UNIT – IV

Fringe Benefits, Incentives, Retirement Plans, Compensation

practices of MNCs

FRINGE BENEFITS

Fringe benefits are indirect form of compensation given to employees

in addition to the various forms of cash pay- base pay, dearness
allowance and inventive pay. They provide a quantifiable value for
individual employees. They are the indirect form of compensation
as they are not related to the performance but are granted to the
employees for just being a member of the organization. They are
called benefits as the employees stand benefited on account of such
provisions. They are not in the form of wages, salaries and time
related payments. For example key executives in large companies
might also enjoy fringe benefits like use of time-share condominiums,
paid continuing education, use of a company jet, use of a company
credit card, discounted or free health club memberships, and a
significant amount of paid vacation.

According to the International Encyclopedia of social sciences “A

fringe benefits has to meet two tests, it must provide a specific benefit
to an employee and it must represent a cost to the employer”

Objectives of Fringe Benefits

The employer’s views are that fringe benefits form an important part
of employee incentives to obtain their loyalty and retaining them.
The important objectives of fringe benefits are:
  To create and improve sound industrial relations
  To boost up employee morale.
  To motivate the employees by identifying and satisfying their
unsatisfied needs.
  To provide qualitative work environment and work life.
  To provide security to the employees against social risks like old
age benefits and maternity benefits.
  To protect the health of the employees and to provide safety to
the employees against accidents.
  To promote employee’s welfare by providing welfare measures
like recreation facilities.
  To create a sense of belongingness among employees and to
retain them. Hence, fringe benefits are called golden hand-cuffs.
  To meet requirements of various legislations relating to fringe
benefits.

Features of Fringe Benefits

 They are the payments and benefits to an employee by his

employer in addition to his normal earnings
  Fringe benefits are not linked to performance or efficiency of any
employee
  Fringe benefits may be statutory or voluntary in nature
  Difference in fringe benefits may exist due to classification of
employees based on organizational status
 Fringe benefits are paid to all the employees based on their
membership in the organization
  Fringe benefits are indirect compensation because these are
usually extended as a condition of employment and are not directly
related to performance.
 Fringe benefits involve labour cost for the employer and are not
meant directly to improve efficiency
  Fringe benefits may be statutory or voluntary. Provident fund is a
statutory benefit whereas housing is a voluntary benefit
  Fringe benefits raise the standard of living of the employees.
Factors Determining Features of Fringe Benefits

  They are the payments and benefits to an employee by his

employer in addition to his normal earnings
  Fringe benefits are not linked to performance or efficiency of any
employee
 Fringe benefits may be statutory or voluntary in nature
  Difference in fringe benefits may exist due to classification of
employees based on organizational status
 Fringe benefits are paid to all the employees based on their
membership in the organization
  Fringe benefits are indirect compensation because these are
usually extended as a condition of employment and are not directly
related to performance.
  Fringe benefits involve labour cost for the employer and are not
meant directly to improve efficiency
  Fringe benefits may be statutory or voluntary. Provident fund is a
statutory benefit whereas housing is a voluntary benefit
  Fringe benefits raise the standard of living of the employees

Factors Determining /Reasons for Offering Fringe Benefits

When a company wants to hire or keep an employee, they look at all

the standard and non-standard compensation they can offer. The set of
perks the business comes up with is known as a fringe benefits
package. Creating one of these packages is challenging because even
though the company wants to look like a good, competitive
employment choice, they cannot make offers that put financial strain
on the business.

i. Social Security
The employers must pay in whole or in part for certain legally
mandated benefits and insurance coverage also known as social
security. According to ILO, social security refers to the protection
which society provides for its members through a series of public
measures against the economic and social distress that otherwise
would be caused by the stoppage or substantial reduction of earnings
resulting from sickness, maternity, employment injury,
unemployment invalidity, old age and health.

i. Social Security
The employers must pay in whole or in part for certain legally
mandated benefits and insurance coverage also known as social
security. According to ILO, social security refers to the protection
which society provides for its members through a series of public
measures against the economic and social distress that otherwise
would be caused by the stoppage or substantial reduction of earnings
resulting from sickness, maternity, employment injury,
unemployment invalidity, old age and health.

ii. Paternalistic or Humanistic Consideration

Historically, fringe benefits were introduced with humanistic
considerations to support wage compensation with certain
infrastructure or facilities to provide for health, education and housing
as also social, cultural, religious and recreational activities.

iii.Tax Considerations
There are individual and organizations to develop ingenious methods
of avoiding the obligations through restructuring the pay packet. The
various fringe benefits like house rent, education expenses, travel
charges and many more are shown as re-imbursement of
expenditures. However, in recent years the tax authorities are taking
exception to such camouflaging and disallowing non-wage benefits
beyond certain limits.

iv. Utilization of Leisure Time

There is awareness about the effects of off-duty life style on working
life and viceversa. The importance of leave and holidays for rest and
recuperation is increasingly being understood. Keeping these in mind,
organizations are providing various facilities for leave travel including
expenses of travel maintenance of guest houses etc
.
v.Competitive considerations
A variety of incentives and benefits are being offered like company
housing liberal loan facilities, construction of schools or re-
imbursement of education expenditure membership in
clubs/professional associations, sponsorship for training and
conference abroad etc to attract and retain people based on the
competitors companies in the field.

