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COMPENSATION PLANNING
Compensation is a tool used by management for a variety of purpose to further the
existence of the company. It is a remuneration that an employee receives in return
for his or her contribution in the organisation. So, the employee compensation
programs are designed to attract capable employees to the organisation, to motivate
them towards superior performance and to retain their services over an extended
period of time.

MEANING OF COMPENSATION

In layman„s language the word compensation means something, such as money,

given or received as payment for service. The word compensation may be defined
as money received in the performance of work, plus the many kinds of benefits and
services that organization provides their employee. It refers to wide range of
financial and non-financial rewards to employee for their service rendered to the
organization. It is paid in the form of wages, salaries , special allowance and
employee benefits such as paid vacation, insurance, maternity leaves, free travel
facility , retirement benefits etc.
Compensation may achieve several purposes assisting in recruitment, job
performance, and job satisfaction.

OBJECTIVES OF COMPENSATION PLANNING

The basic purpose or objective of establishing sound compensation is to establish

and maintain an equitable rewards system. The other aim is the establishment and
maintenance of an equitable compensation structure i.e an optimal balancing of
conflicting personnel interest so that the satisfaction of employees andemployers
is maximised and conflicts minimized, the compensation management is
concerned with the financial aspect of employees need, motivation and rewards.

A sound compensation structure tries to achieve these objectives:

 To attract manpower in a competitive market.
 To control wages and salaries and labour costs by determining rate
change and frequency of increment.
 To maintain satisfaction of employees by exhibiting that remuneration
is fair adequate and equitable. To induce and improved performance,
money is an effective motivator.

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a) To Employees:
 Employees are paid according to requirement of their jobs i.e highly
skilled jobs are paid more compensation than low skilled jobs. This
eliminates inequalities.
 The chances of favouritism are minimised.
 Jobs sequence and lines of promotion are established wherever they are
applicable.
 Employee„s moral and motivation are increased because of the sound
compensation structure.

b) To Employers:
 They can systematically plan for and control the turnover in the
organization.
 A sound compensation structure reduces the likelihood of friction and
grievance over remunerations.
 It enhances an employee morale and motivation because adequate and
fairly administrative incentives are basis to his wants and need.
 It attracts qualified employees by ensuring and adequate payment for all
the jobs.
 In dealing with a trade union, they can explain the basis of their wages
programme because it is based upon a systematic analysis of jobs and
wages facts.
FACTORS AFFECTING COMPENSATION PLANNING
Factors determining compensation of an employee considerable amount of guess
word and negotiation are involved. But following are the certain factors which
have been extracted as having an important bearing upon the final decision:
1. Supply and Demand of Labour: Whatever the organization produces as
commodity they desire services and it must pay a price that of workers acting in
concert. If more the labour is required, such as at war time prosperity, there will be
tendency to increase the compensation; whereas the situation when anything works
to decrease the supply of labour, such as restriction by a particular labour union,
there will be a tendency to increase the compensation. The reverse of each
situation is likely to result in a decrease in employee compensation, provided,
labour union, ability to pay, productivity, government do not intervene.

2. Ability to Pay: Labour Unions has often demanded an increase in compensation

on the basis that the firm is prosperous and able to pay.

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3. Management’s Philosophy: Management„s desire to maintain or improve moral,

attract high calibre employees, reduce turnover, and improve employees standard
of living also affect wages, as does the relative importance of a given position to a
firm.

4. Legislation: Legislation related to plays a vital role in determining internal

organization practices. Various acts are prescribed by government of country for
wage hours laws. Wage-hour laws set limits on minimum wages to be paid and
maximum hours to be worked. In India minimum wages act 1948 reflecting the
wage policy for an organization and fixation of minimum rates of wages to
workers in sweated industries. In 1976 equal remuneration act was enacted which
prohibits discrimination in matters relating to remuneration on the basis of religion,
region or gender.

5. Cost of Living: It is always expected that there has to be adjustment in pay rates in
accordance with prevailing cost of living. The change in the cost of living affects
purchasing power of the person. Trade union also considers this as a base for
collective bargaining on wage issues.
DEVELOPING PAY STRUCTURE
The most important objective of any pay system is fairness or equity. The term
„equity‟ has three dimensions:
1. Internal equity: This ensures that more difficult jobs are paid more.
2. External equity: This ensures that jobs are fairly compensated in comparison to
similar jobs in the labour market.
3. Individual equity: It ensures equal pay for equal work, i.e., each individual‟s
pay is fair in comparison to others doing the same/similar jobs.
1. Equity and Pay Rates
The need for equity is the most important factor in determining pay rates. This is
achieved through the following steps:
 Find the worth of each job through job evaluation.
 Conduct a salary survey to find what other employers are paying for
comparable jobs.
 Group similar jobs into Pay grades.
 Price each pay grade by using wage curves.
 Fine tune pay rates.

