Incentives, Benefits & Services

Compensation Management
Unit 3
Incentives, Benefits & Services
Motivation
# Concept of Motivation:
• The term motivation is derived from the word ‘motive”. The word ‘motive’ as a
noun means an objective, as a verb this word means moving into action. Therefore, motives
are forces which induce people to act in a way, so as to ensure the fulfillment of a particular
human need at a time. Behind every human action there is a motive. Therefore, management
must provide motives to people to make them work for the organization.
• Motivation may be defined as a planned managerial process, which stimulates

people to work to the best of their capabilities, by providing them with motives, which are
based on their unfulfilled needs.
• “Motivation means a process of stimulating people to action to accomplish desired

goods.” —William G. Scott
• “Motivation is the process of attempting to influence others to do your will through

the possibility of gain or reward.” — Flippo
Motivation is, in fact, pressing the right button to get the desired human behavior.
# Following are the outstanding Features of the concept of motivation:
1. Motivation is a personal and internal feeling:
Motivation is a psychological phenomenon which generates within an individual.
2. Motivation is need based:
If there are no needs of an individual, the process of motivation fails. It is a behavioral

concept that directs human behavior towards certain goals.
3. Motivation is a continuous process:
Because human wants are unlimited, therefore motivation is an ongoing process.
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4. Motivation may be positive or negative:
A positive motivation promotes incentives to people while a negative motivation

threatens the enforcement of disincentives.
5. Motivation is a planned process:
People differ in their approach, to respond to the process of motivation; as no two

individuals could be motivated in an exactly similar manner. Accordingly, motivation is a
psychological concept and a complex process.
6. Motivation is different from job satisfaction:
# The process of motivation is illustrated in the figure given below:
Figure 15.1 shows an employee has a need or urge for promotion to a higher position.
If this need is strong, the employee will fix his goal and find alternatives to reach the goal.
The might have two alternatives, namely, (i) hard work and (ii) enhancement of qualification
(e.g., getting MBA) and hard work.
He might choose the second alternative and succeed in getting promotion (goal
achievement) thus, his need for promotion would be satisfied and he would start again for the
satisfaction of a new need.
# Significance/Importance of Motivation:
Motivation is an integral part of the process of direction.
While directing his subordinate, a manager must create and sustain in them the desire
to work for the specified objectives:
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1. High Efficiency:
A good motivational system releases the immense untapped reservoirs of physical and
mental capabilities. A number of studies have shown that motivation plays a crucial role in
determining the level of performance. “Poorly motivated people can nullify the soundest
organisation.” said Allen.
By satisfying human needs motivation helps in increasing productivity. Better

utilisation of resources lowers cost of operations. Motivation is always goal directed.
Therefore, higher the level of motivation, greater is the degree of goal
accomplishment.
2. Better Image:
A firm that provides opportunities for financial and personal advancement has a better
image in the employment market. People prefer to work for an enterprise because of
opportunity for development, and sympathetic outlook. This helps in attracting qualified
personnel and simplifies the staffing function.
3. Facilitates Change:
Effective motivation helps to overcome resistance to change and negative attitude on

the part of employees like restriction of output. Satisfied workers take interest in new
organizational goals and are more receptive to changes that management wants to introduce
in order to improve efficiency of operations.
4. Human Relations:
Effective motivation creates job satisfaction which results in cordial relations between
employer and employees. Industrial disputes, labour absenteeism and turnover are reduced
with consequent benefits. Motivation helps to solve the central problem of management, i.e.,
effective use of human resources. Without motivation the workers may not put their best
efforts and may seek satisfaction of their needs outside the organisation.
The success of any organisation depends upon the optimum utilisation of resources.
The utilisation of physical resources depends upon the ability to work and the willingness to
work of the employees. In practice, ability is not the problem but necessary will to work is
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lacking. Motivation is the main tool for building such a will. It is for this reason that Rensis
Likert said, “Motivation is the core of management.” It is the key to management in action.
# Motivational Theories
1. Maslow’s Motivational Theory
Abraham Maslow is considered to be the father of Humanistic Psychology, also

known as the “Third Force”. Humanistic Psychology incorporates aspects of both Behavioral
Psychology and Psychoanalytic Psychology. Behaviorists believe that human behavior is
controlled by external environmental factors. Psychoanalytic Psychology is based on the idea
that human behavior is controlled by internal unconscious forces. Though he studied both
Behavioral and Psychoanalytic Psychologies, Maslow rejected the idea that human behavior
is controlled by only internal or external forces. Instead, Maslow’s motivation theory states
that man’s behavior is controlled by both internal and external factors. In addition he
emphasizes that humans have the unique ability to make choices and exercise free-will.
Maslow showed little interest in animal or laboratory studies of human behavior. He

chose instead to collect data for his theories by studying outstanding individuals. His studies
led him to believe that people have certain needs which are unchanging and genetic in origin.
These needs are the same in all cultures and are both physiological and psychological.
Maslow described these needs as being hierarchal in nature, meaning that some needs are
more basic or more powerful than others and as these needs are satisfied, other higher needs
emerge.
Maslow’s Motivational Theory
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Maslow Motivation Theory: the Hierarchy of Needs
The Maslow motivation theory is typically represented by 5 steps:
• Physiological needs - such as hunger, thirst and sleep
• Safety needs - such as security, protection from danger and freedom from pain.
• Social needs - sometimes also referred to as love needs such as friendship, giving and
receiving love, engaging in social activities and group membership.
• Esteem needs - these include both self-respect and the esteem of others. For example, the
desire for self-confidence and achievement, and recognition and appreciation.
• Self-actualization - This is about the desire to develop and realize your full potential. To
become everything you can be.
Maslow’s Hierarchy of Needs
Maslow believed that human beings have a strong desire to reach their full potential.
In his own words: “A man’s desire for self-fulfillment, namely the tendency for him to
become actually in what he is potentially: to become everything that one is capable of
being….”
Understanding Maslow’s Needs Hierarchy
To understand Maslow’s thinking it’s worth noting some of his main assertions:
• Broadly, as one set of needs is met, the next level of needs become more of a
motivator to an individual.
• A satisfied need is not a motivator.
• Only unsatisfied needs motivate an individual. We have an innate desire to work our
way up the hierarchy, pursuing satisfaction in higher order needs.
• Self-actualization stimulates a desire for more due to what Maslow explained as

“peak experiences”.
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2. Herzberg›s Motivation-Hygiene Theory (Two Factor Theory)
To better understand employee attitudes and motivation, Frederick Herzberg

performed studies to determine which factors in an employee’s work environment caused
satisfaction or dissatisfaction. He published his findings in the 1959 book The Motivation to
Work. The studies included interviews in which employees where asked what pleased and
displeased them about their work. Herzberg found that the factors causing job satisfaction
(and presumably motivation) were different from those causing job dissatisfaction. He
developed the motivation-hygiene theory to explain these results. He called the satisfiers
motivators and the dissatisfies hygiene factors, using the term “hygiene” in the sense that
they are considered maintenance factors that are necessary to avoid dissatisfaction but that by
themselves do not provide satisfaction. The following table presents the top six factors
causing dissatisfaction and the top six factors causing satisfaction, listed in the order of
higher to lower importance.
Factors Affecting Job Attitudes
Herzberg reasoned that because the factors causing satisfaction are different from
those causing dissatisfaction, the two feelings cannot simply be treated as opposites of one
another. The opposite of satisfaction is not dissatisfaction, but rather, no satisfaction.
Similarly, the opposite of dissatisfaction is no dissatisfaction. While at first glance this

distinction between the two opposites may sound like a play on words, Herzberg argued that
there are two distinct human needs portrayed. First, there are physiological needs that can be
fulfilled by money, for example, to purchase food and shelter. Second, there is the
psychological need to achieve and grow, and this need is fulfilled by activities that cause one
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to grow. From the above table of results, one observes that the factors that determine whether
there is dissatisfaction or no dissatisfaction are not part of the work itself, but rather, are
external factors. Herzberg often referred to these hygiene factors as “KITA” factors, where
KITA is an acronym for Kick In The A..., the process of providing incentives or a threat of
punishment to cause someone to do something. Herzberg argues that these provide only
short-run success because the motivator factors that determine whether there is satisfaction or
no satisfaction are intrinsic to the job itself, and do not result from carrot and stick incentives.
Implications for Management
If the motivation-hygiene theory holds, management not only must provide hygiene
factors to avoid employee dissatisfaction, but also must provide factors intrinsic to the work
itself in order for employees to be satisfied with their jobs. Herzberg argued that job
enrichment is required for intrinsic motivation, and that it is a continuous management
process. According to Herzberg:
• The job should have sufficient challenge to utilize the full ability of the employee.
• Employees who demonstrate increasing levels of ability should be given increasing