vi.To Meet Price Rises

Rising prices and cost of living has brought about incessant demand
for provision of extra benefit to the employees. Employers too have
found that fringe benefits present attractive areas of negotiation when
large wage and salary increases are not feasible.

vii.To Attract and Retain Best Talents

As organizations have developed more elaborate fringe benefits
programs for their employees, greater pressure has been placed upon
competing organizations to match these benefits in order to attract and
keep employees. Recognition that fringe benefits are nontaxable
rewards has been major stimulus to their expansion.

viii. To Protect Employees from Adverse Impact

Rapid industrialization, increasingly heavy urbanization and the
growth of a capitalistic economy have made it difficult for most
employees to protect themselves against the adverse impact of these
developments. Since it was workers who are responsible for
production, it was held that employers should accept responsibility for
meeting some of the needs of their employees. As a result, some
benefits-and-services programs were adopted by employers.

ix. Due to Government Legislation

The growing volume of labor legislation, particularly social security
legislation, made it imperative for employers to share equally with
their employees the cost of old age, survivor and disability benefits.

x. Collective Bargain by Trade Unions

The growth and strength of trade unions has substantially influenced
the growth of company benefits and services.

xi. Labour Scarcity and Competition

Labor scarcity and competition for qualified personnel has led to the
initiation, evolution and implementation of a number of compensation
plans.

Types of Fringe Benefits

There is wide range of benefits available and they are categorized in

many ways:

i. Mandated (Statutory) and Optional (Voluntary) Benefits

Mandated benefits include social security and employee welfare,
optional benefits include health insurance, life insurance, retirement
plan, leave, welfare and recreational plans.

ii. Accounting Purpose Classification

 Payment for the time on the job. It includes overtime payment and
cost of living increases
Payment for time not on the job. It involves paid holidays,
vacations, sick leave, unemployment insurance, vacations and
holiday’s sick leave, paternity leave, maternity leave, severance pay,
supplemental unemployment benefits.
Payment for varied benefits (a) pay for time not worked (b)
insurance benefits (c) Retirement benefits (d) Employee services

iii. Classification Based on its Objectives

Those providing for employees security such as retirement
programme, unemployment compensation, workmen’s compensation,
insurance and allied provisions.
Those purporting to increase employees’ job satisfaction causing
reduction in labour turnover and improvement in productivity. It
includes vacations, holidays, sick leave, discounts on company goods
and services and allied intangible and tangible benefits.

iv. Deferred Benefits and Immediate Benefits

Pension scheme, insurance cover, sick pay are some of the deferred
benefits, whereas providing company car to an employee constitute
immediate benefits.

v. For Employment Security

Benefits under this head include unemployment, insurance,
technological adjustment pay, leave travel pay, overtime pay, level for
negotiation, leave for maternity, leave for grievances, holidays, cost
of living bonus, call-back pay, lay-off, retiring rooms, jobs to the
sons/daughters of the employees and the like.

vi. For Health Protection

Benefits under this head include accident insurance, disability
insurance, health insurance, hospitalization, life insurance, medical
care, sick benefits, sick leave, etc.

vii. For Old Age and Retirement

Benefits under this category include: deferred income plans, pension,
gratuity, provident fund, old age assistance, old age counseling,
medical benefits for retired employees, traveling concession to retired
employees, jobs to sons/daughters of the deceased employee and the
like.
vii. For Personnel Identification, Participation and Stimulation
This category covers the following benefits: anniversary awards,
attendance bonus, canteen, cooperative credit societies, educational
facilities, beauty parlor services, housing, income tax aid, counseling,
quality bonus, recreational programs, stress counseling, safety
measures etc.

viii. 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 benefit of confirmation of the employee on the job
creates a sense of job security. Further a minimum and continuous
wage or salary gives a sense of security to the life.

ix. Retrenchment Compensation

The Industrial Disputes Act, 1947 provides for the payment of
compensation in case of lay-off and retrenchment. The non-seasonal
industrial establishments employing 50 or more workers have to give
one month’s notice or one month’s wages to all the workers who are
retrenched after one year’s continuous service. The compensation is
paid at the rate of 15 days wage for every completed year of service
with a maximum of 45 days wage in a year. Workers are eligible for
compensation as stated above even in case of closing down of
undertakings.

x. Lay-off Compensation
In case of lay-off, employees are entitled to lay-off compensation at
the rate to 50% of the total of the basic wage and dearness allowance
for the period of their lay-off except for weekly holidays. Lay-off
compensation can normally be paid up to 45 days in a year.

xi. Accident or Health Plans

The value of accident or health plan coverage provided by the
employer is usually not included in the income. However, benefits
may be taxable to employee. If employer does not pay the entire cost
of your health insurance, employee may be able to enter into a “salary
reduction agreement” with employer. Under these agreements,
employer reduces salary or wages by the amount of cost of the health
insurance and pays the full amount.

