UNIT 3 ISSUES RELATED TO COMPENSATION 9

Dearness Allowance Concept -Emergence and Growth in India.

Computation of CPI &Dearness Allowance. The role of fringe

benefits in reward systems Retirement Plans including

VRS/Golden Handshake Schemes.

 ISSUES RELATED TO COMPENSATION

• Ignoring compensation issues at your organization can lead to unhappy

workers, low morale, decreased productivity, and increased turnover.

Hence, your Human Resources and/or Compensation & Benefits

department must ensure the compensation you offer to your employees is

appealing enough to keep your team happy.

What are the issues in compensation?

• External competition. We live in an incredibly competitive world where businesses are

willing to pay top dollar to get the cream of the crop talent. ...

• Executive compensation. ...

• Internal equity. ...

• Gaps in employee expectations. ...

• Lack of digitization.
What are some of the top compensation related challenges today's companies are

facing?-part c

• Top Wage & Salary Challenges Facing Businesses Today

• Costly employee turnover. ...

• Lost business due to customer dissatisfaction. ...

• An imbalance between payroll costs and sales volume. ...

• Poorly designed employee incentive programs.

Dearness Allowance
• What is Dearness Allowance?

Dearness Allowance is the cost-of-living adjustment allowance which

the government pays to the employees of the public sector as well as

pensioners of the same.

• Types of Dearness Allowance
• The Two separate categories to calculate Dearness Allowance are
Industrial and Variable Dearness Allowance.

• Industrial Dearness Allowance

• Industrial dearness allowance or IDA is the allowance applicable to
employees of public sector enterprises. Recently, the government of India
has increased IDA by 5% for this sector. This decision is set to benefit all
board-level executives, officers, and employees of central PSUs.

• IDA for government sector enterprises is revised quarterly based on the

movement of the Consumer Price Index (CPI) to compensate for the rising
inflation in the country.
• Variable Dearness Allowance

VAD or Variable dearness allowance is the allowance that comes as a result of

revision every six months for central government employees. The changed new

figure that is received as a result of taking into consideration the increase or

decrease in the Consumer Price Index, CPI, is termed as Variable dearness

allowance. Based on this figure, the DA of employees is revised and rolled out.
 Emergence and Growth of DA
• Dearness Allowance

• The Dearness Allowance earlier called Dear Food Allowance, and later rename
as DA for the Government Employees. This gets to add to every individual
salary on a percentage basis as per the Consumer Price Index number for each
quarter which in result in salary revision.

• There are two types of DA applicable for employees based on their organization
of work. This is purely name as Industrial DA and Central DA which is variable.
• Industrial DA

• The Industrial Dearness Allowance (IDA) is applicable to employees for

public sector enterprises. This will be revised for every 3months based on

Consumer Price Index numbers announcement, The employees under

Central PSUs will be benefited from this announcement.

• Central DA

The Variable DA or Central Dearness Allowance (CDA) is based on the

revision for every six months for Central Government employees and

pensioners, and the new figure of DA will be a result of the consideration of

the past 6 months DA with calculating the increased or decreased consumer

price index.
CONCEPT OF DA

• In the most basic sense, a dearness allowance is paid to government

servants as a cost of living. It is to help them cope with inflation and
increasing prices.

• Why is such a component needed? What is the reason and concept behind
it?

To explain the concept, we will take the help of an example:

• Suppose there are three police officers of the same rank- X, Y and Z.

• X is posted in Delhi, Y is posted in Assam and Z is posted in Goa.

• By applying the All-India Services Act, 1951; X, Y and Z, all three fall under

the category of ‘member of a service’ hence, they are eligible for a DA.
• It is also to be noted that the basic component of the salary of a police officer

would be fixed. Therefore, X, Y and Z all three would receive the same amount

from the government as their basic salary. But we cannot overlook the fact that

X, Y and Z are all posted in three different parts of the country.

• Therefore, depending on the market of the place where X, Y and Z are,
their costs of living would vary from each other!
• To break it into simpler words, the cost of a similar product for example

bread may vary in Delhi, Assam and Goa. Delhi might have a higher price

whereas Assam and Goa might have a lower price for bread. Similarly, the

prices may vary for various products. Thus, it would be unfair if X, Y and Z

are made to live their life on an equal salary.

• This is where DA comes to play its part. The cost of living is calculated

taking a lot of factors into consideration and a dearness allowance is

calculated for every employee.

