Year: 2020

Performance-based pay systems provide financial compensation based on either focus on individual or group performance. Below introduces this common HR concept and the associated advantages and disadvantages.

Performance Pay Systems

There are different types of payment schemes that apply to performance pay systems, which are designed to distribute financial rewards to employees. In contrast with set salaries, performance pay is based on compensating the employee per their individual contribution, not the value of the position itself. There is individual performance pay, which is often associated with sales personnel who depend on commissions, and skill-based pay, in which compensation is connected to competency. Some companies engage in profit-sharing, which means that employees will receive a certain percentage of the company’s financial gains.

Skill-Based Overview

Many manual labor and manufacturing companies favor skill-based pay systems that link aptitude and expertise to pay grades. This promotes productivity, better workforce skills and product quality. There are two types of skill-based payment systems. First, there are general skill systems that increase the employee’s ability to perform more tasks and positions. Second, there are specialized skill systems that compensate employees for master’s highly difficult tasks. An employee who learns how to operate similar machinery would be rewarded through the general skill system; an employee who learns an entirely new machine would be incentivized through a specialized skill system.

The Benefits

Performance pay offers a variety of benefits. Management enjoys better employee performance and employee engagement. As long as there is a fair and effective performance review system that is accurately aligned with local salary levels, employees will strive to work hard. Executives will enjoy increased revenue and working capital. Management can use performance pay systems to transition model employees into supervisors. HR administrators can use performance pay to attract potential job applicants and improve employee retention. In the beginning, turnover rates may be slightly higher as low performers leave, but qualified and motivated employees will remain.

The Disadvantages

Some companies struggle to implement performance pay systems because it is hard to define performance levels and objectively evaluate employees. The performance criteria and measurements may be vague and inadequate. As a result, supervisors favor certain employees over others, which increase collective employee dissatisfaction. When employees cannot understand the performance measures, they may still blame management when they fail to receive wage increases. Sometimes, the objective of performance appraisal systems is to merely identify training needs or promotion suitability. The biggest challenge of performance pay systems is that management must continually observe and document employee performance while also providing feedback, which is very time consuming.

The Performance Criteria

The actual pay scheme will determine the performance criteria, which may be based on individuals, groups, the organization or a customized mixture. Some individual-based criteria focus on the achievement of personal goals and the supervisor’s feedback. Individual training goals may be based on specific skills and knowledge needed to perform work duties. Individual performance systems are not recommended when the company’s objective is to increase teamwork performance and information sharing. Other systems utilize peer reviews, which are often considered to be highly subjective.

Variable Pay Programs

Variable pay programs encompass a variety of discretionary and non-discretionary bonuses that can vary according to the payout period, the employees who are eligible, and the metrics that employees are measured against. Unlike merit pay increases, variable pay programs are increasingly administered not just annually but multiple times a year (e.g., once a quarter) and a mix of different variable pay programs are often used in combination to achieve the desired results.

Discretionary bonuses are awarded on an ad-hoc basis to employees who demonstrate exceptional performance, often without consideration of pre-defined goals and objectives. Some common discretionary bonus types are:

• Spot bonuses: Reward employees “on the spot” for achievements that deserve special recognition.
• Project bonuses: Reward employees for completion or superior completion of a specific project.
• Retention bonuses: Typically awarded to long-tenured employees, or employees in hot jobs, to decrease their flight risk.

Nondiscretionary bonuses are awarded when employees, teams, or the entire organization meets specific, pre-defined goals and objectives. Based on the duration of the assessment period (the amount of time over which performance is measured), they are considered either short-term incentives (STI) or long-term incentives (LTI). Some common nondiscretionary bonus types include:

• Company-wide bonuses: these focus around specific improvement goals for the organization, and reward employees based on how much improvement is made on these goals within a certain period of time.
• Team-incentive bonuses: these focus around specific improvement goals for one team (e.g., marketing or sales) and are rewarded based on performance for that team.
• Individual incentive bonuses: these plans are often based on predetermined, measurable business objectives (MBOs) that are evaluated periodically (e.g., each quarter) based on one person’s performance

New businesses vary greatly in terms of business models and product offers, but every start-up needs to convince consumers to buy its products or services to achieve success. Many business involved in selling physical goods hire sales employees who specialize in convincing potential customers to buy products. Sales employees can receive pay in several different forms.

Salaries and Wages

Many sales employees receive a fixed amount of hourly compensation called a wage or a fixed amount of monthly compensation, known as a salary. Salaried workers are paid a fixed amount of money per month based on an annual salary regardless of how many hours they actually work. In other words, salaried workers must simply work as much as they need to do their jobs, which could be more or less than 40 hours a week.

Fringe Benefits

Fringe benefits describe non-cash form of compensation, such as health insurance benefits, access to a company vehicle and health club memberships. Sales employees often receive certain fringe benefits as compensation along with normal cash pay. The IRS considers fringe benefits income, although certain benefits like health insurance are exempt from taxation.

Commissions

While most workers receive wages or salaries, sales employees also commonly receive pay in the form of commissions. Commissions are payments that sales workers receive based on the amount of product that they sold. For example, a jewelry store might give its sales people a 10 percent commission on all sales, so if a worker sells Rs. 10,00,00,000 worth of jewelry during a month, he would receive Rs. 1,00,00,000 of commission pay for that month.

Bonuses

Bonuses are special awards of cash that employers sometimes give to workers for exemplary performance. If sales employees perform especially well during a certain moth or year, they may receive bonus pay at the end of that month or year.

International Compensation Management

Compensation management can be defined as the provisions of monetary and non-monetary rewards, including base salary, benefits, perquisites, long and short-term incentives, valued by employees in accordance with their relative contributions to MNC performance. Its broad HRM purpose is to attract, retain and motivate that personnel required throughout the MNC currently and in the future. Job evaluation is the means by which internal relatives and compensable factors, those elements an individual’s work role in the MNC and contribute to its performance are determined.

Objectives of International Compensation Management

The objectives of compensation package of MNCs are presented in Figure below MNCs manage the compensation and benefits with the following objectives.

1. Recruitment and Retention of suitable Employees

MNCs design and practice compensation and benefits in order to attract, and retain suitable employees in terms of job efficiency and cultural adaptability.

2. Consistency and Equity

MNCs design the salary and benefits package to secure consistency between pay and performance and equity among employees of different nationalities and categories, and employees of subsidiaries and parent company.

3. Facilitate Mobility

MNCs design pay package in order to enable the employees to move from the parent company to foreign subsidiaries and from one foreign subsidiary to another foreign subsidiary.

4. Adaptability to Foreign Cultures and Environment

MNCs design pay package that motivates employees and his/her family members to willingly adapt to the cultures and environment of the foreign countries. For example, providing comfortable housing, highly reliable medical facilities, security facilities against odds and international standards schooling facilities encourage employee’s family members to adapt to the foreign country cultures and environment and allow the employee to concentrate on the job.

5. Organisational performance

MNCs pay package should work as motivator to enhance employee job performance, learning latest skills and contribute to the enhancement of organisational performance. In fact, performance based pay package enhances organizational performance.

Importance of International Compensations

1. Attracting and Retaining Personnel

Most to attract and retain staff in the areas where the multinational has the greatest needs and opportunities, hence must be competitive and recognize factors such as the incentive for Foreign Services, tax equalization, and reimbursement for reasonable costs.

2. Optimizing Cost of Compensation

It is to facilitate the transfer of International employees in the most cost-effective manner for the firm. Compensation management aims at optimizing the cost of compensation by establishing some kind of linkage with performance and compensation. It is not necessary that a higher level of wages and salaries will bring higher performance automatically but depends on the kind of linkage that is established between performance and wages and salaries.