xii. DeMinimis Benefits

These are benefits having a minimal value. If the cost is so small it
would be unreasonable for the employer to account for it, the value is
not included in employee income. Examples would include use of the
copy machine, coffee, discounts at company cafeterias, and the cost of
company picnics.

xiii.Working Condition Benefits

These include items such as professional dues paid by the employer or
subscriptions to professional publications and are not included in
income.

xiv. Qualified Transportation Fringe Benefits

Employer may provide to the employee transit passes and tokens for
parking. These amounts are excluded from employee income. Also,
transportation in a commuter highway vehicle, provided by employer,
between employee home and place of work is not taxable income.

xv. Recreation and Athletic Facilities

The use of employer-owned athletic or recreation facilities is not
taxable income. This benefit is available for employees, spouses,
dependents and retirees.

xvi. Educational Assistance

Employer provides educational assistance to employee to go for
higher studies, training, children’s education etc.
,
xvii. Employer-Provided Vehicles
Employer provides a vehicle employees personal use is a taxable non
cash fringe benefit. Employer must determine the actual value of the
benefit and include that amount on employees account.
xviii. Stock Options
These are classified as non-statutory or statutory options. If it is a
non-statutory option employee will have income when he receive the
option, when he use the option, or when he sell or otherwise dispose
of the option. With a statutory option, employee does not recognize
any income until you sell or exchange your stock from the option.
Employer can tell you which type of options employees have.

xix.Meals and Lodging

Meals provided by an employer may be excluded from an employee’s
income if the meals are furnished on the employer’s premises and are
for the convenience of the employer. Lodging provided by an
employer may be excluded from an employee’s income if it is
furnished on the employer’s premises, is for the convenience of the
employer, and is required that the employee accept the lodging as a
condition of employment.

xx.Dependent Care Benefits

These benefits are employee-financed programs that provide care for
an employee’s children or other dependents. The care must be care
that would qualify for the dependent care credit if the employee had
paid the amounts.

Principles of Fringe Benefits

The following principles must govern the administration of fringe

benefits:

  Benefits and services must be provided to the employees on the

basis of a genuine interest in the protection and promotion of their
well-being. The management should not feel that the fringes are
thrust upon them. Nor should the management feel that they are
providing the benefits as a matter of charity.
  The benefits must satisfy a real need. Employees resist or are
indifferent to any benefit which is not like by them
  The benefits must be cost-effective
  The benefits should be as broad based as possible
  Administration of the benefits should be preceded by sound
planning
  The wishes of employees expressed by their union
representatives and the bargaining power of the union must be
considered
  Employees should be educated to make use of the benefits.
 INCENTIVES PLAN

With more and more players entering the market and high attrition
rate, it is a challenge for organizations to retain their talented human
resource. The organizations should follow a systematic process to
formulate the incentive plans.

Types of Incentive Plans

Organizations can opt for an effective incentive plans from the

various alternatives available. The organizations usually opt for that
incentive plans which suits its requirement the most. As incentives
covers the financial matters, organizations need to be very focused in
choosing the best alternative that is in alignment to the business goals
and objectives.
The various incentives plans available are:

1. Taylor Differential Piece Rate System: -Under this method the

standard time is fixed for completing the job with the help of time and
motion study. Two rates of wages are determined, higher and lower.
If a worker completes the job within the standard time then he will be
paid at higher rate and lower rate will be paid if more than the
standard time is taken. The motive of this system is to reward efficient
and productive workers and punish the inefficient ones. In Taylor’s
system thus in a way inefficient worker have no place in the
organization.

2. Halsey Plan: Under Halsey plan method standard time for doing a
job is fixed and workers are encouraged to do the job in less than the
standard time. They are given wages for the actual time taken by them
to complete the job, but if they save time they are also paid bonus
equal to one half of the wages of the time saved. In practice, the
bonus may vary from 33 % to 66% of the wages of the time saved.
Bonus is usually set at 50% of the time saved. If there is no saving in
the standard time then the worker is paid only his day rate.
3. Rowan Premium Plan: For making this plan Rowan had studied
the Halsey plan. Under this method the standard time for completing
the job and standard rate of wage payment is computed in the same
way as it is done under Halsey premium plan. Workers who complete
their job before the standard time are paid standard wages plus bonus
in addition. The bonus is paid according to the time saved in
completing the job.

4. Emerson Efficiency Premium Plan: Emerson was one of Taylor’s

associates. Under Emerson Efficiency Premium Plan methods the
standard time and standard wage rate is computed in advance.
Workers who complete their assigned job within the standard time are
paid wages at the standard rate. Workers who complete their job
before the standard time are paid bonus along with the wages.
According to Emerson generally the workers perform around 67% of
the standard work. Therefore if a worker finished his job before the
standard time he must be paid extra so that he may be encouraged to
work more. For example if the standard time to perform a specific
task is 10 hours and a worker performs the same task in 8 hours then
he is 20% more efficient than the standard worker. Therefore he must
be paid for the same. This plan suggests 20 % of the basic wage as
encouragement for those who perform their task before standard time.

