10 – Compensation and Benefits

Introduction

Employees earn compensation in consideration for their contributions to the organisation. Employees typically give their services in exchange for one of three sorts of compensation. Basic wages and salaries are referred to as pay. Bonuses, commissions, and profit-sharing programmes are all forms of compensation meant to encourage employees to go above and beyond expectations. Insurance, medical, leisure, and retirement benefits are examples of indirect remuneration. As a result, compensation is a broad term that encompasses wages, incentives, and benefits provided by employees in exchange for their services.

10.1 Purpose of Compensation Planning

1. Internal equity: to ensure that the more challenging occupations are rewarded more.
2. External equity: to ensure that employment is compensated fairly well compared to similar jobs.
3. Individual equity: to pay people equally for doing the same task.
4. Attract and retain top talent.
5. Keep your best people.
6. Keep costs in control.
7. Adhere to all legal requirements.
8. Operational simplicity.

10.2 Components of Compensation Planning

 10.2.1 Wages

Different acts in India include different items under the term wages, although all acts include basic pay and dearness allowances under the term wages. “Earnings for vacation period, holiday pay, overtime pay, and bonus comprise part of wages,” according to the Workmen’s Compensation Act of 1923.

“Any award of settlement and production bonus, if paid, comprises pay,” according to Section 2(vi) of the Payment of Wages Act of 1936.

“Retrenchment compensation, payment instead of notice, and gratuity payable on discharge comprise wages,” according to the Payment of Wages Act of 1948.

However, the following types of remuneration do not qualify as wages under any of the Acts if they are paid:

1. Bonuses or other profit-sharing payments that are not included in the job contract.
2. The cost of any house, light, water, medical attendance, travel allowance, payment in lieu thereof, or any other concession.
3. Any cash paid covers extraordinary expenses incurred due to a workman’s employment.
4. Any contribution to a pension, provident fund, social security or social insurance benefits system.
5. Any other amenity or service exempted from wage computation by a general or particular directive of a governing body.

The phrase ‘ allowances ‘ includes holiday pay, overtime pay, bonuses, social security benefits, and other monies paid in addition to wages over some time. The salary structure in India can be broken down into the following categories:

Minimum Wage

The base rate is the amount of remuneration (fixed salary or wage) that determines the job’s rate. It may differ depending on the job’s grade or the necessary competence in the case of shop floor workers.

The following criteria may be considered for determining the basic wage:

(i) Job skill requirements;

(ii) Required experience;

(iii) Work difficulty: both mental and physical;

(iv) Required training;

(v) Responsibilities;

(vi) Hazardous nature of the job

Internal and external relativities will impact base pay. Internal relativities can be assessed through a work evaluation, and external relativities are analysed using market rates. Pay scales can also be agreed upon through collective bargaining with trade unions or individual agreements.

Base pay is calculated on a yearly, weekly, or hourly basis. This is often referred to as a time rate payment scheme. Allowances, which will be discussed later, can be added to the base salary. The organisation may alter the rate unilaterally or by agreement with a trade union to reflect increases in the cost of living or market rates.

10.2.2 Allowances

Allowances are paid on top of base salary for specific circumstances (e.g., living in London) or job characteristics (working unsocial hours). The organisation may decide on them unilaterally, but they are frequently negotiated.

Allowance for Dearness (DA)

A stipend is given to employees to help them cope with the rising cost of vital goods. It acts as a buffer, a kind of insurance against increases in commodity prices. Instead of boosting pay every time prices rise, DA is paid to offset the effects of inflation; when prices fall, DA may permanently be reduced to size.

In India, the index factor, the time factor, and the point factor are all tied to DA.

Other Expenses

The following are the primary types of allowances:

1. Location Allowances: Allowances for London and large cities to compensate for higher living costs.
2. Paid Overtime: Most manual labourers and many staff employees up to management level are eligible for paid overtime. If higher-paid employees work longer hours, they may be given time off in lieu. Organizations that pay overtime typically pay time and a half as an overtime premium Monday through Saturday, with double time paid on Sundays and statutory holidays. Some companies also pay double time starting around noon on Saturday. Overtime premiums are generally higher on big statutory holidays like Christmas Day and Good Friday.
3. Shift payments are provided at different rates depending on the shift arrangement. People working evenings may be paid a premium of one-third of their basic pay, while those working early or late in the day may be paid less – perhaps one-fifth of their basic salary.
4. If the work is unpleasant, working condition allowances may be paid.
5. Subsistence payments may be granted for lodging and meals when working away from home.
6. Those who must be available to come in to work as needed may be given stand-by and call-out allowances.