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2. Job Evaluation
Job analysis offers valuable information for developing a compensation system in
terms of what duties and responsibilities need to be undertaken. The worth of a job
to the organisation is as ascertained through job evaluation. Since the whole
process is largely subjective, a committee is appointed to collect information and
come up with a hierarchy of jobs according to their value.
The evaluation is done through the use of market pricing or through the use of
ranking, point or factor comparison methods.
3. Wage and Salary Surveys
While job evaluation ensures internal equity, wage and salary surveys ensure
external equity.
A wage and salary survey provides information as to what other organisations that
compete for employees are paying. The survey could cover all the jobs within an
organisation (obviously costly and hence avoided) or limited to benchmark jobs,
jobs that are used to anchor the company‟s pay scale and around which other jobs
are slotted based on their relative worth to the firm. The benchmark jobs have the
following basic characteristics:
 Many workers in other companies have these jobs.
 They will not be changing in the immediate future in terms of tasks,
responsibilities, etc.
 They represent the full range in terms of salary such that some are among
the lowest paid in the group of jobs, others are in the middle range and some
are at the high end of the pay scale.
Formal and informal surveys (through telephone, for example) could be undertaken
to collect data on benefits like insurance, medical leave, vacation pay, etc., and so
offer a basis on which to take decisions regarding employee benefits.
Published sources also provide valuable information regarding industry-wise
trends in salary structures in and around the country.
The published sources in India include:
 Reports published by the Ministry of Labour.
 Pay commission reports.
 Reports of Wage Bonds appointed by Government.
 Reports of employees and employers‟ organisations.

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 Trade journals of specific industry groups, etc.

One of the major problems with these sources is the comparability of jobs in the
survey to jobs in the organisation. To overcome the limitations of published
surveys, conduct your own surveys of important jobs.
The following survey methods are generally used to collect relevant wage-related
information:
 Key job matching: Under this method, similar key jobs are identified
between the organisations and the relevant wage particulars about those
comparable jobs are collected.
 Key class matching: Similar classes of jobs are identified and the necessary
data about those classes are collected.
 Occupational method: Certain basic occupational groups like clerks,
officers managers are identified and then the necessary data is collected.
 Job evaluation method: All the parties participating in the survey method,
use the same method and same mechanism for evaluating similar jobs.
 Broad classification method: Under this method, broad groups of relatively
homogeneous jobs, i.e., by industry, by profession or by geographical area
are grouped and the relevant information about these jobs is collected.
4. Group Similar Jobs into Pay Grades
In this step, similar jobs (in terms of their ranking or number points as ascertained
by the job evaluation committee) are grouped into grades for pay purposes. The
organisation can now focus on, say 10 to 12 pay grades, instead of hundreds of pay
rates. A pay grade consists of jobs of approximately equal difficulty or importance
as determined by job evaluation. If the point method is used, the pay grade consists
of jobs falling within a range of points. Ten to sixteen grades per job cluster
(factory jobs, clerical jobs) is common.
5. Price each Pay Grade – Wage Curves
In the next step, pay rates are assigned to pay grades through a wage curve.
The wage curve shows graphically the pay rates currently paid for jobs in each pay
grade relative to the points or rankings given to each job or grade.
A completed wage curve tells management the average relationship between the
pay grade points and wage rates. It will show which pay is out of the trend line. If a
job‟s pay rate is very high – where the current rates paid by the company fall well
above or below the wage line – those wage rates are identified as „red circle‟ rates.

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This only means that pay is frozen or below average increases are granted until the
structure is adjusted upward to place the circled rate within a normal range.
6. Fine Tune Pay Rates and Determine Wage Structure
Here the employees fix a pay range for each grade (Officer Grade I, II and III, for
example, in banking industry). The wage structure of a company is nothing but a
pay scale showing ranges of pay within each grade.
PRINCIPLES OF WAGES AND SALARY ADMINISTRATION
Since the issue of wage and salary determination has always enjoying the major
consideration for any organization, it should be develop and maintain based on
sound principles , some of them are narrated below, attempt should be made to
incorporate them as far as possible while designing the compensation system.
1) There should be a definite plan and system to ensure that differences in pay for
jobs are based upon variations in job requirements, means maintaining equity in
the distribution of wages and salaries in the organization.
2) Maintaining competitiveness in the wage market means the general level of
wage and salary should be reasonably in line with that prevailing in the market.
3) Matching employees’ expectations and it should avoid unjustified
discrimination by providing equal pay for equal work.
4) Reinforcing positive employee behavior and contribution to the organization,
differences in the compensation package should be based on contribution,
productivity, job performance, achievement etc.
5) Devising a system that is the most efficient for the organization, as far as
possible it must eliminate any discrepancies or exploitation of the employees.
6) The compensation system should formulate and define rules and regulations
for determining, changing, adjusting wages in the organization.
7) The compensation package must ensure fairness, should maintain
harmonious relationship between the employee and employer.
8) Compensation system should be flexible enough so that future changes can be
incorporated.
9) The wage and salary administration should take care of and comply all the
rules and regulations laid down by the legislator for protecting the employees‟
interest.
10) Optimization of management and employee interests.