3. Consistency in Compensation

It means to be consistent with the overall strategy, structure and business needs of the multinational. Compensation management tries to achieve consistency-both internal and external in compensating employees. Internal consistency involves payment of the basis of criticality of jobs and employees’ performance on jobs. Thus higher compensation is attached to higher-level jobs. Similarly, higher compensation attached to higher performers in the same job. External consistency involves similar compensation for a job in all organizations. Though there are many factors involved in the determination of wage and salary structure for a job in an organization which may result into some kind of disparity in the compensation of a particular job as compared to other organization, compensation management tries to reduce this disparity.

4. Motivating Personnel

Compensation management aims at motivating personnel for higher productivity. Monetary compensation has its own limitations in motivating people for superior performance.

Major Components in an International Compensation Package

International Compensation is an internal rate of return (monetary or non monetary rewards / package) including base salary, benefits, perquisites and long term & short term incentives that valued by employee’s in accordance with their relative contributions to performance towards achieving the desired goal of an organization.

The following are the major components of an international compensation package.

1. Base Salary

This term has a slightly different meaning in an international context than in a domestic one. In the latter case, it denotes the amount of cash compensation that serves as a benchmark for other compensation elements like bonus, social benefits. For the expatriate, it denotes the main component of a package of allowances directly related to the base salary and the basis for in-service benefits and pension contributions. Base salary actually forms the foundation block of the international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to take up foreign assignments. This is with the aim to compensate them for the possible hardships they may face while being overseas. In this context, the definition of hardship, the eligibility criteria for premium and the amount and timing of this payment are to be carefully considered. Such payments are normally made in the form of a percentage of the salary and they vary depending upon the tenure and content of the assignment. In addition, sometimes other differentials may be considered. For instance: if a host country’s work week is longer that of the home country, a differential payment may be made in lieu of overtime.

3. Allowances

One of the most common kinds of allowance internationally is the Cost of Living Allowance (COLA). It typically involves a payment to compensate for the differences in the cost of living between the two countries resulting in an eventual difference in the expenditure made. A typical example is to compensate for the inflation differential. COLA also includes payments for housing and other utilities, and also personal income tax. Other major allowances that are often made are:

• Home leave allowance
• Education allowance
• Relocation allowance
• Spouse assistance (compensates for the loss of income due to spouse losing their job)

Thus, multinationals normally pay these allowances to encourage employees to take up international assignments to make sure that they are comfortable in the host country in comparison to the parent country.

4. Benefits

The aspect of benefits is often very complicated to deal with. For instance, pension plans normally differ from country to country due to difference in national practices. Thus all these and other benefits (medical coverage, social security) are difficult to imitate across countries.

Thus, firms need to address a number of issues when considering what benefits to give and how to give them. However, the crucial issue that remains to be dealt with is whether the expatriates should be covered under the home country benefit programmes or the ones of the host country. As a matter of fact, most US officials are covered by their home country benefit programmes. Other kinds of benefits that are offered are:

• Vacation and special leaves
• Rest and rehabilitation leaves
• Emergency provisions like death or illness in the family

These benefits, however, depend on the host country regulations.

5. Incentives

In recent years some MNC have been designing special incentives programmes for keeping expatriate motivated. In the process a growing number of firms have dropped the ongoing premium for overseas assignment and replaced it with on time lump-sum premium. The lump-sum payment has at least three advantages. First expatriates realize that they are paid this only once and that too when they accept an overseas assignment. So the payment tends to retain its motivational value. Second, costs to the company are less because there is only one payment and no future financial commitment. This is so because incentive is separate payment, distinguishable for a regular pay and it is more readily for saving or spending.

6. Taxes

The final component of the expatriate’s compensation relates to taxes. MNCs generally select one of the following approaches to handle international taxation.

• Tax equalization: Firm withhold an amount equal to the home country tax obligation of the expatriate and pay all taxes in the host country.
• Tax Protection: The employee pays up to the amount of taxes he or she would pay on remuneration in the home country. In such a situation, The employee is entitled to any windfall received if total taxes are less in the foreign country then in the home country.

7. Long Term Benefits or Stock Benefits

The most common long term benefits offered to employees of MNCs are Employee Stock Option Schemes (ESOS). Traditionally ESOS were used as means to reward top management or key people of the MNCs. Some of the commonly used stock option schemes are:

• Employee Stock Option Plan (ESOP): A certain nos. of shares are reserved for purchase and issuance to key employees. Such shares serve as incentive for employees to build long term value for the company.
• Restricted Stock Unit (RSU): This is a plan established by a company, wherein units of stocks are provided with restrictions on when they can be exercised. It is usually issued as partial compensation for employees. The restrictions generally lifts in 3-5 years when the stock vests.
• Employee Stock Purchase Plan (ESPP): This is a plan wherein the company sells shares to its employees usually, at a discount. Importantly, the company deducts the purchase price of these shares every month from the employee’s salary.

Hence, the primary objective for providing stock options is to reward and improve employee’s performance and /or attract / retain critical talent in the Organization.

A Wage Board is a tripartite body with representa­tives of management, and workmen, presided over by an independent person nominated by the Government. The Board is required to fix wages in accordance with the principles of wage fixation.

The Wage Boards help to resolve the disputes in a democratic manner by bringing the parties together, without compulsion on either side. It may, however, be pointed out that a Wage Board can only make recommendations, as there is no legal sanction behind it. But for all practical purposes, a Board’s recommendations are regarded as awards, and if unanimous, are made binding on the parties.

The first wage board was set up in 1957 in the Cotton Textile Industry. Following this, Wage Boards were set up for working journalists, sugar, cement, jute, tea plantation, rubber and coffee, coal mining, iron and steel, road transportation and electricity undertakings.

The wage boards have, however, been criticised on the following counts:

• The recommendations of the Boards have no legal sanction so that the parties are not bound to accept them.
• Very often the recommendations of the Boards are results of compromise decisions and cannot therefore become consistent long range wage policy.
• When the Government has to legislate for giving effect to the recommendations of a Board, as it happened in the case of the Textile Board award, the element of compulsion is brought back, and that militates against the very spirit of such boards.
• Since the members of the Boards are not always the true representatives of the employers and workers, individual units are led to doubt the bona fides of the members.
• The Boards often make recommendations on all-India basis, with the result that at times the special problems relating to any particular region may be ignored.
• The time lag between the making of the recommendations and their implementation is generally very great.

Some people have suggested that Wage Boards should be made statutory bodies. They can probably be used as potent agency for collective bargaining in units which are in favour of this method of wage fixation.

Concept of Wage Boards

The concept of Wage Boards for determining and or fixing the wages of the workers in different industries was developed during the First Five Year plan. The objective of the wage boards is to resolve disputes on wages between the management and the workers. With this objective the Government decided to set up wage boards on an industry-wide basis.

The first Wage Board was set for the textile industry in the year 1957. Thereafter number of wage boards for different industries have been set-up. These boards are appointed by the Government purely on an adhoc basis on the demand of the Trade Unions and employers. The success of the first wage board led to it becoming a machinery for fixation of wages in India.

The National Commission on Labour in its report submitted in 1969, recommended that the wage boards should:-

• Create a climate for harmonious industrial relations
• Safeguard the interests of the community and to represent consumer’s interests; and
• Derive standardised wage structure for the concerned industry.
• However, these recommendations have yet to be followed.

The composition of the Wage Boards is Tripartite, i.e.; it comprises of the representatives from industry, trade unions and the Government. A wage board is a non-statutory body comprising of equal number of representatives of the employers and the employees or their trade unions who are appointed by the Government and it is chaired by a serving or retired judge who is a Government nominee.

The Wage Boards start their work by issuing a detailed questionnaire to collect information, makes its own assessment on the basis of the views of different parties, and thereafter makes its recommendations with regard to suitable wage structure.

The wage structure suggested by the wage board is in operation for five years, although the parties – the management and the trade unions – are not bound statutorily to follow the same with regard to their organization.

However, it has been observed that the management of the companies prefer to follow the same, otherwise the trade unions take to strikes and other means to get the recommendations implemented.

The wage boards make recommendations to the Government and then the Government asks the parties to implement them.