10.3 Importance

1. Job Satisfaction: If employees are fairly compensated for their efforts, they will be satisfied with their positions and want to work for a company.
2. Motivation: Each of us has various needs. Some want to make money, so we work for a firm that pays us more. Some people place a higher value on achievement than money and choose to work for companies that provide more opportunities for advancement, learning, and development. Workers are more likely to act in the intended manner if their remuneration plan meets their needs.
3. Low Absenteeism: Why would anyone want to miss a day at work and watch a less-than-favourite TV show at home if they enjoy the office environment, are satisfied with their wages, and receive all they require and desire?
4. Peace of Mind: Offering your employees a variety of insurance options alleviates some of their concerns, allowing them to operate with a calm mind.
5. Increases self-confidence: Every human being desires recognition for his or her work. If employees are fairly compensated, they gain confidence in themselves and their talents, which increases their productivity.

10.4 Employee Remuneration Influencing Factors

1. Job Requirements: Simple, routine tasks that can be performed by many persons with minimal training are paid poorly. On the other hand, complex, challenging activities that can only be completed by a few people with high skill levels usually pay well.
2. Ability to pay: Companies with significant profit margins can afford higher wages. This helps to explain why the computer software sector pays higher salaries than other commodity-based companies (steel, cement, aluminium, etc.). Multinational corporations, too, pay relatively high wages due to their profitability.
3. Living expenses: Inflation reduces employees’ purchasing power. Unions and employees wish to link pay to the cost-of-living index to avoid this. When the index rises due to higher prices, wages follow suit.
4. Prevailing wage rates: When determining wages, prevailing wage rates in competing enterprises within an industry are considered. It may not be easy to attract and retain talent if a company does not pay equal rates.
5. Unions: Highly unionised industries have higher pay because well-organized unions may influence management and achieve various benefits and concessions for employees.
6. Productivity: When workers’ wages are tied to their productivity levels, this is the current trend in most private sector organisations. If you perform well at work, you will be paid well.
7. State regulation: Minimum salaries, bonuses, clearness allowances, and other legislative provisions determine the wage structure in a given industry.

10.5: Creating Strategic Compensation Plans

Strategic pay plans are rules and decisions organisations make about compensating their employees to meet both employee and organisational goals and objectives.

Strategic Pay Plan Objectives

The following are some examples of strategic pay plan objectives:

1. Equity:

• Internal equity: This ensures that more challenging jobs are compensated more.
• External equity: External equity ensures that employment is compensated correctly when compared to similar jobs on the market.
• Individual equity assures equal pay for equal effort, i.e., that each individual’s wage is comparable to that of others doing the same or similar employment.

1. Attract talent: Compensation must be competitive to attract talented individuals. Because numerous companies compete for qualified people’s services, the salaries must be competitive enough to entice them to apply.
2. Retain talent: Employees may become dissatisfied and leave if pay levels fall short of employee expectations or are not competitive.
3. Ensure equity: Pay should be commensurate with the value of the job and comparable to similar jobs. Similarly, persons with higher qualifications should be paid more.
4. New and desired behaviour: Loyalty, commitment, experience, risk-taking, initiative, and other desired behaviours should be rewarded through pay. If the organisation fails to reward such behaviour, employees may seek better pastures outside the firm.
5. Keep expenditures under control: The cost of hiring individuals should not be excessive. Effective compensation management ensures that workers are not overpaid or underpaid.
6. Comply with legal requirements: Compensation plans must always adhere to government regulations covering minimum pay, bonuses, allowances, and benefits, among other things.
7. Simplicity of use: The compensation management system should be simple to comprehend and use. It will only increase employees, unions, and managers’ understanding of pay-related issues.

