large extent, by the
form of the political government it has. Therefore, the objectives of industrial relations are likely
to change with change in the political government across the countries. Accordingly, Kirkaldy
has identified four objectives of industrial relations as listed below:

1. Improvement of economic conditions of workers.

2. State control over industrial undertakings with a view to regulating production and promoting
harmonious industrial relations.
3. Socialisation and rationalisation of industries by making the state itself a major employer.
4. Vesting of a proprietory interest of the workers in the industries in which they are employed.

IMPORTANCE OF IR
Industrial relations usually imply good and positive relations between the employees and
employers. The good IR help run an industry effectively and successfully, i.e., the desideratum
of the day. The importance of IR can be imbued with multiplicity of justifications. To mention,
good IR help:

1. Foster Industrial Peace: Under the mechanism of IR, both employees and managers discuss
the matter and consult each other before initiating any actions. Doubts, if any, in the minds of
either party are removed. Thus, unilateral actions that prop confusion and misunderstanding,
disappear from the scene. In this way, IR help create a peaceful environment in the organisation.
Peace, in turn, breeds prosperity.

2. Promote Industrial Democracy: Industrial democracy means the government mandated

worker participation at various levels of the organisation with regard to decisions that affect
workers.

It is mainly the joint consultations, discussed later in this chapter, that pave the way for industrial
democracy and cement relationship between workers and management. This benefits the both.
The motivated workers give their best and maximum to the organisation, on the one hand, and
share their share of the fruits of organisational progress jointly with management, on the other.
3. Benefit to Workers: IR benefit workers in several ways. For example, it protects workers
against unethical practices on the part of management to exploit workers by putting them under
in human working conditions and niggardly wages. It also provides a procedure to resolve
workers‘ grievances relating to work.

4. Benefit to Management: IR protect the rights of managers too. As and when workers create
the problem of indiscipline, which is discussed in detail earlier in chapter 22, IR provides
mangers with a system to handle with employee indiscipline in the organisation.

5. Improve Productivity: Experiences indicate that good industrial relations serve as the key for
increased productivity in industrial organisations.

APPROACHES TO IR

Like other behavioral subjects, both the scenario of IR and factors affecting it are perceived
differently by different behavioral practitioners and theorists. For example, while some perceive
IR in terms of class conflict, others view it in terms of mutual co-operation, yet others understand
it related to competing interests of various groups and so. An understanding of these approaches
to HR helps the human resource manager in devising an effective human resource strategy.
Based on these perceptions, the behavioral theorists have developed some approaches to explain
the IR dynamics. Among them, the popular approaches to IR are:
1. Unitary Approach
2. Pluralistic Approach
3. Marxist Approach
These are discussed one by one.

Unitary Approach
The Unitary approach to IR is based on the assumption that every one be it employee, employer
or government-benefits when emphasis is on common interest. Alternatively speaking, under
unitary approach, IR is founded on mutual co-operation, team work, shared goal, and so. Conflict
at work place, if any, is seen as a temporary aberration resulting from poor management or
mismanagement of employees. Otherwise, employees usually accept and cooperate with
management. Conflict in the form of strikes is disregarded as destructive.
Alwar plant of Eitcher Tractors represents one such example of unitary approach9.
Nonetheless, unitary approach is criticised mainly on two grounds. First, it is used as a tool for
keeping employees at bay from unionism. Second, it is also seen as exploitative and manipulative

Pluralistic Approach
In fact, pluralistic approach is a departure from unitary approach of IR. This approach was
evolved and practised in mid 1960s and early 1970s in England. Later, this approch was
developed by the British scholars in particular by A. Fox . The approach perceives that
organisation is a coalition of competing interest groups mediated by the management. At times, it
may so happen that management in its mediating role, may pay insufficient attention to the needs
and claims of employees.

In such a situation, employees may unite in the form of trade unions to protect their needs and
claims. As a result, trade unions become the legitimate representatives of employees in the
organisation.

Thus, the system of IR gets grounded on the product of concessions and compromises between
management and trade unions.

Conflict between employees and management understood as competing interest groups, is

considered as inevitable and, in fact, necessary also. Normally, employees are not that much
forceful in negotiation process as much management is. Hence, employees join trade unions to
negotiate with management on equal terms to protect their interests.

