Year: 2020

Salary Administration refers to all components of wage administration and pay structure:

• Monitoring salary structures and pay grades for exempt and non-exempt staff and making recommendations for update when necessary
• Conducting internal and external market analysis to determine comparability and equity with existing University positions
• Providing salary and benefits data for federal, state, and private compensation surveys
• Developing career ‘ladders’ for existing job series to provide versatility in compensation options

Principles of wage and salary administration

The main principles that govern wage and salary fixation are three:

• External Equity
• Internal Equity
• Individual Worth

1. External Equity

This principle acknowledges that factors/variables external to organization influence levels of compensation in an organization. These variables are such as demand and supply of labour, the market rate, etc. If these variables are not kept into consideration while fixing wage and salary levels, these may be insufficient to attract and retain employees in the organization. The principles of external equity ensure that jobs are fairly compensated in comparison to similar jobs in the labour market.

2. Internal Equity

Organizations have various jobs which are relative in value term. In other words, the values of various jobs in an organization are comparative. Within your own Department, pay levels of the teachers (Professor, Reader, and Lecturer) are different as per the perceived or real differences between the values of jobs they perform.

This relative worth of jobs is ascertained by job evaluation. Thus, an ideal compensation system should establish and maintain appropriate differentials based on relative values of jobs. In other words, the compensation system should ensure that more difficult jobs should be paid more.

3. Individual Worth

According to this principle, an individual should be paid as per his/her performance. Thus, the compensation system, as far as possible, enables the individual to be rewarded according to his contribution to organization.

Alternatively speaking, this principle ensures that each individual’s pay is fair in comparison to others doing the same/similar jobs, i.e., ‘equal pay for equal work’. In sum and substance, a sound compensation system should encompass factors like adequacy of wages, social balance, supply and demand, fair comparison, equal pay for equal work and work measurement.

Current Trends in Salary Administration

Automated Payroll will be entirely GDPR-friendly: Payroll automation is founded on the idea that employee data is seamlessly available across locations and interfaces. The GDPR went into effect in the middle of last year; any new payroll management solution being introduced to the market will now be GDPR-compliant.

1. Payroll will be Audit-ready from Day One

Instead of scrambling at quarter-end or year-end to collate and reconcile payroll information, employers will adopt automated report generation that allows electronic submission, without any complex bureaucratic formalities.

2. Gig Workers will enter your Payroll

The distinction between pay rolled employees and third-party workers will start to fade as companies increasingly rely on gig workers. This goes beyond blue collar jobs, encompassing high-value projects led by experienced consultants and the enlightened ‘digital nomad’.

3. Bots will Guide Query Resolution

Employees running from one department to the other, trying to get queries answered from HR, finance, or even accounts, is a familiar picture to us all. In 2021 AI-based chatbots (deployed as standalone apps or part of a larger employee service suite) will be a common answer to this problem.

4. Manual Payroll will Finally become Obsolete

With payroll automation finally becoming extremely cost-effective as well as easy-to-deploy, a larger number of small businesses will abandon manual, paper-driven processes. This will be driven by increasing familiarity with tech and a boom in the payroll solutions market.

5. Weekly or Monthly payroll won’t be the Only Way

Some solutions have already started rolling out flexible payroll systems that align wages to a specific date every month or even support one-time payments as part of a company’s regularized disbursal cycle. Interestingly, this is perfectly in-line with gig worker requirements.

“Payroll companies like Gusto are increasingly offering alternatives to bi-weekly or monthly pay periods. For example, Gusto recently launched Flexible Pay, which allows employees on-demand access to funds without having to wait until payday, for little or no cost,” said Rick Chen, Communications Lead at Gusto.

6. Unbanked Employees will be Welcomed

Contrary to popular belief, a huge portion of the global population remains unbanked, even in developed economies. Platforms like Gusto will help bring this workforce segment into the payroll management ambit, easing access to the salaries they have rightfully earned.

7. Disbursal will be Instantaneous

Taking off from the widespread popularity of mobile payment applications, payroll management will also explore instant payment options, so that workers do not have to wait for a certain period after their shift/project/seasonal tenue with a company has ended.

8. Financial Wellness will be Part of the Package

By advocating the need for financial wellness, employers can make sure their workforce is equipped to maintain a certain quality of life and correctly utilize their allocated wages. In 2019, financial wellness benefits will be a way to drive employee satisfaction without constant pay hikes.

9. Pay Transparency will be the Norm Everywhere

From ensuring that salary and wage levels are kept private, progressive employers will look at sharing salary levels publicly from white-collar ranks to part-time workers. This will go a long way in reinforcing employer brand, communicating the values of fair pay and equality.

Basic Pay

The concept of basic Pay is contained in the report of the Fair Wages Committee. According to this Committee, the floor of the basic pay is the “minimum wage” which provides “not merely for the bare sustenance of life but for the preservation of the efficiency of the workers by providing some measure of education, medical requirements and amenities.” The basic Pay has been the most stable and fixed as compared to dearness allowance and annual bonus which usually change with movements in the cost of living indices and the performance of the industry.