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METHODS OF WAGE PAYMENTS

Basically there are three methods for wage payments, viz. (1) Time rate wage
system; (2) Piece rate wage system and (3) Balance and Debt System. The wage
paid to labor has to perform important functions in the economic system. It should
be such as to make the worker capable and willing to be efficient and involved in
the job. There should be link, wherever feasible between emoluments and
productivity; and fair parity between wage differentials and skill differential. The
plan should act as an incentive to improve the efficiency, and it should attract the
worker wherever demanded or needed. Whatever may be the method of wage
payment but the wage plan should contain following ingredients:
 It should be simple and understandable It should be capable of easy
computation
 It should be capable of motivating the employees
 It should be attractive enough for new talent in the organization. It
should be fair, just and stable to all the employees.
The fundamental plans of wage payment are:
I. Time Rate Wage System: It is the oldest and the simplest form of wage fixing.
Under this system, workers are paid according to the work done during a certain
period of time at a rate of per hour, per day, per week, per fortnight, or per month
or any other fixed period of time. According to the section4 of the Payments of
Wages Act, 1936, not more than one month must elapse between two wage period.
Time wage system adopts time as the basis of worker remuneration without taking
in to account the units produced. The worker is guaranteed a specified sum of
money for a fixed period of his time taking no account of the quality or quantity of
the work done.
Merits:
 It is simple and understandable and easy for calculation of wages, since wages
under this system is equal towage per hour* numbers of hours worked by an
employee.
 There is no time limit for completion of job, workman are not in hurry to finish
it and this may mean that they may pay p enough attention to the quality of work,
effective handling of machinery and utilization of resources in an optimum
manner.
 All workers are given same treatment in terms of equal wage payment, so
grievances, ill will; jealousy can be avoided among them.

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 Time rate system provides regular and stable income to workers, so they can
adjust and manage their budget accordingly.
 It requires less administrative attention as this system provide good faith and
mutual understanding and trust between employer and employee.

Demerits:
 It does not take in to account the ability and capacity of the workers so the
skilful and more
 Capable workers who have higher production efficiency will demoralize.
 Time rate system is unrelated to the productivity and does not provide
extra motivation for extra efforts by the workers.
 The labor charges for a particular job do not remain constant. This put the
management in a difficult position in the matter of quoting rates for a particular
piece of work.
 There is a possibility of systematic evasion of work by the workers, since there
is no specific target or demand for specific quantity of work by the
management.
 Time rate system does not ask for maintaining individual workers record, it
becomes difficult for the employer to determine his relative efficiency for the
purpose of performance evaluation for future promotion or rewards. Thus it
does injustice to the outstanding employees.
Suitability:
Time rate system is suitable when the output contributed by the worker is difficult
to measure and cannot be recorded in an individual basis. It is also suitable when
by cultivating mutual trust and confidence and by giving fair and equal treatment to
all the employees, management can get the work done in an appropriate manner.
II. Piece Rate Wage System:
Under this system, workers are paid according to the amount of work done or
numbers of units produced or completed, the rate of each unit being settled in
advance, irrespective of the time taken to do the work. This does not mean that the
workers can take any time to complete a job because of his performance far
exceeds the time which his employer expects he would take, the overhead charges

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for each unit of article will increase. There is an indirect implication that a worker
should not take more than average time.
Merits:
 The main advantage of this system is recognition of merit, as efficient is
rewarded, It is therefore more equitable then time rate system.
 It pays workers as per their efficiencies, ability, capacity or performance, so
it gives direct stimulus and motivation to the employees for extra efforts,
which may result into more productivity.
 It requires less managerial supervision as total remuneration depends upon
units produced, and not on time spent in an organization.
 Being interested in continuity of his work, a workman is likely to take
greater care to prevent breakdown in the machinery or in the work shop. It is
a gain to the management since it reduces maintenance expenditure in an
organization.
 As the direct labor cost per unit of production remains fixed and constant,
calculation of cost while filling tenders and estimates becomes easier.
 It results in to not only increase in the output and wages ,but the methods of
production too are also improved, as workers demand material and tools free
from defects and machinery in perfect operating conditions.
Demerits:
 If rates of wages are not scientifically fixed and acceptable to the workers,
would result into workers exploitation and may prove counterproductive.
 As workers are interested in completion of the job with a greatest speed,
may damage the machinery, quality of output or may increase rate of
hazards in an organization.
 Trade unions generally do not like this system of wage payment; they may
not have full support and acceptance. It may be the major issue for industrial
dispute.
Suitability:
It can be introduced generally in jobs of a repetitive nature, when task can be
easily measured, inspected and counted. It is practically suitable for standardized

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processes, and it appeals to skilled and efficient workers who can increase their
earnings by working to their best capacity.
III. Balance and Debt System:
This system combines time rate and piece rate. Under it a minimum weekly wage
is guaranteed for a full weeks‟ work, with an alternative piece-rate determined by
the rate fixed on the assumption that the worker would put enough effort to earn
his minimum wage. If the wages calculated on piece bases are in excess of the
time rate, the worker earns the excess. If the piece rate wages are less than the
time-rate earnings, he would still get weekly wage, but on the condition that he
shall have to make good the excess paid to him out of the subsequent wage he
would earn. Suppose a worker is expected to complete at least 10 pieces during the
week in order to earn the minimum wage of rs.60, the piece rate has been fixed at
a rate of Rs.6 per unit. If the worker produces 12 units within the week, his earning
will be Rs.72. If on the other hand he produces only 9 units , he will still be paid
Rs. 60 his minimum weekly wage but as on the basis of piece rate his earning
should amount to only Rs. 54, the sum of Rs. 6 paid in excess will be debited to
him to be deducted out of his subsequent earnings.
Thus under this system workers‟ wages are determined, by both the number of
hours he works and the pieces he produces. So it a hybrid system producing the
same benefits and limitations of both the time rate and piece rate system.
Various Modes of Compensation
Various modes of compensation are as follows:
a) Wages and Salary- Wages represent hourly rates of pay and salary refers to
monthly rate of pay irrespective of the number of hours worked. They are subject
to annual increments. They differ from employee to employee and depend upon
the nature of jobs, seniority and merit.
b) Incentives- These are also known as payment by results. These are paid in
addition to wages and salaries. Incentive depends upon productivity, sales, profit
or cost reduction efforts. Incentive scheme are of two types:
 Individual incentive schemes.
 Group incentive schemes.
c) Fringe Benefits- These are given to employees in the form of benefits such as
provident fund, gratuity, medical care, hospitalization, accident relief, health
insurance, canteen, uniform etc.

