Components of wage/salary: Basic Wages, D.A, incentives, Bonus, Fringe benefits etc.

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.