Dearness Allowance

Dearness allowance is a cost of living adjustment allowance paid to the government employees and pensioners. It is one of the components of salary, and is counted as a fixed percentage of the person’s basic salary. It is adjusted according to the inflationary trends to lessen the impact of inflation on government employees.

The fixation of wage structure also includes within its compass a fixation of rates of dearness allowance. In the context of a changing pattern of prices and consumption, real wages of the workmen are likely to fluctuate greatly. Ultimately, it is the goods and services that a worker buys with the help of wages that are an important consideration for him. The real wages of the workmen thus require to be protected when there is a rise in prices and a consequent increase in the cost of living by suitable adjustments in these wages. In foreign countries, these adjustments in wages are effected automatically with the rise or fall in the cost of living.

In India, the system of dearness allowance is a special feature of the wage system for adjustment of the wages when there are frequent fluctuations in the cost of living. In our country, at present, there are several systems of paying dearness allowance to the employees to meet the changes in the cost of living. In practice, they differ from place to place and industry to industry. One of the methods of paying dearness allowance is by a flat rate, under which a fixed amount is paid to all categories of workers, irrespective of their wage scales. The second method is its linkage with consumer price index numbers published periodically by the government. It indicates the changes in the prices of a fixed basket of goods and services customarily bought by the families of workers. In other words, the index shows the rise or fall in the cost of living due a rise or fall in consumer prices.

The Consumer Price Index (CPI) is a monthly index published by the Bureau of Labor Statistics. The CPI is compiled by price data collected throughout the country for a fixed set of goods, such as food, clothing, shelter, fuels, prescriptions, transportation fares, and medical fees. The CPI is important as a predictor of wage increases and of employees’ need for greater income.

D.A. as a Separate Component

The Second World War, too, repeated the same economic inflation and again the demand for increased D.A. was made by the industrial workers. It is to be noted here that the main reason for keeping the D.A. as a separate component and not merging it in the wages, was due to the fact that the employers always considered the D.A. increase as a temporary feature and expected such allowance to be adjusted downward, if the cost of living restored. But their hope was never fulfilled and the D.A. continued to remain as a separate component which could be raised with the rise in the price index number. This element of D.A. is also found in some of the early reports like the Report of Rau Court of Inquiry which was constituted in the year 1940 under the provisions of the Trade Disputes Act, 1929 to investigate the dearness allowance of railway employees. Subsequently, Justice Rajadhyaksha Award given in 1946 in the trade dispute between the Post Telegraph Department and its non-gazetted employees, the Central Pay Commission 1947, the Committee on Fair Wages, 1948, the Bank Award Commission, 1955, the Second Pay Commission, 1959, the Dass Commission, 1965 and the Gajendragatkar Commission, 1967, all approved and recommended payment of D.A. as a separate component of the earning of the workers. The Wage-Boards also generally sought to keep the D.A. as a separate component although some of them recommended the merger of D.A. with the basic wage.

Relevant Factors and Practices

The very concept of D.A. is linked with the need of mitigating the hardship of the lowest paid employees living on subsistence level and cushioning the impact on the higher paid employees. In the actual determination of the quantum of D.A. various relevant factors need to be taken into consideration like the following:

• A. as a separate component and linking it with the cost of living Index,
• The selection of the All India or State level index with which D.A. should be linked;
• Extent of neutralization
• The capacity of the employer to pay D.A.

Revision of D.A

As far as revision of D.A. is concerned several State Govts., Employers’ Organisations etc. have suggested revision of D.A. after 10 point rise in the index, or once in 6 months, whichever is later. Some State Governments and Employers’ Organizations suggested for revision of D.A. after a 5 point rise in the index or once in a quarter. The National Commission on Labour2, recommended increase of D.A. linked with 5 point slab on the basis of all India price index number.

“The Union Cabinet, chaired by the Prime Minister Narendra Modi has approved to release an additional instalment of Dearness Allowance (DA) to Central Government employees and Dearness Relief (DR) to pensioners w.e.f. 01.07.2018 representing an increase of 2% over the existing rate of 7% of the Basic Pay/Pension, to compensate for price rise,”

How to Calculate Dearness Allowance?

DA is calculated as a percentage of (basic pay + grade pay). After 1/1/2006 the calculation of DA for government employees is as follows:

Dearness Allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 12 months – 115.76]/115.76} x 100

Formula for calculating DA for Central public-sector employees after 1/1/2007 is:

Dearness allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 3 months – 126.33]/126.33} x 100

AICIP stands for All India Consumer Price Index

Beginning 1st of January 1996, the dearness allowance is granted to compensate for price increases to which the revised pay scales relate. This will be reviewed twice a year, on 1st January and 1st July.