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d) Non- Monetary Benefits- They include challenging job responsibilities,

recognition of merit, growth prospects, competent supervision, comfortable
working condition, job sharing and flexi time.
 INCENTIVES
Incentives are monetary benefits paid to workmen in lieu of their outstanding
performance. Incentives vary from individual to individual and from period to
period for the same individual. They are universal and are paid in every sector. It
works as motivational force to work for their performance as incentive forms the
part total remuneration. Incentives when added to salary increase the earning thus
increase the standard of living. The advantage of incentive payment are reduced
supervision, better utilisation of equipment, reduced scrap, reduced lost time,
reduced absenteeism and turnover & increased output.
According to Burack & Smith, “An incentive scheme is a plan or programmes to
motivate individual or group on performance. An incentive programme is most
frequently built on monitory rewards (incentive pay or monetary bonus), but may
also include a variety of non monetary rewards or prizes.”
Kinds of Incentives
Incentives can be classified under the following categories:
1. Individual and Organizational Incentives
2. Financial and Non-Financial Incentives
3. Positive and Negative Incentives
1) Individual and Organizational Incentives- According to L.G. Magginson,
“Individual incentives are the extra compensation paid to an individual for all
production over a specified magnitude which stems from his exercise of more than
normal skill, effort or concentration when accomplished in a predetermined way
involving standard tools, facilities and materials.” Individual performance is
measured to calculate incentive where as organizational or group incentive involve
cooperation among employees, management and union and purport to accomplish
broader objectives such as an organization-wide reduction in labour, material and
supply costs, strengthening of employee loyalty to company, harmonious
management and decreased turnover and absenteeism.
I) Individual Incentive System is of two types:
a) Time based System- It includes Halsey Plan, Rowan Plan, Emerson Plan and
Bedeaux Plan

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b) Production based System- it includes Taylor‟s Differential Piece Rate System,

Gantt‟s Task and Bonus Plan
II) Group/Organization Incentive System is of following types
a) Scalon Plan
b) Priestman‟s Plan
c) Co-Partnership Plan
d) Profit Sharing

Some important plans of incentive wage payments are as follows:

INDIVIDUAL INCENTIVE SYSTEM

(a) Time based System:

Halsey Plan: Under this plan a standard time is fixed in advance for completing a
work. Bonus is rewarded to the worker who performs his work in less than the
standard time and paid wages according to the time wage system for the saved
time.
The total earnings of the worker = wages for the actual time + bonus
Rowan Plan: Under this method minimum wages are guaranteed given to worker
at the ordinary rate for the time taken to complete the work. Bonus is that
proportion of the wages of the time taken which the time saved bears to the
standard time allowed.
Incentive = Wages for actual time for completing the work + Bonus
Emerson Plan: Under this system, wages on the time basis are guaranteed even to
those workers whose output is below the standard. The workers who prove
efficient are paid a bonus. For the purpose of determining efficiency, either the
standard output per unit of time is fixed, or the standard time for a job is
determined, and efficiency is determined on the basis of a comparison of actual
performance against the standard.
Bedeaux Plan: It provide comparable standards for all workers. The value of time
saved is divided both to the worker and his supervisor in the ratio of ¾ and ¼
respectively. A supervisor also helps a worker in saving his time so he is also given
some benefit in this method. The standard time for each job is determined in terms
of minutes which are called Bedeaux points or B‟s. Each B represents one minute

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through time and motion study. A worker is paid time wages up to standard B‟s or
100% performance. Bonus is paid when actual performance exceeds standard
performance in terms of B‟s.
(b) Production based System:
Taylor’s Differential Piece Rate System : F.W. Taylor, founder of the scientific
management evolved this system of wage payment. Under this system, there is no
guarantee of minimum wages. Standard time and standard work is determined on
the basis of time study. The main characteristics of this system are that two rates of
wage one lower and one higher are fixed. Those who fail in attaining the standard,
are paid at a lower rate and those exceeding the standard or just attaining the
standard get higher rate. Under this system, a serve penalty is imposed on the
inefficient workers because they get the wages at lower rates. The basic idea
underlying in this scheme is to induce the worker at least to attain the standard but
at the same time if a worker is relatively less efficient, he will lose much. For
example, the standard is fixed at 40 units per day and the piece rate are 40 P. and
50 P. per unit. If a worker produces 40 units or more in a day, he will get the wages
at the rate of 50 P per unit and if he produces 39 units will get the wages at 40
paise per unit for the total output.
Gantt’s Task and Bonus Plan - In this, a minimum wage is guaranteed.
Minimum wage is given to anybody, who completes the job in standard time. If the
job is completed in less time, then there is a hike in wage-rate. This hike varies
between 25% to 50% of the standard rate.
GROUP/ORGANIZATIONAL INCENTIVE PLANS
1. Scalon plan:
This method is named after Joseph Scalon. There is a payment of one percent
participating bonus for every one percent increase in productivity under this plan.
The bonus is available to all workers except top management.

The entitle amount or bonus is not paid every month. A reserve fund of one-half of
first fifteen percent is created for off-setting any change in labour cost. In case, this
reserve remains unused at the end of the year then this amount is also distributed
among workers in the last month of the year and a fresh reserve is created in the
year.