Pay Structures: Strategic Choices

Strategic pay plans cover the following four areas:

1. Choosing a pay scale examines whether the company has a lead, lag, or match policy. Performance, skill development, work-related attitudes, and workforce compensation are all influenced by pay decisions. It also impacts whether or not a person is willing to stay in their current position.
2. Differential Pay Decision: There are two approaches to differential pay decisions. The first is dependent on the seniority of the employee, which has been the basis of traditional compensation. The other is linked to an employee’s merit. Under this strategy, employees are compensated based on their performance, regardless of their terms of service. However, deciding on differential compensation necessitates making a wise choice between two techniques for the organisation to fulfil its goals and objectives efficiently. In practice, organisations blend these two approaches to achieve their goals.
3. Pay Structure Decision: This relates to the disparities in pay between organizational levels. If there are significant differences, personnel may focus on networking and integration to advance to higher levels. This technique disregards good job performance. However, if the compensation gap is insufficient, employees may be less motivated to pursue promotions and more substantial income, hampering their ability to perform effectively.
4. Administrative Decision: This is concerned with deciding on the methods and measures to deliver benefits to the company’s employees. These decisions also influence employee behaviour. If pay decisions are made based on performance, employees will be motivated to do better and improve their skills and knowledge. If judgments are made on a subjective basis, integration and networking will take precedence over job performance.

Stock Options for Employees

Employee stock ownership plans (ESOPs) were first introduced in the United States in the early 1990s. In India, such initiatives have not gained traction. In 1988, however, the government granted software experts stock options, recognising the need to retain expertise within the country.

Employee stock option plans provide eligible employees with company shares at a discount to the market price. Longevity of service, value to the department/division where the individual works and other factors may be considered. The corporation may even allow employees to pay for their stock in instalments or advance money deducted from their monthly wages. The stock option allows the employee to become a part owner of the firm and participate in its growth. It also aids the organisation in retaining skilled individuals and increasing their commitment to the position.

Employees at Wipro have become millionaires thanks to the company’s ESOP.

10.6 Performance-Based Pay

In today’s knowledge-based organisations, employees can earn prizes for cost-cutting proposals, incentives for perfect attendance, or merit pay based on supervisory appraisals. Performance pay aims to create a productive, efficient, and successful organisation by increasing employee motivation and productivity. Employees are paid based on how well they perform on the job. This strategy is thought to recruit and retain better personnel.

In recent years, many businesses have formed employee pay plans with bonuses based on individual, group, and organisational success. It’s easy to see why this decision was made. Organizations want everyone to think about performance in the same manner that they do. You must compete, get ahead, give results, and fight for the winning slot daily. In such a setup, the employer-employee relationship takes on a mercenary tone, with low performers being bulldozed at every turn. Instead of being warm and relationship-oriented, the organisation becomes cold and transactional. It hurts workplace camaraderie and, without a doubt, kills the morale of most employees who fall behind in the race. Of course, a laser-like emphasis on performance aids the organisation in clearing out the deadwood and remaining competitive.

Most companies, on the other hand, continue to pay their employees based on the number of hours worked per week and offer specific benefits for loyally serving the company for a set period.

Designing performance-based pay entails compensating people based on their individual or group performance, achievements obtained, or contributions to the organization’s overall performance. It takes the focus away from compensation models based on the job’s value and the employees’ talents. It cannot be tailored because it depends on various elements, such as the nature of the business, the nature of technology, the attitude of unions, and the organization’s HR strategies. It can lower labour expenses while maintaining employee motivation and the organization’s competitiveness. Before implementing performance-based compensation, assessing the influence on employee motivation and fostering a performance-oriented culture within the company is critical. It entails cultivating a proactive mindset by broadcasting accurate information, consultation, communication, and employee training and development.

10.6.1 Competency-based Compensation

Experts define competencies as those demonstrable qualities of a person’s personality, such as knowledge, abilities, and behaviours, that outstanding performers display more consistently and successfully than mediocre performers.

Competency, more precisely, is an underlying trait of a person or organisation that enables them to perform well in a specific profession, role, or scenario. Competencies can be divided into three categories:

1. Organizational competencies are distinct characteristics (outstanding customer service, excellent product development capabilities, superior innovation processes, manufacturing process flexibility, and so on) that distinguish a company; some examples of organisational competencies include Sony’s miniaturisation, Phillips’ optical media and Honda’s manufacturing process flexibility.
2. Job-related abilities are those required to carry out a certain task effectively. They are job-specific and differ from one position to the next.
3. Personal competencies are behavioural abilities that, in addition to job-related skills and knowledge, include taking risks and initiative, producing outcomes, demonstrating dedication, and adapting to changing circumstances.