Foreign Countries Experience

It is interesting to note that the practice of paying D.A. as a separate component appears to he confined only to India and some Asian countries and similar concept is not found elsewhere in other industrial countries. However in other countries to meet the demand of the increase cost of living, the real wages themselves are revised to provide for the desired level of standard of living. Some wage agreements contain ‘escalator clause’ to provide for the review of wages in the event of increase in price index. Such practice is common in USA, Italy and Scandinavian countries. In Japan cost of living allowance and rent allowance is comprised in the wages. In some countries the wage agreements provided for the increase in wage as a separate component linked with the increase in the price index. In India such increase is referred as ‘Dearness Allowance’ keeping it as 3 component distinct from the wages. There are different pros and cons of retaining D.A. as a separate component in India as it would give flexibility in the determination of the quantum of D.A. corresponding to the increase in the Price Index number and to achieve desirable level of neutralisation.

Overtime Payment

Working overtime in industry is possibly as old as the industrial revolution. The necessity of the managements’ seeking overtime working from employees becomes inevitable mainly to overcome inappropriate allocation of manpower and improper scheduling, absenteeism, unforeseen situations created due to genuine difficulties like breakdown of machines. In many companies, overtime is necessary to meet urgent delivery dates, sudden upswings in production schedules, or to give management a degree of flexibility in matching labour capacity to production demands. The payment of overtime allowance to the factory and workshop employees is guaranteed by law. All employees who are deemed to be workers under the Factories Act or under the Minimum Wages Act are entitled to it at twice the ordinary rate of their wages for the work done in excess of 9 hours on any day or for more than 48 hours in any week. The major benefit of overtime working to workers is that it offers an increase in income from work.

Annual Bonus

The bonus component of the industrial compensation system, though a quite old one, had assumed a statutory status only with the enactment of the Payment of Bonus Act, 1965. The Act is applicable to factories and other establishments employing 20 or more employees.

Eligibility: Every employee not drawing salary/wages beyond Rs. 10,000 per month who has worked for not less than 30 days in an accounting year, shall be eligible for bonus for minimum of 8.33% of the salary/wages even if there is loss in the establishment whereas a maximum of 20% of the employee’s salary/wages is payable as bonus in an accounting year. However, in case of the employees whose salary/wages range between Rs. 3500 to Rs. 10,000 per month for the purpose of payment of bonus, their salaries/wages would be deemed to be Rs. 3500.

Incentive System

The term “incentive” has been used both in the restricted sense of participation and in the widest sense of financial motivation. It is used to signify inducements offered to employees to put forth their best in order to maximise production results. Incentives are classified as financial and non-financial. Important financial incentives are attractive wages, bonus, dearness allowance, traveling allowance, housing allowance, gratuity, pension, and provident fund contributions. Some of the non-financial incentives are designation, nature of the job, working conditions, status, privileges, job security, opportunity for advancement and participation in decision making. However, a vast diversity exists in regard to policy and practice of incentive payments. Incentive systems also have been classified into three groups: individual wage incentive plan, group incentive scheme, and organization-wide incentive system.

The individual wage incentive plan is the extra compensation paid to an individual over a specified amount for his production effort. Individual incentive systems are based upon certain norms established by work measurement techniques such as past performance, bargaining between union and the management, time study, standard data, predetermined elemental times and work sampling. There are four types of individual incentive systems such as measured day-work, piece-work standard, group plans and gains-sharing plans. Under the measured day-work incentive wage system, an individual receives his regular hourly rate of pay, irrespective of his performance. Piece-work system form the most simple and frequently used incentive wage. In this, individual’s earnings are direct and proportionate to their output. Group plans embody a guaranteed base rate to the workers in which the performance over standard is rewarded by a proportionate premium over base pay. Gains-sharing system involves a disproportionate increase in monetary rewards for increasing output beyond a predetermined standard. As the gains are shared with the entrepreneurs, the worker gets less than one per cent increment in wage for every one percent increase in output.

The group or area incentive scheme provides for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job – the difference between allowed time and actual time. Such schemes may be most appropriate where:

• People have to work together and teamwork has to be encouraged; and
• High levels of production depend a great deal on the cooperation existing among a team of workers as compared with the individual efforts of team members.

The organization-wide incentive system involves cooperation among employees and the management and purports to accomplish broader organizational objectives such as:

(i) To reduce labour, material and supply costs

(ii) To strengthen loyalty to the company

(iii) To promote harmonious labour-management relations

(iv) To decrease turnover and absenteeism

One of the aspects of organization-wide incentive system is profit sharing under which an employee receives a share of the profit fixed in advance under an agreement freely entered into. The major objective of the profit sharing system is to strengthen the unity of interest and the spirit of cooperation. Some of the advantages of such a scheme are:

(i) It inculcates in employees’ a sense of economic discipline as regards wage costs and productivity;

(ii) It engenders improved communication and increased sense of participation;

(iii) It is relatively simple and its cost of administration is low; and

(iv) It is non-inflationary, if properly devised.

One of the essentials of a sound profit sharing system is that it should not be treated as a substitute for adequate wages but provide something extra to the participants. Full support and cooperation of the union is to be obtained in implementing such a scheme.