5. Gantt Bonus Plan: Under Gantt Bonus Plan method a minimum

time wage is guaranteed. The standard time allotted for completing
the job is set with the help of time and motion study. Workers who
complete their assigned job after the standard time, they are paid
wages at the standard rate. Workers who complete their job within or
before the standard time are paid bonus in addition to standard wages.
Bonus is paid according to the time saved in completing the job. The
rate of bonus may be 25% or 33.33%. Under this method, the
supervisor also gets bonus in proportion to the bonus earned by his
team members.

6. Bedaux Point Premium Plan: Under this premium plan methods

the standard time for completing the job is set with the help of time
and motion study. The workers who are not able to or are just able to
complete the job within standard time are paid at the normal time rate.
Those workers who finish their job before the standard time are paid
bonus equal to the wages for time saved. Generally the bonus paid to
the worker is 75% of the wages for time saved and the remaining 25%
goes to the supervisor. This method not only pays bonus to efficient
workers but their supervisor at a predetermined rate which helps in
bringing up partnership between employees and supervisors which
helps in improving overall productivity of human resources.

7. Merric Piece Rate System: This plan can be considered as an

enhanced version of Taylors Differential Piece rate system. Under this
system three rates of wages are determined. A minimum guaranteed
time wages are given to employees who complete 80% of the standard
production. Workers who completes 80% to 99% of standard job get
10% bonus in addition to minimum time wage and the workers who
completes more than 100% of standard job gets 20% bonus in
addition to minimum time wage rate.

8. Commission System: According to Herry and Noon (2001), “sales

commission is a form of sales incentives which provides employees
with a bonus proportionate to the financial values of sales”.
Commission is an important incentive scheme which is used for sales
personnel. The commission on sales generated by sales personnel in a
given period may be granted in addition to his normal pay or
compensation. Increasingly commission portion is getting larger and
is estimated to be about 40% of total income of average sales
personnel. An organization should carefully balance its short-term
gain with long-term gain.

Basic Rate System

Basic rate systems are straightforward but may not provide incentives
to individual workers under basic rate systems a worker is paid in
relation to a given period of time – an hourly rate, weekly wage or
annual salary. Generally this rate is the established rate for all workers
in one category, but there are often incremental scales which allow for
progression, perhaps as additional experience and skills are obtained.
Advantages
 They are relatively simple and cheap to administer and allow
labour costs to be forecast with accuracy.

 They lead to stability in pay and are easily understood by the

workforce, who will be able to more readily predict and check their
pay
 There may be fewer disputes and individual grievances than under
systems linking pay to performance or results.

Disadvantages
 Basic rate systems do not by definition provide direct incentives to
improve productivity or performance. Nevertheless employers may
prefer to operate simple basic rate systems and improve the design
of jobs, so that the job provides the necessary interest, motivation
and satisfaction
 Basic systems may be criticized by individual workers, who wish
to see their own abilities specifically rewarded
 Basic rate systems can also lead to a rigid, hierarchical system of
spot-rates or pay ranges.
 All workers do identical or similar work
 The volume or quality of work is difficult to measure, or where the
workflow is uneven
 Where the volume and/or pace of work is outside the workers’
control
 Where high output is not as important as other considerations (eg
quality, stable production levels).
Incentive Schemes for Individuals

Individual payment schemes include payment by results, piecework

and bonuses, work measurement (including measured day work) and
appraisal and performance related pay.
Other individual types of scheme include market-based pay, which
links pay to what is available outside the organization, and
competency/skills based pay, which offers the opportunity for higher
reward based on the acquisition and utilization of additional skills and
competencies. Many sectors of employment use pay systems that
contain direct links to individual performance and results. On an
individual basis this may be via:

 Payment by results (PBR) for example bonus, piecework,

commission
 Work-measured schemes and pre-determined motion time systems
 Measured day work (MDW)
 Appraisal/performance related pay
 Market-based pay
 Competency and skills based pay.

Individual Payment by Results (PBR)

The aim of any PBR scheme is to provide a direct link between pay
and output: the more effectively the worker works, the higher their
pay. This direct relationship means that incentives are stronger than in
other schemes. However, traditional bonus, piecework and work-
measured schemes have declined in recent years, as many employers
have moved to all-round performance rather than simple
results/output based pay. Many bonus schemes incorporate quality
measurements or customer service indicators in the assessment to
avoid the likelihood of workers cutting corners or compromising safe
working methods in order to increase output. Individual skills are not
rewarded and indeed the most skilled may be put onto more difficult
and potentially less rewarding work. In instances where workers
regulate their own output to satisfy their individual needs production
can be affected and forward planning made more difficult.

Piecework, Bonus Schemes and Home Workers

Piecework is the simplest method of PBR – workers are paid at a
specific rate for each ‘piece’ of output. This means the system is
straightforward to operate and understand, although open to the
disadvantages that quality and safety may be compromised to achieve
a higher output. Pieceworkers must be paid at least the national
minimum wage and there are special rules for working this out. Other
individual PBR schemes include incentive bonus schemes where for
instance an additional payment is paid when volume of output
exceeds the established threshold, or where there is an increase in
sales which exceeds given targets. Variable bonuses can also be paid
in relation to performances achieved against predetermined standards
so that the higher the performance achieved, the greater the level of
bonus generated. Home workers must also be paid at least the national
minimum wage, with employers being able to demonstrate that they
have worked out rates paid to home workers to ensure compliance.