Competency-based management A pay plan is a form of compensation that rewards an employee for the breadth, depth, and sorts of skills and knowledge that he or she possesses rather than the job title that he or she occupies. Employees are compensated for what they bring to the workplace (personality qualities, attitudes, intentions, and so on) and what they can do in the future, if not immediately. ‘Competency-based compensation can be described as compensating for developing and applying critical skills, behaviours, and actions that promote high levels of individual, team, and organisational performance,’ according to Brown and Armstrong.

What skills are required for a task to be done well?

• Collection of abilities
• Collections of knowledge
• The ability to sell with insight
• The capacity to be direct while remaining sensitive
• The ability to keep the broader objective/goal active
• The ability to stay calm under pressure
• The ability to be an effective mentor
• Inventive solutions to challenging situations
• Negotiation skills that work
• Shows a selfless team spirit regularly

How Do You Implement a Competency-Based Pay Plan?

Before a competency pay plan can be implemented, the following aspects must be properly integrated within the organisation: An employee appraisal process must already exist; managers must be trained to assess competencies; employees must be aware of the competencies required and how to demonstrate them in their appraisals; all employees must give their total commitment; and the system must be fair so that all employees are included.

Employee Competency Framework Development

A competency framework identifies the behaviours that an employee must exhibit to execute their job effectively. Using the framework, employees should be able to understand what is expected of them in terms of their behaviour and specific job positions. The following is a list of resources.

(i) Ensure that the framework is relevant to both individual and organisational performance,

(ii) Include a planned analysis of relevant jobs to combine the imminent changes that will affect the ways employees work,

(iii) Ensure that the necessary data gathered is as objective as possible and is put into practice with discipline and

(iv) Maintain the relationship between employees and management. This should also be tried and tested before it is implemented.

Assessing Competencies and Creating a Compensation Plan

Competencies are evaluated regularly to permit pay advancement within a grade. The ideal way is to explain each job in terms of the required skills. These can be selected from a list of ‘core’ competencies. More sophisticated senior responsibilities require more complex individual competencies. There are two well-known approaches to competency-based pay:

Broad banding and job families are two examples of broad banding.

Broad banding refers to condensing wage grades and ranges into a few broad levels or bands, each allowing for a diverse range of employment and pay levels. It’s a method of grouping several previously distinct job titles, ranks, and pay grades into much larger categories. This system stimulates lateral job movement by de-emphasizing development through a plethora of vertical work grades and rewarding both performance excellence and in-band job transitions.

Distinct compensation structures for different job families can be developed under occupational or functional groupings (groups of other jobs that require similar skills). Because these groups share everyday job activities and basic skills, defining distinct levels of responsibility, expertise, and competency is feasible.

Benefits and Drawbacks

• Competency-based compensation motivates people to give their all to reach their full potential and offer superior results, helping them stay ahead of the competition and receive incentives.
• They must stay relevant and focused on what they may achieve by the tangible, measurable benefits of exceptional performance.
• It’s a people-focused strategy that distinguishes exceptional personnel from the average, respected individuals from the mediocre.
• Employees become more valuable to an organization as they continue to equip themselves with more organizationally relevant abilities through the organization’s ongoing training and development programmes.
• Of course, many criticise the system. Identifying capabilities and their degrees of proficiency and periodically assessing employee competencies would necessitate a significant amount of managerial attention, time, and commitment.
• An organisation may be obliged to pay people for information and abilities they possess but do not regularly put into practice!
• The link between competency learning and wage increases must be continually emphasised.
• It all depends on how employees assess the effort-reward relationship in the end.
• Employees may be less excited about learning new skills if competency development is unrelated to salary raises.
• As a result, it’s not unexpected that competency-based compensation has recently become the subject of fierce controversy in both corporate and academic circles. While its supporters claim that it produces exact quantitative benefits, critics claim that it often results in unfair, illegitimate, and discriminatory outcomes. Evidence shows that the failure rate is relatively high among organisations implementing competency-based pay.

10.6.2 Best Practices for a Performance-Based Pay System

• When implementing merit-pay schemes, employers should keep the following rules in mind to be fair to employees.
• Establish rigorous performance standards so that only the most exceptional employees are recognised as winners.
• Create accurate performance evaluation methods. The emphasis must also be on job-specific, results-oriented criteria.
• Train supervisors on the mechanics of conducting appraisals and providing appropriate feedback to staff.
• Rewards should be tightly linked to performance.
• Make use of a variety of increases. Make pay raises significant as well.