Fringe Benefits

The remuneration that the employees receive for their contribution cannot be measured by the mere estimation of wages and salaries paid to them. Certain supplementary benefits and services known as “fringe benefits” are also available to them. The characteristics of fringe benefits are:

• These benefits are distinctly additional to the regular wages paid to the workers. As such, they are not provided as a substitute for wages or salaries of the employees.
• These benefits are meant primarily to be of advantage to the employees.
• The advantages accrued to the employees through the provision of fringe benefits are as such they cannot be secured through their own individual efforts.
• Only those benefits fall within the purview of fringe benefits which are or can be expressed in cash terms.
• The scope of fringe benefits is different from that of welfare services. Fringe benefits are provided by the employers alone whereas welfare services may be provided by other agencies as well. Benefits that have no relation to employment should not be regarded as fringe benefits.

Fringe benefits have been classified in several ways. In terms of their objectives, Meggison classifies them into two groups: those providing for employees’ security and those purporting to increase employees’ job satisfaction causing reduction in labour turnover and improvement in productivity. The former group includes retirement programmes, workmen’s compensation, unemployment compensation, social insurance, and other provisions. The later group incorporates vacations, holidays, sick leave, discounts on company goods and services, and allied tangible and intangible benefits.

Fringe benefits are also categorised as statutory, contractual, and voluntary. Statutory benefits include social security and medical care, unemployment compensation, workmen’s compensation, provident fund, and gratuity. The benefits provided by the employers in pursuance of agreements with workers may include dearness allowance, house rent allowance, city compensatory allowance, medical allowance, night-shift allowance, heat allowance, transport, housing and educational allowances. Voluntary fringe benefits which are provided unilaterally by the company include group insurance, death benevolent fund, washing allowance, leave encashment, leave travel concession, conveyance allowance, incentive for family planning, service awards, and suggestion awards.

Currently fringe benefits are a significant part of employee compensation system and the employees tend to take them for granted and do not link these items with wages or income as they do not have any direct bearing on payments. They are no more on the fringe of compensation but form an integral component of individual’s earnings involving spiraling costs for the company. However, the fringe benefit system can become effective if attempts are made to gear them to the needs of human resource in organizational settings.

Conveyance allowance

Conveyance allowance is one of the compulsory employee benefits provided for meeting an expenditure incurred by an employee ( especially government employee) for commuting from home to office and office to home. In order to claim conveyance allowance by an employee, he or she should reside and work in towns only.

City compensatory allowance

City compensatory allowance is one of the employee benefits provided for meeting additional cost of living for working in cities.

This is the oldest method of wage payment. “Time” is made a basis for determining wages of worker. Under this system, the wages are paid according to the time spent by workers irrespective of his output of work done. The wage rates are fixed for an hour, a day, week, a month or even a year (seldom used).

For example, a wage rate of Rs. 70 per day is fixed in an industrial unit. Two workers A and B attend work for 28 and 16 days respectively. The wages as per time wage system will be Rs. 1960 and 1120 for A and B respectively. This method of wage payment does not give weight age to the quantity of goods produced by the workers.

The supervisor may ensure that workers do not waste their time and the quality of goods is also maintained. There are no hard and fast rules for fixing rates of wages. These may be decided according to the level of the past higher positions may be paid higher rates and vice- versa.

Wages are calculated in the method as follows:

Earnings = T x R

where T stands for time spent and R is rate of pay.

Suitability of Time Wage System

Time wage system is suitable under following situations:

• When productivity of an employee cannot be measured precisely.
• Where quality of products is more important than the quantity produced.
• Where individual employees do not have any control over production.
• Where close supervision of work is possible.
• Where work delays are frequent and beyond the control of workers.

Advantage of Time Wage System

1. Simplicity

The method of wage payments is very simple. The workers will not find any difficulty in calculating the wages. The time spent by a person multiplied by the rate will determine his wages.

2. Security

Workers are guaranteed minimum wages for the time spent by them. There is no link between wages and output, wages are paid irrespective of output. They are not supposed to complete particular task for getting their wages. They are sure to set certain wages at the end of a specified period of time spent in working.

3. Batter Quality of Products

When workers are assured of wages on time basis, they will improve the quality of products. If wages are related to output, then workers may think of increasing production without bothering about quality of goods.

In this method, workers will concentrate on producing better quality of goods. In certain situations, only time wage system will be suitable. If some artistic nature products are produced, then this method will be most suitable.

4. Support of Unions

This method is acceptable to trade unions because it does not distinguish between workers on the basis of their performance. Any method which gives different wage rates or wages based on output is generally opposed by trade unions.

5. Beneficial for Beginners

Wage rate system is good for the beginners because they may not be able to reach particular level of production on entering employment.

6. Less, Wastages

The workers will not be in a hurry to push through production. The materials and equipment’s will be properly handled leading to less wastage.

Limitations pf Time Wage System

Time wage system suffers from the following drawbacks:

1. No Incentive for efficiency

This method does not distinguish between efficient and inefficient workers. The payment of wages is related to time and not output. Thus, the method gives no incentive for more production.

