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CHAPTER 2 - FRINGE BENEFITS AND STRATEGIC COMPENSATION PLANNING

Objectives:
a. Define fringe benefits;
b. Understand the objectives of fringe benefits;
c. List features of fringe benefits;
d. Understand different types of fringe benefits;
e. Recognize the recent practices of image benefits;
f. Know the principles of fringe benefits;
g. Define strategic compensation planning
h. Understand the process of compensation planning;
i. List different methods of compensation planning;
j. Know traditional compensation planning; and
k. Understand modern compensation planning.

A. INTRODUCTION
∙ 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”
B. 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:
o To create and improve sound industrial relations
o To boost up employee morale.
o To motivate the employees by identifying and satisfying their unsatisfied needs.
o To provide qualitative work environment and work life.
o To provide security to the employees against social risks like old age benefits and
maternity benefits.
o To protect the health of the employees and to provide safety to the employees
against accidents.
 o To promote employee’s welfare by providing welfare measures like recreation
facilities.
o To create a sense of belongingness among employees and to retain them.
Hence, fringe benefits are called golden hand-cuffs.
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o To meet requirements of various legislations relating to fringe benefits.

C. FEAUTURES OF FRINGE BENEFITS
o They are the payments and benefits to an employee by his employer in addition to
his normal earnings
o Fringe benefits are not linked to performance or efficiency of any employee
o Fringe benefits may be statutory or voluntary in nature
o Difference in fringe benefits may exist due to classification of employees based on
organizational status
o Fringe benefits are paid to all the employees based on their membership in the
organization
o Fringe benefits are indirect compensation because these are usually extended as a
condition of employment and are not directly related to performance.
o Fringe benefits involve labour cost for the employer and are not meant directly to
improve efficiency
o Fringe benefits may be statutory or voluntary. Provident fund is a statutory benefit
whereas housing is a voluntary benefit
o Fringe benefits raise the standard of living of the employees
D. 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. ∙ They must find a
balance between meeting or exceeding market expectations and maintaining the company
budget. Companies also know that employees will want benefits to increase over time, so
they need to create a package that has room to grow. The following are the main reason
company offers fringe benefits:
∙ 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.
∙ 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.
∙ 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.
∙ Utilization of Leisure Time - There is awareness about the effects of off-duty life style
on working life and vice versa. The importance of leave and holidays for rest and
recuperation is increasingly being understood. Keeping these in mind, organizations are

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providing various facilities for leave travel including expenses of travel maintenance of
guest houses etc.
∙ 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.
∙ 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.
∙ 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.
∙ 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.
∙ 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.
∙ Collective Bargain by Trade Unions - The growth and strength of trade unions has
substantially influenced the growth of company benefits and services.
∙ 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.
E. TYPES OF FRINGE BENEFITS / BASES CLASSIFICATION OF FRINGE BENEFITS ∙
 There is wide range of benefits available and they are categorized in many ways: ∙
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.
∙ Accounting Purpose Classification
o Payment for the time on the job. It includes overtime payment and cost of living
increases
o 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.
o Payment for varied benefits (a) pay for time not worked (b) insurance benefits (c)
Retirement benefits (d) Employee services
∙ 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,

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sick leave, discounts on company goods and services and allied intangible and tangible
benefits.
∙ 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.
F. TYPES OF FRINGE BENEFITS
∙ The following are the general types of fringe benefits offered to the employees ∙ 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.
∙ For Health Protection - Benefits under this head include accident insurance, disability
insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick
leave, etc.
∙ 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.
∙ 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.
∙ 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.
∙ 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.
∙ 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.
∙ Health Facility - Employee’s health should be taken care of in order to protect the employee
against accidents, unhealthy working conditions and to protect worker’s capacity. In India,
the Factories Act, 1948, stipulated certain requirements regarding working conditions with a
view to provide safe working environment. These provisions relate to cleanliness, disposal
of waste and effluents, ventilation and temperature, dust and fume, artificial humidification,
over-crowding, lighting, drinking water, latrine urinals, and spittoons.
∙ Safety Facility - Provisions relating to safety measures include fencing of machinery, work
on or near machinery in motion, employment of young person’s on dangerous machines,
striking gear and devices for cutting off power, self-acting machines, easing of new
machinery, probation of employment of women and children near cotton openers, hoists
and

