55 Compensation management: Job evaluation; Incentives and fringe benefits

55.1 Concept of Compensation Management

Compensation management is “the systematic approach to providing monetary and non-monetary rewards in return for the work performed by employees”. It is one of the most consequential HR functions — for the employee it determines economic standing and self-worth, for the firm it is typically the largest expense (often 30-70 % of operating cost) and a critical lever for attracting, retaining and motivating talent. Compensation has two broad parts: direct compensation (wages, salaries, incentives, bonus) and indirect compensation (perquisites, fringe benefits, welfare, social security). A well-designed plan balances internal equity, external competitiveness, individual equity and legal compliance.

55.2 Objectives of Compensation

Objectives

Attract qualified talent.
Retain existing employees.
Motivate high performance.
Ensure internal equity (equal pay for similar work).
Ensure external competitiveness.
Comply with labour laws.
Control labour cost.
Align pay with strategy.

55.3 Wage Concepts in India

The Fair Wages Committee (1949) distinguished three concepts:

Three Wage Concepts in India

Concept	Working content
Minimum wage	Bare minimum to sustain physical efficiency and provide for education, medical and amenities
Fair wage	Above minimum; reflects industry’s paying capacity and prevailing rates
Living wage	Highest — provides for comforts, social needs, security; the ideal

The 15th Indian Labour Conference (1957) prescribed need-based minimum wage — for a worker, spouse and two children; 2,700 calories; 72 yards of cloth; rent equal to industrial housing rent; 20 % for fuel, lighting and other items.

55.4 Theories of Wages

Wage Theories

Theory	Proponent	Working idea
Subsistence theory	Ricardo	Wages tend to subsistence level
Wage Fund theory	J.S. Mill	Wages determined by ratio of wage fund to workers
Surplus Value theory	Marx	Wages are part of value; surplus extracted by capitalist
Marginal Productivity theory	J.B. Clark	Wages equal MRP of labour
Bargaining theory	Davidson	Wages determined by relative bargaining power
Behavioural theory	Maslow, Herzberg etc.	Wages affect motivation through needs

55.5 Job Evaluation

Job evaluation is “the systematic process of determining the relative worth of jobs in an organisation”. Distinct from job analysis (gathering job info) and performance appraisal (evaluating people).

55.5.1 Four Methods of Job Evaluation

Four Methods

Method	Working	Type
Ranking	Compare whole jobs and rank from highest to lowest	Non-analytical
Job Classification (Grading)	Slot jobs into pre-defined grades (e.g., Govt pay grades)	Non-analytical
Point Rating / Point Method	Assign points to compensable factors (skill, effort, responsibility, working conditions); sum to find job worth	Analytical, most widely used
Factor Comparison	Rank jobs on each factor against benchmark jobs; assign monetary values	Analytical

55.6 Wage Components in India

Indian Wage Components

Basic pay.
Dearness Allowance (DA) — inflation-linked; revised periodically.
House Rent Allowance (HRA).
Conveyance Allowance.
Medical Allowance / Reimbursement.
Leave Travel Allowance (LTA).
Special Allowances.
PF, ESI, Gratuity — statutory deductions / accruals.
Variable pay / Performance bonus / ESOPs.

55.7 Incentive Plans

Incentives are variable pay linked to performance, output, or profit. Categories:

Categories of Incentives

Individual incentives — piece-rate (straight, Taylor, Merrick, Gantt task-and-bonus, Halsey, Rowan, Emerson efficiency, Bedaux); commission.
Group incentives — Scanlon plan, Rucker plan, Improshare.
Organisation-wide — profit-sharing, ESOPs, gain-sharing.
Non-financial — recognition, awards, autonomy, career growth.

55.7.1 Selected Individual Incentive Plans

Five Classic Individual Plans

Taylor’s Differential Piece Rate — two piece rates; high rate for ≥ standard output; low rate below.
Merrick’s Multiple Piece Rate — three rates: below 83 %, 83-100 %, above 100 % of standard.
Halsey Premium Plan — guaranteed time wage + 50 % of time saved.
Rowan Plan — bonus proportional to time saved ÷ standard time × time wages.
Gantt’s Task and Bonus — fixed bonus on reaching standard + high piece rate beyond.
Emerson’s Efficiency Plan — graduated bonus from 66⅔ % efficiency upward.
Bedaux Point Plan — based on standard “B” units of work.

55.8 Fringe Benefits

Fringe benefits (also called perquisites, supplemental compensation) are non-wage rewards offered to employees beyond their wage.