The wage boards while determining the wage structure for a particular industry, uses the following factors:

(i) Need-based minimum wage

(ii) Industry’s capacity to pay

(iii) Productivity of labour

(iv) Prevailing rates of wages

(v) Level of national income and its distribution

(vi) Place of industry in the economy of the country

(vii) Needs of industry in developing economy

(viii) Requirements of social justice; and

(ix) Adjustment of wage differentials in such a manner as to provide incentives for skill formation.

Objectives of Wage Boards

To achieve the following objectives the Wage Board was set-up:

1. To align the wage settlements with the social and economic policies of the Government.
2. To represent consumers/public the interests.
3. To standardise wage structure throughout the industry concerned.
4. To provide better climate for industrial relations.
5. To work out wage structure based on the principles of fair wages as formulated by the Committee on Fair Wages,
6. To work out a system of payment by results.
7. To evolve a wage structure based on the requirements of social justice.
8. To evolve a wage structure based on the need for adjusting wage differentials in a manner to provide incentives to workers for advancing their skill.

Wage Boards: Growth and Development in India

The history of wage boards in India dates back to the 1930’s. The Royal Commission on Labour recommended the setting up of tripartite boards in Indian industries. It said: we would call attention to certain cardinal points in the setting of (wage- fixing) machinery of this kind.

The main principle is the association of representatives of both employers and workers in the constitution of the machinery. Such representatives would be included in equal members, with an independent element, chosen as far as possible in agreement with or, after consultation with, the representatives of both the parties.

No action was taken during that plan period. However, the Second Plan emphasized the need for determining wages through industrial wage boards. It observed the existing machinery for the settlement of wage disputes has not given full satisfaction to the parties concerned.

More acceptable machinery for settling wage disputes will be the one which gives the parties themselves a more responsible role in reaching decisions. An authority like a tripartite wage board, consisting of an equal number of representatives of employers and workers and an independent chairman, will probably ensure more acceptable decisions.

Such wage boards should be instituted for individual industries in different areas. This recommendation was subsequently reiterated by the Indian Labour conference in 1957 and various industrial committees. The government decision to setup the first wage board in cotton textile and sugar industries in 1957 was also influenced by the Report of the ILO.

The appointment of a wage board often results from the demands for labour unions. It has been reported: The formation of wage boards in all industries has been the result of demands and pressures on the part of trade unions. In their efforts to secure the appointment of wage boards, trade unions have to re pressurize not only the government but also the employers whose formal or informal consent to their establishment must be obtained.

In India, the Bombay Industrial Relations (Amendment) Act of 1948 may be regarded as perhaps the earliest legislation included a provision for the establishment of wage boards in any industry covered by the act. Accordingly, the first wage board was set up in Bombay for the cotton textile industry. The principal purpose of starting wage boards was to relieve the Industrial Courts and Labour Courts of a part of their adjudication work.

Motivating your sales team month after month is no easy task. Not all sales incentives are created equal. A gift card to a chic boutique might motivate one sales rep but bore another.

A sales incentive is effective only if it’s something your team actually wants. And while we’re all familiar with the typical cash incentive, some reps might need something new and exciting to truly motivate them.

Start by getting to know the individuals on your sales team. What are they passionate about? What drives and inspires them?

If you’re unsure where to begin, start with the 10 sales incentive ideas below.

1. Travel vouchers

Your reps travel to the same office day after day, week after week. They don’t have many chances to get out and see new things. Help avoid burnout with travel vouchers such as these:

• Hotel vouchers
• Plane tickets
• Cruises
• Travel points (employees can choose their own adventure)

The prospect of a trip is something your team can look forward to. Give your team a reason to keep their “eye on the prize” with travel sales incentives.

2. Tickets to concerts or sporting events

Dangle a ticket to a playoff or a high-stakes rival game and die-hard sports fans will go crazy. Plus, if more than one of your reps are fans of the same team, game tickets could bring them closer together and improve team camaraderie (a win-win for everyone). Concert tickets are also effective incentives for reps who love live music. An Eric Clapton superfan would go nuts over a VIP ticket to one of his shows.

• Season tickets (football, hockey, baseball, etc.)
• One-off tickets to big games (playoffs, championships, civil war games)
• Reimbursable concert experience (tickets to any show of the rep’s choice)
• Backstage or VIP tickets to a specific show (as suggested by the rep)

Ask your team if there’s a band they’re obsessed with, or a sports team they’re die-hard loyal to. Chances are, you’ll discover a few incentives your reps will go crazy for.

3. Fine dining experience

Sometimes it’s hard to justify treating yourself to a fancy, expensive dinner. But that doesn’t mean we all don’t want to. Fine dining experiences cater to one of our most primal desires: delicious food.

• Let your employees weigh in on which restaurants they’d want to try.
• Consider offering a few restaurant options your reps can select from once a winner is selected.
• Offer the top performer a lunch with the CEO.
• Treat your entire team to a meal at a restaurant of their choice.
• Deliver the prize as a gift card so the winner can go alone or with a loved one.

Find out if you have any self-proclaimed “foodies” on your team. If so, they’re likely to work hard for this one.

4. Tech goodies

Make your sales incentive program feels like Christmas. What tech toys does your team have their eyes on? Maybe it’s fitness watches for your health-conscious reps, Kindles for the bookworms on your team, or even new laptop computers for anyone looking to upgrade. The good thing about tech sales incentives is that there’s a ton of options to choose from:

• Cash voucher redeemable for a gadget of choice
• New laptop
• Smartwatch or fitness tracker
• Kindle
• Bluetooth headset

The list is endless. Find out what’s on your employees’ wish lists and your incentives will turn your reps into kids in a candy store.

5. Office modifications or additions

Unless you have outside salespeople on your team, the majority of your reps spend 40 hours a week at their desks. That’s a long time to spend sitting in one place, and it can start to take a toll. Consider offering the following incentives:

• Ergonomic office chairs
• Standing desks
• Larger cubicles or desks

A little extra comfort can go a long way when it comes to an employee’s well-being. If it can make a rep’s work life more comfortable, they’re going to want it.

6. Membership to a gym or studio of their choice

It’s not always easy to budget for your favorite fitness class. I mean, let’s face it: yoga studios, CrossFit gyms, spinning classes, and athletic clubs are not cheap. But for many of us, the endorphins we get from exercise are what keep us going every day. That’s why gym memberships and exercise class punches are effective incentives for your sales reps. Try offering:

• 10-time punch card to a yoga studio, CrossFit gym, or spin class
• Monthlong membership to a studio of choice
• Yearlong membership to a gym of choice
• Personal training session(s)

If exercise helps your reps perform their best, it’s an incentive that benefits everyone.

7. Online learning courses

Online learning courses are great incentives for reps looking to grow their careers or expand their knowledge base. They can also serve as training for top performers looking to move up in the company. The knowledge they learn in the online courses they win can help ensure that they, and the rest of the team, are successful in the future. Some examples include:

• Language classes
• Online college courses
• Private lesson plans (not affiliated with any colleges)
• Full courses for professionals, created by industry experts

Give your employees the opportunity to get where they want to be with knowledge-based incentives.

8. Spa day or massage

Sometimes nothing’s better than a relaxing day of self-care. This is especially true after a long month of hard work. Consider chatting with your reps (or taking an anonymous poll) to make sure a day of self-care is something they’d be motivated to work for. And don’t forget: self-care isn’t limited to spa days or massages. Consider:

• Flotation therapy (it’s all the rage)
• Pedicures or manicures
• Salon appointments
• Facials
• Massages
• Acupuncture

Self-care incentives are opportunities for your top performers to relax and rejuvenate after a month of hard work. This is especially desirable after a particularly stressful quarter. Plus, they’ll come back refreshed and ready for another month of hard work (another win-win).

9. More PTO

What could be more appealing than extra paid time off? It’s an opportunity to spend more time with the family, go on longer trips, or simply not be at the office. Motivate your team with PTO sales incentives like:

• Extra vacation days for the current year
• More vacation days for next year
• Additional PTO hours to use at any time during employment
• More paid sick days

Working hard to work less is an incentive anyone, from the foodie to the sport nut, can appreciate.