levels of responsibility
• If a job cannot be designed to use an employee’s full abilities, then the firm should
consider automating the task or replacing the employee with one who has a lower level of
skill. If a person cannot be fully utilized, then there will be a motivation problem.
Critics of Herzberg’s theory argue that the two-factor result is observed because it is
natural for people to take credit for satisfaction and to blame dissatisfaction on external
factors.
Furthermore, job satisfaction does not necessarily imply a high level of motivation or
productivity. Herzberg’s theory has been broadly read and despite its weaknesses its enduring
value is that it recognizes that true motivation comes from within a person and not from
KITA factors.
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3. Adams’ Equity Theory
John Stacey Adams, a workplace and behavioral psychologist, put forward his Equity
Theory on job motivation in 1963. There are similarities with Charles Handy’s extension and
interpretation of previous simpler theories of Maslow, Herzberg and other pioneers of
workplace psychology, in that the theory acknowledges that subtle and variable factors affect
each individual’s assessment and perception of their relationship with their work, and thereby
their employer.
However, awareness and cognizance of the wider situation - and crucially comparison
- feature more strongly in Equity Theory than in many other earlier motivational models.
The Adams’ Equity Theory model therefore extends beyond the individual self, and
incorporates influence and comparison of other people’s situations - for example colleagues
and friends - in forming a comparative view and awareness of Equity, which commonly
manifests as a sense of what is fair.
When people feel fairly or advantageously treated they are more likely to be
motivated; when they feel unfairly treated they are highly prone to feelings of disaffection
and de-motivation. The way that people measure this sense of fairness is at the heart of
Equity Theory.
Equity, and thereby the motivational situation we might seek to assess using the
model, is not dependent on the extent to which a person believes reward exceeds effort, nor
even necessarily on the belief that reward exceeds effort at all. Rather, Equity, and the sense
of fairness which commonly underpins motivation, is dependent on the comparison a person
makes between his or her reward/investment ratio with the ratio enjoyed (or suffered) by
others considered to be in a similar situation.
Adams called personal efforts and rewards and other similar ‘give and take’ issues at
work respectively ‘inputs’ and ‘outputs’.
• Inputs are logically what we give or put into our work. Outputs are everything we
take out in return.
• these terms help emphasize that what people put into their work includes many
factors besides working hours, and that what people receive from their work includes many
things aside from money.
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• Adams used the term ‘referent’ others to describe the reference points or people with
whom we compare our own situation, which is the pivotal part of the theory.
• Adams Equity Theory goes beyond - and is quite different from merely assessing
effort and reward. Equity Theory adds a crucial additional perspective of comparison with
‘referent’ others (people we consider in a similar situation).
Equity theory thus helps explain why pay and conditions alone do not determine
motivation.
In terms of how the theory applies to work and management, we each seek a fair
balance between what we put into our job and what we get out of it. But how do we decide
what is a fair balance?
The answer lies in Equity Theory. Importantly we arrive at our measure of fairness -
Equity - by comparing our balance of effort and reward, and other factors of give and take -
the ratio of input and output - with the balance or ratio enjoyed by other people, whom we
deem to be relevant reference points or examples (‘referent’ others).
Crucially this means that Equity does not depend on our input-to-output ratio alone -
it depends on our comparison between our ratio and the ratio of others.
We form perceptions of what constitutes a fair ratio (a balance or trade) of inputs and
outputs by comparing our own situation with other ‘referents’ (reference points or examples)
in the market place as we see it.
In practice this helps to explain why people are so strongly affected by the situations
(and views and gossip) of colleagues, friends, partners etc., in establishing their own personal
sense of fairness or equity in their work situations.
Adams Equity Theory is therefore a far more complex and sophisticated motivational
model than merely assessing effort (inputs) and reward (outputs).
The actual sense of equity or fairness (or inequity or unfairness) within Equity Theory
is arrived at only after incorporating a comparison between our own input and output ratio
with the input and output ratios that we see or believe to be experienced or enjoyed by others
in similar situations.
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This comparative aspect of Equity Theory provides a far more fluid and dynamic
appreciation of motivation than typically arises in motivational theories and models based on
individual circumstance alone.
For example, Equity Theory explains why people can be happy and motivated by their
situation one day, and yet with no change to their terms and working conditions can be made
very unhappy and de-motivated, if they learn for example that a colleague (or worse an entire
group) is enjoying a better reward-to-effort ratio.
It also explains why giving one person a promotion or pay-rise can have a
demotivating effect on others.
Note also, importantly, that what matters is the ratio, not the amount of effort or
reward per se.
This explains for example why and how full-time employees will compare their
situations and input-to-output ratios with part-time colleagues, who very probably earn less,
however it is the ratio of input-to-output - reward-to-effort - which counts, and if the part-
timer is perceived to enjoy a more advantageous ratio, then so this will have a negative effect
on the full-timer’s sense of Equity, and with it, their personal motivation.
Remember also that words like efforts and rewards, or work and pay, are an
oversimplification - hence Adams’ use of the terms inputs and outputs, which more aptly
cover all aspects of what a person gives, sacrifices, tolerates, invests, etc., into their work
situation, and all aspects of what a person receives and benefits from in their work and wider
career, as they see it.
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If we feel are that inputs are fairly rewarded by outputs (the fairness benchmark being
subjectively perceived from market norms and other comparable references) then generally
we are happier in our work and more motivated to continue inputting at the same level.
If we feel that our ratio of inputs to outputs is less beneficial than the ratio enjoyed by
referent others, then we become de-motivated in relation to our job and employer.
People respond to a feeling of inequity in different ways. Generally the extent of de

motivation is proportional to the perceived disparity with other people or inequity, but for
some people just the smallest indication of negative disparity between their situation and
other people’s is enough to cause massive disappointment and a feeling of considerable
injustice, resulting in de-motivation, or worse, open hostility.
Some people reduce effort and application and become inwardly disgruntled, or
outwardly difficult, recalcitrant or even disruptive. Other people seek to improve the outputs
by making claims or demands for more reward, or seeking an alternative job.
Understanding Equity Theory - and especially its pivotal comparative aspect – helps
managers and policy-makers to appreciate that while improving one person’s terms and
conditions can resolve that individual’s demands (for a while), if the change is perceived by
other people to upset the Equity of their own situations then the solution can easily generate
far more problems than it attempted to fix.
Equity Theory reminds us that people see themselves and crucially the way they are
treated in terms of their surrounding environment, team, system, etc - not in isolation – and so
they must be managed and treated accordingly.
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Adams’ Equity Theory:
4. Expectancy Theory
Expectancy theory proposes that a person will decide to behave or act in a certain way
because they are motivated to select a specific behavior over other behaviors due to what they
expect the result of that selected behavior will be. In essence, the motivation of the behavior
selection is determined by the desirability of the outcome. However, at the core of the theory
is the cognitive process of how an individual processes the different motivational elements.
This is done before making the ultimate choice. The outcome is not the sole determining
factor in making the decision of how to behave.
Expectancy theory is about the mental processes regarding choice, or choosing. It

explains the processes that an individual undergoes to make choices.
In the study of organizational behavior, expectancy theory is a motivation theory first

proposed by Victor Vroom of the Yale School of Management. This theory emphasizes the
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needs for organizations to relate rewards directly to performance and to ensure that the
rewards provided are those rewards deserved and wanted by the recipients.
Victor H. Vroom (1964) defines motivation as a process governing choices among

alternative forms of voluntary activities, a process controlled by the individual. The
individual makes choices based on estimates of how well the expected results of a given
behavior are going to match up with or eventually lead to the desired results. Motivation is a
product of the individual’s expectancy that a certain effort will lead to the intended
performance, the instrumentality of this performance to achieving a certain result, and the
desirability of this result for the individual, known as valence.
Key Elements
The Expectancy Theory of Motivation explains the behavioral process of why

individuals choose one behavioral option over another. It also explains how they make
decisions to achieve the end they value. Vroom introduces three variables within the
expectancy theory which are valence (V), expectancy (E) and instrumentality (I).
The three elements are important behind choosing one element over another because
they are clearly defined: effort-performance expectancy (E>P expectancy), performance-
outcome expectancy (P>O expectancy).
Three components of Expectancy theory: Expectancy, Instrumentality, and Valence
1. Expectancy: Effort → Performance (E→P)
2. Instrumentality: Performance → Outcome (P→O)
3. Valence- V(R)
Expectancy: Effort → Performance (E→P)
Expectancy is the belief that one’s effort (E) will result in attainment of desired
performance (P) goals. Usually based on an individual’s past experience, self-confidence
(self efficacy), and the perceived difficulty of the performance standard or goal. Factors
associated with the individual’s Expectancy perception are self efficacy, goal difficulty, and
control. Self efficacy is the person’s belief about their ability to successfully perform a
particular behavior. Goal difficulty happens when goals are set too high or performance
expectations that are made too difficult are most likely to lead to low expectancy perceptions.
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Control is one’s perceived control over performance. In order for expectancy to be

high, individuals must believe that they have some degree of control over the expected
outcome.
Instrumentality: Performance → Outcome (P→O)
Instrumentality is the belief that a person will receive a reward if the performance
expectation is met. This reward may come in the form of a pay increase, promotion,
recognition or sense of accomplishment. Instrumentality is low when the reward is the same
for all performances given. Factors associated with the individual’s instrumentality for
outcomes are trust, control and policies. If individuals trust their superiors, they are more
likely to believe their leaders promises. When there is a lack of trust in leadership, people
often attempt to control the reward system.
When individuals believe they have some kind of control over how, when, and why
rewards are distributed, Instrumentality tends to increase. Formalized written policies impact
the individuals’ instrumentality perceptions. Instrumentality is increased when formalized
policies associates rewards to performance.
Valence- V(R)
Valence: the value the individual places on the rewards based on their needs, goals,
values and Sources of Motivation. Factors associated with the individual’s valence for
outcomes are values, needs, goals, preferences and Sources of Motivation Strength of an
individual’s preference for a particular outcome.
The valence refers the value the individual personally places on the rewards. -1 →0→
+1 -1= avoiding the outcome 0= indifferent to the outcome +1=welcomes the outcome
In order for the valence to be positive, the person must prefer attaining the outcome to
not attaining it.
Expectancy Theory of motivation can help managers understand how individuals

make decisions regarding various behavioral alternatives. The model below shows the
direction of motivation, when behavior is energized:
Motivational Force (MF) = Expectancy x Instrumentality x Valence
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When deciding among behavioral options, individuals select the option with the
greatest motivational force (MF). Expectancy and instrumentality are attitudes (cognitions)
that represent an individual’s perception of the likelihood that effort will lead to performance
that will lead to the desired outcomes. These perceptions represent the individual’s subjective
reality, and may or may not bear close resemblance to actual probabilities. These perceptions
are tempered by the individual’s experiences (learning theory), observations of others (social
learning theory), and self-perceptions. Valence is rooted in an individual’s value system. One
example of how this theory can be applied is related to evaluating an employee’s job
performance. One’s performance is a function of the multiplicative relationship between
one’s motivation and ability [P=f (M*A)] Motivation can be expressed as [M=f (V*E)], or as
a function of valence times expectancy. In layman’s terms, this is how much someone is
invested in something along with how probable or achievable the individual believes the goal
is.
Victor Vroom’s expectancy theory is one such management theory focused on

motivation. According to Holdford and Lovelace-Elmore (2001, p. 8), Vroom asserts,
“Intensity of work effort depends on the perception that an individual’s effort will result in a
desired outcome”. Vroom suggests that “for a person to be motivated, effort, performance
and motivation must be linked” (Droar, 2006, p. 2). Three factors direct the intensity of effort
put forth by an individual, according to Vroom; expectancy, instrumentality, and preferences
(Holdford and Lovelace-Elmore, 2001).
In order to enhance the performance-outcome tie, managers should use systems that
tie rewards very closely to performance. Managers also need to ensure that the rewards
provided are deserved and wanted by the recipients. In order to improve the effort
performance tie, managers should engage in training to improve their capabilities and
improve their belief that added effort will in fact lead to better performance.
• Emphasizes self-interest in the alignment of rewards with employee’s wants.
• emphasizes the connections among expected behaviors, rewards and organizational

goals
Expectancy Theory, though well known in work motivation literature, is not as

familiar to scholars or practitioners outside that field.
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# INCENTIVES PLAN
In today’s competitive business world of globalization organizations should formulate

