DETERMINING OPTIMAL FRINGE

BENEFITS, SALARY OF EXECUTIVES

USING DCF TECHNIQUES
 WHAT IS CALLED A BENEFIT?

 Benefits are indirect financial and non financial payments which

employees receive for continuing their employment with the
company.

 Benefits are a major expenses for most of the employers. The

pressure of rising costs and greater competition is driving
employers to find out ways of using the workforce more
effectively.
 MEANING OF FRINGE BENEFITS
 The term Fringe Benefits refers to various extra benefits
provided to employees, in addition to the compensation paid in
the form of wage or salary.
 Fringe benefits are those monetary and non monetary benefits
given to the employees during and post employment period
which are connected with employment but not to the employees
contributions to the organisation.
 Fringe benefits are also called as welfare measures, social
charges, social security measures, supplements, sub wages,
employee benefits etc.
 It covers bonus, social security measures, retirement benefits
like provident fund, gratuity, workmen’s compensation,
housing, medical, canteen, co-operative credit, consumer stores,
educational facilities, recreational facilities, financial advice etc.
 DEFINITION OF FRINGE BENEFIT

 Balcher defines fringe benefits as, “Any wage cost not directly
connected with the employees productive effort, performance,
service or sacrifice.”

 Cockmar defined fringe benefits as, “Those benefits which are

provided by an employer to or for the benefit of an employee
and which are not in the form of wages, salaries and time-
related payments.”
 Thus one can say that it is benefit which supplements the
employees ordinary wages and which is of value to them and
their families in so far as it materially increases their
retirement benefit.
 It helps to build up a good corporate image. An organisation
providing fringe benefits tries to enhance employee morale,
remain cost effective, and introduce changes with much
resistance.
 So the primary effect of fringe benefit is to retain the
employees in the organization on a long term basis.
 NEED OF FRINGE BEENFITS
 Employee demands:
Employees demand a more and different types of fringe
benefits instead of increase in salary because of reduction in
tax burden .
 Trade Union Demands:
Trade unions compete with other for getting more and a new
variety of fringe benefits to their employees. Thus the
competition among trade unions within an organisation results
in more and varied benefits.
 Employer’s preference:
Employer’s prefer to pay fringe benefits as it is one type of
motivation to the employees for their better contribution to the
organization. It improves morale and works as an effective
advertisement.
 NEED OF FRINGE BEENFITS
 As a social security:
Social security is a security that society furnishes through
appropriate organization against certain risks. These risks are
accidents, occupational diseases etc. Employer has to provide
various benefits like safety measures, compensation in case of
involvement of workers in accidents, medical facilities etc.
with a view to provide security to his employees against
various contingencies.
 To improve human relations:
Human relations are maintained when the employees are
satisfied economically, socially and psychologically. Fringe
benefits satisfy the workers economic, social and
psychological needs. Thus fringe benefits improve human
relations as it minimizes economic problems of the employees.
 TYPES OF FRINGE BENEFITS

 Payment for time not worked:

Benefits under this category include sick leave with pay,
vacation pay, paid rest and relief time, paid lunch periods,
grievance time, bargaining time, travel time etc.
 Employee Security :
Physical and job security to the employee should also be
provided with a view to promoting security to the employee
and his family members. The Payment of wage Act, 1936, The
Minimum Wages Act, 1948, The Payment of Bonus Act,
1965, provide income security to the employees.
 Safety and Health:
Employee’s safety and health should be taken care of in order
to protect employee against accidents, unhealthy working
conditions and to protect worker’s capacity. In India, the
Factories Act, 1948 provides certain requirements regarding
safe working environment. Along with safety and health
measures, The Workmen’s Compensation Act, 1923, provides
compensation to those employees whose wages are less than
Rs. 500 per month. The amount of compensation depends
upon the nature of injury and monthly wages of the
employees.
Employees State Insurance Act 1948 provides sickness
benefits, maternity benefit, disablement benefit, dependant’s
benefit, medical benefit.
 Welfare and recreational facilities:
It includes dating allowances, canteens, consumer societies,
housing, legal aid, employee counselling, welfare
organization, holiday homes, educational facilities,
transportation, parties and picnics, miscellaneous.

 Old age and retirement benefits:

Employers provide some benefits to the employees, after
retirement and during old age, with a view to create a feeling
of security about old age. These benefits are called old age and
retirement benefits. These benefits include a) Provident Fund,
b) Pension, c) Deposit linked insurance, d) Gratuity, e)
Medical benefit.
 COST CONCEPT OF A BENEFIT & SALARY PACKAGE

 The cost concept of an employee is made up of 3 components:

Salary, Benefits and Overheads.
 Companies are increasingly taking the view that they should
offer the senior executive a total compensation package, i.e.
ceiling is set to an employee’s total compensation.
 So each employee can choose the benefits which are useful to
them.
 WHAT IS FRINGE BENEFIT TAX

 The taxation of perquisites or fringe benefits provided by an

employer to his employees, in addition to the cash salary or
wages paid, is fringe benefit tax.
 EXECUTIVE REMUNERATION

 Executive remuneration is paid to an individual who is in a management position at the highest levels.

 The remuneration consists of 4 elements:

Salary
Bonus
Long term incentives
Perquisites
 DISCOUNTED CASH FLOW METHOD (DCF)

• Discounted cash flow is a capital budgeting technique deals

with the actual cash flow.

• The term capital budgeting refers to the process of investment

decisions in capital expenditures or fixed assets.

• Capital budgeting is a technique used to evaluate expenditure

decisions which involve current money spent on any project
but the benefits are likely to come over a period of time
usually after one year.
 METHODS USED FOR EVALUATING CAPITAL
BUDGETING

 Payback period method

 Accounting rate of return (ARR) method
 Discounted cash flow method:
Net present value (NPV) method
Internal rate of return (IRR) method
 Benefit cost ratio (BCR) method
 DISCOUNTED CASH FLOW TECHNIQUE

 DCF is a capital budgeting technique which considers the time

value of money while evaluating the costs and benefits of a
project.

 DCF recognises the time value of money. According to DCF a

rupee in hand today possesses more value than a rupee to be
received in future.
THANK YOU