10. Employee’s choice (within a certain budget)

Let your employees pick their incentives. If you’re rewarding top performers on an individual basis, the most logical option is to offer a cash bonus. That way, your employees can use the reward however they see fit.

If your entire team succeeds in exceeding their sales goals, you may want to reward them collectively. At the beginning of the month or quarter, let your team sit down together to brainstorm an incentive they’d work hard to win (within a reasonable budget, of course). Examples include:

Cash bonuses (to be used at the rep’s discretion).

Noncash team incentives, such as

• Company trips
• A service where you can pay for puppies to come to your office to relieve employee stress
• Company lunches or dinners

Pick a budget and let your employees decide. Letting your reps choose their own incentives is a surefire way to assure they’ll work hard to win them.

Pay Commission is set up by Government of India, and gives its recommendations regarding changes in salary structure of its employees, set up in 1946, Since India’s Independence, seven pay commissions have been set up on a regular basis to review and make recommendations on the work and pay structure of all civil and military divisions of the Government of India. Headquartered in Delhi, the Commission is given 18 months from date of its constitution to make its recommendations.

First Pay Commission

The first pay commission was established on January, 1946 and it submitted its report in May, 1947 to the interim government of India. It was under the chairmanship of Srinivasa Varadachariar. The mandate of 1st (nine members) was to examining and recommending emolument structure of Civilian employees.

Second Pay Commission

The second pay commission was set up in August 1957, 10 years after independence[5] and it gave its report after two years. The recommendations of the second pay commission had a financial impact of ₹ 39.6 crore. The chairman of the second pay commission was Jagannath Das. The second pay commission reiterated the principle on which the salaries have to be determined. It stated that the pay structure and the working conditions of the government employee should be crafted in a way so as to ensure efficient functioning of the system by recruiting persons with a minimum qualification.

Raghuramiah Committee

The Departmental Pay Committee, set up after the 2nd pay Commission, was called, the Raghuramiah Committee(1960), which had service representatives. It examined armed forces emoluments and made recommendations.

Third Pay Commission

The third pay commission set up in April 1970 gave its report in March 1973 i.e. it took almost 3 years to submit the report, and created proposals that cost the government ₹ 144 crore. The chairman was Raghubir Dayal. The third pay commission (3CPC) added three very important concepts of inclusiveness, comprehensibility, and adequacy for pay structure to be sound in nature. The third pay commission went beyond the idea of minimum subsistence that was adopted by the first pay commission. The commission report says that the true test which the government should adopt is to know whether the services are attractive and it retains the people it needs and if these persons are satisfied by that they are getting paid.

Third Pay Commission and the Armed forces.

1. 3rd CPC was the first CPC for Defence Forces. I quote from para 5, chapter 48 Vol 3 of the report, “5. It is for the first time that a Pay Commission has been asked to enquire into the, structure of emoluments of both the civilian employees, of the Government and the Armed Forces. In the past, the latter, was entrusted to departmental committees which included the representatives of the Services also.”
2. There was no bureaucratic interference in proposals made by services. Ex Chiefs Gen Kumaramangalam and Adm Chatterjea were invited for discussions besides some other veteran officers. I quote from para 7, chapter Report of the Third Central Pay Commission, 1973.Vol.IV. 48 Vol 3. “Report of the Expert Cell was finalised only by the Service members. The Ministry of Defence in, their letter forwarding the Report of the Expert Cell in June, 1971, clarified that “the views contained in the Report are those of the Service Experts, as endorsed by the three Service Chiefs”.
3. Commission also visited forward posts at heights of 13000 feet, air bases, ships, submarines, ordnance depots, hospitals etc. to gain first hand experience of service hardships. There is no evidence of any bureaucratic or political interference in the report. The CPC was headed by a retired Supreme Court justice, Shri Raghubar Dayal.Report of the Third Central Pay Commission, 1973.Vol.III.

The commission was of the view that the most practical and equitable method for determining Service pays would be on the basis of fair comparison with the pay rates fixed for the civilian employees of the Central Government. This nexus becomes all the more relevant and desirable when we recall that recruitment to our Armed Forces is on a voluntary basis, which means that persons have to be attracted from civilian life. The quality of recruitment to the Armed Forces will be satisfactory only if Service pays are comparable to levels of remuneration in civilian employment. A link between the two is therefore, inherent in the case of volunteer armed forces.

In 1973, the Government implemented the following changes in pensions of the Armed Forces:

Pensions before 3rd CPC. Pensions were worked in fractions and not in percentages, as is being claimed by many dubious sources. For ease of understanding, fractions will be converted to percentage in subsequent text.

Armed forces Pensions. Armed forces pay and pensions were lower than those of the Britishers. During second world war these were hiked for obvious reasons. After world war was over these were reduced drastically and brought more or less in line with civilians. After Independence, pensions of Armed Forces were fixed by Armed Forces Pension Revision Committee (AFPRC). It’s recommendations were implemented wef 1st Jun 1953. Pensions remained more or less fixed till next pay commission for civilians was finalised. For example a Lt Col drew a fixed pension of Rs.625/- from Jun 1953 till Oct 1961. No DA/DR was admissible to pensioners before 3rd CPC. Later pension wasincreased to Rs 675 in Oct 1961. In Sep 1970 pension was reduced to Rs 587/- to compensate for grant of Death Cum Retirement Gratuity (DCR). As for as PBOR are concerned, upper retirement age was 50 years for Army and 55 years for other two services. For officers and PBOR, AFPRC used the formula of 1/60 to work out pensions rank wise. Maximum pension was capped at 30 years of service. A person retiring with 30 years or more of service got a pension 30/60 (50%) of the rank emoluments. The pension was not worked for individuals. It was worked rank wise. Rank was to be held for at least 2 years to get pension for the same rank. However, it was based on the minimum pay of the rank for officers and mean of the pay group for PBOR. There was a depression of 2 years for PBOR who served from 15 years to 25 years. Therefore soldiers were compensated for 13 years of service while they actually served for 15 years and so on. This depression was removed in 1968. Service pensioners did not receive any DCR till 1970. In 1970, DCR was introduced, where as civilians were receiving DCR since 1950 with their pensions reduced proportionately from 1/60 (50%) to 1/80 (37.5%). The loss of pension was 12.5% to compensate for DCR. On similar lines, to compensate for DCR in 1970, officer’s pension was reduced by appx 8% and PBOR 11%. From the information given above, it is evident that before 3rd CPC a PBOR retiring with 15 years of service got a pension of 15/60 (25%) less 11%. A PBOR retiring with 30 and more years of service got 30/60 (50%) less 11%, appx. 39% of his emoluments as pension. It is clear that no PBOR got a pension of more than 39% of emoluments contrary to the belief that the PBOR pensions were 70% before 3rd CPC and OROP was in vogue.Report of the Third Central Pay Commission, 1973.Vol.III.

Liberalised Family Pension: Conditions. Mrs Indra Gandhi for the first time introduced Liberalised Family Pension for war widows and their children. It was made effective from 1947 to include all past operations including Counter Insurgency Operations. In case of death of an Armed Forces Personnel under the circumstances mentioned below, the eligible member of the family is entitled to Liberalised Family Pension equal to reckonable emoluments last drawn, both for officers and PBOR. Liberalised Family Pension at this rate is admissible to the widow in the case of officers and to the nominated heir in the case of PBOR until death or disqualification.