Work Measured Schemes

Work measurement is often used to determine target performances
and provides the basis for many PBR schemes for shop-floor workers.
In these systems, a ‘standard time’ or ‘standard output level’ is set by
rate-fixers, or by work study, for particular tasks. Work study
calculates a basic time for a task by using laid down methods,
observing workers performing the operation and taking into account
their rate of working. Incentive payments are then linked to
performance or to the output achieved relative to the standard, or to
the time saved in performing the task. British Standard Institution
(BSI) formulas are frequently used to calculate the incentive payment
and examples of these are in the Appendix: Examples of some
commonly used schemes. As the setting of standard times usually
includes an assessment of how the individual being studied is
performing, which can have a significant impact on bonus earnings,
such judgments often result in disputes. Organizations using this
system often train trade union representatives in the technique to
promote understanding of the way judgments are made. An
alternative is to use ‘pre-determined motion time systems (PMTS)’. In
these systems a synthetic time for a job is built up from a database of
standard times for each basic physical movement. A common form of
this system is Methods Time Measurement (MTM). Allowances for
relaxation and contingencies are then added to the basic time to form
the standard time for the task. Such systems are arguably less open
to dispute than work-measured schemes as long as the synthetic times
upon which the standards are based are acceptable to the workers and
their representatives.

Measured Day Work (MDW)

Measured day work (MDW) is a hybrid between individual PBR and
a basic wage rate scheme. Pay is fixed and does not fluctuate in the
short term providing that the agreed level of performance is
maintained. MDW systems require performance standards to be set
through some form of work measurement and undergo revisions as
necessary. Motivation comes from good supervision, goal setting and
fair monitoring of the worker’s performance. MDW is difficult and
costly to set up and maintain. It requires total commitment of
management, workers and trade unions. There must be effective work
measurement and efficient planning, control and inventory control
systems. The pay structure is often developed by job evaluation and
with full worker consultation.

Appraisal/Performance Related Pay

Appraisal/performance related pay is generally used to link
progression through a pay band to an assessment of an individual’s
work performance during a particular reference period, often a year.
Alternatively, the reward may be an additional sum of money paid in
the form of a bonus. Assessments usually relate to an individual’s
achievements against agreed objectives relating to output and quality
of work but may also include an element of evaluation of personal
characteristics, such as adaptability, initiative and so on.

Advantages of Appraisal-Related Pay

 It may provide a ‘felt fair’ system of rewarding people
according to their contribution
 Higher performance within the organization may result
 It provides a tangible means of recognizing achievements
 People understand the performance imperatives of the
organization
 The link between extra pay and extra performance is clear.

Disadvantages
 Appraisal-related pay can prove difficult because measurements
of individual performance may be broad and lack objectivity
and may be inconsistent
 As noted, such schemes also usually involve only an annual
assessment and payout, which may weaken any incentive effect
 Many appraisal-related or performance pay schemes pay quite
small sums in terms of performance pay progression or annual
‘bonus’. While any such scheme may encourage workers to
focus on organizational objectives, they are unlikely to provide a
great deal of individual motivation and may even de-motivate.

Market-Based Pay
Market-based pay links salary levels, and progression through the
scales, to those available in the market. It is often used in conjunction
with a performance pay matrix, which allows faster progression from
the bottom of the scale to the market rate, which will be the mid-
point. Progression then slows, regardless of the performance of the
worker, as they are deemed to be earning above the market rate for
their job. It is rarely used as a scheme in isolation, but may be part of
a reward strategy incorporating several performance elements.

Competency and Skills-Based Pay

Competency and skills-based pay schemes have increased in
popularity in recent years. A direct link is created between the
acquisition, improvement and effective use of skills and competencies
and the individual’s pay. Competency and skills-based schemes
measure inputs, ie what the individual is bringing to the job, unlike
traditional performance based schemes which measure outputs.
Competency may be generally defined as the ability of an individual
to apply knowledge and skills and the behaviors necessary to perform
the job well. Competency based systems have become more wide-
spread because many organizations already use competencies in
recruitment and in performance appraisal for non-pay purposes, such
as development and training. It goes along with the increasing
tendency for pay to be linked to the abilities of the individual rather
than a single set rate for the job. Competency based pay is often used
in conjunction with an existing individual performance related pay
scheme and will reward on the basis of not only what the individual
has done, but how they have achieved their targets. Examples of
competencies may include leadership skill, or team-working ability.
Competency-related pay fits well with an overall organizational
philosophy of continuous improvement.
Reward is given for skills that can be used in other jobs in the same
job band, encouraging multi-skilling and increased flexibility.
Workers may also be allowed to develop the skills of a higher job
band.

Advantages
 Increased skill and flexibility in the workforce
  Reduction in traditional demarcations
 Increased efficiency
 Tangible benefits for workers in return for changes in working
practice.