compensation strategies keeping in mind their employees’ interest. 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. Incentive Strategy Formulation Process involves the following
steps:
• Organizations should first understand the need of incentive plans.
• They should set clear objectives as of why incentive plans are formulated, what are
the objectives.
• These objectives should be in alignment with organizational goals and objectives
• Various options for individual and group incentive plans should be explored.
• Benefits and disadvantages of each plan should be considered and from the various
options available one incentive plan should be chosen.
• Using the best incentive plan, compensation strategy should be formulated
Incentive Strategy Formulation Process
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# 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:
• 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.
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Suitability of Basic Rate System
• 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).
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• 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.
a) 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. Earnings may fluctuate through no fault of the individual. Supervisors and
managers may fail in their responsibilities towards workers by inconsiderate allocation of
work or using the incentive scheme to control output. Targets may not be accurate enough
resulting in the perception of easy or difficult jobs. Material shortages or delays can affect
production. 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
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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.
b) 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
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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. When the organization is
considering the relationship of performance to reward there will generally be a starting point
from which additional pay is attracted - performance at or below the starting point attracts no
additional payment, but performance above the starting point attracts additional payment at a
proportion of the basic wage or bonus calculator. Most schemes are ‘straight proportional’,
which allow the reward to rise in direct proportion to the rise in performance.
Examples of proportional incentive schemes are in the Appendix: Examples of some

commonly used schemes. Schemes should include provisions covering the effects of
downtime or other non-productive time on pay. Schemes should be controlled fairly and
regularly reviewed to ensure there is no degeneration of work-measured standards. The
operation of the scheme should be audited regularly. Arrangements need to be in place to
accommodate changes in product, material, specifications and methods – re-measurement of
the job may be necessary. Work-measured schemes may be appropriate in organizations that
work on short-cycle repetitive work, where changes in methods are infrequent, where shop-
floor hold ups or downtime are rare and where management should be capable of successfully
managing the scheme to increase productivity. Procedures should be in place to deal with any
grievances or issues that might arise. Even the simplest systems require a set of rules or
guidelines to ensure fairness and equal earning opportunity for equal effort.
c) 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. A version of MDW is
‘stepped’ MDW. Under this scheme the worker agrees to maintain one of a series of
performance levels and different levels of pay apply to each one. Movement between levels is
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possible, usually after a sustained change in performance.MDW is now relatively rare. It suits
organizations where a high, steady, predictable level of performance is sought, rather than
highest possible individual performance. MDW may be worth considering where stability of
earnings is important, or where the manufacturing cycle is lengthy.
d) 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.
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Linking pay to appraisal can also have the disadvantage of turning the appraisal into a
backward looking event where assessments are made and where workers may become
defensive, as opposed to using the appraisal to look forward and agree new objectives,
discuss development and any training needs. Where pay is at stake the individual may be less
receptive to work counseling and may seek to negotiate softer objectives at the outset. If a
worker rated ‘less than satisfactory’ receives no increase at all under an appraisal pay scheme
their motivation and morale may be adversely affected. It is important therefore to focus
appraisals on the assessment of performance, the identification of training needs and the
setting of objectives, not on any dependent pay. Any organization that chooses appraisal
related pay should have good industrial relations and good communications systems in place.
It is also important that the finance necessary to operate the scheme is available. Appraisal
related pay is most successfully introduced when it is linked to an existing appraisal scheme
that is working well, rather than a simultaneous introduction of appraisal and appraisal related
pay. It is important to monitor the appraisals, to pick up any drift from the overall distribution
of ratings and to check the fairness, equity and consistency of the ratings.
e) 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.
f) 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, i.e. 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
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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.
Difficulties may arise in defining the competencies valued by the organization. There
are differences between behaviors that are in-built and those that can be developed. Problems
may also arise because of the complex nature of what is being measured and the relevance of
the results to the organization. Judgments about people’s behavior may be less than objective.
Competency assessment rests on several factors - identifying the correct competencies,
choosing the right form of assessment and crucially, training the assessors to make accurate,
objective judgments. Skills-based pay also rests on workers gaining new and improved skills
- often in a manufacturing environment. 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. Skills may be based on National
Vocational Qualifications or internal evaluation and accreditation. Both competency-based
and skills-based pay have similar advantages and disadvantages:
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
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• 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. Some organizations utilize pay systems based on the
performance of the team, or group. Sometimes it may be the performance of the whole plant
or enterprise that is the trigger for the performance elements of pay.
a) 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. As with any other pay system, involvement of the
workers who will be affected is crucial in the design of the scheme. They must be involved
particularly in the way objectives are set, how performance is measured, and the basis on
which team rewards are distributed. Team-based pay has both advantages and disadvantages:
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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
• Inter-team competition may become dysfunctional for the organization as a whole
• Once effective the team could prove difficult to change or break-up in response to
changing processes, markets or competitive pressures
• 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
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b) Plant or Company Based Pay / Enterprise Incentive Plan
Plant or company based performance pay schemes are based on larger groups than
teams, for instance, divisional, plant or the whole organization. They may well use the same
factors as team-based or individual performance schemes, or perhaps total sales within a set
period, or comparative reductions in labour costs. The most common forms of plant or
company based payment systems tend to be based on overall profits (profit sharing), or
alternatively on schemes that owe more to the improvements within the direct control of the
workforce, such as added value or similar types of gain sharing systems. Overall profitability
in an organization is subject to factors outside the workforce’s control, such as depreciation,
economic changes, taxation, as well as the productivity improvements of individuals and
therefore may not reflect real efficiency gains by the workforce. Plant/company based pay
schemes are generally most effective in organizations where the workforce can clearly see the
results of their efforts. They are successful where communications and employment relations
are good and where the performance measurement is not subject to major changes arising
from external causes. There are advantages and disadvantages to plant and company based
pay schemes:
Advantages
• They can encourage wider co-operation within the plant, with workers being more
aware of their contribution to the total effort of the organization
• They provide a more obvious and direct link with the organization and its ability to
pay
• They may encourage greater flexibility in ways of working to increase efficiency

and productivity.
Disadvantages
• The direct incentive value of such schemes tends to be relatively weak, as the link
between daily work and bonus may seem quite remote, especially if the payments are
quarterly or annually
• Bonus payments may come to be seen as part of normal pay
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• Added-value schemes may involve complex financial information and may be

difficult to understand.
• 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
• 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.
Rucker plan
• 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.
Other gain sharing / value-added schemes
There are several forms which further refine the calculations and link bonus payments
to the increase in added value, above a given norm. Value-added deducts wages and salaries;
administration expenses, services and materials from income derived, and thus represents the
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value added by the production or other process within the organization. The level of added
value of an enterprise is an indicator of its efficiency.
• Share Incentive Schemes

Share incentive schemes involve the provision of shares to employees - either by
giving them direct or allowing them to be bought. The aim is to encourage staff involvement
in the company’s performance and therefore improve motivation and commitment. The Share
Incentive Plan (previously the All-employee share ownership plan (AESOP)). The share
incentive plan (“SIP”) was introduced by the government as part of the 2000 Finance Act.
SIPs can include four types of shares:
• Free shares
• Partnership shares
• Matching shares - companies can reward this commitment by giving up to 2
matching shares for each partnership share an employee buys
• Dividend shares - companies can provide for dividends paid on free shares,
partnership shares and matching shares to be reinvested in further shares
Other Schemes
Examples of other share incentive schemes include:
• Savings Related Share Option Schemes (SAYE)
• Enterprise Management Incentives (EMI
• Company Share Option Plans (CSOP)
Although share-owning schemes can appear attractive to employers it is not always
helpful to a company’s finances to have a constant turnover of shareholders. Companies
therefore need to be clear about how much of the equity can be held in this way and how to
create ways to get workers to keep their shares long-term.
• Executive Incentives
Ex Organizations offer heavy incentives to executives to retain the talented
workforce. The immense competition in the market has forced the organizations to offer
lucrative compensation packages. Performance based incentives comes out to be the only
solution for the demand-supply disparity. Who works- receives the appreciation and who
does not works- lacks behind. executive Incentives are more effective in the marketing
segment as it results in more and more sales. The business development executives strive for
more incentives and in the effort produce more business and receive heavy perks
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Executive Incentives
The issues that have come up related to executive incentives are:
• People believe that the incentives offered to the executives are much more than what
the stockholders receive.
• Some people also criticize the appraisals blaming the time duration given in
achieving the set performance standards.
• Some people also complaint of the un-fair distributions of incentives. They believe
that team members actually work and more appreciation is given to the team leader.
• Some people also complain that more incentives are given to place the organizations
on top of the salary surveys conducted by the respected research organizations
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• Profit sharing
The workers are regarded as partners of the industry and therefore, profits of the
enterprise must be shared with the labour because profits have been earned by the enterprise
with their active cooperation and therefore a rightful due must be given to them. Under the
scheme of profit sharing the profits of the concern are paid to the workers annually as agreed
upon, over and above the wages. Meaning-:profit sharing is meant to provide organization
wide incentive based on the profit earned by the organization.
The concept of profit-sharing started around 1880s and international cooperative

congress held in perish in 1889 considered the issue of profit sharing and defined it as “an
arrangement by which employee receive a share, fixed in advance, of profit, thus profit
sharing, as its name suggest, is the distribution of a portion of an organization profit among
employee at the end of financial year. The basic idea behind profit sharing is that the
organization profit is earned through the cooperative approach of all organization members
and, therefore should share that just like shareholders get dividend for the investment in their
capital.
Profit sharing refers to monetary benefits offer to the employees by the employer
apart from salary and bonuses. They are a form of incentives given to employees either
directly or perhaps indirectly, depending upon the profits made by the respective company.
The profit can be shared in the form of bonds, stocks or cash, which can be given at
the time of retirement. A company will share its pre-taxed profits with employees who are
eligible for it. The base salary of the employee will be taken into consideration and depending
upon the amount the profit will be shared.
Those employees having higher base salaries will get a higher share of the profits to
be shared. Profit sharing is a gesture extended by the company to make the employee feel that
he or she is also part of the company. Any employee who is well taken care of will perform
better. His or her motivation to work will be higher.
• Definition of Profit-Sharing
A plan that gives employees a share in the profits of the company. Each employee
receives a percentage of those profits based on the company’s earnings. Also known as
deferred profit-sharing plan “or “DPSP.”
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• Features of Profit-Sharing
• Profit sharing denotes the extra payment given to workers in addition to usual
wages/ salaries and allowances
• It is paid out of the net profits and as per the agreement between the two parties i.e.
employers and employees
• The sharing of profits in a particular proportion is decided by an agreement between

the employers and the employees
• The profit-sharing agreement is possible at the unit level or even at the industry
level. It is also possible to have such agreement on regional basis or industry-cum region
basis.
• The payment to workers under profit-sharing is generally made on cash basis, but it
is also possible to make such payment in shares or transfer of money to provident fund
account of the employees
• Workers share the profit only. They do not share the losses incurred by the firm.
Objectives of Profit –sharing
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• Profit-Sharing Methodologies of Companies
Typically, the percentage of the profits distributed to employees is agreed on by the