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lifts, lifting machines, chains ropes and lifting tackles, revolving machinery, pressure plant,
floors, excessive weights, protection of eyes, precautions against dangerous fumes,
explosive or inflammable dust, gas etc. Precautions in case of fire, power to require
specifications of defective parts of test of stability, safety of buildings and machinery etc.
∙ 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.
∙ Adoption Assistance - Employee may be able to exclude from your income amounts paid
or expenses incurred by your employer for qualified adoption expenses if employee attempt
to adopt an eligible child.
∙ 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.
 ∙ Holiday Gifts - If employer gives employee a ham, turkey, or other item of nominal value at
Christmas or other holidays, it is not included in employee income. However, cash, gift
cards, or similar items are included in the income regardless of the amount.
∙ Qualified Employee Discounts - These are not taxable if the discount for services does not
exceed 20%. Discounts for merchandise are limited to the employer’s gross profit
percentage. No discounts are allowed for real estate, stock, or other investment property.
This is available to employees, spouses, dependents and retirees.
∙ 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. ∙
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.
∙ 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.
∙ Educational Assistance - Employer provides educational assistance to employee to go for
higher studies, training, children’s education etc.,
∙ 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.
∙ Retirement Planning Services - Employer has a qualified retirement plan, qualified
retirement planning services provided by the employer to employee and his spouse are not
included in employee income. This does not include the value of tax preparation,
accounting, legal, or brokerage services provided by employer. These items are taxable
income to employee.
∙ Retirement Plan Contributions - Employer’s contributions qualified retirement plans for the
employee are not included in his income. Generally speaking, contributions into a non
qualified plan are taxable income.

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∙ 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.
∙ 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.
∙ 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.
∙ Employee Death Benefits - These are payments made to the family or friends of a relative
who dies. They may or may not be taxable, depending on the facts and circumstances. If
the payments were for past services such as bonuses, accrued wages, or unused vacation
pay they are taxable income to the family. The important issue here is if the employee
would have received these payments had he lived.
G. CURRENT FRINGE BENEFITS PRACTICES
∙ Currently three main approaches are in vogue in the area of fringe benefits: o Innovation:
organizations are offering many new types of fringe benefits to their employees
o Flexibility in fringe benefits: employees are allowed to choose from an array of
benefits within certain cost limits and
o Harmonization is tried to be attempted to give a feeling of equity and fair play to
employees
H. PRINCIPLES OF FRINGE BENEFITS
∙ The following principles must govern the administration of fringe benefits o 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.
o The benefits must satisfy a real need. Employees resist or are indifferent to any
benefit which is not like by them
o The benefits must be cost-effective
o The benefits should be as broad based as possible
o Administration of the benefits should be preceded by sound planning o The wishes
of employees expressed by their union representatives and the bargaining power of the
union must be considered
o Employees should be educated to make use of the benefits.
I. PROCESS OF DETERMINATION OF COMPENSATION
∙ Today the compensation systems are designed aligned to the business goals and strategies.
The employees are expected to work and take their own decisions. Authority is being
delegated. Employees feel secured and valued in the organization. Organizations offer
monetary and non-monetary benefits to attract and retain the best talents in the competitive
environment. Some of the benefits are special allowances like mobile, company’s vehicle;
House rent allowances; statutory leaves, etc.

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J. TRADITIONAL COMPENSATION SYSTEMS