Major Fringe Benefits

Payment for time not worked — paid leave, holidays, sick leave, maternity / paternity.
Insurance and risk benefits — group medical, life, accident.
Retirement — Provident Fund, gratuity, pension, NPS.
Allowances — HRA, conveyance, LTA, telephone, education.
Health and welfare — canteen, transport, recreation, crèche.
Stock options (ESOPs).
Employee Assistance Programmes (EAPs).
Flexitime, remote work, sabbatical.

55.9 Indian Labour Codes (2019-20)

India consolidated 29 central labour laws into four labour codes:

Four Indian Labour Codes

Code	Year	Covers
Code on Wages	2019	Wages, bonus, equal remuneration, minimum wages — universal floor wage
Industrial Relations Code	2020	Trade unions, standing orders, ID Act
Code on Social Security	2020	EPF, ESI, gratuity, maternity, gig workers
Occupational Safety, Health and Working Conditions (OSH) Code	2020	Safety, working conditions, factories, mines

The Code on Wages 2019 mandates a universal floor wage and timely payment of wages across all employments.

55.10 Statutory Benefits in India

Statutory Benefits

Provident Fund — EPF Act 1952; 12 % employee + 12 % employer.
Gratuity — Payment of Gratuity Act 1972; 15 days’ wage per year of service; minimum 5 years’ continuous service.
ESI — Employees’ State Insurance Act 1948; medical and cash benefits.
Bonus — Payment of Bonus Act 1965; min 8.33 %, max 20 % of salary.
Maternity — Maternity Benefit Act 1961; 26 weeks (extended in 2017).
Gratuity ceiling — ₹20 lakh (raised in 2018).
Equal Remuneration — for equal work irrespective of gender (now under Code on Wages).

flowchart TB
  C[Compensation] --> D[Direct]
  C --> I[Indirect / Fringe]
  D --> BS[Basic Salary]
  D --> AL[Allowances DA/HRA]
  D --> IN[Incentives / Bonus / ESOPs]
  I --> PF[PF, Gratuity, ESI]
  I --> HE[Health, welfare]
  I --> LV[Paid Leave]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

Distractor warning

PYQ trap: Fair Wages Committee 1949 distinguished minimum, fair, living wage. Living wage is the highest level — ideal but rarely achieved.

55.11 Practice Questions

Q 01WagesEasy

The "three wage concepts" — minimum, fair, living — were given by:

AFair Wages Committee 1949
BTripartite Commission
CNational Wages Board
DIndian Labour Conference

View solution

Correct Option: A

**Fair Wages Committee 1949** — three concepts.

Q 02JE methodMedium

The most widely used analytical job-evaluation method is:

ARanking
BJob classification
CPoint method
DFactor comparison

View solution

Correct Option: C

**Point method** — analytical and most popular.

Q 03HalseyMedium

Under Halsey Premium Plan, the worker is paid:

ATime wage + 50 % of time saved
BPiece-rate only
CBonus proportional to ratio of time-saved / standard time
DDifferential rates

View solution

Correct Option: A

**Halsey** — guaranteed time + 50 % of time saved.

Q 04PlansMedium

Match each incentive plan with its proponent:

	Plan		Proponent
(i)	Differential piece rate	(a)	Gantt
(ii)	Task and bonus	(b)	Halsey
(iii)	Premium plan (50 % bonus)	(c)	Rowan
(iv)	Bonus proportional to time saved	(d)	Taylor

A(i)-(d), (ii)-(a), (iii)-(b), (iv)-(c)
B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
C(i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
D(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)

View solution

Correct Option: A

Taylor — DPR; Gantt — Task & bonus; Halsey — 50 % time saved; Rowan — proportional.

Q 05Marginal ProdMedium

Marginal Productivity Theory of wages was given by:

ARicardo
BJ.B. Clark
CMarx
DJ.S. Mill

View solution

Correct Option: B

**J.B. Clark** — wages = marginal revenue product of labour.

Q 06CodesMedium

India has consolidated central labour laws into how many codes?

ATwo
BThree
CFour
DSix

View solution

Correct Option: C

**Four Codes** — Wages 2019, IR 2020, Social Security 2020, OSH 2020.

Q 07PFMedium

The standard employee contribution to PF in India is:

A8.33 %
B10 %
C12 %
D15 %

View solution

Correct Option: C

**12 %** — both employee and employer (with portion to EPS).

Q 08Bonus ActMedium

Under Payment of Bonus Act 1965, statutory bonus ranges between:

A5 % - 10 % of wages
B8.33 % - 20 % of wages
C10 % - 25 %
DFixed at one month's salary

View solution

Correct Option: B

Min **8.33 %**, max **20 %** of wages.