end of the year before distribution. In some profit-sharing plans, employees receive portion of
the profits at the end of the year; in other, the profits are deferred, placed in a fund and made
available to employees on retirement or on their leaving the organization. The following are
the show the companies in these days set the profit –sharing plan:
Profit-Sharing Plan Frame Work- Choices
• Basis of Profit Sharing
1. Individual Basis. Each worker may be paid that share of the profit which the
concern has earned due t his efforts. In this way, a direct relationship between his effort and
reward will be established. But it is very difficult to find out individual’s contribution to the
profit.
2. Departmental Basis. The profits earned by the particular department are shred by
the employees of the department. For this purpose, each department may have its own
arrangement.
3. Unit Basis. The profit earned by the unit is distributed among the employees and
the employer of the unit. Thus efforts of the workers are duly rewarded.
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4. Locality Basis. The profits of all the industrial units in a particular locality are
pooled and divided among the workers and employers of the locality in a predetermined ratio.
5. Industry Basis. The profits of all units belonging to a particular industry are added
together and divided between the employers and the employee in the given ratio. In this way,
the workers of the unit having losses, may also get the shares in the profits of the industry.
• Types of Profit Sharing Plans
Cash Plan
Cash payment profit-sharing plans pay out a percentage of profits to employees

annually or quarterly in the form of cash, check or stocks. The amount is taxed as ordinary
income when distributed.
Deferred Plan
Employers with deferred profit-sharing plans place a percentage of company profits

into a trust which the employee can access upon retirement. These plans are ideal for
companies with an older workforce that plans to stay with the company until retirement. One
advantage of deferred plans is that employers can write them off as a business expense for tax
purposes, and the taxes to the employees are deferred until the money is disbursed. Profit
sharing contributions are not paid out currently but rather are deferred to individual accounts
set up for each employee. Benefits—and any investment earnings accrued—are distributed at
retirement, death, disability, and sometimes at separation from service and other events.
Combination Plan
Cash and deferred plans can be mixed and matched in a variety of ways to give both
employers and employees the best of both worlds. In this type of plan, the participant has the
option of deferring all or part of the profits t-sharing allocation. The portion taken as a
deferral is placed into the participant’s account, where it and investment earnings accrue tax-
free until withdrawal. Any amount taken in cash is taxed at current rates. For tax purposes,
Internal Revenue Service (IRS) qualification of profit-sharing plans is restricted to deferred
or combination plans.
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•Advantages of the Profit-Sharing Scheme
(i) Increased Productivity. The scheme creates an interest and a desire among the
workers to work whole heartedly for the concern, because they realize that increase in output
or a reduction in cost will benefit not only the employer but also to their personal advantage.
(ii) Improved Industrial Relations. Industrial unrest and strike come to an end and are
replaced by the community of interests. The management and workers cooperate to maximize
the profits of the concern and thus ensure industrial peace and better industrial relations.
(iii) Increased Earning for Workers. It is an additional earning thus contributes

materially to the welfare of the workers. The lump sum paid to them can be sued for some
constructive purpose. It also ensures greater economic security.
(iv) Stabilization of Labour Force. The workers, who leave the concern during the
course of year, lose their share of profit hence the scheme is a positive incentive to the
workers to stick on their jobs. Thus, it ensures stabilization of labour.
(v) Improvement in supervision and Administration. As the workers are directly

linked with the share of profit and then their morale is keep thigh. They do not need strict
supervision. Disciplined workers only can keep the standard of administration high.
(vi) Realization of Social Justice. It achieve some measure of social justice by relating
earning of the workers to the company’s financial position and by affording them the place of
equal partners in an industrial enterprise.
(vii) Sense of Responsibility. The worker is self-motivated and feels a sense of

responsibility as he is interested in the prosperity of the concern.
(viii) Advantage the society. Society is benefited to a great extent by the reduction in
industrial disputes, reduction in the cost of production, improvement in the quality of the
goods and low price of the commodity. Wastage of man, material and machines are avoided
or minimized.
(ix) Increased National Income. Lesser industrial disputes, more production, better
quality, increased income of workers and employers are some of the contributor factors for
the increased national production and national income.
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• Disadvantages of Profit Sharing Scheme
(i) Not well founded
The profit results not merely from the availability of capital or efforts of labour. It
depends of several other factors such as efficiency of management, market conditions, on
several other factors beyond the control of the workers. Thus profit sharing maintains n
relationship between effort and reward.
(ii) Equal share
Profit sharing does not distinguish between efficient and inefficient workers. All
workers share equally irrespective of individual’s efficiency.
This lowers the morale of an efficient workers and their productivity comes down.
(iii) Delay in remuneration
A share of profit is paid to the worker only at the end of a specified period. In other
words, reward comes long after the exertion has been made. It reduces the eagerness to get
something for the efforts.
(iv) Industrial Unrest
During the lean years of depression, the profits of the concern are either very low or
are turned into losses, the workers morale will be at its lowest. Instead of eliminating
industrial disputes, it may well be a cause of industrial unrest.
(v) Determination of Profit
The determination of the exact amount of profit and the workers’ share thereof may
pose a number of complex problems, because management tempers account. Even if the
management is honest, trade unions may still have their own doubts about the correctness of
accounts.
(vi) Opposition by Trade Unions
Trade unions generally put up stiff opposition to the scheme on the plea that it is a
mischievous move on the part of the management to tempers account. Even if the
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management is honest, trade unions may still have own doubts about the correctness of
accounts.
(vii) Opposition by Employers
Employers even object to the profit sharing scheme. They argue that profit is partly
the reward of the risk which the employer runs. Further if there is a loss why should the
workers not bear the share of it?
(viii) Reduced Mobility of Labour
Profit sharing ensures the stability of workers. It means it reduces the mobility of
workers which is always not into the interest of the worker and the organization.
# Employee Stock Ownership Plans (ESOP)
Attracting and retaining competent professionals is an uphill task Employee Stock

Ownership Plan (ESOP) is an employee benefit plan. The scheme provides employees the
ownership of stocks in the company. It is one of the profit sharing plans. Employers have the
benefit to use the ESOPs as a tool to fetch loans from a financial institute. It also provides for
tax benefits to the employers. Organizations strategically plan the ESOPs and make
arrangements for the purpose. They make annual contributions in a special trust set up for
ESOPs. An employee is eligible for the ESOPs only after he/she has completed 1000 hours
within a year of service. After completing 10 years of service in an organization or reaching
the age of 55, an employee should be given the opportunity to diversify his/her share up to
25% of the total value of ESOPs. Law has also provided an amendment for the employees
who have attained the age of 60 and their ESOP shares are allotted after December 31, 1986.
The amendment provides those employees with an option to diversify their shares up to 50%.
a) How an Employee Stock Ownership Plan (ESOP) Works?
Employee ownership can be accomplished in a variety of ways. Employees can buy

stock directly, be given it as a bonus, can receive stock options, or obtain stock through a
profit sharing plan. Some employees become owners through worker cooperatives where
everyone has an equal vote. But by far the most common form of employee ownership in the
U.S. is the ESOP, or employee stock ownership plan. Almost unknown until 1974, about
11,000 companies now have these plans, covering over 13 million employees. Companies
can use ESOPs for a variety of purposes. Contrary to the impression one can get from media
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accounts, ESOPs are almost never used to save troubled companies—only at most a handful
of such plans are set up each year.
Instead, ESOPs are most commonly used to provide a market for the shares of
departing owners of successful closely held companies, to motivate and reward employees, or
to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In
almost every case, ESOPs are a contribution to the employee, not an employee purchase.
b) ESOP Rules
An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing

plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its
own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy
new or existing shares, with the company making cash contributions to the plan to enable it to
repay the loan. Regardless of how the plan acquires stock, company contributions to the trust
are tax-deductible, within certain limits.
Shares in the trust are allocated to individual employee accounts. Although there are
some exceptions, generally all full-time employees over 21 participate in the plan.
Allocations are made either on the basis of relative pay or some more equal formula. As
employees accumulate seniority with the company, they acquire an increasing right to the
shares in their account, a process known as vesting. Employees must be 100% vested within
three to six years, depending on whether vesting is all at once (cliff vesting) or gradual.
When employees leave the company, they receive their stock, which the company
must buy back from them at its fair market value (unless there is a public market for the
shares). Private companies must have an annual outside valuation to determine the price of
their shares.
In private companies, employees must be able to vote their allocated shares on major
issues, such as closing or relocating, but the company can choose whether to pass through
voting rights (such as for the board of directors) on other issues. In public companies,
employees must be able to vote all issues.
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C) Merits of Employee Stock Option
• To Understand the Company as Shareholder
It promotes mutually of interest between the employees and the employer. The
employee is encouraged to consider the view-point of a shareholder. He is also led to read
company literature such as operating results, balance sheet and annual report sent to him as a
shareholder which he/she would have probably ignored as an employee.
• To Know About the Future Progress of the Company
The employees get an opportunity to attend the meetings of the shareholders and have
detailed information about the progress and future plans of the company.
• To Motivate the Employee and Create Saving Habits
It promotes thrift, efficiency and security on the part of the employees. The
employees feel that they are not merely servants but masters also. The stake in company
profit and loss is a great motivating force towards increased efficiency.
• Developing Interest in Investing in Company
Worker’s income is supplemented by dividends. In the beginning, it may not be very

alluring but when some more shares are acquired by a worker out of the dividends received,
his interest goes on increasing.
• To Maintain Relationship between Company and Employee
The management also gains because of better cooperation, lesser supervision, reduced
labour turnover. Improved industrial relations, better understanding on the part of workers,
and elimination of waste, enhancement of efficiency.
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d) Uses for ESOPs
1. To buy the shares of a departing owner:
Owners of privately held companies can use an ESOP to create a ready market for
their shares. Under this approach, the company can make tax-deductible cash contributions to
the ESOP to buy out an owner’s shares, or it can have the ESOP borrow money to buy the
shares (see below).
2. To borrow money at a lower after-tax cost:
ESOPs are unique among benefit plans in their ability to borrow money. The ESOP
borrows cash, which it uses to buy company shares or shares of existing owners. The
company then makes tax-deductible contributions to the ESOP to repay the loan, meaning
both principal and interests are deductible.
3. To create an additional employee benefit:
A company can simply issue new or treasury shares to an ESOP, deducting their value
(for up to 25% of covered pay) from taxable income. Or a company can contribute cash,
buying shares from existing public or private owners. In public companies, which account for
about 5% of the plans and about 40% of the plan participants, ESOPs are often used in
conjunction with employee savings plans. Rather than matching employee savings with cash,
the company will match them with stock from an ESOP, often at a higher matching level.
e) Major Tax Benefits
ESOPs have a number of significant tax benefits, the most important of which are:
1. Contributions of stock are tax-deductible:
That means companies can get a current cash flow advantage by issuing new shares or
treasury shares to the ESOP, albeit this means existing owners will be diluted.
2. Cash contributions are deductible:
A company can contribute cash on a discretionary basis year-to-year and take a tax
deduction for it, whether the contribution is used to buy shares from current owners or to
build up a cash reserve in the ESOP for future use.
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3. Contributions used to repay a loan the ESOP takes out to buy company shares are
tax-deductible:
The ESOP can borrow money to buy existing shares, new shares, or treasury shares.
Regardless of the use, the contributions are deductible, meaning ESOP financing is done in
pretax dollars.
4. Sellers in a corporation can get a tax deferral:
In C corporations, once the ESOP owns 30% of all the shares in the company, the
seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain.
5. In S corporations, the percentage of ownership held by the ESOP is not subject to