Efficient workers may start to follow inefficient persons because rates of pay are same. Rates of wages fixed in this method are also low because these are fixed by taken into account the output of dullest workers. Thus, this method does not provide incentive for efficiency.

2. Wastage of time

Workers may waste their time because they will not be following a target of production. Efficient workers may also follow slow workers because there is no distinction between them. This may lead to wastage of time.

3. Low production

Since wages are not related to output, production rate shall be low. The responsibility for increasing production may mostly lie on supervisors. Because of low production, overhead expenses per unit will go up, leading to higher production cost.

4. Difficulty to determine labour cost

Because wages are not related to output, employees find it difficult to calculate labour cost per unit. The output will go on varying from time to time while wages will remain almost same. Production planning and control will be difficult in the absence of a relationship between wages and output wages and output.

5. Difficult supervision work

Under this system, workers are not offered incentives for production. To get more worker from them, there will be need for greater supervision. More supervision may be required to maintain proper quality of goods also. In wage system supervision cost goes up to a great extent.

6. Employer-employee trouble

When all employees, irrespective of their merit are treated equally, there is likely to be a trouble between management and workers. Those employees, who are not satisfied with this method, may start disobeying order from their superiors.

An efficiency wage is a wage paid by a firm to its workers that is above the competitive wage (i.e., above the equilibrium wage determined by the market for that work) voluntarily in order to increase worker productivity and profits.

It is not used for payments above the competitive wage due to union power of workers or due to minimum wage laws.

The term efficiency wage is not used specifically either for the total wage paid or the difference between the wage paid and the market wage. Rather, it is used for the overall concept.

Definition of Efficiency Wage Theory / Hypothesis

The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay.

Therefore if firms increase wages some or all of the higher wage costs will be recouped through increased staff retention and higher labour productivity.

In theory, higher wages could cause increased labour productivity (MRP). In this case, the wage increases can pay for themselves.

Reasons for efficiency wage theory

1. Fear of losing jobs: “Shirking model”

The argument is that if workers are paid a higher wage, they have more to lose from being made redundant. Therefore, if they have a job with a wage significantly higher than benefits or alternative jobs, they will have greater motivation to impress their boss and keep it. Shapiro and Stiglitz posited that workers with a higher wage will work at an effort level which involves no shirking. This wage is above market-clearing levels.

2. Loyalty

Secondly, if workers receive a higher pay, they may just feel more loyalty towards the company and be willing to work harder and with more determination. By contrast, if they feel they are being exploited by a monopsonist employer, then they will do the minimum amount of work to get by, but try to take more breaks and not work as hard.

3. Labour market “Gift Exchange”
4. Akerlof (1982) saw the labour market has a ‘gift exchange’ where good labour relations depended on goodwill. FIrms could pay wages above market-clearing levels, and in return, workers would take on more responsibility and initiative.
5. Lower costs of supervision. JB Rebitzer (1995)

Rebitzer noted that lower wages were associated with higher levels of supervision. WOrkers receiving higher wages were more motivated and therefore needed less managerial supervision.

5. Attract higher quality labour

If a firm pays above the market clearing level, it will attract a better quality worker who will feel they can get a relatively better-paid job.

6. Nutritional theories

In developing economies at very low rates of pay, increasing wages can enable a reduction in absolute poverty better health, and nutrition lead to better quality labour.

Efficiency wage theory and involuntary unemployment

Shirking models of efficiency wage theory, state that employers have an incentive to pay a wage above the market clearing level. If this is the case, and efficiency wage payments are widespread then it can cause involuntary unemployment with wages above the equilibrium and wages.

However, in the case of monopsony, higher wages can increases wages without any cost of unemployment.

Examples of minimum efficiency wage

A test case for the minimum efficiency wage was in 1914 when Henry Ford introduced a five dollar day. Ford paid well above the market-clearing rate. He wanted to pay higher wages in order to

• Ban unions. A condition for high pay was no trade unions
• Compensate for boring work on his efficient assembly lines. Ford increased productivity by the revolutionary use of assembly lines, but was worried a low wage, workers would get bored and stop working.

Raff and Summers (1986) concluded that Ford’s five dollar day was consistent with what was expected of efficiency wage theories.

“There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.”

Raff, Summers “Did Henry Ford pay efficiency wages” (1986) NBER

Limitations of efficiency wage theory

• In practice, many factors determine worker morale and productivity, wages are just one of them. Often other factors are more important such as work conditions, management, e.t.c. If non-wage factors are negative, then higher wages may be insufficient to boost productivity.
• It depends on the reaction of other firms. If other firms also start paying above market clearing levels, then the gain from attracting the best quality workers will be lost.
• Firms with monopsony power may not need to pay higher wages to create the threat of workers losing their jobs.

An 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.

There are a large number of such plans that are applied in industrial concerns these days. However, before these differ­ent types of plans are discussed, the various requirements of a sound wage-incentive system must be noted.