G.O.I, M.O.D. vide its letter No. 200847/Pen-C/71 dt. 24.2.72, decided to grant Liberalized Pensionary Awards equivalent to the basic pay +increments +rank pay +good service pay+ dearness pay + home saving element to the nominated heir of PBORs of Armed Forces personnel as well as NCs(E), (including APS and DSC personnel), who were killed in action or disabled in the operations against any neighboring country and as well as in following actions:

• 1947-48 Kashmir Operations, international wars of 1962, 1965 (including Kutch and Kargil Ops.), 1971, as well as Goa and Hyderabad operations.
• In warlike operations or border skirmishes either with Pakistan on cease fire line or any other country, operation against armed hostiles like Naga & Mizos and also while deployed in peace-keeping mission abroad.
• During laying or clearance of mines .These benefits were granted wef 1-2-1972 to the nominated heirs / NoKs of all personnel who were killed in above actions and operations from 1947-48 onwards.

Rates of Liberalised Family Pension. Under this category nominated heir of the PBOR will be granted Lib. Family Pension equal to the reckonable emoluments last drawn which includes Pay in pay band + GP + MSP + X Group Pay if any + Classification allowance actual drawn if any until death or disqualification. If a PBOR is not survived by widow but is survived by child (ren) only, all children together shall be eligible for Lib. Family Pension at the rate equal to 60% of reckonable emoluments till his/her disqualification i.e. attaining the age of 25 years. On death / disqualification of senior most children it will pass on to next eligible child. And the crippled child if any will be granted continuance award of family pension when all children become disqualified. The crippled child will continue to receive this award for life at the rate equivalent to 60% of Liberalised Family pension. Link for Liberalised Family Pensions

In addition, Civilians serving in field formations (cooks, washer up, water carriers etc.) were given uniform and made NC(E)s.

Civilian Pensions

As far as Civilian pensions are concerned, their retirement age varied from 50 years for senior officers to 58 years for class 4 employees. Till 1950 they were not getting DCR and their pension was based on 1/60 formula and capped at 30 years of service. They received 30/60 (50%) of the last three years of average emoluments as pension. In 1950 DCR was introduced and their maximum pension reduced to 30/80 (37.5%). This continued till 3rd CPC. Therefore, Civilians as well as PBOR were drawing less than 40% of emoluments as pension by more or less using similar formulas. Both were getting similar DCR too. There was no DA/DR for any one. PBOR had no advantage on account of early retirement. Report of the Third Central Pay Commission, 1973.Vol.IV.

Post 3rd CPC Pensions. Civilian pension formula wasn’t altered much. The significant change was to increase qualifying service for pension from 30 to 33 years. There after, maximum pension improved to 33/80 (41.25%) for 33 years of service. Formula for DR was worked out. I quote from para 92 Vol IV,

“We have received numerous representations suggesting that we should recommend some measures for protecting the pensions of the existing Government employees from erosion O!l account of the possible increases m the cost of Living in future. We recommend that all future pensioners, irrespective of the amount of pension drawn by them, should be given a relief at the rate of 5 per cent of their pension subject to a minimum of Rs 5 per mensem and a maximum of Rs. 25 per mensem. The relief at these rates should be given as and when there is a 16 points rise in the 12-monthly average of the All India Working Class Consumer Price Index (1960=100).”

On the other hand, service pensions were revamped. Same 33/80 formula was used to work out defence pensions. There was no change in rank criteria for earning pension. Pensions were granted as per rank held for two years. Improvements were done to base pensions on the maximum pay of the rank and not minimum/mean pay as was the case earlier. The main high light of the 3rd CPC was that for the first time weightage was given to Armed Forces for early retirement and DR granted. PBOR, Lt Colonels, Colonels and Brigadiers got a weightage of 5 years, Majors 6 years and Captains and below 7 years. This resulted in a PBOR retiring with 15 years of service getting a pension @ 20/80 (25%) compared to 15/80 (18.75%) received by a civilian. A PBOR retiring with 28 years of service received 33/80 (41.25%) in comparison to civilian who received a lower percentage of 28/80 (35%). Hence, for the first time since independence Armed Forces had an edge over civilians in pensions.

Fourth Pay Commission

Constituted in June 1983, its report was given in three phases within four years and the financial burden to the government was ₹ 1282 crore. This commission has been set up on dated 18.3.1987, Gazette of India (Extra ordinary) Notification No 91 dated 18.3.1987, The chairman of fourth pay commission was P N Singhal.

Fourth Pay Commission and the Armed forces

Indian National Congress (I) Government, headed by Rajiv Gandhi, in the wake of the 4th CPC to implemented concept of ‘Rank Pay’ for armed forces officer. Rank Pay affected all officers ranks from second lieutenant to brigadier in the army, and equivalent ranks in the Indian Air Force and the Indian Navy. The ‘rank pay’, which varied from 200 to 1200, was not an additional pay, but amount deducted from their pay grade. This ended long established err Military Indian Police service equations. Police Officers, and officers from other AIS officers, with 14 years of service, who were formerly in the same pay grade as majors, with 14 years service, were equated to Brigadiers, on the basis of the new pay grades. Maj General Satbir Singh an expert on Police- military rank structures and pay grades, called rank pay, “rarest of rare fraud, perjury and Injustice to the defence forces”.

He explained, “How could it be allowed that the first military rank of Second Lieutenant along with two promotional ranks of Lieutenant and Captain were all clubbed with the first civilian rank?”. Similarly at the level of major “rank pay’ had the effect of promoting civilian pay grades equal to major till the 3 CPC, to that of Colonels.” The rank pay became an issue of considerable resentment in the armed forces, and cause of general distrust of the pay commissions, and the Congress I Government. Eventually, Maj AK Dhanapalan, a retired major, litigates ‘rank Pay’. After protracted legal struggle high court, despite many appeals, in a landmark decision declares the ‘rank pay’ concept illegal. In its judgment the SC notes that the ‘rank pay’ was wrongly deducted from basic pay and ordered re-fixation of pay “with effect from” and not “as on” 1 January 1986.

Fifth Pay Commission

The notification for setting up the Fifth CPC was issued on 9 April 1994, but started functioning only on 2 May 1994, with the assumption of charge by the Member Secretary. The chairman of fifth pay commission was Justice S. Ratnavel Pandian. the members were: Suresh Tendulkar, Professor Delhi school of Economics; and M.K Kaw, Indian Administrative Service. In comparison, First CPC had nine members including military members, the second had six members including a military member, the 3 CPC and 4 CPC had five, but no military member. The fifth had three members, but no military member. The first had no member secretary, just a secretary. After the 1 CPC all pay commissions have had a member secretary, and invariably from the IAS.

The 5 CPC report, a massive tome, had nine part in 172 chapters. It took three years with a sanctioned staff 107, which ballooned to 141, to prepare the report. By way of comparison, 4 CPC took 209 bureaucrat Accounts Service, Indian Revenue Service, Indian Economic Service, Central Secretariat Service, Border Security Force, Geological Survey of India, Central Public Works Department and National Informatics Centre. 1.63It cost ₹ 17,000 crore.

Part VI of report dealt with pensions and retirement benefits for civilian; Part VII dealt with pay scales and allowances of Armed Forces personnel. Part IX is the concluding part of the Report.

Financial Impact of Fifth pay commission

With the implementation of the Fifth Pay commission a huge burden was taken up by the central government. It declared hike in salary of about 3.3 million central government employees. Further, it also insisted on pay revision at the state government level. The Fifth pay commission disturbed the financial situation of both the Central and the State Governments and led to a hue and cry after its implementation. The Central government’s wage bill before the implementation of the commission’s recommendations was 218.85 billion in 1996-1997 which also included pension dues, and by 1999 it shot up by about 99% and the burden on the exchequer was about to ₹ 43,568 crore in 1999-2000. With regard to the state government the bill went up by 74%. The state governments which paid about Rs 515.48 billion in 1997 as salaries, had to pay Rs 898.13 billion in 1999 as salaries. This clearly indicates the burden on the state and the central government. Many economists say that about 90% of the revenue of the state went in as salaries. 13 states of India were not in a position to pay salaries to its employees due to the hike and hence the central government’s help was sought.

Other recommendations

One of its recommendations was to slash government workforce by about 30%. It also recommended to reduce the number of pay scale from 51 to 34 and to not recruit to about 3,50,000 vacant position in the government. None of these recommendations were implemented.