income tax at the federal level (and usually the state level as well):
That means, for instance, that there is no income tax on 30% of the profits of an S
corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of
an S corporation wholly owned by its ESOP. Note, however, that the ESOP still must get a
pro-rata share of any distributions the company makes to owners.
6. Dividends are tax-deductible:
Reasonable dividends used to repay an ESOP loan, passed through to employees, or

reinvested by employees in company stock are tax-deductible.
7. Employees pay no tax on the contributions to the ESOP, only the distribution of their
accounts, and then at potentially favorable rates:
The employees can roll over their distributions in an IRA or other retirement plan or
pay current tax on the distribution, with any gains accumulated over time taxed as capital
gains. The income tax portion of the distributions, however, is subject to a 10% penalty if
made before normal retirement age.
f) Demerits of ESOP
1. Though voluntary in nature, some employees may feel they are being forced to
join.
2. Employees earnings at present and in future become subject to a greater risk (that
of performance of their employer)
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3. It is being used as a management tool to fend off takeover attempts. Holders of

employees owned stock often align with management to turn down bids that would not only
benefit outside stock holders but would also replace existing inefficient management and
restructure operations.
4. There is no direct relationship between the effort and rewards Therefore, ESOPs
suffer from many disadvantages and are effective only during periods of prosperity. Still,
they are continuously growing in popularity. A more extensive approach of employees stock
option plan result in employees actually owning all or significant parts of their employers
business. That is also known as Employee Stock Ownership Plan (ESOPs).
g) Appraisal of Employees Stock Option Plan
The main objectives of this scheme are to have good understanding between the
employer and the employee. In addition to that to act as shareholder of the company the
employee may know his role as shareholder. It may leads to the above advantages still many
employees feel stock option plan not the preferred method of investment due to the following
reasons:
• The employee is asked to invest savings as well as earnings in the company. Most of
the workers have hardly any surplus to invest in shares.
• There is no guarantee about increase in the market value of shares in future
• As long as the share price go up. The morale of the employee is high. When share
prices go down, the employees are like to blame the company.
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• Employees participation in company meetings, management and control, sometimes,

may prove to be more of an interference rather than an aid to cooperation.
• It is a very poor incentive because of indirect relationship between effort and reward
of employees and remoteness and uncertainty of reward.
h) Employees Stock Ownership Plan (ESOP) Vs. Employees Stock Option Scheme
(ESOS)
In contrast to the ESOP, the ESOS is simply a scheme through which participation of
employees in the shareholding of the company is encouraged. The employees can be allotted
shares through the preferential allotment route every financial year or they may be given
shares by way of reservation in a if fresh issue. Shares are issued under ESOS directly to the
employees.
However, in an ESOP, shares are issued to a trust which held the shares for the benefit
of a group of employees. The companies get tax benefits for making contribution to the
ESOP in USA. However, in India, such provisions are yet to be incorporated in the Income
Tax Act 1961.
i) Employees Stock Option Scheme in India
The Securities and Exchange Board of India (SEBI) guidelines for disclosure and
Investor Protection explain that ESOS is a voluntary scheme on the part of the company to
encourage employee’s participation in the company. A suitable percentage of reservation can
be made the issue for the employees of his company. However, under the existing guidelines,
5% of the new issue may be reserved for the ESOS subject in a maximum of 200 shares per
employee who agree to participate to the ESOS. Further, the membership of the ESOS should
be restricted only to the permanent employees of the company.
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# EMPLOYEE BENEFITS IN INDIA
Each organization has a distinctive method to treat their employees. The concept of
employee benefits comprises of the framework within which an organization operates its
functions and grows rapidly. It provides a form of social security in which the employees are
to contribute a part of their salaries and the employers must contribute on behalf of their
employees. This amount of money is a provision of efficient social security to all the
employees and is further paid at the time of retirement, emergencies, resignation or death(to
nominee).
There are several employee benefits that serve the purpose of financial comfort
at the workplace to the employees. Following will help you to understand this :
1. Provident Fund [PF]
Provident Fund (PF) is one of the main employee benefits in India serving platform of
savings for nearly all people working in any sector of organizations. It is a defined
contribution plan for providing financial security and stability to the people at their
retirement. Its purpose is to help employees save a fraction of their salary every month, to be
used in an event that the employee is temporarily or no longer fit to work or at retirement.
Provident fund is implemented by the Employees Provident Fund Organisation

(EPFO) of India. EPFO is a statutory body of the Indian Government under Labour and
Employment Ministry. Any organization having 20 or more employees is required by law to
register with the EPFO.
EPF is calculated on employee’s Basic+DA. An employee needs to compulsory

register for EPF contribution if his Basic+DA is below INR 15,000. But if Basic+DA is
above INR 15,000 then PF contribution is voluntary.
Employee Provident Fund is a fund which is composed of contributions made by

the employee along with the contribution by his employer. Employee and employer both need
to contribute 12% of Basic + DA. But, employer’s contribution is divided into 2 parts :
1) PF (3.67%)
2) Employee Pension Scheme [EPS] (8.33%)
This way the total of employer’s contribution is divided (3.67 + 8.33 = 12%).
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PF payment cycle should be completed by 15th of every month.
When an employee joins the company, two forms are to be filled if they want to be an
EPF member:
 Form 11
 Form 2
Form 11 is Declaration form and Form 2 is Nomination form. After filing these
forms, their contributions start accumulating towards PF account and are thus, a PF member!
To claim your PF amount, one needs to fill only ‘Composite claim form’. The
composite claim form is the combination of forms 19, 10C and 31. An employee can submit
the composite claim form to the employer after 2 months only on leaving the company to
claim their PF amount.
When an employee does not want to claim PF amount after leaving the old company
and wants to continue his PF in the new company then Form 13 – Transfer Claim Form is
to be submitted.
2. Gratuity
Gratuity is a defined benefit plan and an important form of social security employee
benefits. It is one of the many retirement benefits offered by the employer to the employee
upon leaving his job. Gratuity is a part of the salary that is received by an employee from
his/her employer in gratitude for the services offered by the employee in the company. An
employee may leave his job for various reasons such as retirement, by way of voluntary
retirement, resignation or for a better job elsewhere. Every factory or establishment would
pay gratuity to its employees if employees are more than 10; according to Payment of
Gratuity Act, 1972.
Gratuity is calculated on Basic+DA. It is TAX FREE to 10 Lakhs.
Eligibility to receive gratuity
An employee will be eligible for receiving gratuity:
 Only if he completes 4years 6months 1day when he/she resigns from the company for
continuous service with a single employer
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 When he/she retires from the company
 When he/she dies or suffers disability due to illness or accident
Note :
6 months+1 day of a year can be counted as one year.
Examples for consideration of years :
1) 7 years 6 months 1 day = 8 years (considered)
2) 7 years 6 months = 7 years (considered)
3) 7 years 4 months = 7 years (considered)
Calculation of gratuity :
Gratuity = (last payslip’s Basic+DA) * (15/26) * (number of years serviced)
Example:
Consider Basic+DA = 6500
Time period = 6 years 7 months
Calculation:
Gratuity = (Basic+DA) * (15/26) * no. of years serviced
= (6500) * (15/26) * 7
=26,250
An employee can give nomination by filling”Form F” at the time of joining

the company (during new joinee formalities). An employee can nominate one or more
members of his/her family to receive the gratuity amount in the event of the death of the
employee.
To claim the amount of gratuity:
Form I
 Application for gratuity.
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 To be submitted by the employee within 30 days of gratuity is payable.
Form J
 Application of gratuity by the nominee.
 To be submitted by the nominee to the employer within 30 days of gratuity is payable.
Form K
 Application of gratuity by the legal heir.
 To be submitted to the employer within a year of gratuity is payable.
Form L
 Notice for payment of gratuity.
 On verification of claims, the employer issues a notice to the employee/nominee/legal

heir about the amount of gratuity payable within 15 days of the receipt of the notice.
The payment should be made within 30 days of the receipt of application.
Tax Exemption on Gratuity payment to an employee as per Income Tax Act
For government employees, the entire amount of gratuity received on retirement or

death is exempted from income tax.
In case of non-government employees, income tax rules on gratuity depend on

whether employees are covered under the Payment of Gratuity Act, 1972 or not. For non-
government employees covered under the Gratuity Act, the income tax exemption on gratuity
received is least of the following:
 15 days salary based on the salary last drawn for every completed year of service or
part thereof in excess of 6 months. Therefore the amount that shall be exempt from
total Gratuity paid is calculated as Last drawn salary (Basic+DA) * 15/26 * years of
service.
 Maximum amount specified by the government which is currently Rs. 10 lakhs.
 Actual gratuity received.
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For non-government employees not covered under the Payment of Gratuity Act, the
income tax exemption on gratuity received is least of the following:
 Half month’s average salary for each completed year of service. While calculating
completed years, any fraction of a year shall be ignored.
 The maximum amount specified by the government which is currently Rs. 10 lakhs.
 Actual gratuity received.
3. Employee State Insurance [ESI]
It is a comprehensive employee benefit scheme for employees in the organized sector.