Types of Incentive Schemes: Individual and Group Incentive Scheme

The various types of incentives are classified into two broad categories: financial and non- financial. Here, we are concerned with financial incentives only. Financial incentives may further be classified as individual incentives and group incentives. Both are discussed now one by one.

1. Individual Incentive (PBR) Schemes

Under this plan, employees are paid on the basis of results”. The chief incentive plans included in this category are discussed in seriatim.

(i) Taylor’s Differential Piece Rate Plan

This plan was developed by F. W. Taylor, the father of scientific management. Under this plan, Taylor prescribed two piece work rates. One, a higher wage rate for those who reach the standard work. Second, a lower wage rate whose performance is below the standard.

The standard work is determined on the basis of time and motion studies. This wage plan encourages and rewards the employees who are efficient by giving them wages at a higher rate. At the same time, the plan penalizes those who are slow performers by paying them at a low wage rate.

(ii) Halsey Premium Plan

This plan, originated by F. A. Halsey, an American engineer, is a combina­tion of the time and the piece wage in a modified form. Under this plan, a guaranteed wage based on past experience is determined. If a worker saves time, he gets 50% of wages for time saved (called premium) in addition to normal wages. It is optional for the worker to work on the premium or not. Thus, this plan also provides incentive to efficient workers.

(iii) Rowan Premium Plan

This plan was developed by D. Rowan in 1901. This plan, to a large extent IS similar to that of Halsey Premium Plan. The only difference is in regard to the determination of the premium. Unlike a fixed percentage in case of Halsey plan, it considers premium on the basis of the proportion which the time saved bears to the standard time.

(iv) Emersson Efficiency Plan

Under this scheme, both standard work and day wage are fixed. Bonus is paid on the basis of worker’s efficiency. A worker becomes entitled to get bonus only when his/her efficiency reaches to 67%. The rate of bonus goes on increasing till he achieves 100% effi­ciency. Above 100% efficiency, bonus will be 20% of the basic rate plus 1% for each 1% increase in efficiency. In this way, at 120% efficiency, a worker receives a bonus of 40% and at 140% efficiency worker gets 60% of the day wage as bonus.

(v) Gantt Task and Bonus Plan:

This plan is devised by H. L. Gantt. This plan combines time, piece wage and bonus. Standard time, piece wage and high rate per piece are determined. A worker who cannot complete standard work within standard time is paid only the minimum guaranteed wage. A worker performing up to the standard level of work gets time wage plus a bonus @ 20% of normal time wage. If the worker exceeds the standard, he is paid a higher piece rate but there is no bonus.

The above mentioned various incentive schemes indicate that the incentive may vary along with variation in earning with changes in performance or output.

Thus, based on linkages between perfor­mance and incentive, the various incentive schemes (PBR) may be classified into the four types as follows:

• Incentives in the same proportion as performance.
• Incentives varying proportionately less than performance.
• Incentives varying proportionately more than performance
• Incentives varying in proportions that varies with levels of performance.

The first of the above mentioned schemes is called the straight proportional scheme while the rest are nomenclature as differential or geared incentive scheme.

An employee’s performance, or say, output is not exclusively due to his own efforts but is influenced by some other factors also. For example, quality of raw material and equipments, their costs, timeliness of completion of job, etc. do also matter and count in one’s performance. Therefore, one’s performance must be measured in a holistic sense, taking all the factors into account. It has also been felt, over the years that incentives should be given on the basis of performance measured over an extended period of time (e.g. week, fortnight, month or longer) rather than by hour or day.

The underlying rationale is to sustain higher levels of productivity over a period of time and also maintain a measure of stability of employee performance and earnings. But, the duration between performance duration and incentive, i.e. reward should not be unduly lengthened; otherwise it may dampen em­ployee motivation. Therefore, it has been suggested that incentives should be given to the employ­ees at least on a monthly basis.

2. Group Incentive Schemes

The incentive schemes can be applied on a group basis also. Group incentive schemes are appropriate where jobs are interdependent. It is difficult to meaningfully measure indi­vidual performance and group pressures affect the performance of the members of the group. The chief group incentive schemes are discussed here.

(i) Profit-sharing

The concept of profit-sharing emerged towards the end of the nineteenth century. Profit-sharing, as the name itself suggests, is sharing of profit of organisation among employees. The International Co-operative Congress” held in Paris in 1889 considered the issue of profit-sharing and defined it as “an agreement (formal or informal) freely entered into by which an employee receives a share fixed in advance of the profits”.

The basic rationale behind profit-sharing is that the organisational profit is an outcome of the co-operative efforts of various parties, therefore, employees should also share in profits as shareholders share by getting dividend on their investment, i.e. share capital. The very purpose of introducing profit-sharing is to strengthen the loyalty of employees to the organisation. Thus, profit-sharing is regarded as a stepping stone to industrial democracy.