Like unitary approach, pluralistic approach also suffers from certain limitations. The basic
assumption of this approach that employees and management do not arrive at an acceptable
agreement do not hold good in a free society. This is because a society may be free, but power
distribution is not necessarily equal among the competing forces. The experience of England
where this approach was involved and developed in mid sixties and early seventies faced
widespread strikes substantiates that pluralistic approach is a costly affair, at least, in short run if
not in long-run.

Marxist Approach

Like pluralists, marxists also view conflict between labour and management as inevitable. But
marxists unlike pluralists, regard conflict as a product of the capitalist society based on classes.

According to marxists, conflict arises because of devision within society in terms of haves i.e.,
Capitalists and have nots i.e., labour. The main objective of capitalists has been to improve
productivity by paying minimum wages to labour. Labour views this as their exploitation by the
capitalists.

The marxists do not welcome state intervention as, in their view, it usually supports
management‘s interest. They view the pluralistic appraoch is supportive of capitalism and the
unitary approach as an anathema. Therefore, the labour-capital conflict, according to marxist
approach, cannot be solved by bargaining, participation and co.operation. In such situation, trade
union comes in picture and is seen as a reaction to exploitation by capitalists and also a weapon
to bring a revolutionary social change by changing capitalistic system. For this, coercive powers
such as strikes, gherao, etc. are exercised by the labour against capitalists. Such systems of IR
have been very much observed in most of the socialist countries like erstwhile USSR. The
marxist approach is mainly practised in communist bloc. Hence the scope of marxist approach
remains limited to the countries based on
socialism.

PARTIES TO IR

IR as a system is a complex of inter-relations among workers, managers and government. Based

on this, there are three major parties to industrial relations:
1. Employees
2. Employer
3. Government
.
Employees
Among the participants to IR, employees are considered as the most affected one by the IR
system prevalent in an organisation. Employees with their various characteristics such as their
commitment to the work and the organisation, their educational and social background, their
attitudes towards the management and so on affect and are affected by the system of IR.
Generally, employees perceive IR as a means to improve their conditions of employment, voice
against any grievances, exchange views and ideas with management and participate in
organisational decision making process

Employees participate in the IR system through their associations, or say, trade unions. Past
evidences indicate that trade unions play a crucial role in making an IR system as effective or
otherwise. Trade unions with their strong
political and emotional overtones are looked upon as a tool to wrest concessions from employers.

With regard to their role in relation to IR, they work to achieve the following objectives

1. To redress the bargaining advantage on one-on-one basis, i.e., individual worker vis-à-vis
individual employer by way of joint or collective actions.
2. To secure better terms and conditions of employment for their members.
3. To obtain improved status for the worker in his/her work.
4. To increase democratic mode of decision making at various levels
However, various factors such as union membership, its attitude towards management,
interunion rivalry and the strengths at the national or local level determine the role of trade
unions in influencing the system of IR in an organisation.

Employer
Employer is the second party to IR. In the corporate organisation, employer is represented by the
management. Hence, management becomes responsible to various stakeholders in an
organisation including employees. According to Cole management has to see IR in terms of the
following employee-employer relationship :
1. Creating and sustaining employee motivation.
2. Ensuring commitment from employees.
3. Achieving higher levels of efficiency.
4. Negotiating terms and conditions of employment with the representatives of employees.
5. Sharing decision making with employees.

Like employees‘ associations, employers also form their associations at the local, industry and
national levels. Examples of employers‘ associations at all India level are Associated Chambers
of Commerces and Industry (ASSOCHAM), Confideration of Indian Industry (CII) Federation of
Indian Chambers of Commerce and Industry (FICCI), etc. The major objectives of the
employers‘ associations in relation to IR are to:
1. Represent employers in collective bargaining at the national or industry level.
2. Develop machinery for avoiding disputes.
3. Provide feedback on employee relations.
4. Advise member organisations on the issues relating to IR.