It is designed to accomplish the task of socially protecting the employees’ as defined in the
Employees’ State Insurance Act, 1948 against the impact of incidences of sickness,
maternity, disablement or death due to employment injury and to provide medical care to the
insured employees and their families.
The ESI scheme is administered by a corporate body called the “Employees’ State
Insurance Corporation”(ESIC), according to rules and regulations stipulated in the ESI Act
1948, which oversees the provision of medical and cash benefits to the employees and their
family.
ESI is calculated on ‘Gross amount’. Gross amount of an employee should be below

INR 21,000 as this is the limit to calculate ESI.
There are 2 cycles for ESI :
1) April – September
2) October – March
If gross amount of an employee increases more than INR 21,000 during the
employment then ESI is not calculated but one needs to complete the cycle compulsory from
the above mentioned.
The ESI funds are primarily built out of contribution from employers and employees
payable monthly at a fixed percentage of salary paid.
Contribution towards ESI
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 For registered organization :
 Contribution of Employee = 1.75%
 Contribution of Employer = 4.75%
 For newly registered organization :
 Contribution of Employee = 1%
 Contribution of Employer = 3%
Following are the benefits you can have by being a member of ESI :
 Medical Benefit
 Sickness Benefit
 Maternity Benefit
 Disablement Benefit
 Dependants’ Benefit
 Funeral Expenses
 Unemployment Allowance
Every claim for a benefit payable under the Act is to be made in writing to the
appropriate Branch Office on the form appropriate for the purpose of the benefit for which
the claim is made. Assistance for filling in the claim form in case of insured persons who
cannot do so they will be provided at the Branch Office.
Forms related to ESI to claim the benefits:
 Form 7a & Form 37 (Combined) – Application For Acceptance For Medical

Treatment And Certificate Of Re-Employment/Continuing Employment Respectively
 Form 6 – Register Of Employees
 Form 9 – Claim For Sickness/T.D.B./Maternity Benefit For Sickness
 Form 14 – Claim For Permanent Disablement Benefit
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 Form 15 – Claim Form For Dependant’s Benefit
 Form 16 – Claim For Periodical Payments Of Dependants’ Benefit
 Form 19 – Claim For Maternity & Notice Of Work
 Form 20 – Claim For Maternity Benefit After The Death Of An Insured Woman
Leaving Behind The Child
 Form 22 – Federal Expenses Claim Form
 Form 32 – Wage/Contributory Record For Disablement Benefit
4. Superannuation / Employee Pension
Superannuation fund benefit is one of the retirement employee benefits that an

employer provides to its employees. It can be a defined benefit or defined contribution. It is
an organizational pension program for the benefit of its employees. The plan is also known as
the pension plan. Provision of pension may be an attraction for employees to continue in the
organization and give their best to the organization, as a regular income even after retirement
has become a necessity.
There are two types of superannuation employee benefits:
 Defined benefit – Under this, the employee benefits from retirement or pension are
already known to an employee and it is fixed. Therefore, the risk of generating such
defined benefit is purely on an employer (usually based on a formula linked to salary,
years of service).
 Defined contribution – Under this, the contributions by the employer is only known
and fixed. However, the end employee benefits of retirement are not guaranteed. In
such type of benefits, the risk is with an employee as he doesn’t know how much he
will get at retirement. Employer contributes a certain amount to a Group
Superannuation policy and at the time of Retirement, the employee starts getting
pension depending on the plan variant which employer has opted for at the time of
contribution.
The company can contribute up to 15% of employee’s Basic+DA. This 15% is not
fixed, but a maximum limit is 15% of Basic+DA. Therefore, based on company rules, it may
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change the category of employees. However, there must be the same contribution to a
category of employees. The contribution is invested by the managing company as per the
guidelines set in the policy.
If an employee resigns, then he has an option to transfer this amount to the new
employer. If the new employer does not have superannuation scheme, then either he can
withdraw the whole amount which is taxable or retains the amount in the fund till the
retirement age.
Once an employee attains a retirement age then he/she has the following option: One
may withdraw 1/3 of accumulated amount and 2/3 must be converted as a pension. One can
choose to receive annuity returns either monthly, quarterly, half-yearly or annually. This
amount that you get periodically will be considered as an income and hence is taxable.
Increasing life expectancy, favourable savings & greater employment in the

organized sector will demand pension plans.
5. Insurance
One of the employee benefits in India is ‘Insurance’. The Insurance Regulatory and
Development Authority (IRDA), an agency of the Government of India, is the regulatory
body for the insurance sector’s supervision and development in India. It was established in
1999 under the IRDA Act. It is responsible for regulating, promoting and ensuring orderly
growth of the insurance and re-insurance business in India. The insurance industry of India
consists of 53 insurance companies of which 24 are in life insurance business and 29 are non-
life insurers.
Insurance is a contract between an individual (the policyholder) and an insurance

company. An entity which provides insurance is known as an insurer, insurance company, or
insurance carrier. A person or entity who buys insurance is known as an insured or
policyholder.
The insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be financially compensated. The
amount of money charged by the insurer to the insured for the coverage set forth in the
insurance policy is called the premium. The policyholder pays a premium to obtain insurance
coverage.
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If the policyholder experiences a loss which is potentially covered by the insurance

policy, such as a car accident or a house fire, the policyholder files a claim for reimbursement
with the insurance company. Claims may be filed by the policyholder directly with the
insurer or through brokers or agents. The policyholder will pay a deductible to cover part of
the loss and the insurance company will pay the rest.
Why people opt for Insurance?
Life is full of uncertainties. People opt for insurance purely for the reasons of
uncertainties in life. Insurance gives the insured a kind of peace of mind as he is assured of
making up the loss in the event of such uncertainties in life if it happens.
To assure better job performance, most of the companies provide insurance to its
employees as a form of employee benefits. A company may provide:
 Health Care Insurance
 Disability Insurance
 Life Insurance
 Flexible Compensation
Insurance is one of the most desirable employee benefits an organisation can offer
to their employees.
6. Leave Encashment
Leave encashment is one of the employee benefits in India. A salaried employee,

whether in government sector or private, is entitled to various types of leave such as casual
leave, sick leave, privileged leave and earned leave during their course of employment. Some
of these leaves can be carried forward to the next year while others cannot. Employees can
opt for encashment of these leaves if they haven’t availed them.
In short, a benefit that an employer offers an employee whereby an employee can

accumulate his/ her leave over a period of time and can encash for those accumulated leaves
is known as leave encashment.
However, the number of leaves that can be availed and encashed is decided by the
employer and also needs to check whether the leave is encashed during the course of
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employment or at the time of retirement. The taxation is again dependent on whether an

individual is a government or non-government employee.
Leave encashment during employment
If an employee opts for encashment of leaves during his course of employment, the
entire amount would be taxable under the head “Income from salary”. However, at the time
of filing for returns, the exemption is allowed on a certain amount.
Leave encashment at the time of retirement
For leave encashment at the time of retirement, an employee is entitled to exemptions

under Section 10(10AA). The amount, which is exempted, is different for government and
non- government employees. Leave encashment for government employees is fully exempt
from tax while non-government employees will be exempted on the least of the below:
 10 months’ average salary
 Actual leave encashment received
 30 days of cash equivalent of unveiled leave for every year of service
 Maximum limit allowed by the government is Rs. 3 lakhs
In case of resignation by the employee, the taxation applicable would be the same as
that for retirement.
In case of death of the employee, the leave encashment would be received by his/her
legal heir or nominee. The amount would be completely exempted from taxes for both
government and non-government employees.
Encashment of leave is a granted employee benefit and not a pensionary benefit.
7. Statutory Bonus
The statutory bonus is considered one of the employee benefits in which certain
categories of employees are entitled to receive a statutory bonus calculated by reference to
the employee’s salary and the employer’s profits, under the Payment of Bonus Act 1965. The
Act applies in respect of establishments with 20 or more employees.
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The minimum statutory bonus that an employer must pay an eligible employee is
generally 8.33% of the employee’s salary earned during the relevant accounting year and the
maximum statutory bonus payable is 20% of the employee’s salary earned during the
accounting year. It is paid on “Last financial audited balance sheet”.
The statutory bonus is calculated on employee’s Basic+DA. Employees earning up to

INR 21,000 per month (Basic+DA) and with service of at least 30, working days in the
relevant accounting year are eligible for the statutory bonus. If Basic+DA of an employee is
above INR 21,000 then generally statutory bonus is not applicable.
“FORM C” is to be filled to calculate statutory bonus report. Statutory bonus calculated or

minimum state wage, which one is higher, is considered for a bonus.
8. Labour Welfare Fund (LWF)
Labour welfare fund is a statutory contribution managed by individual state

authorities. The state labour welfare board determines the rate of the contribution and
frequency of the contribution.
The contribution and periodicity of paying fund to employees differ with every state.
In some states, the periodicity is annual and in some states, it is to be contributed half-yearly.
Following below shows the applicable ‘States’ with their contribution frequency and month:
• Andhra Pradesh
Contribution frequency – Annual
Contribution month – December
Return to be filled – Form F
• Chandigarh
Contribution frequency – Monthly
Contribution month – April-March
Return to be filled – Nil
• Chhattisgarh
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Contribution frequency – Half-yearly
Contribution month – June, December
Return to be filled – Form A
• Delhi
• Goa
Return to be filled – Form B
• Gujarat
• Haryana
Contribution month – January-December
• Karnataka
Return to be filled – Form D
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• Kerala
• Madhya Pradesh
• Maharashtra
Return to be filled – Form A1
• Punjab
Contribution month – April-March
• Tamilnadu
• West Bengal
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Return to be filled – Form D
These employee benefits may be statutory or non-statutory are generally provided by

many organized sectors and when employees are provided such benefits they feel satisfied to
work in your organisation.
# Statutory or Government mandatory employee benefits
Although most employee benefits are provided at the employer’s discretion, others are
required by law and mandatory. Statutory benefits include Social Security, unemployment
compensation, and workers’ compensation. These are known as statutory employee benefits
1. Workers’ Compensation
Job related illness, injuries, emotional impairment due to the job related injury, and
job related emotional strain are covered under Workers’ Compensation laws. The
compensation is provided by the employer through state insurance or a private carrier. The
system allows quick payment of cash benefits, rehabilitation and medical care given to
employees. Employers are protected from legal action by giving qualified workers the
appropriate compensation
2. Unemployment Compensation
These benefits are a part of the Social Security Act of 1935. According to Mandated
Benefits: 1997 Compliance Guide “Both federal and state statutes exist to protect and
preserve the income of individuals who lose their jobs” through no fault of their own. The
claims are paid to employees by the employer through taxes and the employer’s experience
rating. Employees can have up to 26 weeks of pay, at the rate of 50% to 80% of normal pay.
Terminated employees may not collect if they were discharged because of wilful misconduct,
labour stoppage such as strikes or have refused to accept suitable employment. (Note: As of
1/1/03 both employers and employees are required to pay unemployment compensation
taxes.)
3. Social Security
Benefits provide income to employees after retirement or in the event of permanent

disability. According to Personnel Policy Handbook, “The employee pays a percentage of
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income through payroll deductions for social security benefits up to a specified limit. The
employer pays an equal percentage in all covered wages of employees.”
4. COBRA
The Consolidated Omnibus Budget Reconciliation Act of 1986 requires businesses

with 20 or more employees to continue health care coverage to discharged employees.
COBRA excludes employees of churches, the federal government, and those terminated
because of gross misconduct. Individuals can have up to 18 months of medical coverage and
up to 36 months for dependents of displaced employees.
5. Family and Medical Leave
Employees who have worked for a private employer with 50 or more employees
within a 75 mile radius for one year and 1250 hours of service may be eligible for a leave of
absence under the Family and Medical Leave Act.
6. Minimum Wages:
If an employee is covered by the Minimum Wages Act, the minimum notified wages
must be paid to him or her. These vary from one region to another and from one job to
another. There is no exemption or proportional reduction in wages for employees who work
for a limited number of hours. If a lower payment is made, then the employer can be fined or
imprisoned.
7. Provident Fund:
Provident Fund is an emergency fund, set aside for use by employees. Provident fund
is compulsory in some cases and in some cases the employees can start it voluntarily.
Compulsory Provident fund:
Compulsory provident fund is applicable to employees working in a specific field.