• As the cost of living differs from state to state, the DA differs from

employee to employee.
 HISTORY / EMERGENCE AND
DEVELOPMENT
• HISTORY AND DEVELOPMENT

• Dearness Allowance is compensatory part of wages. It has been in existence for

about four decades and now covers almost all employees in the organised

sector. Accordingly, it has emerged as an important area of pay administration

having financial, economic and administrative implications

• Its origins can be traced back to the times of World War II. In those times it

was introduced by the name of ‘Dear Food Allowance’. At that time such a

DA was provided to subside the demand of a wage rise by the government

employees.
• Originally, it was the textile industry in Bombay which introduced DA

scheme. Bombay was found to be the most expensive city to live in in our

country. It would also go on to become the most expensive sometimes

throughout the world. It moves from time to time and so the atmosphere

with it also moves.

• At different times different cities had varying price levels that in turn affected price

indices of every city. It was then the times when each price index was differently

numbered, marked and recorded in each state. For e.g., Bombay PI, Delhi PI, Kolkata

PI etc. Since the basic concept of Dearness Allowance is based on the concept of

Price Index, an All-India Consumer Price Index (AICPI) was established. In current

times, the PI of 2001 is taken as the base index to calculate the DA for employees.
• As cost of living, inflation kept going up from time to time, it became

extremely difficult for the common man to keep surviving. India already

facing massive issues of unemployment, the Indian government had to take

cognizance of such daily life struggles. It was then that the government

went on to establish ‘Pay Commissions’ to keep a check on the PI and keep

making changes to DA accordingly.

• The government keeps appointing the commissions from every 5-7 years to revise base PI or

to suggest any changes in the paying system for the government employees. These changes if

implemented stay until the next commission suggests some other changes. For e.g., the

fourth pay commission for the Central Government employees said that the “Dearness

allowance which is being paid at present is in the nature of a compensatory payment to

employees for erosion in the real value of their salaries resulting from price rise.
• Not just the central government, the state governments also pay its

employees particular dearness allowance. Such an allowance is based on

almost same pattern of calculation as the central government’s. However,

since the pay scales of state government employees are linked to different

index levels, the actual rates of dearness allowance paid by them are different

from those payable to central government employees.

• Since the inception of the concept of DA, there have been many changes

to it. In particularly, with regards to what employees it will cover, what

percentage of neutralization would exist for various categories as well as

the periodicity of payment.

• How is dearness allowance calculated?

• Dearness allowance is calculated twice every year – in January and July. The
formula to calculate the dearness allowance was changed in 2006 by the
government. According to Clear Tax, dearness allowance is calculated as per
the following formula: For the central government employees of % of DA =
{(Average of the All-India Consumer Price Index (Base year -2001 =100) for the
last 12 months -115.76)/115.76} x 100For Central Public Sector Employees % of
DA = {(Average of the All-India Consumer Price Index (Base year -2001 =100) for
the last 3 months -126.33)/126.33} x 100.
• Fringe benefits serve as additional compensation. Providing unique

fringe benefits to employees helps the company stand out from its

competitors. It provides a greater opportunity to attract high value

and talented employees from competing companies.

• 'Reward system refers to all the monetary, non-monetary and

psychological payments that an organisation provides for its

employees in exchange for the work they perform. ' Rewards

schemes may include extrinsic and intrinsic rewards.

• Fringe benefits are a new buzz doing the rounds of corporate halls. It is

generally combined or part of the total rewards system. Fringe benefits

broadly include health, security and retirement benefits offered to all full-

time employees. They are offered in addition to the defined compensation

structure.
• VRS stands for voluntary retirement scheme, whereby an employee is

offered to voluntarily retire from services before the retirement date. The

scheme allows companies to reduce the strength of employees. It can be

implemented by both the public and private sectors. VRS is also known as

'Golden Handshake’.
• How does VRS work

• VRS applies to employees who have completed 10 years of service or are

above the age of 40 years. It applies to workers, executives of companies

and/or to an authority of a co-operative society (except company/co-

operative society directors).

• As per the rules, voluntary retirement scheme should result in an overall

reduction in the existing strength of employees and the vacancy cannot be

filled up. PSUs have to obtain prior approval of the government before

offering voluntary retirement. Firms can frame different schemes, however,

they must conform to the guidelines under section 2BA of the Income-Tax

Rules. One of the pertinent rules clearly states that retiring employee must

not be employed in another firm belonging to the same management.

• A Golden Handshake Scheme is associated with voluntary retirement. It is a

clause in an executive employment contract that provides the executive with

a significant severance package in the case the executive loses his/her job

through firing, job restructuring or even scheduled retirement.