Q 09GratuityMedium

Under the Payment of Gratuity Act 1972, gratuity is computed at:

A15 days' wage per completed year of service
B30 days' wage
C1 month per 5 years
DNo formula

View solution

Correct Option: A

**15 days/year**; minimum 5 years' service; ceiling ₹20 lakh.

Q 10MaternityMedium

Maternity benefit under the 2017 amendment is:

A12 weeks
B16 weeks
C26 weeks
D52 weeks

View solution

Correct Option: C

**26 weeks** since 2017 amendment.

Q 11Living wageMedium

The **highest** of the three wage levels (Fair Wages Committee) is:

AMinimum wage
BFair wage
CLiving wage
DStatutory wage

View solution

Correct Option: C

**Living wage** — highest; ideal.

Q 12ESOPMedium

ESOPs are a form of:

ADirect cash compensation
BEquity-based long-term incentive
CStatutory bonus
DAllowance

View solution

Correct Option: B

**ESOP** — equity-based long-term incentive linked to share price.

Q 13DAEasy

Dearness Allowance (DA) is linked to:

APerformance
BInflation / cost of living
CProfits
DPosition

View solution

Correct Option: B

DA — periodic inflation adjustment.

Q 14ScanlonHard

**Scanlon Plan** is an example of:

AIndividual incentive
BGroup / gain-sharing plan
CProfit-sharing plan only
DESOP

View solution

Correct Option: B

**Scanlon** — labour-cost-based gain-sharing.

Q 15MerrickHard

Merrick's Multiple Piece-Rate has how many rates?

ATwo
BThree
CFour
DFive

View solution

Correct Option: B

**Three rates** — below 83 %, 83-100 %, above 100 % of standard.

Q 16SubsistenceHard

The "Iron Law of Wages" — wages tend to subsistence — is associated with:

ARicardo / Lassalle
BMarshall
CKeynes
DDrucker

View solution

Correct Option: A

**Ricardo / Lassalle** — wages tend to subsistence level.

Q 17Equal payMedium

"Equal pay for equal work" irrespective of gender in India is now under:

ACode on Wages 2019
BCompanies Act 2013
CRBI directives
DCSR rules

View solution

Correct Option: A

Now consolidated in **Code on Wages 2019** (earlier Equal Remuneration Act 1976).

Q 18Internal equityMedium

**Internal equity** in compensation refers to:

APay parity with external market
BPay parity among similar jobs within the organisation
CPerformance-based pay
DInflation adjustment

View solution

Correct Option: B

**Internal equity** — equal pay for similar jobs within the firm.

Q 19FringeEasy

Which is a *fringe benefit*?

ABasic salary
BGroup medical insurance
CPiece-rate wage
DDA

View solution

Correct Option: B

Fringe benefits — non-wage rewards (insurance, leave, PF…).

Q 20Codes matchMedium

Match each Code with its content:

	Code		Content
(i)	Code on Wages 2019	(a)	EPF, ESI, gratuity, maternity
(ii)	Industrial Relations Code 2020	(b)	Safety, working conditions
(iii)	Social Security Code 2020	(c)	Trade unions, standing orders
(iv)	OSH Code 2020	(d)	Wages, bonus, equal remuneration

A(i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
C(i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
D(i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)

View solution

Correct Option: A

Wages — wages/bonus; IR — TU/SO; SS — EPF/ESI/Gratuity; OSH — safety.

55.12 Quick Recall

Quick recall

Compensation = Direct (basic, allowances, incentives) + Indirect (PF, gratuity, insurance, perquisites).
Wage concepts (Fair Wages Committee 1949): Minimum < Fair < Living.
Theories: Subsistence (Ricardo), Wage Fund (Mill), Surplus Value (Marx), Marginal Productivity (J.B. Clark), Bargaining (Davidson).
Job evaluation methods: Ranking, Job classification (non-analytical); Point method (most popular), Factor comparison (analytical).
Incentive plans: Taylor DPR (2 rates), Merrick (3 rates), Halsey (time wage + 50 % time saved), Rowan (proportional), Gantt (task + bonus), Emerson efficiency, Bedaux; group — Scanlon, Rucker, Improshare; org-wide — profit-sharing, ESOPs.
India statutory: PF (12 %), Gratuity (15 days/year, 5 years min), ESI, Bonus (8.33 %–20 %), Maternity 26 weeks.
Four Indian Labour Codes (2019-20): Wages 2019, IR, Social Security, OSH 2020.