Total Provident Fund contribution comes to 21.16% of the salary amount. Of this, 10% is
contributed by the employee from his / her salary, another 10% by the employer and the
balance 1.16% is contributed by the Government. The total collection of 20% should be
deposited with the PF Commissioner every month. The Fund is administered by the PF
Commissioner.
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Voluntary Provident Fund:
If Provident Fund Act does not apply to a particular field of work, the employer can
still provide this benefit to the employees. This can be done by depositing the desired amount
in a Public Provident Fund account in the name of each employee. In such a case, there is no
requirement of a fixed percentage or amount that must be contributed. The amount can
therefore be decided and fixed internally. However, it is best to make the contribution
regularly, at least on an annual basis.
# Voluntary or Discretionary Benefits for employees
These benefits may be classified as
1) Earned leave
2) Payments for time not worked,
a) Paid Vacations
b) Sick Leave
c) Surrogacy leave
d) Adoption leave
e) Menstrual leave
3) Health Benefits
4) Security benefits,
5) Employee services
6) Voluntary retirement benefit
7) Premium pay.
8) Funeral expenses
1. Earned leave:
Earned leave is mandatory for employees working in government sector but this leave
is not mandatory and it is a voluntary benefit given to employees working in private and
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corporate sector. Irrespective of casual leaves, medical leaves and optional holidays, earned
leaves can be availed by the employees for personal works. Unlike casual leaves some
organisations may not grant single earned leave. If an employee wants to avail this sort of
leave he/she needs to request for three or more in one stretch. in order to avail Leave under
this benefit, he/she must inform controlling/superior officer in advance but in case of casual
leave giving information in advance may not be necessary.
2. Payment for Time Not Worked—
In providing payment for time not worked, employers recognize that employees need
time away from the job for many purposes, such as maternity and paternity leave paid
vacations, payment for holidays not worked, paid sick leave, jury duty, national guard or
other military reserve duty, voting time, and bereavement time. Some payments are provided
for time off taken during work hours, such as rest periods, coffee breaks, lunch periods,
cleanup time, and travel time.
Adobe introduced improvements to its family time-off benefits for its employees in
India, to provide better support during the birth or adoption of a child. The new leave
programme includes 26 weeks of paid maternity leave for the birth or adoption of a child,
including time for recovery and bonding (previously 12 weeks), and two weeks of paid
paternity leave for fathers to bond after the birth of adoption of a child (previously one
week).
a) Paid Vacations:
Payment for time not worked serves important compensation goals. Paid vacations
provide workers with an opportunity to rest, become rejuvenated, and hopefully, become
more productive.
Monster.com offers several tips to make a smooth return to work after a vacation.
Leave a to-do list for teammates and colleagues; draft a to-do list for your first day back; set
up appropriate phone and email messages; plan and send requests to be fulfilled while you
are away; schedule an extra day off to use to prepare; keep expectations low for the first days
back to work.
Italy, France, and Germany top the list of average number of vacation days per
year, according to the World Tourism Organization. Italians receive an average of forty-two
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vacation days per year. Korea, Japan, and the U.S. are at the bottom of the list. Americans
receive an average of thirteen vacation days per year.
b) Sick Leave:
Each year many firms allocate, to each employee, a certain number of days of sick
leave, which they can use when ill.
Two of every three sick days used by U.S. workers were used for something other
than illness, according to a survey by human resources information company CCH. The
survey of more than 1.3 million workers found that family issues, personal needs, and stress
were the rationale for taking more than half of all sick days. About 32% of sick days were
actually used for personal illness
There is no federal law or mandate that requires an employer to give workers lunch
breaks or rest periods, although most companies allow and encourage them. Studies have
found up to 58% of American workers skip their lunch break. Health and workplace experts
suggest that this practice ultimately leads to worker burnout and diminished productivity.
c) Surrogacy leave
Surrogacy is an plan or agreement in which a woman ( called a surrogate mother)

agrees to carry a pregnancy for another person and gives birth to a baby so as to give it to
someone who wants to become parent of the newborn baby after birth.
Surrogacy is a practice where a woman gives birth to a child for an intending couple
and agrees to hand over the child after the birth to the intending couple. The leave granted to
the woman who is going to have a child through surrogate pregnancy is called as surrogacy
leave.
Accenture increased the adoption leave its staff can take to 22 weeks from the current
eight and added surrogacy leave, also of 22 weeks, as a new category, making the company
one of the first in India to equate surrogacy and adoption leaves to maternity leave practices.
In the year 2015, company extended its maternity benefits (to five months) and that has had a
tremendous impact on retention of women.
Realising that it has extended the same benefits to adoption and surrogacy. The first
few months is crucial for child nurturing and to bond with the child. It is not just in case of
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maternity but also in case of surrogacy and adoption. Hence organisation decided to extend
the benefits so that all its woman employees that it cares to support them in this crucial life
stage and so that senior high-potential woman employees do not leave the organisation at this
care-giving stage to never return.
Several companies, including the Tata Group, Mondelez India Foods and Microsoft,
have framed policies offering leave to employees who have a child through surrogacy.
Companies offer such flexible options to allow women an opportunity to boost their careers
even as they manage the demands of home and family. The Tata Group, for instance, offers
six months paid maternity leave for child born thorough surrogacy. Under its refurbished
parental policy, Mondelez India Foods also formally covers alternative forms of parenthood
like surrogacy. Such internal policies apply to all employees and they have been framed
given the transforming social conventions.
Technology Company Pitney Bowes introduced a new policy ‘Mayeri’, which

provides a six-month maternity leave for women employees in India and same applies to
employees who wants to have child by way of adoption and to have a child by surrogacy
(surrogate pregnancy).
India - The Surrogacy (Regulation) Bill, 2016 was introduced by Minister of Health
and Family Welfare, Mr. J. P. Nadda in Lok Sabha on November 21, 2016.
d) Paid leave to adoptive mothers.
According to the 2016 Working Mother and AVTAR 100 Best Companies for
Women in India, 70% of the companies offer paid leave to adoptive mothers. Only a few
companies in India are treating adoption on a par with maternity leave. Among the jet-setting
few is Accenture, which on Monday announced that it will provide 22 weeks leave
irrespective of whether the child is biological, adopted or birthed through surrogacy. And
among these, the ones that are most adoption friendly are IT majors, banks, insurers, FMCG
players and automotive, chemical companies.
Accenture joins a club of corporates such as Standard Chartered, Citibank, Barclays,

Murugappa group and HCL who choose to give 22-28 weeks leave for adoption surrogacy.
Accenture increased its adoption leave from the current eight weeks to 22 weeks and
included a clause that puts surrogacy leave at 22 weeks. The move gains particular
significance as the current statutory requirement is at three months or 12 weeks. While some
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companies choose to give parents as much as 28 weeks leave, others give their workforce one
week leave, said the study.
On average, Indian companies choose to give their workers nine weeks leave to
celebrate the latest entrant to their family. IT majors like HCL Tech lead the pack with 26
weeks surrogacy leave -on a par with maternity. Not far behind is Infosys with 16 weeks for
the primary caregiver. International banks such as Standard Chartered, Citibank and Barclays,
who choose to give between 22 and 28 weeks leave, have a liberal adoption policy globally.
In India, they retain the same guidelines -proving highly beneficial to heterosexual couples
who want to adopt, couples in a live-in relationship, same-sex couples and the rising
population of single dads. Barclays, which has revised its maternity policy from 84 days to
154 days, introduced adoption leave in 2014.
At Mondelez India, mothers, who choose to adopt, get three months leave versus six-
month maternity leave. But the company is offering a 15-month-flexi work option for all new
parents, irrespective of whether they chose to adopt. Family-run business Murugappa Group
also offer 24 weeks for adoption.
e) Menstrual leave
A digital media company in India is offering "menstrual leave" to female staff as part
of its official policy and calling on authorities to legislate to give all working women the
option of taking the first day of their period off work. The firm, which has 75 female workers,
announced the policy in a video on YouTube. It features female employees talking the first
day of their periods and reacting to the news of the company's "First Day of Period (FOP)
Leave" policy.
Menstruating women and girls are considered unclean and impure and are subjected
to discrimination during their periods when, for example, they may not be allowed to go to
the temple, or prepare and touch certain food. In the video, which has had over 150,000 views
since July 3 2017, Culture Machine's female staff talk of their experiences at work on the first
day of their periods and the taboos and lack of understanding around the issue of
menstruation.
"Sometimes with male bosses, you have to be a little discreet," said one female
employee.
The company has also launched a petition on change.org calling on India's Minister
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for Women Maneka Gandhi and the Minister for Human Resources Prakash Javadekar to
adopt a similar policy for all women irrespective of where they work. The petition, which has
attracted over 25,000 signatures in a week, asks why menstruation be kept hidden and why
women have to show up for work despite the pain and use "silly excuses".
3) Health Benefits—
Health benefits are often included as part of an employee’s indirect financial

compensation. Specific areas include health, dental, and vision care.
4) Security Benefits—
Security benefits include retirement plans, disability insurance, life insurance, and
supplemental unemployment benefits.
a) Retirement Plans:
Private retirement plans provide income for employees who retire after reaching a
certain age or having served the firm for a specific period of time. In a defined benefit plan,
the employer agrees to provide a specific level of retirement income that is either a fixed
dollar amount or a percentage of earnings. A defined contribution plan is a retirement plan
that requires specific contributions by an employer to a retirement or savings fund established
for the employee.
A 401(k) plan is a defined contribution plan in which employees may defer income up
to a maximum amount allowed.
An employee stock ownership plan (ESOP) is a defined contribution plan in which a

firm makes a tax-deductible contribution of stock shares or cash to a trust.
b) Disability Protection:
Workers’ compensation protects employees from job-related accidents and illnesses.