Criticisms by World Bank

The World Bank criticized the Fifth Pay Commission, stating that the Fifth Pay Commission is the ‘single largest adverse shock’ to the public finance of the nation. It also said that the number of employees of the government was ‘not unduly’ large, but there was a ‘pronounced imbalance’ in the skills. It noted that about 93% of the employees were of 3rd or 4th grade.

Fifth Pay Commission and the Armed forces

Terms of Reference

The 4CPC, for unknown reasons, had no separate TORs for the Armed Forces. The 5 CPC, however, for the first time was asked to examine the terms and conditions of the Armed Forces, and make suggestions for what is “considered desirable and feasible”. Thus, the pay commission noted ambiguously that “even their recommendations with regard to changes in the structure of emoluments including death cum gratuity in respect of Armed Forces Personnel had to be made with due regard to the terms and conditions of their service”.

Lateral Transfer

The 5 CPC, in its report submitted in January 1997, recommended increase in posts for Armed Forces personnel in Group C and D in Central Armed Police Forces (CAPFs) from 10 to 25percent. For Short Service Commissioned Officers, on completion of their military service, 5 CPC recommended earmarking 25 percent officer’s post in the CAPFs. These recommendations by the pay Commission were intended to reduce the defence pension bill; save on training and recruitment costs; provide trained manpower to government departments; and provide soldiers a second career after their term of military engagement.

These recommendations of the Pay Commission were, however, mostly ignored by the Janata Dal (United Front), and BJP Government of Atal Bihari Vajpayee that followed. Mulayam Singh Yadav, Defence Minister (1 June 1996 – 19 March 1998), Indrajit Gupta (Communist Party of India-United Front), Home Minister (29 June 1996 – 19 March 1998), and L K Advani (BJP), Home Minister (19 March 1998 – 22 May 2004) did little to implement these recommendations. The problem festered, and the pension bill ballooned.

Sixth Pay Commission

In July 2006, the Cabinet approved setting up of the sixth pay commission. This commission has been set up under Justice B.N.Srikrishna with a timeframe of 18 months. The cost of hikes in salaries is anticipated to be about ₹ 20,000 crore for a total of 5.5 million government employees as per media speculation on the 6th Pay Commission, the report of which is expected to be handed over in late March/early April 2008. The employees had threatened to go on a nationwide strike if the government failed to hike their salaries. Reasons for the demand of hikes include rising inflation and rising pay in the private sector due to the forces of Globalization. The Class 1 officers in India are grossly underpaid with an IAS officer with 25 years of work experience earning just Rs.55,000 as his take home pay. Pay arrears are due from January 2006 till September 2008. Almost all the Government employees received 40% of the pay arrears in 2008 and balance 60% arrears (as promised by Government) has also been credited in Government employees account in 2009. The Sixth Pay Commission mainly focused on removing ambiguity in respect of various pay scales and mainly focused on reducing number of pay scales and bring the idea of pay bands. It recommended for removal of Group-D cadre.

Seventh Pay Commission

The Government of India has initiated the process to constitute the 7th Central Pay Commission along with finalisation of its Terms of Reference, the composition and the possible timeframe for submission of its Report. On 25 September 2013 then Finance Minister P Chidambaram announced that Prime Minister Manmohan Singh has approved the constitution of the 7th Pay Commission. Its recommendations are likely to be implemented with effect from 1 January 2016. Justice A.K Mathur will be heading the Seventh Pay Commission, announcement of which was done on 4 February 2016 . On 29 June 2016, Government accepted the recommendation of 7th Pay Commission Report with meager increase in salary of 14% after six month of intense evaluation and successive discussion.

Executive compensation, also known as executive pay, refers to remuneration packages specifically designed for business leaders, senior management and executive-level employees of a company.

Executive compensation includes benefits such as salaries, perks, incentives, insurances etc.

The Executive Compensation refers to the financial payment and other non-monetary rewards given to the top executives in exchange for their services to the organization.

Executive compensation differs substantially from typical pay packages for either hourly workers or salaried management and professionals in that executive pay is heavily biased toward rewards for actual results. Hence if a company underperforms, the executives typically receive a smaller fraction of their potential pay. Conversely, if a company meets its annual objectives and the stock price responds long term, the executives stand to receive a much larger payout. 

This section of the site describes the typical Executive Compensation program and explains the most commonly used terms. It includes several charts, including one below that shows the share of compensation that is at risk by executives, as compared with managers and hourly employees.

The pay packages given to the senior executives of corporations often consist of six components:

• Base salary
• Incentive pay, with a short-term focus, usually in the form of a bonus
• Incentive pay, with a long-term focus, usually in some combination of stock awards, option awards, non-equity incentive plan compensation
• Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan (SERP)
• Extra benefits and perquisites, such as cars and club memberships
• Deferred compensation earnings

 Executive pay is structured to reward company performance and align executive pay with shareholder value. As a result, unlike most other employees, a majority of executive pay is at-risk; in other words, executives may never receive it. However, if executives and the company perform well, they along with the company’s shareholders stand to gain much more from superior performance.

Importance of executive compensation

Senior management and executive-level employees play a crucial role in the company as they’re the ones making the strategies, taking importance decisions etc. In order to keep them motivated and satisfied it’s important to set the right benefits package.

This type of compensation is negotiable between the employer and potential executive and can defy the organizational norms on compensation to regular employees.

Components of executive compensation

1. Salary
2. Short Term Incentives (STI)
3. Long Term Incentives (LTI)
4. Guaranteed Severance Package
5. Perquisites, like club memberships, private planes
6. Insurance, health insurance for self and dependents

Objectives of executive compensation policy

• The manager should be incentivized so that they adopt those strategies, investments, and actions that result in the increase in the shareholder value. Thus, an executive aligns his interest with the interest of the shareholder.
• The remuneration package should be designed such a way that it motivates the executives to work harder, take risks and take unpleasant decisions such as termination or retrenchment, aimed at increasing the shareholder’s wealth.
• The executive compensation is often designed with the intent to retain the executives during the bad times caused due to the adverse market and industry factors.
• The cost of the executive pay must be limited to the extent where the shareholder’s wealth does not get affected and, in fact, maximizes.

Generally, the executive compensation packages are designed by the board of directors, particularly the compensation committee, which is comprised of the independent directors. The purpose for which the committee is created is to pay incentives to the executive team who play a significant role in decision making and is responsible for the corporate strategy and the overall value creation of the company.

Effective Executive Compensation

1. Use Metrics as the Basis for Incentive Compensation

A common mistake for incentive-based compensation is promising incentives that are not tied to specific metrics. By having only discretionary bonuses or incentives, executives are unaware what precisely they need to focus on to be successful.

For each executive, the metrics that are well within their control and follow the SMART criteria (specific, measurable, attainable, relevant and time-bound) should be used as the basis for their incentives. This way, they are aware of what they must focus on and they can optimize their work to achieve those specific goals. Sometimes metrics like revenue and profit are applicable, but, more often, there are better key performance indicators (KPIs) that should be used.

2. Effectively Communicate to Ensure Understanding

Another common mistake companies make is when they assume that compensation plans are well understood by their executives, but the reality is that there are often gaps. Make sure every executive is fully aware of all of the components related to their compensation package.

If an executive does not have a clear picture of their total ability to accumulate wealth in their current position, the likelihood of looking for opportunities with more clarity of the upside is increased. Uncertainty is almost always bad for business, and this is a case where uncertainty on the part of a core team member can have unforeseen deleterious effects on a business.

Progress on a compensation plan should be addressed at least annually, outlining both short-term and long-term incentives. An even better idea is for quarterly communication where the core metrics to which incentives are tied are discussed. This prevents any miscommunication prior to when the awards are issued.

3. Benchmark Compensation Levels

If you’re trying to attract top talent, your compensation needs to be competitive. Use benchmarking tools and publications to ensure you’re compensating your executives in the way you intend.