Both the share (percentage) of profit to be shared by employees and mechanism for its distribu­tion are determined in advance and also made known to the employees. In order to be eligible to participate in profit-sharing. An employee needs to serve for a certain number of years and, thus, earn some seniority. As regards the forms of profit-sharing, Metzger has classified these into three categories, namely,

• Current: Under this form, profits are paid to the employees in cash or by cheque or in the form of Stock option immediately after the determination of profits.
• Deferred: Profits are credited to employees’ accounts to be paid at the time of retirement or at a time of his dissociation from organisation due to reasons like disability, death, sever­ance, withdrawal from employment, etc.
• Combination: In this case, a part of employee share of profit is paid in cash or cheque or stock and the remaining part is deferred and credited to his/her account.

Employees receive their share in the organisational profit in the form of bonus. In India, the employee bonus is governed by the Payment of Bonus Act, 1965.

The major apprehensions expressed against profit-sharing is mat management may dress up profit figures, as is often done for tax evasion purposes, and deprive employees of their shares in profit. It is also commented that profit-sharing, being a long-term scheme, does not work as incentive due to the absence of immediate feedback about the efforts and rewards.

(ii) Co-partnership

In a way, co-partnership is an improvement over profit-sharing. In this scheme, employees also participate in the equity capital of a company. They can have shares either on the basis of cash payment or in lieu of other incentives payable in cash like bonus. Thus, under co-partnership scheme, employees become shareholders also by having company shares. Now, employ­ees participate in both —profits and management of the company.

The finer points of this scheme are that it recognizes the dignity of labour and also of a partner in the business. This would, in turn, develop a sense of belongingness among the employees and encourage them to contribute their best for the development of the organization.

(iii) Scanlon Plan

The Scanlon plan was developed by Joseph N. Scanlon, a Lecturer at the Massa­chusetts Institute of Technology in USA in 1937. The plan is essentially a suggestion scheme de­signed to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity.

The plan is characterised by two basic features. First, both employees and managers can partici­pate in the plan by submitting their suggestions for cost-cutting methods. Second, increase in efficiency on account of cost-cutting is shared by the employees of the unit.

The Scanlon plan, wherever adopted, has been successful to encourage a sense of partnership among employees, improved employee-employer management relations, and increased motivation to work.

The criticism labelled against group incentive is that the incentive benefits being similar to all members of the group, the best performers may loose incentive. However, this can be overcome if group incentive scheme generates peer-level pressure for superior performance and also reduces the need for supervision. Stability in group may be a necessary condition to make the group incentive scheme successful.

As regards the ultimate impact of incentives on organisational performance, the research stud­ies” conducted in India report that incentive schemes have a positive impact on productivity, labour cost, and industrial relations. It is concluded that “money” has a “salutary” impact on production.

Payroll Processing

Payroll processing in HR is an elaborate process that involves a lot more than salary calculations. The process can be intimidating if you do not know how to go about it which is exactly why this handy guide will navigate you through the intricacies of payroll processing.

Meaning of Payroll Processing

Payroll processing is an essential business function that involves arriving at the ‘net pay’ of the employees after the adjustment of necessary taxes and deductions. For efficient payroll management process, the payroll administrator needs to plan the payroll process step-by-step.

Note:

Net pay = Gross income – Gross deduction

Here,

Gross income/Salary = Regular Income + Allowances + One-time payment/ Benefit

Gross deduction = Regular deductions + Statutory deductions + One-time deductions

What does Payroll Processing encompass?

Here’s a list of tasks the payroll administrator needs to accomplish during payroll processing.

• Develop the organisation’s pay policy that includes flexible benefits, leave encashment policy, and more
• Define payslip components: basic and variable pay, HRA, LTA, etc.
• Collect other payroll inputs from the transport service provider or the food/canteen vendor
• Arrive at the net pay by calculating gross salary and deducting the statutory and non-statutory sums
• Finally, release employee salary.
• File returns and deposit dues such as TDS, PF, and more, with respective authorities.

Payroll in a Company

Preparing payroll involves a series of basic calculations to determine each employee’s base pay as well as deductions for state and federal taxes, and employee contributions to retirement funds and health insurance plans. This information is then transferred to individual employee paychecks as well as company records that facilitate the process of tracking information for internal and external tax and financial reporting. Developing a comprehensive and user-friendly payroll system will make your life much simpler when it’s time to fill our quarterly and annual tax forms. It will also provide you with clear and useful information for understanding your company’s financial activities.

1. Calculate each employee’s base pay by multiplying the number of hours worked for wage employees, or by referring to salary levels for salaried employees. If you use payroll software, your program will do these calculations for you. Pay wage employees who work more than 40 hours per week one and-a-half times their base pay rate for any overtime hours.
2. Calculate each employee’s state and federal deductions. Use federal tax tables or the percentage method to determine federal income tax withholding, and calculate Social Security and Medicare withholdings by multiplying base pay by .0565 as of 2012. Calculate state income tax according to your state’s specific income tax rates. Subtract withholding amounts from each employee’s gross pay. Also subtract the amounts of other paycheck deductions such as employee contributions to health insurance plans or retirement funds. Prepare paychecks that clearly show the information you have used to calculate each employee’s net pay, including regular and overtime hours, and tax and insurance withholdings.
3. Track payroll information and pay payroll taxes on time. Separate the amounts you have withheld from employee paychecks from general business funds, either by depositing them in a separate bank account until it is time to remit them, or keeping a running total of how much you owe so you don’t treat this money as regular operating capital. Make federal tax deposits according to the deposit schedule that the IRS gives you, based on your payroll volume. Complete state payroll tax forms quarterly.
4. Use payroll information in your business accounting to evaluate your company’s profitability and financial health. Divide payroll information relative to different tasks and departments. For example, if you own a retail grocery store, track the amount you spend on payroll in the meat department versus the amount you spend in the produce department. Compare these amounts to the revenue from each department to assess the profitability of each section.