Some firms, however, provide additional protection that is more comprehensive.
c) Supplemental Unemployment Benefits (SUB): Supplemental unemployment benefits are

designed to provide additional income for employees receiving unemployment benefits.
d) Life Insurance:
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Group life insurance is a benefit commonly provided to protect the employee’s family
in the event of his or her death. Although the cost of group life insurance is relatively low,
some plans call for the employee to pay part of the premium.
e) Severance pay
Severance pay is the compensation or benefit paid in the form of money by employer
at the time of resignation on mutual agreement, retirement, laid off or employee leaving the
company on any reason expect on dismissal by misconduct. Typically, severance pay
amounts to a week or two of pay for every year that the employee was with the company.
Executives may receive a month's pay for each year of service and senior executives
generally receive severance pay as outlined in the employment contract. In addition to pay,
severance packages can include extended benefits, such as health insurance and outplacement
assistance to help the employee secure a new position.
Severance pay amounts may have peaked in 1999 when employers were giving laid
off workers an average of twenty-four weeks of pay, according to a study by finance
publisher Kiplinger. The study observed that the decline was a result of employees changing
jobs more frequently than in previous years, since severance pay is based on the length of
employment.
The Severance package may include the following:
1. The employees remaining regular pay
2. An additional payment based on months of service
3. Payment for unused vacation or sick leave
4. A payment in lieu of a required notice period
5. Medical, dental or life insurance - Some employers offer a continuation of

insurance benefits but they would not foot the paying of the bills
6. Retirement benefits
7. Stock options
8. Unemployment benefits - Fired employees can claim unemployment benefits if

they were fired for reasons other than serious misconduct
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Dell India has laid off around 70 people in the Dell software group (DSG) that was set
up some nine months ago in Bengaluru. DSG, which has nearly 110 people in India spread
across Bengaluru and Hyderabad, was expected to become a 400-500 people strong unit in
Bengaluru, but the plans were drastically scaled back following Dell's $67 billion acquisition
of EMC. It's not clear if the unit became redundant following the EMC acquisition or whether
Dell's business priorities changed after that expensive acquisition
The company offered a three month severance package to the affected employees.
Company executives told the employees that the layoffs were due to a "strategic decision".
A severance packages worth varies from company to company, as well as from

employee to employee. Employers may consider the following circumstances when
determining how much severance to offer:
 Pay level/salary received prior to termination
 Duration of employment
 Position at company
 Performance
 And other pertinent factors
It is important to remember that although you may feel like you deserve severance,
employers are not required to provide one in the event of a layoff. Eligibility for Severance
Pay
To be eligible for severance pay, an employee must be serving under a qualifying

appointment, have a regularly scheduled tour of duty, have completed at least 12 months of
continuous service, and be removed from Federal service by involuntary separation for
reasons other than inefficiency (i.e., unacceptable performance or conduct).
Computation of Severance Pay Fund
An employee's severance pay fund may consist of two parts-the basic severance pay
allowance and an age adjustment allowance, if applicable.
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Basic severance pay allowance
The basic severance pay allowance consists of- One week of pay at the rate of basic
pay for the position held by the employee at the time of separation for each full year of
creditable service through 10 years; Two weeks of pay at the rate of basic pay for the position
held by the employee at the time of separation for each full year of creditable service beyond
10 years; and Twenty-five percent of the otherwise applicable amount for each full 3 months
of creditable service beyond the final full year.
Age Adjustment Allowance
The basic severance pay allowance is augmented by an age adjustment allowance

consisting of 2.5 percent of the basic severance pay allowance for each full 3 months of age
over 40 years.
Thus, any severance pay you may have received in the past is taken into account when
applying the limit. Severance payments will be equal to your weekly pay at the time of
separation and will be paid out at regular pay period intervals (usually biweekly) until the
severance pay is exhausted. The only deductions made from severance pay are taxes, social
security (if applicable), and Medicare.
Severance Package as Goodwill to Employees
Many companies offer severance package as a sign of goodwill to former employees.

A good severance package says a great deal about the humanity of a business manager. It
may be designed in such a way that the size and the financial capacity of a business company
are also considered. The severance package need not be elaborate; it just has to be an honest
gesture on the part of the employer.
Having a good severance package to offer a departing employee creates a lasting

impression of understanding and goodwill.
A severance agreement is a contract, or legal agreement, between an employer and an

employee that specifies the terms of an employment termination, such as a layoff. Sometimes
this agreement is called a "separation" or "termination" agreement or "separation
agreement general release and covenant not to sue." Like any contract, a severance agreement
must be supported by "consideration." Consideration is something of value to which a person
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is not already entitled that is given in exchange for an agreement to do, or refrain from doing,
something.
Severance contracts often stipulate that the employee will not sue the employer for
wrongful dismissal or attempt to collect on unemployment benefits, and that if the employee
does so, then they must return the severance money.
Severance agreements are more than just a "thank you" payment from an employer.
They could prevent an employee from working for a competitor and waive any right to
possibly pursue a legal claim against the former employer. Also, an employee may be giving
up the right to seek unemployment compensation. It is important to review a severance
agreement carefully and contact an employment attorney to assist with the review.
If you were promised a certain amount of severance by your former employer and you
have not seen that money or have only seen a portion of it, your employer has violated a
contract and you can sue for that money and breach of contract.
While severance is not the same as an actual wage-as you did not actually work for
that sum of money-the fact that you entered into a contract stating that a certain amount of
severance pay would be granted is enough to justify a lawsuit.
5) Employee Services-
Organizations offer a variety of benefits that can be termed employee services. These
benefits encompass a number of areas including relocation benefits, child care, educational
assistance, food services/ subsidized cafeterias, and financial services.
 Relocation Benefits: Include shipment of household goods and temporary living

expenses, covering all or a portion of the real estate costs associated with buying a
new home and selling the previously occupied home.
 Child Care: Another benefit offered by some firms is subsidized child care. Here, the
firm may provide an on-site child care center, support an off-site center, or subsidize
the costs of child care.
 Educational Assistance: According to a recent benefits survey, 81 percent have

educational benefits that reimburse employees for college tuition and books.
Page 154
 Food Services/ Subsidized Cafeterias: Most firms that offer free or subsidized
lunches feel that they get a high payback in terms of employee relations.
 Financial Services: One financial benefit that is growing in popularity permits

employees to purchase different types of insurance policies through payroll deduction.
 Unique Benefits: A tight labour market gives birth to creativity in providing benefits.
6) Voluntary retirement benefit
When a company realizes that it needs to downsize its scale of operations, its first task
is to examine alternatives to layoffs. One of the most popular of these methods is early or
voluntary retirement.
In case of voluntary retirement the normal retirement benefits are calculated and paid
to all such employees who put in a minimum qualifying service Sometimes the employer may
encourage the employees to retire voluntarily with a view to reduce surplus staff and cut
down labour costs. Attractive compensation benefits are generally in built in all such plans
(referred to as golden handshake scheme). To reduce post retirement anxieties companies
these days organize counselling sessions, and offer investment related services (e.g. Citibank
, Bank of America) Some companies extend medical and insurance benefits to the retirees
also e.g. Indian Oil corporation.
7) Premium Pay—
Compensation paid to employees for working long periods of time or working under
dangerous or undesirable conditions.
 Hazard pay: Additional pay provided to employees who work under extremely
dangerous conditions.
 Shift differentials: Paid to employees for the inconvenience of working undesirable

hours.
8) Funeral expenses-
In case if an employee demise (if death occurs while doing work in the factory
premises or in the course of employment, such cases attracts Workmen's Compensation Act,
1923, however payment of the expenditure towards funeral is mandatory according to the
Page 155
section 4(4) ) i.e. Rs.5000/- according to the amendment in the year 2009) most of the
organisations pay funeral expenses to their family members to meet expenditure towards
Cremation or burial of a deceased employee which depends on their religious customs and
traditions.
If a deceased employee is a member of trade union under the Trade union Act 1926,
the deceased employee's family members can approach office bearers of that trade union
according section 15 of the Trade union Act 1926, for requesting funeral expenses or
religious ceremonies of the deceased employee.
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Compensation Management

Incentives, Benefits & Services

• Motivation may be defined as a planned managerial process, which stimulates

• “Motivation means a process of stimulating people to action to accomplish desired

• “Motivation is the process of attempting to influence others to do your will through

# Following are the outstanding Features of the concept of motivation:

1. Motivation is a personal and internal feeling:

Motivation is a psychological phenomenon which generates within an individual.

2. Motivation is need based:

If there are no needs of an individual, the process of motivation fails. It is a behavioral

3. Motivation is a continuous process:

Because human wants are unlimited, therefore motivation is an ongoing process.

4. Motivation may be positive or negative:

A positive motivation promotes incentives to people while a negative motivation

5. Motivation is a planned process:

People differ in their approach, to respond to the process of motivation; as no two

6. Motivation is different from job satisfaction:

# The process of motivation is illustrated in the figure given below:

Motivation is an integral part of the process of direction.

By satisfying human needs motivation helps in increasing productivity. Better

Effective motivation helps to overcome resistance to change and negative attitude on

1. Maslow’s Motivational Theory

Abraham Maslow is considered to be the father of Humanistic Psychology, also

Maslow showed little interest in animal or laboratory studies of human behavior. He

Maslow’s Motivational Theory

Maslow Motivation Theory: the Hierarchy of Needs

The Maslow motivation theory is typically represented by 5 steps:

• Physiological needs - such as hunger, thirst and sleep

Maslow’s Hierarchy of Needs

Understanding Maslow’s Needs Hierarchy

• A satisfied need is not a motivator.

• Self-actualization stimulates a desire for more due to what Maslow explained as

2. Herzberg›s Motivation-Hygiene Theory (Two Factor Theory)

To better understand employee attitudes and motivation, Frederick Herzberg

Factors Affecting Job Attitudes

Similarly, the opposite of dissatisfaction is no dissatisfaction. While at first glance this

Implications for Management

• Employees who demonstrate increasing levels of ability should be given increasing

3. Adams’ Equity Theory

People respond to a feeling of inequity in different ways. Generally the extent of de

Adams’ Equity Theory:

Expectancy theory is about the mental processes regarding choice, or choosing. It

In the study of organizational behavior, expectancy theory is a motivation theory first

Victor H. Vroom (1964) defines motivation as a process governing choices among

The Expectancy Theory of Motivation explains the behavioral process of why

Three components of Expectancy theory: Expectancy, Instrumentality, and Valence

1. Expectancy: Effort → Performance (E→P)

2. Instrumentality: Performance → Outcome (P→O)

Expectancy: Effort → Performance (E→P)

Control is one’s perceived control over performance. In order for expectancy to be

Instrumentality: Performance → Outcome (P→O)

Expectancy Theory of motivation can help managers understand how individuals

Motivational Force (MF) = Expectancy x Instrumentality x Valence

Victor Vroom’s expectancy theory is one such management theory focused on

• Emphasizes self-interest in the alignment of rewards with employee’s wants.

• emphasizes the connections among expected behaviors, rewards and organizational

Expectancy Theory, though well known in work motivation literature, is not as

In today’s competitive business world of globalization organizations should formulate

• Organizations should first understand the need of incentive plans.