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2. Priest man’s plan:

A standard production is fixed for the whole enterprise under this plan. If
productivity exceeds the standard then bonus is paid in accordance with the
increase. In case production does not reach the standard then workers get minimum
wages only. For example, a standard production of 200, 000 units is fixed for the
year. Actual production during the year is 240,000 units since production has gone
up by 20% workers will get 20% higher wages as bonus.

The workers get sufficient incentive to raise their performance. A team spirit is
visible among the workers because production will increase with the collective
efforts of various limbs of the organization. This method does not offer incentive
to individual workers. Inefficient workers share the efforts of efficient workers
because increased production benefits all the manpower in the organization.

3. Co-partnership:
The employees are offered shares of the enterprise at reduced rates in this plan.
The payment is also collected in installments. The employees share profits of the
enterprise as its members. The underlying idea of this method is to make workers
feel as a part of the organization and understand view point of the management. As
co-partners they will behave in a responsible manner and will try to make the
concern more and more profitable and successful.

4. Profit sharing:
When shareholders share profits for contributing towards capital then workers
should also get a part of profits for contributing their labour. The workers are an
integral part of any organization and their contribution to its prosperity should also
be rewarded by making them the recipients of profits.
This realization that employees/workers contribute significantly to increase profit
has encouraged the adoption of this system. Profit sharing is a method of
remuneration under which an employer undertakes to pay his employees a share in
the net profits of an enterprise, in addition to regular wages.
Profit sharing is of two types:
(1) Current Profit Sharing:
It is the one directly paid to the employee annually or six monthly.
(2) Deferred Profit Sharing: It is the one which is not paid directly to the
employee but credited in his provident fund account or to pension account or
sometimes paid in the form of bonus shares.

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MERITS:
(1) Creation of industrial peace because workers are satisfied as they are getting an
additional amount besides their wages.
(2) The bonus is paid only when the amount of profit exceeds the set target. It
means bonus is not part of cost of production.
(3) Profit sharing scheme is based on the basic pay of the employees.
(4) Workers have share in profit and not losses incurred by the employer.
(5) It represents a reward for group effort and group efficiency.
(6) It brings about team spirit among the employees. They developed a sense of
belonging to the organization, reduces training time.
(7) Profit sharing results into equitable distribution of the profit.
DEMERITS:
(1) Employees are entitled to bonus when company earns profit. They do not get
bonus when company recur losses.
(2) It is not possible for newly established company to pay bonus.
(3) There is no distinction between efficient and inefficient employees of the
company while distribution of bonus.
(4) Bonus is paid to the employee once in a year. This does not motivate them for
better performance.
2) Financial and Non-financial Incentives- Individual or group performance can
be measured in financial terms. It means that their performance is rewarded in
money or cash as it has a great impact on motivation as a symbol of
accomplishment. These incentives form visible and tangible rewards provided in
recognition of accomplishment. Financial incentives include salary, premium,
reward, dividend, income on investment etc. On the other hand, non-financial
incentives are that social and psychological attraction which encourages people to
do the work efficiently and effectively. Non-financial incentive can be delegation
of responsibility, lack of fear, worker‟s participation, title or promotion,
constructive attitude, security of service, good leadership etc..
3) Positive and Negative Incentives- Positive incentives are those agreeable
factors related to work situation which prompt an individual to attain or excel the

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standards or objectives set for him, where as negative incentives are those
disagreeable factors in a work situation which an individual wants to avoid and
strives to accomplish the standards required on his or her part. Positive incentive
may include expected promotion, worker‟s preference, competition with fellow
workers and own„s record etc. Negative incentives include fear of lay off,
discharge, reduction of salary, disapproval by employer etc.
 FRINGE BENEFITS
Employees are paid several benefits in addition to wages, salary, allowances and
bonus. These benefits and services are called „fringe benefits‟ because these are
offered by the employer as a fringe. Employees of the organization are provided
several benefits and services by the employer to maintain and promote employee‟s
favorable attitude towards the work and work environment. It not only increases
their morale but also motivate them. These provided benefits and services forms
the part of salary and are generally refereed as fringe benefits. According to D.
Belcher, “Fringe benefits are any wage cost not directly connected with the
employee‟s productive effort, performance, service or sacrifice”.
Kinds of Fringe Benefits
The various organizations in India offer fringe benefits that may be categorized as
follows:
1) Old Age and Retirement Benefits - these include provident fund schemes,
pension schemes, gratuity and medical benefits which are provided to employee
after their retirement and during old age as a sense of security about their old age.
2) Workman’s Compensation - these benefits are provided to employee if they
are got ignored or die under the working conditions and the sole responsibility is of
the employer.
3) Employee Security- Regular wage and salary is given to employee that gives a
feeling of security. Other than this compensation is also given if there is lay-off or
retrenchment in an organization.
4) Payment for Time Not Worked – Under this category of benefits, a worker is
provided payment for the work that has been performed by him during holidays
and also for the work done during odd shifts. Compensatory holidays for the same
number in the same month are given if the worker has not availed weekly holidays.
5) Safety and Health – Under this benefit workers are provided conditions and
requirements regarding working condition with a view to provide safe working

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environment. Safety and Health measures are also taken care of in order to protect
the employees against unhealthy working conditions and accidents.
6) Health Benefits – Employees are also provided medical services like hospital
facility, clinical facility by the organization.
PROMOTIONS