Fringe benefits are a type of compensation provided to an employee outside of his normal wage or salary. Many years ago, employers began to understand that potential employees give great consideration to the wage or salary offered. In an effort to tempt a qualified individual to accept employment with the company, rather than going to a competing company, many employers began offering non-wage compensation in addition to the actual salary offered.

These fringe benefits, often in the form of employer-paid life and health insurance policies, retirement benefits, and other things that might aid in the recruitment of top quality, skilled workers. In fact, fringe benefits play a large role in keeping workers motivated to do quality work and increase production. Some fringe benefits may be classified as taxable income by the IRS.

Types of Fringe Benefit

Many employers offer employees an array of fringe benefits in addition to their salaries. Also considered “job-perks,” these benefits cost employers, who pay for such perks, and are therefore considered a portion of the employees’ salaries on their books, even if the benefits are not in the form of money, such as bonuses. There are many types of fringe benefit, and which types are offered often depends on the type of employer, and value of the employee’s position.

1. Taxable Fringe Benefits

According to the IRS, any fringe benefit provided by an employer may be taxable, unless it is specifically excluded from taxation. The IRS provides specific information regarding fringe benefits, including which are considered taxable. Some of the fringe benefits that may be taxable under certain situations often include payment of, or reimbursement for, things in an excessive amount. These include:

(i) Excessive Moving Expenses

If an employer reimburses or pays for an employee’s moving expenses, when the move was less than 50 miles from the employee’s current residence, may be taxed.

(ii) Excessive Mileage Reimbursement

Employer reimbursement for business-related driving of the employee’s private vehicle may be taxable if the total exceeds the IRS’ standard mileage rate.

(iii) Expense Reimbursement

Expense amounts reimbursed to an employee with the employee’s sufficient accounting, may be taxable.

(iv) Clothing Reimbursement

Employer reimbursement for clothing that is not strictly for work on the job, but which is suitable for everyday street wear, is taxable.

(v) Working Condition Benefits

Any equipment or supplies purchased by an employee that is used for work purposes exclusively, it is tax free. If the item is used for any personal purpose at all, it is taxable.

(vi) Excessive Education Expenses

Educational assistance for education that is not job-related, or which the amount exceeds the IRS allowable amount is taxable.

(vii) Awards and Prizes

Employee awards and prizes that are given in cash, are taxable, unless they are given to charity in the employee’s name. Valuable non-cash awards may also be taxable, unless the value is minimal.

2. Non-Taxable Fringe Benefits

There are many types of non-taxable fringe benefits that may be offered to employees without increasing their tax burden. Some of the most common tax-free types of fringe benefit provided to employees by private and public businesses include:

(i) Insurance Coverage

Insurance coverage is perhaps the most common fringe benefit provided to employees, though the structure of how insurance is paid for has changed in recent years. Insurance coverage may include employer-paid life insurance, health insurance, and short or long-term disability insurance. When an insurance coverage fringe benefit is offered, the employer most commonly shares the cost of premiums at a certain percentage, thus reducing the amount for which the employee is responsible. Of course, insurance coverage may be offered entirely at the employer’s expense. Some employers also offer health savings accounts to their employees, often matching the employees’ contributions to the plan.

(ii) Childcare Assistance

Childcare assistance is one fringe benefit that comes in handy for many families, and may increase attendance at work, as well as productivity. This is because parents have additional responsibilities in ensuring their children are well cared-for while they are at work. Many large employers are offering on-site childcare, either free of charge, or at a discounted price. This allows parents to concentrate on their work, knowing their children are close by, and being cared for. Some smaller employers, while unable to maintain an on-site daycare facility, offer a cost-share for daycare.

(vi) Physical Fitness

Some employers make it a priority to ensure their employees have access to gyms or fitness centers in order to promote a healthy lifestyle, which in turn increases attendance and productivity. Some companies maintain on-site fitness centers, where employees can work out on breaks or other off times, while others offer paid gym memberships, or memberships at a discounted price.

(v) Education Assistance

Education assistance in the form of tuition reimbursement, or other assistance in adding to an employee’s education or skill set, is one of the more popular types of fringe benefit offered by employers. Helping an employee gain new job-related skills or knowledge helps the company, as the employee is then able to work at a different level in his current position, or may become able to advance into new areas of the business.