10.6.3 Incentives

Incentives are not the same as fringe perks. Incentives are paid in exchange for an employee’s greater performance. It’s similar to a bonus for good work. They are compensated to attract, motivate, and retain workers. Incentive compensation programmes have the potential to generate powerful emotions. Because time-based workers produce only around 50 to 60% of the output of incentive-pay workers, incentive-pay plans are founded on the notion that a fair day’s work is not generally achieved without some proportion of pay being at risk. Financial and non-financial incentives are the two types of incentives. Non-financial incentives address an employee’s social, psychological, and esteem needs, whereas financial incentives offer monetary advantages to employees for their outstanding performance. They can be further divided into the following categories:

Incentive Plans: What Are They and How Do They Work?

1. Incentive Pay Plans at the Individual Level:

This is the most common type of incentive pay scheme. Each person’s output or performance is assessed in this type of strategy, and the awards they receive depend on that measurement. This type of incentive compensation plan is most likely to instil in the employee a clear performance-reward relationship. The goal of the strategy is for the individual to improve their work rate or the amount of effort they are willing to put in to obtain more significant rewards. A piecework system, in which the employee is paid a defined sum for each production unit, is a classic example of this scheme. The company anticipates receiving more production than if the employee was paid on time.

Furthermore, the company can readily keep track of the labour costs connected with each output unit. One of these plans’ assumptions is that the employee is an independent operator capable of carrying out all of the actions required to meet the performance metric on his or her own. Performance is a function of this in this way. If such a plan is to be helpful, the performance criteria must be clearly stated and measured. Furthermore, the job must be somewhat stable: the job’s output must be consistent, and the job’s inputs must arrive so that the employee may work continually.

2. Group Level Incentive Pay Plans:

In cases where it is impossible to link output to an individual employee’s efforts, the output may be connected to the workgroup’s efforts. If cooperation is also necessary to achieve the intended result, a group incentive plan may be the best option. As a result, work interdependence is a crucial factor in choosing a collective strategy over an individual one. A group incentive plan can reward behaviours substantially different from those rewarded by an individual plan, such as cooperation, teamwork, and activity coordination. A group plan is the best option when it is highly valued. Group incentive pay plans are likely to grow more common as companies get more complicated and the production process becomes more continuous. Group plans can be helpful when performance standards and measures cannot be set objectively. Random variation or a lack of consistency doesn’t harm anyone as much in a group context because variations tend to average out. Almost every individual plan can be altered for use in a group. As a result, the focus in group plans continues to be on a higher degree of effort. The collective plan’s main problem distorts the relationship between individual effort and performance. When group members’ efforts are likely to vary widely, a collective incentive may lead to more intragroup conflict than cooperation. Keeping track of performance standards and measures in group programmes is also more challenging. Finally, group norms significantly influence group plans, both positively and negatively. They have more power and control over the individual. This is a bonus when group norms align with management’s objectives; however, it can jeopardise the incentive plan’s effectiveness when they don’t.

3. Incentive Pay Plans at the Plant and the Organizational Level:

Under “strategic planning,” the organization’s plans are increasing. Organizational plans differ from individual plans in that they reward different things. As previously stated, most individual and group programmes aim to enhance effort. On the other hand, most organisation-wide plans promote increased organization-wide results that directly impact the organization’s cost and profit picture. Typically, these programmes reward plant or organisation productivity advances as assessed by cost reductions about some benchmarked average cost. Alternatively, they could reward higher output with the same or fewer inputs. A significant aspect of company-wide incentive compensation systems is a shift in management and employee relationships. Most organization-wide plans demand a considerable degree of cooperation rather than the conventional adversarial relationship between the two. This is because both parties must concentrate on the targeted cost savings while listening to each other. There are several sorts of organisational-level plans:

(a) Profit Split: Profit sharing is a popular company-wide scheme frequently called a gainsharing plan. This type of plan can be far more straightforward than a cost-cutting strategy. It also does not necessitate the transformation of employee-management relationships that cost-cutting initiatives necessitate. Management thinks that profit sharing will improve employee sentiments toward the organisation without changing managerial views toward the employee. Profit sharing aims to foster a sense of collaboration with the company and the employees. However, most plans go above and beyond, utilising profit sharing to retain valuable employees and encourage employee thrift. Profit-sharing schemes are usually classified according to when profit shares are delivered. Cash plans (also known as current-distribution plans) distribute profit shares regularly. Deferred plans place earnings in the hands of a trustee, and pay-out is postponed until a specific event happens. Most of the time, this type of plan is linked to a retirement system. Combination plans split current profits in half and defer the remainder. Organizational contributions, employee allocation, eligibility restrictions, pay-out provisions, and other administrative aspects vary substantially among profit-sharing schemes. In two-thirds of the plans, a formula determines the amount of the organization’s contribution; in the remaining plans, the board of directors decides the amount. After stockholder reservations and reserves, most formulas stipulate a direct percentage of pre-tax earnings. The quantities allotted to employees or their accounts are usually determined by their pay, but they can also be influenced by their length of service, contributions, performance, or responsibilities. Most full-time employees are eligible right away or after a short waiting period, however, a significant minority of plans exclude union personnel or limit participation to specific employee categories. Plan categorization (cash, deferred, or combination) traditionally determines payment provisions; however, deferred and combination plans increasingly include vesting provisions and payouts under various circumstances.

(b) Profit Sharing: This strategy is more comprehensive than profit sharing. It is a more appropriate incentive compensation scheme for the entire organisation. The goal of gainsharing aims to link employees to the performance metrics used to evaluate senior management and determine what constitutes a successful firm in society. Although unambiguous performance-reward links may be drawn in certain situations, making a performance-effort connection is more complicated. Gainsharing can utilise a variety of performance indicators, but they all have one thing in common: a baseline benchmark must be created to evaluate where the business is right now. Employees are then informed of the value of future performance measurement improvements. One set of performance criteria promotes cost reductions or improvements in quality. The Scanlon Plan is the most prevalent gainsharing plan. Employees are paid a bonus if costs stay below pre-determined levels in this arrangement. The benchmarks were established through examinations of historical cost averages. A succession of organisational committees produces cost-cutting ideas, and a plant-wide screening committee reviews and executes adjustments. Even though Scanlon devised this idea in 1937, these committees took much longer to pay profit shares at regular intervals when they were earned. Deferred plans place earnings in the hands of a trustee, and pay-out is postponed until a specific event happens. Usually, this type of plan is linked to a retirement plan. Combination plans provide a portion of the profit share as it is received while deferring the rest.

10.7 Employee Benefits and Services

The term ‘benefits’ refers to the additional perks granted to employees in addition to their regular wage or salary. Many years ago, benefits and services were referred to as “fringe” benefits because they were minor or non-essential aspects of compensation. The situation has changed recently, though, as employers have increasingly included these benefits in their employees’ full compensation package.

10.7.1 Employee Services

These are services that organisations provide in addition to standard fringe benefits, either free of charge to the employee or at a heavily subsidised rate. Such services include eating establishments, transit facilities, childcare facilities, educational services, and flexible working hours.

10.7.2 Features

The following are the key characteristics of benefits and services as they currently exist:

• They’re additional forms of compensation.
• They are distributed to all employees based on their status within the company.
• They are considered indirect compensation since they are typically provided as a condition of employment and are not directly linked to performance. They assist employees in improving their living conditions, whether statutory or voluntary.

10.7.3 Employee Benefits and Services are Required

Year after year, most Indian companies have been providing fringe benefits to their employees for the following reasons:

1. Employee demands: Because of the reduced tax burden on employees and in light of the soaring price index and cost of living, employees seek more and different forms of fringe perks rather than wage raises.
2. Trade union demands: Trade unions compete with one another to provide their members with more innovative fringe benefits. If one union is successful in obtaining a perk, the other union convinces management to grant a new benefit. As a result of the competition among trade unions within an organisation, more perks are available.
3. Employer preference: Employers prefer fringe benefits to wage raises because fringe benefits encourage employees to give their all to the company. It boosts employee morale and serves as an excellent marketing tool.
4. As a form of social security: Social security is a form of protection society provides to its members via suitable organisations against specific hazards. These dangers include unforeseen events, such as accidents and occupational diseases. To give security to his employees against various scenarios, the employer must provide numerous benefits, such as safety measures, compensation for worker involvement in accidents, medical facilities, etc.
5. To strengthen interpersonal relationships: Employees’ human interactions are maintained when they are economically, socially, and mentally pleased. Fringe benefits meet the economic, social, and psychological demands of employees. Consumer stores, credit facilities, canteens, recreational facilities, and other social demands are met by consumer stores, while retirement benefits address some of the psychological issues associated with post-retirement life.