Government
The role of government in the matter of industrial relations has been changing along with
changes in industrial environment and management persepective. For example, till 19th century,
the governments everywhere in the world adopted a policy of laissez faire. The IR matters were
left to be settled by the employees and employers. But, towards the end of the 19th century, the
attitude of the government in the changed conditions of conflicts between employees and
employers, changed to some kind of intervention in the matter of IR. In due course of realization,
government intervention became a reality. As of day, government intervention has become
widespread in HR matters. In India, government tries to regulate the relationship of employees
and employers, and also keeps an eye on both groups to keep each in line. This relationship is
enforced and maintained through labour courts, industrial tribunals, wage boards, investigating
and enquiry committees, etc.
Employee relations
Employee relations are concerned with generally managing the employment relationship and
developing a positive psychological contract. In particular they deal with terms and conditions of
employment, issues arising from employment, providing employees with a voice and
communicating with employees. Employees are dealt with either directly or through collective
agreements where trade unions are recognized.

Employee relations cover a wider spectrum of the employment relationship than industrial
relations, which are essentially about what goes on between management and trade union
representatives and officials. The wider definition of employee relations recognizes the move
away from collectivism towards individualism in the ways in which employees relate to their
employers. The concepts of joint control and rule-making belong to a historical era. To a large
extent, especially in the private sector, employers are in charge.

Employment relation can be defining as employer and employees relationship in a formal and
informal nature that arises between management and employee interactions in all working
situation.

According to Armstrong (2003), employee relations consist of all those areas of human resource
management that deals with employees directly and through collective agreements where trade
unions are recognised. The union practices for the welfare and good working condition of the
employees. Employee relations are concerned with generally managing the relationship between
employer and employees at the workplace that can be formal e.g. contract of employment or
procedural agreement.

The Institute of Personnel and Development (IPD) defines employee relation as

― that part of personnel; management that enable competent managers though the development of
institutions, procedures and policies to reconcile within acceptable limits to the organization, the
interest of employers as the buyers of labour service and those of employees as the suppliers of
labour services.‖

Farnham (1993), suggests that Employee relation are:

― Concerned with the interaction between primary parties who pay for work and those who
provide it in the labour market ( employers and employees), those acting as secondary parties on
their behalf (management or management organization and trade unions) and those providing a
third party role on employment matters (state agencies and EU institutions)‖
The Importance of Employee Relation
Encourage good organizational climate, mutual understanding and cooperation.
There is a clear and fair policy in solving the problems of the organization.
Employee relation treats people as valuable assets.
There is a equitable, fair and transparent treatment of employees.
There is an effective communication throughout the organization.

Employee relations policies-:

Employee relations policies express the philosophy of the organization on what sort of relationships
between management and employees are wanted, and how the pay–work bargain should be managed. The
overall objectives of employee relations policies should be to create and maintain a positive, productive,
cooperative and trusting climate of employee relations. The areas that can be covered are:

 The employment relationship: the extent to which terms and conditions of employment should be
governed by collective agreements or based on individual contracts of employment (in other
words, collectivism versus individualism).
 Trade union recognition: whether trade unions should be recognized or derecognized, which
union or unions the organization would prefer to deal with, and whether or not it is desirable to
recognize only one union for collective bargaining and/or employee representational purposes.
 Collective bargaining: if unions are recognized with negotiating rights, the scope of areas to be
covered by collective bargaining.
 Managing workplace conflict: how grievances should be settled and disputes resolved.
 Participation and involvement: the extent to which the organization is prepared to give
employees a voice on matters that concern them.
 Partnership: the extent to which a partnership approach is thought to be desirable.
 Harmonization of terms and conditions of employment for staff and manual workers.
 Working arrangements: the degree to which management has the prerogative to determine
working arrangements without reference to employees or, if they are recognized, trade unions.
Employee relations policies provide the basis for managing employee relations with or without
trade unions, and can affect informal employee relationships.

Shift from Industrial Relations to Employees Relations

According to Blyton and Turnbull (2004)- industrial relations: ―has acquired a deserved
reputation for being dull and because it has too often failed to relate in any meaningful way to
the reality of people‘s working lives, how these were formed, how they are constrained and how
they might be changed.‖ .

Employee relation is a wider subject than ‗industrial relation‘. Nowadays, managements have a
preference for the term ‘employee relation‘ than ‗industrial relation‘ as the latter often invokes
conflict, strikes, social disharmony and disagreement. Employee relation is also better
understood by the new evolution of todays life like computerisation, the greater used of robotic,
the information technologies and advance manufacturing methods.