∙ In the traditional organizational structures, employees were expected to work hard and obey
the bosses’ orders. In return they were provided with job security, salary increments and
promotions annually. The salary was determined on the basis of the job work and the years
of experience the employee is holding. Some of the organizations provided for retirement
 benefits such as, pension plans, for the employees. It was assumed that humans work for
money, there was no space for other psychological and social needs of workers
K. CHANGE IN COMPENSATION SYSTEMS
∙ With the behavioral science theories and evolution of labour and trade unions, employees
started asking for their rights. Maslow brought in the need hierarchy for the rights of the
employees. He stated that employees do not work only for money but there are other needs
too which they want to satisfy from there job, i.e. social needs, psychological needs, safety
needs, self-actualization, etc. Now the employees were being treated as human resource.
Their performance was being measured and appraised based on the organizational and
individual performance. Competition among employees existed. Employees were expected
to work hard to have the job security. The compensation system was designed on the basis
of job work and related proficiency of the employee.
L. MODERN COMPENSATION SYSTEMS
∙ The Salary/Wage Survey - It is difficult to set pay rates if one don’t know what others paying,
so salary survey of what others are paying will play a big role in pricing jobs. Virtually every
employer conducts at least an informal telephone, newspaper, or internet salary survey.
∙ 2. Job Analysis - Job analysis is a systematic approach to defining the job role, description,
requirements, responsibilities, evaluation, etc. It helps in finding out required level of
education, skills, knowledge, training, etc for the job position. It also depicts the job worth
i.e. measurable effectiveness of the job and contribution of job to the organization.
∙ Job Description - Job description refers the requirements an organization looks for a
particular job position. It states the key skill requirements, the level of experience needed,
level of education required, etc. It also describes the roles and responsibilities attached with
the job position. The roles and responsibilities are key determinant factor in estimating the
level of experience, education, skill, etc required for the job. It also helps in benchmarking
the performance standards.
∙ Job Position - Job position refers to the designation of the job and employee in the
organization. Job position forms an important part of the compensation strategy as it
determines the level of the job in the organization. For example management level
employees receive greater pay scale than non-managerial employees. The non-monetary
benefits offered to two different levels in the organization also vary
∙ Job Worth Job Worth refers to estimating the job worthiness i.e. how much the job
contributes to the organization. It is also known as job evaluation. Job description is used to
analyze the job worthiness. It is also known as job evaluation. Roles and responsibilities
helps in determining the outcome from the job profile. Once it is determined that how much
the job is worth, it becomes easy to define the compensation strategy for the position
∙ Job Evaluation - The relative value of every job is determined through job evaluation. The
relative job value is then converted into money value so s to fix. Wage Survey: Wage or
salary surveys are conducted to find out wage or salary levels prevailing in the region or
industry for similar jobs. Other organizational problems such as recruitment policy, fringe
benefits, etc., are also considered.

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 ∙ 3. Groups Similar Jobs Into Pay Grades - Once the committee has used job evaluation to
determine the relative worth of each job, it can turn to the task of assigning pay rates to
each job; however, it will usually want to first group jobs into pay grades. It could, of course,
just assign pay rates to each individual job. But for a larger employer, such a plan would be
difficult to administer, since there might be different pay rates for hundreds or even
thousands of jobs. And even in smaller orgnisation, there’s a tendency to try to simplify
wage and salary structures as much as possible. Therefore, the committee will probably
group similar jobs into grades of pay purposes.
∙ 4. Developing Wage Structure - On the basis of foregoing steps an equitable wage structure
is prepared. While determining such a structure several points need to be considered; o a)
Legislation elating to wages
o b) Payments equal to, more or less than prevailing wage rates
o c) Number and width of pay grades
o d) Jobs to be placed in each pay grade
o e) Provision for merit increases
o f) Differentials between pay and plans and
o g) Dealing with wages or salaries that are not line with the structure
∙ 5. Wage Administration Rules - Rules are required to determine the degree to which
advance will be based on length of service rather than merit, the frequency with which pay
based on length of service rather than merit, the frequency with which pay increments will
be awarded, the rules that will govern promotions from one pay grade to another, and the
way control over wage/salary costs can be maintained. Once the rules are framed these
should be communicated to the employees.
∙ 6. Employee Appraisal - In order to reward merit and performance, it is necessary to
evaluate the performance of individual employees. Some differentials in pay are maintained
on the basis of employee’s performance. This is necessary to provide incentive for hard
work and superior performance is evaluated against predetermined standards of
performance.
∙
REFERENCES:

Bhatia S.K.(2003), NEW COMPENSATION MANAGEMENT IN

CHANGING ENVIRONMENT, Deep and Deep, Publishers, New Delhi.

Chappra T.N. (2006) ESSENTIALS OF ORGANIZATIONAL BEHAVIOR,

Dhanpat Rai and Company Delhi.

Fisher, Cynthia D, Schoenfeld Lyle F. Shaw James. B (2004) HUMAN

RESOURCE MANAGEMENT, Biztantra, New Delhi p.543.
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LINKS
TOPICS LINKS FOR VIDEO

Objectives of Fringe Benefits https://youtu.be/aClkdVsRnlc

Features of Fringe Benefits https://youtu.be/TIYXdMcBiXA

Factors Determining / Reasons for Offering Fringe Benefits https://youtu.be/9rss4jIOGXc

Types of Fringe Benefits / Base Classification of Fringe Benefits https://youtu.be/IgAs8mttrs8

Principles of Fringe Benefits https://youtu.be/OLl1VzHQUmk

Process of Determination of Compensation https://youtu.be/wZoRId6ADuo

Traditional Compensation System https://youtu.be/H_sPmLm6glo

Change in Compensation System https://youtu.be/lCx0m5IQQaQ

Modern Compensation System https://youtu.be/LRa3Nk9t9yg

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