Disadvantages
 Payroll costs will increase as workers gain higher rewards for
increased skills
 Increased training costs (time and expenses)
 Employers may be paying for skills/competencies rarely used
 Queuing for training - if people cannot be released, then there
might be resentment and questions of fairness
 Can de-motivate once workers reach a ceiling of their training
opportunities or there are no higher grade positions available
when they have completed their training
 Highly trained workers will be more marketable and may be
‘poached’ or tempted to leave.

Incentive Schemes for Groups/ Team Compensation

Group pay schemes include those based on the performance of the

team, plant or company. They also include ‘gain sharing’, which is a
form of added-value scheme which links pay to the achievement of
organizational goals. Share incentive plans involve the provision of
shares to employees - either by giving them direct or allowing them to
be bought - and can be related to performance

Team-Based Pay
While team-based pay has been around for some time - in the shape of
departmental or group bonus systems - it has taken on more
importance with the increased interest in team working. In team-based
pay systems the payments reflect the measurable goals of the team.
Team working may be most effective in situations involving high task
interdependence and creativity, although it can be difficult to define
the team, the goals, and the appropriate reward. Schemes can be
divisive if they are not open and transparent. Goals should not be
shifted once agreed - they need to be achievable.

The aim of team-based pay is to strengthen the team through

incentives – building a coherent, mutually supportive group of people
with a high level of involvement. The team achievements are
recognized and rewarded. Peer group pressure can also be helpful
in raising the performance of the whole team.

Advantages
 It can encourage team working and co-operation between
workers
 Team goals can clearly be integrated with organizational
objectives
 It encourages less effective performers and acts as an incentive
for the whole team to improve
 It may help in developing self-management within the team
 It enhances flexibility of working and encourages multi-skilling.

Disadvantages
 Difficulty in defining the team
 It can take time for teams to become well-defined and work
together effectively
 Individuals may feel their personal self-worth is diminished
 Peer pressure could be oppressive and lead to conformity rather
than creativity.
 Pressure on individuals perceived to be under-contributing or
not ‘fitting in’ can degenerate into bullying and/or harassment
 Each team should have equality of earnings opportunity or inter-
team movement will be restricted
 Introducing a new member to a team may be problematic, if the
team perceive that their earnings could be affected by a less
skilled operator
 Reduced flexibility because individuals in high performing
teams are often reluctant to move to other teams.
Gain Sharing Incentive Plan
Gain sharing is a form of added-value pay scheme linking workers’
pay to the achievement of organizational goals by rewarding
performance above a pre-determined target. This may be in the form
of a share in the profits generated by sales, or on measures of
customer satisfaction, but is almost always led by measures of
productivity, performance and quality. Gain sharing schemes have to
be based on factors that are in the workers’ control. Gain sharing
should be part of a long-term strategy to improve communications,
staff involvement and teamwork.
The goal is not to work harder, but more effectively. It may be used as
a replacement for bonus/piecework schemes, where quality is
sometimes lost to quantity. All workers and management who have
any involvement in the product of the organization should be included
in any gain share plan. In this way their support is encouraged so that
they can feel a direct responsibility for the plan’s success.
Performance measures and results should be made available and
everyone encouraged offering suggestions for improvements. Open
communications and exchange of information are crucial. Common
types of gain sharing schemes include:

Scanlon Plan

The Scanlon Plan is a specific type of gainsharing plan. The

philosophy behind the Scanlon plan is that employees should offer
ideas and suggestions to improve productivity and, in turn, be
rewarded for their constructive efforts. Improvement or gains largely
comes from working smarter not harder. Financial incentives under
the Scanlon plan are ordinarily offered to all the employees on the
basis of an established formula.
 It is an incentive plan developed in 1937 by Joseph Scanlon and
designed to encourage cooperation, involvement, and sharing of
benefits
  This formula measures labour costs as a proportion of total sales
and sets a standard ratio which will trigger some distribution of
savings to a pre-established formula.
 Scanlon plans have five basic features. Such as (1) philosophy of
cooperation, (2) identity, (3) competence, (4) involvement
system and (5) sharing of benefits formula.
 These plans work best in environments where employees have
relatively stable, long-term attachments to a single corporation.

  In a standard Scanlon plan, a series of production committees

operate on the departmental level to solicit and discuss ways to
improve productivity. A screening committee operates at a
higher level and is made up of members of the workforce and
representatives from management. This committee reviews the
progress made in improving efficiency and computes the amount
of additional compensation to be paid to workers as their share of
these improvements.

 Workers in a Scanlon Plan receive monthly or quarterly bonuses

that are directly tied to improvements in efficiency.

Scanlon Plan Base Ratio =

Sales dollars less returned goods ±Inventory changes

Cost of work and non-work time paid +pension +insurance

Rucker plan

The Rucker Plan is based on the same philosophy as the Scanlon

Plan. Committees are once again used to administer the plan. The
bonus is based on the historical relationship of the total earnings of
hourly employees to the production value that they create. Any
improvement in this relationship results in the incentive payout.
This is a refinement of the Scanlon plan which measures labour costs
against sales less the cost of materials and supplies and provides a
simple added-value calculation.