Promotion is the advancement of an employee from one job level to a higher one,
with increase in salary. It should also usually result in changes in duties and higher
level/degree of responsibility, status and value. Sometimes the job itself may be
upgraded (e.g., steno to secretary) to a higher level of skill, responsibilities and
pay. When as a result of promotion there is no increase in the employee‟s pay it is
called a „dry‟ promotion. A dry promotion is usually made decorative by giving a
new and longer title to the employee. Employers generally get rid of their
incompetent employees by giving them such decorative promotions.
In many companies, only vertical promotions are made under which the
employees are promoted from one rank to the next higher rank in the same
department. A vertical promotion scheme has two disadvantages: first, it limits the
experience of an employee; second, it deprives him of the opportunity to secure
promotion in other departments at the right time. As such, horizontal promotions
are also allowed in some companies under which employees may be promoted to
higher ranks in other departments as well.
It is considered good personnel policy to fill vacancies in a higher job through
promotion from within. Such promotions provide an inducement and motivation
to the employees, removes feeling of stagnation and frustration and inculcates a
sense of growing up with the organization reinforcing common goals between the
individual and the organization.
The criteria for promotion decisions may include the following, though the crux
of the issue centres around the dilemma over seniority versus merit:
 Performance-length of service (seniority) or merit and ability
 Educational/technical qualification
 Assessment of potential
 Career and succession plan
 Organization chart based vacancies
 Motivational strategies-job enlargement
 Spacing of the promotion and career span of the individual
The promotion policy should seek to optimize the interests of the organizations as

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well as the needs and aspirations of the individual employees.

A good promotion policy may include the following:
 Encouragement of promotion within the organization, instead of looking
outside to fill vacancies in higher posts;
 An understanding that ability as well as seniority will be taken into account in
making promotions;
 Drawing up an organization chart to make clear to all the ladder of promotion.
Where there is a job analysis and a planned wage policy, such a chart is quite easy
to prepare;
 Making it clear to all concerned who may initiate and handle cases of
promotion. Though departmental heads may initiate promotion, the final approval
should lie with top management, after the personnel department has been asked to
check whether any repercussions are likely to result from the proposed promotion;
 All promotions should be for a trial period. Normally during this trial period the
employees draws the pay of the higher post, but it should be clearly understood
that if “he does not make the grade” he will be reverted to his former post and his
former pay scale”.
The advantages of having promotion schemes are as follows :
i) They provide an opportunity to the present employees to move into jobs that
provide greater personal satisfaction and prestige.
ii) They offer opportunities to management to provide recognition and incentives
to the better employees.
iii) They generate within an organization beneficial pressures on work
performance and desired behaviour of all its members.
iv) Finally, they serve as an orderly, logical and prompt source of recruitment for
management to fill vacancies as they arise.
One important drawback of all promotion schemes is that they result in a condition
known as „inbreeding‟ in which the company‟s idea and habits are perpetuated and
little new thinking is able to occur. The system becomes stagnant, repetitious and
overly conformist. The newer employees are introduced at lower levels where they
can have little influence.

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Merit vs. Seniority: Although it is best for the profitability of a company to be

able to promote those who are the most able without reference to seniority but
rarely is merit given complete control in such matters. It is very often complained
that „merit‟ is a highly subjective concept which encourages inequities and
favouritism in promotion and that the differences in merit are not readily
measurable. To avoid these difficulties it is suggested that the criterion of seniority
should also be used.
The advantages of this criterion are as follows:
i) It is an objective means of distinguishing among personnel. Under this
criterion it is not the management but the system which ranks individuals.
ii) The measurement with this criterion is both simple and exact.
iii) The criterion is in consonance with our culture in which seniority is respected
in all walks of life.
iv) The criterion gives a feeling of security and assurance to the individual who
can calculate his promotion well in advance.
v) Seniority, being valued as an asset, prevents people from leaving an
organization. It thus reduces labour turnover.
The disadvantages of this criterion are as under:
(1) Excessive emphasis on seniority leads to the promotion of incompetents.
Oldest is not always the ablest. Accumulation of years of experience or length of
service does not invariably produce ability. In any case, the demonstrated ability to
perform a given job provides no assurance of the potential to perform at a higher
level or in a different type of job.
(2) When seniority is the only deciding factor in promotion, initiative inevitably
withers away. Human nature being what it is, few people will take the trouble of
qualifying themselves for the next rung up the ladder if they can achieve the same
goal merely by “putting in time”.
(3) The seniority criterion adversely affects the morale of meritorious workers
and drives the ambitious and able men, with little service, out of the organization.
It can now be easily understood that seniority by itself is an incomplete criterion.
Much of the clamour for its recognition as the sole criterion is based on a
fundamental distrust of management. But in the interests of efficiency, equity and.
a contented workforce the management should work out a compromise between
seniority and n1erit. Only when coupled with merit does seniority meet the twofold