In our research, companies often believe they are paying near the top-end of the spectrum for each of their executives when, in reality, they are at or below the median compensation level for similar companies.

Make sure the benchmarks you use are meaningful and relevant to your company. Using multiple reference points to compare your company (for example, by revenue, industry, region, and revenue growth) will give you a much clearer idea of how competitive your compensation levels are.

4. Value Company Equity Regularly

In our research, more than half of the companies we surveyed do not have a clear idea of what the equity awarded to their executives is worth. By granting equity-linked compensation but not tying them to any real value, you’re simply adding uncertainty to the executive’s total compensation picture.

If you plan on issuing equity-linked incentives, your company’s equity value should be appraised or estimated at least annually. At regular intervals (quarterly, annually, etc.), each executive should be told the estimated current value of their equity-linked incentives, as well as the expected future value.

5. Include both Short and Long-Term Incentives

Providing a truly competitive executive compensation package usually requires that your executive team has both short and long-term goals from which they benefit financially should they be met.

A blend of incentive compensation that provides executives with cash incentives in the short-term and longer-term incentives that tie an executive to the overall success of the company helps to ensure your executive team is engaged and feeling rewarded for their hard work regularly.

Wage structure may be defined as the internal pattern of varying job ranking and basic wage rates and differentials of different categories of employees in a company according to skill, qualifications and experience. Together with this, wage structure may also be influenced by labour market forces. But the outside market impinges only at certain points in the company wage structure.

There is a great array of semi-skilled and unskilled production jobs that are specific to a particular industry or even a particular company. Workers are usually not recruited into these jobs from the outside, but work up from within the company on a seniority basis. These types of jobs, if not easily available elsewhere, wage rates become subject to inside market.

Factors Affecting Wage Structure

The wage structure in a modern plant may be influenced by the following factors:

(i) Collective bargaining and labour relations

(ii) Management discretion and custom

(iii) Skill and production operation sequence

(iv) Job evaluation or job rating

(v) Minimum wage legislation

(vi) Dearness allowance

(vii) Bonus

(viii) Wage incentives

(ix) Wage differentials

(x) Company wage policy

(xi) Governmental wage fixation methods

(xii) Tripartite convention

(xiii) ILO convention.

Wage structure may be industry based or there may be inter-industry wage structure or Federation level wage structure. In India, wage structure for different industries has been set on the basis of Government wage regulation, and tripartite negotiation.

Theories of Wage Structure

The classical economists were of the view that wage ultimately gets settled at the subsistence level, a level determined by custom. The two main assumptions underlying this view are the Malthusian Theory of Population and a fixed amount earmarked from the national dividend as wage fund. The wage fund is an amount set apart by the entrepreneur towards the payment of wage bill.

It is, according to the classical economists, fixed in quantity once for all. Therefore whenever the supply of labour increa­ses, the wage per head goes down and with a decrease in the supply of labour the wage goes up. If the wage is above the subsistence level, population tends to increase bringing down the wage level and vice versa.

Wage level ultimately settles down at the subsistence level. The classical analysis of wage determination relies more on the supply side of the picture. Though Marx stresses the influence of ‘bargaining power’ on the level of wages, he also believes that, under capitalism, wage tends to be at subsistence level due to the substitution of machinery for labour which helps to maintain ‘reserve army’.

The Marginal Productivity Theory looked at distribution as a relationship between the marginal product of the factor and the demand for it. Marginal Productivity Theory is an extension of marginal utility analysis. The firm combines the various factors of production in such a way as to maximise its profits just as the consumer varies the combination of goods to maximise his utility.

In doing so the entrepreneur, as a logical deduction, pays each factor of production according to its marginal physical productivity. This theory says that wage, the price paid to labour, thus should be equal to its marginal productivity expressed in terms of value.

Wage rate will be higher when the marginal productivities are higher and vice versa. It is the marginal revenue product of labour that establishes its demand schedule.

This theory stresses the demand side; the supply side is only indirectly accounted for. Secondly, Marginal Productivity Theory concentrates more on ‘how much labour would be employed at a particular wage’ than how the wage rate is determined and what are all the factors that influence such determination.

This is evident from the fact that it is based on the neoclassical idea of isoquants where it is assumed that there is perfect substitutability between capital and labour.

It tries to bring out the demand schedule for labour under an assumption of labour being the only variable factor. If that is so it implies that capital is malleable in the sense that the same amount of capital can be stretched or contracted in such a way that any number of labourers can work with it.

In reality we find that there is a definite relationship between capital input and labour input irrespective of whether the technique is primitive or sophisticated.

Even if capital is expressed in money terms, the problem cannot be solved because whenever the technique is changed from a capital intensive to a labour intensive one, additional costs in terms of money and time are involved in converting the existing capital good into the other one.

Above all, measuring the marginal productivity of labour itself is not possible as production is the result of coordination between labour and capital. It is not possible to keep capital constant and increase the labour content in order to know the marginal productivity of labour. That is why probably the Marginal Productivity Theory is considered more as a statement of demand side than a theory of wages.

Reservation price of labour dictated by custom or need or the trade union action does not have much of a place in the theory. Marginal productivity theory, as Dunlop says, ‘cannot be applied to the complexities of wage structures’ also.

It may be true that wages tend to measure the marginal productivity of labour, but it cannot be a theory of wage rate determination; wage according to this theory depends upon the marginal productivity of labour but at the same time it is also true that the productivity of labour depends upon the wage that the labourer receives.

In the context of industrialization and economic development, it is found that the institution of collective bargaining has been playing an important role in wage-setting in the areas where labour is organized. Government, through legislative measures, like the Minimum Wages Act, is another institution that has considerable influence on wage-setting.

Reformation of Wage Structure

1. Wage Policy

The main aim of wage policy is to bring wage structure in conformity with the expectations of the working classes and in the process, to maximize wages and employ­ment. Wage changes beyond a certain level must reflect productivity changes. Any substantial improvement in real wages, which is an important objective of wage policy, cannot be achieved without increasing productivity.

Wage policy has to be framed taking into account such factors as the price level which can be sustained, the employment level to be attained at requirements of social justice, capital formation needed for the future growth of the economy, and the pattern of income generation and its distribution.

Wage policy should foster an appropriate choice of techniques so as to maximise employment at rising levels of productivity and wages. Wage policy should be so designed as to check living costs from rising.

It may be possible to fix a regional minimum for different homogenous regions in each state. Need based minimum wages can be introduced keeping in mind the extent of the capacity of the employer to pay the same. Every organized worker has a claim to this minimum. Prices constitute an important indicator of the economic health of a nation. They exercise a profound influence on the economy of a country.

During the last several years, the inflationary trends in India have inflicted a great hardship on the workers with rising prices, the cost of living of the workers also increased leading to a persistent demand for higher wages.

Ever rising prices exercise a retarding influence on economic growth. In order to secure economic development with stability, all possible efforts should be made to prevent any further rise in prices of essential goods.

The prime interest of workers is fair wages, satisfactory conditions of work such as security of service, justice and fair play. In a developing economy, wage policy is faced with a real conflict between the needs of workers for larger consumption and the demands of the company for a higher rate of capital formation.

The rate of progress has to be determined not only by the needs of the workers but also by the limitations of the national resources.

2. Wages and Productivity

The proposition that linking wages with productivity provides a generally agreed basis for wage adjustment. There seems no general consensus on the linking of wages with productivity. Industrial production had also risen by about 10 per cent in 1976-77 and perhaps by another 6 per cent in 1976-78. It was obvious that industrial pro­duction per man had gone up recently and productivity also had increased.

Workers ought to switch over to a wage augment based on productivity per man. There is no tradition yet in India for demanding a wage increase according to profitability and productivity per man, the unions might not change their basis for bargaining.

As wage increases in India had been linked to the cost of living rather than productivity, there have been reasons for regional differences in wages of similar workers, since the cost of living rose differently in different parts of the country.