10.7.4 Fringe Benefits

Fringe benefits refer to various advantages granted to employees in addition to the compensation paid in the form of wages or salaries. Benefits are any salary cost that is not directly related to an employee’s productive labour, performance, service, or sacrifice. It’s also described as any benefits that a company provides to or for the benefit of an employee that isn’t in the form of wages, salaries, or time-related payments.

There are numerous terms for fringe benefits. Examples include social security measures, social levies, welfare measures, supplements, employee benefits, and so on.

“Wages are typically increased by special monetary benefits, by the provision of medical and other services, or by payments in kind, that form part of the wages for expenditure on goods and services,” according to the International Labour Organization. In addition, workers frequently receive advantages such as paid vacations, low-cost meals, and low-cost housing. Even though they may make up a significant portion of a worker’s total pay, such additions to compensation are sometimes referred to as fringe perks.

As a result, we can conclude that fringe benefits comprise monetary and non-monetary perks provided to employees during and after their employment.

Coverage

Statutory bonuses, social security measures, retirement benefits such as provident fund, gratuity, pension, workmen’s compensation, housing, medical, canteen, co-operative credit, consumer stores, educational facilities, recreational facilities, financial advice, and so on are all considered fringe benefits. Thus, fringe benefits refer to various employee services and amenities that an employer provides to his employees and their family members in some situations. Employee and family welfare is a successful form of advertising and a way to buy employees’ gratitude and loyalty. However, while some businesses go above and beyond their legal obligations to make the most of their employees, others limit themselves to the legally required advantages.

Extending Fringe Benefits Is Necessary

During World War II, various non-monetary incentives were provided to employees to mitigate the effects of inflation. As a result of trade union demands and pressures, these benefits, which include housing, health, education, recreation, credit, canteens, and so on, have been enhanced from time to time. These perks have been regarded as assisting employees in meeting some of their life’s contingencies and meeting companies’ social obligations.

The following are the main characteristics of fringe benefits:

1. They are additional forms of remuneration.
2. They are paid to all employees based on their organisational membership.
3. They are considered indirect compensation since they are typically provided as a condition of employment and are not paid directly.
4. They assist in improving employee living circumstances.
5. They are either mandatory or optional. Transportation is an optional benefit, whereas the provident fund is a statutory benefit.

The requirement for a fringe benefit

1. To meet employee demands: Because of the lower tax burden on employees, workers seek more and a wider range of fringe benefits than a wage raise.
2. To Meet Trade Union Demands: If one union successfully obtains one benefit, the other union convinces management to grant the new fringe benefit. As a result of the competition among trade unions, more perks are available.
3. To Improve Human Relationships: Fringe benefits meet employees’ economic, social, and psychological demands. The majority of fringe perks fulfil and alleviate workers’ financial concerns. Some social security benefits provide workers with post-retirement relief, meeting their psychological demands. Other social benefits include credit facilities, canteens, recreational facilities, and customer stores.
4. To Improve Organizational Commitment: It boosts staff morale and encourages them to give their all to the company. In the long run, it enhances organizational dedication and loyalty.
5. To Provide Social Security: To secure his employees against various contingencies, the employer must provide various advantages such as safety measures, compensation in the event of worker involvement in accidents, medical facilities, and so on.

Fringe Benefits’ Objectives

1. Establishing and improving good industrial relations.
2. To entice people to work by identifying and meeting their unmet needs.
3. To offer employees protection against social risks such as old age and maternity benefits.
4. Protecting the employee’s health and ensuring their safety in an accident.
5. To improve the well-being of employees.
6. To instil a sense of belonging in employees.
7. To comply with various legislation about fringe benefits.