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aim of according the employee due recognition for his years of service and of
providing him with a built in incentive to qualify himself for advancement. Thus,
there is always the problem of balancing one in relation to the other.
Every organization must decide on the relative weights it will give to the merit and
seniority in making promotion decisions. For example, seniority may be
completely controlling in such matters as length of vacations or choice of shifts but
only partly controlling in such matters as transfers and promotions.
DEMOTIONS
Demotion is the opposite of promotion. It is a downward movement from one job
level to another preceding it, leading to a reduction in rank, status, pay and
responsibility. Demotions become necessary when:
 A promotee is not able to meet the demands of the new job;
 Adverse business conditions lead to downsizing of the organization which can
then decide to layoff some and downgrade other jobs;
 It is viewed as a disciplinary measure.
Demotions may be:
 Effected during the trial period after promotion, if the cause of demotion is poor
performance. However, the candidates should be given a fair opportunity to
improve and be offered training and counseling, before a final decision is taken;
 Reversed and status quo restored once business conditions improve in case
demotions are a result of adverse business conditions;
 Normally not resorted to as a disciplinary measure.
Demoting an employee is not an easy matter and calls for tact and diplomacy.
Perhaps it is easy to dismiss than to demote. In both the cases, the person‟s
interests and pride will be hurt, but in the latter case, since the person still
continues his association with the organization he may avenge by hurting the
interests of the organization.
TRANSFER
A transfer is a lateral movement within the same grade, from one job to another. A
transfer may result in changes in duties and responsibilities, supervisory and
working conditions, but not necessarily salary. Transfers may be either
company-initiated or employee-initiated. A company may initiate a transfer to

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place employees in positions where they are likely to be more effective or where
they are likely to get greater satisfaction or where they are better able to meet the
work schedules of the organization. Similarly, employees may initiate transfers for
several reasons. They may want a change of bosses or of locations. They may try
to obtain more allowances or better working conditions which are attached to a
new position. They may want to join their friends and relatives or they may try to
avoid interpersonal conflicts with their present colleagues. Transfers may be made
for reasons such as:
 Correcting misplacement 
 Filling vacancies internally 
 Meeting skill shortages/job redundancies 
 Dealing with problem employees 
 Facilitating superior-peer adjustment 
 Providing a chance for wider experience 
 Job rotation as part of career development 
 Accommodating personal needs and convenience of the individual 
 Reward or punishment 
 Change working conditions (e.g. manual to mechanical operations) 
 Humanitarian/compassionate ground (transfer to one‟s native place to enable the
person to look after the sick or old parents). 
Transfers could be temporary and adhoc when they are made to meet
emergencies. They may be regular and planned as part of training development,
career and succession planning activities. Transfer decisions may be perceived as
negative or positive depending upon an individual‟s personal preferences, needs
and aspirations. An organization may consider transfer from a regional office to the
head office as a reward since it enables the person to broaden his knowledge and
experience; but the individual concerned may feel otherwise if it means breaking
his ties with the people and community.

Whether transfers are planned or adhoc, employees and their families face
certain practical difficulties particularly when a transfer means change in
location:
 Timing of the transfer 
 Housing/accommodation
 School/college admission of children
 Working spouse/dependent family 
 Relocation/hardship expenses. 

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Types of Transfers: When the transfers are considered from the standpoint of
their purpose, five types may be distinguished:
(i) Production transfers: These are transfers from one department of an
organization in which labour requirements are declining to another
department of the, same organization in which they are increasing. Such
transfers are done to avoid layoff of efficient and trained employees by
providing them with alternative positions in the same organization.

(ii) Replacement transfers: These are transfers of long-service employees to

similar jobs in other departments where they replace employees with shorter
service. The object of these transfers is also to retain the efficient and trained
employees as long as possible but in this process some short-service
employees may be relieved from the organization.

(iii) Versatility transfers: These are transfers (better called „rotation‟) of

workers from one job to another to make them versatile. Besides resulting in
greater satisfaction to the workers through job enrichment and enlargement,
such transfers also help management in creating a workforce of all-rounder
who can be conveniently shifted to other jobs at the time of necessity.

(iv) Shift transfer: These are transfers of workers from one shift to another on
the same type of work.
(v) Remedial transfers: These are transfers made to remedy some situation
primarily concerned with employee-on the job. For example an employee‟s
initial placement may have been faulty, or he may not get along with his
superior or with fellow workers in the department or he may be getting too
old to continue in‟ his present job or the type of job or working conditions
may not be well suited to his present health or accident record, and so on.

Objections to Transfers: Employees generally resist company initiated transfers

because:
i) They suspect their victimization by management.
ii) They are unwilling to move to an unknown place.
iii) They dislike leaving their social group of friends and relatives.
iv) They develop proprietary interests in their workplace and in other
concomitants of their positions such as desks, machines, tools, lockers, etc.
v) They develop „craft consciousness‟ – the feeling that no one should work
outside his narrowly defined duties.

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Transfer is a major motivation tool available with management. Organizations

need to develop proactive measures to deal with practical difficulties that affect
individuals at the time of transfer. They need to have a human perspective while
developing transfer policies.
SEPARATIONS
An employee who works for an organization has to leave the organization one day
or the other. Even in Japanese organizations, where there is life-time employment,
separation is inevitable. Separation is the act of an employee leaving his
organization because of any of the reasons viz., superannuation, turnover, transfer,
dismissal, retrenchment, etc.
A manager, who looks after the staffing function, has to adhere to the formalities,
rules, terms, conditions, legal provisions, standing orders etc. in separating any
person who works for the organization. While an unconfirmed employee must be
given notice pay, a confirmed employee must be given compensation, gratuity,
pension benefits etc. according to rules. Similarly, when an employee is not able
to make the contribution expected of him, the organization would not be able to go
on tolerating it. Hence, the need for separation arises. But the manager must be
able to determine when, how and why an employee should be separated and what
compensation should be given to him.
An organization having human resource management philosophy must care for the
human aspect while separating an employee. After working for an organization for
a substantially long period, a person goes himself acclimatized to the given
environment. His mind, feelings, thoughts, attitudes, approaches, fashion, taste and
temperament, his very personality itself is influenced by his work environment.
Obviously when he comes to a turning point to separate himself, his mind is bound
to be filled with mixed reactions, feelings, agony and anxiety about future. He
needs encouragement, affection, strengthening, sympathy, some amount of
counselling, guidance, or promise. Irrespective of the cause of his separation, the
human resources manager must take into account of the human aspects of the
individual, and go ahead to help him to release his tension, worry or anxiety. The
human resource manager‟s patronisation, affection and promise will certainly be a
great solace to the individual in his weak spot.
Employees may move out of the organization or be separated for a variety of
reasons like retirement, resignation, suspension, discharge, dismissal;
redundancy, retrenchment and outplacement. These are discussed here briefly.
 Golden handshake: Golden handshake is the name given to the method of