Corrections in wage rates for the cost of living changes should be regional in character. There is a point in not having a national but a regional wage and regional wage structures in a few regions would probably be ideal. The basic issue of the rationality of a wage structure is that wages in order to be just would have to be related to the productivity of workers.

3. Bonus

This also has become a subject of persistent dispute between management and the workmen.

It is rather ironic that while bonus was intended to give a sense of partnership to labour in industry and help the identification of workmen with the welfare of the industry, it has been responsible for some of the major strikes in industry and has often hundred the establishment of harmonious relations between the workmen and the employers.

As far as raising the minimum bonus from 4 per cent to 8.33 per cent is concerned, this decision has been taken on political consideration rather than on merit. However, once the workmen have come to enjoy 8.33 per cent as minimum bonus, it will be a practical wisdom to restore the same.

4. Wage Motivation and Productivity

In some quarters, it is felt that wage should not be linked with productivity until workers are given need based wages and financial motivation through sharing the gains of productivity, is not effective unless it is preceded by psychological motivation.

National Productivity Council, in the guidelines, has clearly stated that sharing the gains of productivity should be regarded more as a philosophy of industrial relations rather than a statistical technique or a mathematical formula of distribution of gains.

In reality, no person would deny the fact that workers should get need based wage. The economy has to be geared at a faster rate to fulfill this objective. Productivity also helps considerably to improve the wage level of workmen. If an industry prospers through increased productivity, the employees should be given due share in the prosperity of an industry.

Some felt that wages should definitely be linked to productivity where even the minimum wages for a fair day’s work should be linked to certain minimum norms of output. As for higher production or work output beyond the minimum, payment by results systems be used.

There are different ways of linking wage with productivity. National Productivity Council has developed eleven different models for this purpose. These models can be changed according to the need of an organization. Different systems of payment by results could be considered to increase productivity if it is preceded by psychological motivation.

Distortion in Wage Structure

In the developed countries, several studies have demonstrated the importance of economic variables in determining the wage structures. In India, studies have been neglected. This may be partly due to paucity of data. Wage structure is grossly distorted so that different industries and professions are divided into water-tight compartments, with wages bearing no relation to one another.

As a result, workers of the same category may be getting different wages. The classic example is one of wage levels of unskilled workers in the organized and unionized industries, and those in unorganized and un-unionized sectors. Even with two main sectors, there are different wage payments for the same or similar work.

This glaring distortion is to be found in case of organizations which often maintain two different rates for workers doing the same job, one for regular employees and another for workers employed on a daily wage basis.

Even in the case of the Government, the minimum pay of class IV employee is almost double of that prescribed for a daily wage earner; and this without any consideration for holidays, house rent allowance, medical facilities and provision for pension. Another example is that of high payments made by foreign companies which bear no relation to and are much higher than, the wage paid in domestic companies.

The huge differentials exist between different types of wages as also of salaries. Top salaries in enterprise, net of income tax, are often sixteen to eighteen times as high as wages of unskilled workers. If to this, perquisites, such as free house or cheap houses and subsidized travelling or free travelling, are added the differential would be higher still.

Within the organized sector, the wage levels are determined more by unionized action. Outside the organized sector, workers are paid wages which are almost equal to distress selling of labour. It is, therefore, clear that wage structure is a haphazard one, and is full of incompailities and imbalances.

Fixation of wages in India is a recent phenomenon. There was no effective machinery till 2ns world war for settlement of disputes for fixation of wages. After independence of India, industrial relations become a major issue and there was a massive increase in industrial dispute mostly over wages leading to substantial loss of production. Realizing that industrial peace is essential for progress on industrial as well as the economic front, the central government convened in 1947 a tripartite conference consisting of representatives of employers, labour and government.

Government of India formulated industrial policy resolution in 1948 where the government has mentioned two items which have bearing on wages:

• Statutory fixation of minimum wages
• Promotion of fair wages

To achieve the 1st objective, the minimum wages act of 1948 was passed to lay down certain norms and procedures for determination and fixation of wages by central and state government.

To achieve the second objective, GOI appointed in 1949 a tripartite committee on fair wages to determine principles on which fair wages should be fixed.

As of now, India does not have a formal national wage policy, though the issue has been discussed several times. The government has direct and indirect control over wage levels, which has been exercised through different institutions. Wages and salary incomes in India are fixed through several institutions:

• Collective bargaining
• Industrial wage boards
• Government appointed pay commissions
• Adjudication by courts and tribunals

Collective Bargaining

Collective bargaining relates to those arrangements under which wages and conditions of employments are generally decided by agreements negotiated between the parties. Broadly speaking the following factors affect the wage determination by collective bargaining process:

• Alternate choices and demands
• Institutional necessities
• The right and capacity to strike

In a modern democratic society wages are determined by collective bargaining in contrast to individual bargaining by working. In the matter of wage bargaining, unions are primarily concerned with:

• General level of wages
• Structure of wage rates (differential among occupations)
• Bonus, incentives and fringe benefits, administration of wages

Wage determination in the unorganized sector

Wage determination in India has been achieved by various instruments. For the unorganized sector the most useful instrument is the Minimum Wages Act 1948.

This law governs the methods to fix minimum wages in scheduled industries (which may vary from state to state) by using either a committee method or a notification method.

A tripartite Advisory Committee with an independent Chairman advises the Government on the minimum wage. In practice unfortunately, the minimum wage is so low that in many industries there is erosion of real wage despite revision of the minimum wage occasionally.

A feeble indexation system has now been introduced in a few states only.

Collective bargaining in the organized sector

An important factor that is not much recognized, but which still prevails in many organized sector units is fixing and revising wages through collective bargaining.

The course of collective bargaining was influenced in 1948 by the recommendations of the Fair Wage Committee that reported that three levels of wages exist – minimum, fair, and living.

These three wage levels were defined and it was pointed out that all industries must pay the minimum wage and that the capacity to pay would apply only to the fair wage, which could be linked to productivity.

In addition to this the fifteenth Indian Labour Conference, a tripartite body, met in 1954 and defined precisely what the needs-based minimum wage was and how it could be quantified using a balanced diet chart.

This gave a great boost to collective bargaining; many organized sector trade unions were able to achieve reasonably satisfactory indexation and a system of paying an annual bonus.

It is now the law, that a thirteenth month of wage must be paid as a deferred wage to all those covered by the Payment of Bonus Act.

Industrial Wage Boards

Concept of wage board was first enunciated by committee on fair wages. It was commended by first five year plan and second five year plan also considered wage board as an acceptable machinery for settling wage disputes. Wage boards in India are two types:

• Statutory wage board
• Tripartite board

Statutory wage board is a body set up by law or with legal authority to establish minimum wages and other standards of employment which are then legally enforceable in particular trade or industry to which the board’s decisions relate.

Tripartite wage board is a voluntary negotiating body set up by discussions between organized employers, workers and government to regulate wages, working hours and related conditions of employment.

Wage board decisions are not final and are subjected to either executive or judicious review or reconsideration by other authority or tribunals. The powers and procedure of wage boards are same as industrial tribunals instituted under the ID act 1947

Pay Commissions

First pay commission was appointed by GOI in 1946 to enquire in to the conditions of service of central government employees. This commission in its report said that in no case should they pay less than a living wage.

The 2nd pay commission was appointed in August 1957; it examined the norms for fixing a need based minimum wage setup.

GOI appointed the 3rd pay commission in the 1970’s which in its report expressed support for a system in which adjustments of pay will occur automatically with upward movement in consumer price index.

The 4th pay commission came in 1983 to examine the structure of all central government employees, including those of union territories, officers belonging to the armed forces and all India service. Commission submitted a report that recommended drastic changes in pay scale.

The 5thpay commission 1996 made certain recommendation regarding restricting of pay scales.

The 6th pay commission was established in 2006 which submitted a report suggesting revision of Pay scales of employees of Autonomous bodies.

Adjudication

This instrument is used for settlement of any wage related disputes through courts and tribunals. Supreme Court has also adjudicated upon such disputes.