Rucker Plan Base Ratio =

Cost of all wages, benefits

Sales dollar value of product - goods returned - supplies,
services, materials

Improshare

When using Improshare, an organization pays a bonus based on the

overall productivity of the work group. The basis of measurement is
the number of products that a group finishes in a given time period.
Employees involved directly or indirectly in the work are included in
the bonus payout. The bonus is achieved when the work group gets
productivity gains obtained through lower hours to produce a finished
product. The bonus is split 50/50 between employees and the
organization.

Cafeteria Plan:
Under the cafeteria plan an employee is allowed to choose a plan
which suits their need from a variety of benefit plans. As we know
that each human being is unique in his own ways and hence the
motivational value of different incentive plans has varying degrees of
influence on each employee.
 RETIREMENT PLANS

The government of India provides for two mandatory contributions

from the employer for the purposes of providing support to the
employee and must be part of the overall individual compensation.

Provident fund. The Constitution of India, under “Directive

Principles of State Policy,” provides that the state shall, within the
limits of its economic capacity, make effective provisions for securing
the right to work, to education, and to public assistance in cases of
unemployment, old-age, sickness and disablement, and undeserved
want.
The Employees’ Provident Fund & Miscellaneous Provisions Act,
1952, was enacted by parliament and came into force in March 1952.
Presently, the following three schemes are in operation under the Act:
 the Employees’ Provident Fund Scheme, 1952;
 the Employees’ Deposit Linked Insurance Scheme, 1976; and
 the Employees’ Pension Scheme, 1995
(replacing the Employees’ Family Pension Scheme, 1971).

The Employees’ Provident Fund Organization, India, in New Delhi is

one of the largest provident fund institutions in the world in terms of
members and volume of financial transactions that it has been
carrying on.

Payment of gratuity. Gratuity is payable to an employee after he or

she has rendered continuous service for not less than five years and
when he or she either resigns or is terminated or has been rendered
disabled due to accident or disease. It is paid to an individual
nominated by the employee in case of his or her death. The maximum
amount that can be paid as gratuity is prescribed by law.

Employee State Insurance Corporation (ESIC). The promulgation

of the Employees’ State Insurance Act (ESI), 1948, envisaged an
integrated, needs based social insurance scheme that would protect the
interest of workers in contingencies that result in loss of wages or
earning capacity such as sickness, maternity, temporary or permanent
physical disablement, or death from employment injury. The act also
guarantees reasonably good medical care to workers and their
immediate dependents, and the benefits provided to them employees
under the act are in conformity with international labor organization
(ILO) conventions. In addition, the scheme also provides some other
needs-based benefits to insured employees. These include
rehabilitation allowance and vocational rehabilitation.
The scheme prescribes a wage ceiling and is applicable only to those
employees whose compensation (wage as defined by the act) is within
this ceiling. The act covers a large number of beneficiaries. An
interesting feature of the ESI scheme is that the contributions are
related to the paying capacity as a fixed percentage of the workers’
wages, whereas they are provided social security benefits according to
individual needs without distinction.
However, because the ESI is provided only to employees whose
salary is within the ceiling, it cannot cover those earning higher wages
and hence the coverage of this specific benefit is predominantly
restricted to the blue-collar employees. In light of this fact,
organizations also are turning to private providers to have employee
social security schemes, in addition to the Provident Fund and
Gratuity.
 COMPENSATION IN MNCs

For multinationals successfully mange compensation and benefits

requires knowledge of employment and taxation, customs
environment and employment practices of many foreign countries,
familiarity with currency fluctuations and the effect of inflation on
compensation and an understanding of why and when special
allowances must be supplied and which allowances are necessary in
what countries all within the context of shifting political, economic
and social conditions.

The level of local knowledge needed in many of these areas requires

specialist advice and many multinational retain the services of
consulting firms which may offer a broad range of services or provide
highly specialized services relevant to Human Resource Management
in a multinational context. International compensation management is
difficult issue due to two reasons.
First payment of the same pay scale for all the employees of a
particular rank meets the norm of equity and simplifies the task of
keeping track of disparate country by country compensation rates.
But, it may create more problems than it solves. The cost of living
may vary significantly from one country to another. For example, it is
enormously more expensive to live in London than in New Delhi.
Unless the cost of living differences are duly incorporated in
compensation levels, it may be highly difficult to make executives
take up the high cost overseas assignments. Thus, one of the most
difficult problems in managing compensation in multinationals is
establishing a consistent compensation measures between countries
that builds credibility and is fair and equitable.

Objectives of International Compensation Management

During course of compensation policies development the firm should
seek to satisfy the following objectives:
1. The compensation policy should be consistent with the overall
strategy, structure and business needs of the multi-national
companies.
2. The compensation policy must work to attract and retain staff in the
areas where the multinational has the greatest needs and
opportunities.
3. The compensation policy must be competitive and recognize
factors such as incentive for Foreign Service, tax equalization and
reimbursement for reasonable costs.
4. The compensation policy should facilitate the transfer of
international employees in the most cost-effective manner for the firm
5. The compensation policy should must give due consideration to
equity and ease of administration
6. The compensation policy should give financial protection in terms
of benefits, social security and living costs in the foreign location.
7. Compensation should give to the expatriate some opportunities in
terms of financial advancement through income and or/ savings.
8. The compensation should meet the issues such as employees
housing, education of children and recreation needs.