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retrenchment under which employees with a certain minimum service can opt for
voluntary retirement and get a fat lumpsum amount in return: It is generally feared
that as an impact of the new economic policy now being followed by the
Government the size of the bureaucracy is going to be trimmed in near future. With
more and more controls being lifted, many government departments will become
redundant. To begin with the Government has decided to cut down 10% vacancies
in its various ministries and commercial banks. The voluntary retirement scheme
offering a good enough golden handshake may turn out to be a run away success as
is clear from the case of State Bank of lndia.
 Death, Retirement and Resignation: Some employees may die while in service.
Such deaths may be caused by accidents or other reasons. Where the death occurs
due to occupational hazards, the provisions of Workmen‟s Compensation Act
apply. Organizations may additionally have insurance and family-benefit schemes.
Several organizations also have a policy of offering employment to the
spouse/child/or dependant of an employee who dies in service.
Typically, all employment contracts stipulate the age of superannuation.
Employees retire from service on attaining the age of superannuation. Some
organizations may have a policy to reappoint professionals and others who possess
rare skills for a limited duration at a time. All contractual appointments terminate
after the expiry of the period of contract The normal retirement benefits such as
provident fund, pension and gratuity as applicable accrue and become payable to
the employee on retirement. Some organizations extend certain employee benefits
like medical facilities to the employees and their families even after retirement.
Usually the retiring employees are bid farewell appropriately with a party, gift and
a mention in the house journal.
Organizations are also providing liberal incentives for people to leave before
reaching the age of superannuation when they are faced with the situation of
surplus staff. Employees -may opt to retire voluntarily to avail the benefits of
such schemes and possibly pursue a second career or self-employment.
Resignation refers to a situation where an employee takes or is made to take the
initiative to leave the job. Resignation may be voluntary or involuntary. A person
may leave the Job if he is discontent with it or any other aspect of the organization
or when he gets a better job elsewhere.
Resignation is considered involuntary when the employer advises the employee to
resign or face disciplinary action: However, in disciplinary cases, it is better to
follow the due process of in-house enquiry than to shorten the process and accept
the forced resignation. Otherwise the affected employee can subsequently go to the

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union and/or court and assert that the resignation was obtained under duress, even
if there was no duress.
Where the incidence of separation is high due to resignation, it is appropriate for
the organizations to know the reasons through holding ‘exit interviews’. Exit
interviews are held with the employees leaving the organization for obtaining
information regarding reasons for their leaving. If more people are leaving due to
dissatisfaction with organizational factors such as pay, supervision, company
policies and working conditions or low morale and motivation, the organization
would do well to take immediate measures to remedy the situation so that such
departures do not reach the proportion of an exodus.
 Suspension, Discharge and Dismissal: Suspension means prohibiting an
employee from attending work, stopping him from performing the duties assigned
to him and withholding the remuneration payable to him. Suspension is not
termination of services of an employee, but may in some cases, eventually lead to
it.
An employee may be suspended as a matter of punishment for a specified period in
accordance with the provisions in the standing orders. Suspension may be
procedural when the employer feels that the delinquent employee be kept away
from work pending enquiry into his alleged misconduct so that he will not tamper
with evidence or the enquiry itself. Procedural suspension is usually resorted to
only in major or repetitive acts of misconduct.
Dismissal is termination of the services of an employee for misconduct. Discharge
also means termination from service of an employee, but not necessarily as a
punitive measure.
 Redundancy, Retrenchment and Outplacement: Employees may become
surplus with the introduction of new technology, automation, modernization,
rationalization, loss of market for the product, etc. The surplus employees may be
laid off or retrenched. This is called as Redundancy. Layoff of employees refers to
the failure, refusal or inability of an employer to provide employment due to
factors beyond his control such as shortage of inputs and infrastructure, breakdown
of machinery, etc. Layoff does not mean termination of service, but leads to a
temporary denial of employment.
Retrenchment means the termination by the employer of the services of an
employee for reasons other than punishment but does not include retirement or
termination for reasons of ill-health. The legal provisions stipulate employers‟
obligations to give advance notice (one month or equivalent wages), pay

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compensation (15 days average pay for each completed year of service) and follow
the prescribed procedure (first-in-last- out principle to be followed, and a notice to
be served to the appropriate government). Employers should give preference to
retrenched employees if they advertise for reemployment against future vacancies.
When labour becomes surplus, some organizations seek to provide them training in
marketable skills and actively assist them in finding a job elsewhere.
Outplacement refers to such activities.

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