Employee Benefits from Fringe Benefits

1. Rising prices and the expense of living have resulted in an ever-increasing need for additional employee benefits.
2. When big wage and salary increases are not possible, employers have discovered that fringe benefits create exciting areas of negotiation.
3. As companies build or expand their employee fringe benefit programmes, competitors are under increasing pressure to match these perks to attract and retain personnel.
4. The fact that fringe benefits are non-taxable compensation has been a primary driver of their growth.
5. Rapid industrialization, expanding urbanisation, and the rise of a capitalist economy have made it difficult for most workers to defend themselves from the adverse effects of these changes. Because workers were in charge of production, it was thought bosses should take responsibility for addressing part of their employees’ demands. As a response, several firms have implemented perks and service programmes.
6. The expanding number of labour regulations, notably social security legislation, required businesses to split the expense of old age, survivor, and disability payments equally with their employees.
7. The rise and power of labour unions have significantly impacted the expansion of corporate perks and services.
8. A variety of compensation plans have been developed, evolved, and implemented due to labour scarcity and competition for qualified workers.
9. Management has become increasingly aware of its responsibility to its employees. It has concluded that the benefits of increased productivity due to increased industrialization should go, at least in part, to the employees who are responsible for it so that they are protected from insecurity caused by unemployment, sickness, injury, and old age. Managers employ a variety of techniques to provide this security, including company benefits and service programmes.

Benefits of Different Kinds

The fringe benefits provided by various Indian organisations can be divided into several categories. The following are some of them:

1. Payment for Unworked Time: Hours of work, paid holidays, shift premium, holiday pay, and paid vacation are all included in this category.
2. Employee Security: Physical and work security should be offered to employees to ensure their and their families’ safety. When the employee’s services are confirmed, he is assured of a job. The Industrial Disputes Act of 1947 provides compensation in the event of layoff or reduction, ensuring the employee’s income stability.
3. Employee Safety and Health: Employee safety and health should be prioritised to safeguard employees from accidents and hazardous working circumstances and maximise their productivity. The Factories Act of 1948 in India established certain rules for working conditions to ensure a safe working environment.
4. Workmen’s Compensation: In addition to safety and health precautions, the Workmen’s Compensation Act of 1923 provides for compensation. The Act is designed to cover the possibility of a worker becoming disabled or dying as a result of a work-related injury or occupational disease that is the sole responsibility of the employer.
5. Health Benefits: Organizations now provide a variety of medical services, including hospital, clinical, and dispensary facilities, to employees and their family members. Sickness benefits, maternity benefits, disability benefits, dependent benefits, and medical benefits are just a few examples.
6. Voluntary Arrangements: Most large corporations, on the other hand, establish hospitals, clinics, dispensaries, and homoeopathic dispensaries to provide health care to their employees at no expense in addition to their legal obligations.
7. Welfare and Recreational Facilities: (a) canteens, (b) consumer societies, (c) credit societies, (d) housing, (e) legal aid, (f) employee counselling, (g) welfare organisations, (h) vacation homes, I educational facilities, (j) transportation, (k) parties and picnics, and (l) miscellaneous) are examples of welfare and recreational benefits.
8. Retirement and Old-Age Benefits:
   1948. Provident Fund: The Act’s Provident Fund Scheme provides monetary support to employees and their dependents after they retire. The Act covers employees in all factories regulated by the Factories Act of 1948. Both the employee and the employer contribute to funding the fund. Employees who have been members for 15 years are eligible for a 100% refund of their contributions, plus interest. In most cases, organisations pay the Provident Fund amount plus interest to the employee upon retirement or to the person’s dependents in the event of death.
   1949. Pension: The Employees Family Pension Scheme, established in 1971, offers a family pension to the family of a dead employee at set rates.

This scheme additionally provides for an employee to receive a lump sum of $4,000 as a retirement benefit and a lump sum of $2,000 as life insurance benefits in the event of an employee’s death.

1. Deposit-Linked Insurance: If a member of the Employees Provident Fund dies while on the job, his family will receive an additional amount equivalent to the average balance in his account for the previous three years. (The amount should never be less than $1,000.)
2. Gratuity: It is paid to all employees who have worked for the current employer for at least five years. It is paid to an employee upon his or her superannuation, retirement, or death or disablement due to an accident or disease. A gratuity of 15 days’ wage shall be paid to an employee for each completed year of service, or portion thereof, for more than six months. The wage refers to the average employee’s most recent basic pay. The maximum gratuity to be paid to an employee is 20 months’ pay.
3. Medical Benefits: Some large corporations benefit retired personnel and their dependents. This benefit gives employees a sense of long-term commitment to the company, even while they are not working.

Fringe benefits are one of the ways to ensure, maintain, and improve employees’ material well-being.