Key Components of an International Compensation

The international compensation is complex primarily because multi-
nationals must cater to three categories of employees:

Parent Country Nationals (PCN),

Third Country Nationals (TCN), and
Host Country Nationals (HCN).

Base Salary
The term base salary acquires a somewhat different meaning when
employees go abroad. In a domestic context, base salary denotes the
amount of cash compensation serving as a benchmark for other
compensation elements such as bonuses and benefits.
For expatriates, it is primary component of a package of allowances,
many of which are directly related to base pay. For example foreign
service premium, cost of living allowance, housing allowance and
also the basis for in service benefits and pension contributions. It may
be paid in home or local country currency. The base salary is the
foundation block for international compensation whether the
employee is a PCN or TCN. Major difference can occur in the
employee’s package depending on whether the base salary is linked to
the home country of the PCN or TCN, or whether an international rate
is paid.

Foreign Service Inducement or Hardship premium

Parent country nationals often receive a salary premium as an
inducement to accept a foreign assignment or as compensation for any
hardship caused by the transfer. Under such circumstances, the
definition of hardship, eligibility for the premium and amount and
timing of payment must be addressed. In cases in which hardship are
determined.

Allowances
Issues concerning allowances can be very challenging to a firm
establishing an overall compensation policy, partly because of the
various forms of allowances that exist.
 Cost of living allowance: which is typically receives the most
attention, involves a payment to compensate for difference in
expenditures between the home country and the foreign country.
Often this allowance is difficult to determine, so companies may
use the services of organization who are expert in calculating
above.
 Housing allowance: implies that employees should be entitled
to maintain their home-country living standards or, in some
cases, receive accommodation that is equivalent to that provided
for similar foreign employees and peers. Such allowances are
often paid on either an assessed or an actual basis. Other
alternative include company provide housing, either mandatory
or optional, a fixed housing allowance or assessment of a
portion of income, out of which actual housing costs are paid.
 Home leave allowance: Many employees cover the expense of
one or more trips back to the home each year. The purpose of
paying for such trips is to give expatriates the opportunity to
renew family and business ties, thereby helping them to avoid
 adjustment problems when they are repatriated. Although firms
traditionally have restricted the use of leave allowances to travel
home, some firms give expatriates the option of applying the
allowances to foreign travel rather than returning home.
 Education allowances: for expatriates the children are also an
integral part of any international compensation policy.
Allowances for education can cover items such as tuition,
language class tuition, enrolment fees, books and supplies,
transportation, room and board and uniforms.
 Relocation allowances: usually cover moving, shipping and
storage charges, temporary living expenses, subsidies regarding
appliance or car purchases and down payments or lease related
charges. Allowances regarding perquisites (cars, club
memberships, servants) may also need to be considered.
 Spouse Assistance: to help guard against or offset income lost
by an expatriate’s spouse as a result of relocating abroad.
Although some firms may pay an allowance to make up for a
spouse’s lost income.

Approaches to International Compensation

Two main approaches adopts by the MNCs in fixing compensation
for their employees are:

1. Going Rate Approach

2. Balance sheet Approach

1. Going Rate Approach

In this approach salary has been fixed based on the local market rates.
The local market rates are decided based on survey conducted in
comparing compensation of local nationals (Host country Nationals
(HCNs), expatriates of the same nationality and expatriates of all
nationalities. The selected survey comparison the base pay and
benefits offered.
Advantages
 Compensation paid with equality with local nationals
 This method of compensation is easy to calculate
  Compensation decided in identification with host country
 Equity is maintained amongst different country nationals
Disadvantages
 Variation in compensation is exist between assignments for the
same employee
 Variations between expatriates of the same nationality in
different countries
 Due to this method of compensation re-entry problems will
come in future.

2. Balance sheet Approach

The balance sheet approach aims to develop a salary structure that
equalizes purchasing power across countries so expatriates have the
same standard of living in their foreign assignment as they had at
home. There are three common methods implementing the balance
sheet compensation plan.

Home based Method- sets compensation based on the salary of a

comparable job in his or her home city.
Headquarters based Method set salary in terms of the salary of a
comparable job in the city where the MNCs has its headquarters and
Host Based Method- bases compensation on the prevailing pay
scales in the locale of the foreign assignment, plus foreign-service
premiums, extraordinary allowances, home country benefits, and
taxation compensation.

Advantages
 This method gives advantage in terms of equity between
assignments and between expatriates of the same nationality
 This approach facilitates expatriate re-entry
 In this approach it is easy to communicate to employees
Disadvantages
 This approach of compensation can result in great disparities
between the expatriates of different nationalities and between
expatriates and local nationals
 This approach of compensation can be complex to administer