SET 2

Q.1.

What are the external factors that affect Remuneration ? Explain briefly each of them.

A. The following external factors affect Remuneration :

a) Labour Market

i)

Demand for and supply of labour influence wage and salary fixation. A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to be paid when the demand exceeds supply, as in the case of skilled labour. A paradoxical situation prevailing in India is that the excessive unemployment is being juxtaposed with shortage of labour. While unskilled labour is available in plenty, there is a shortage of technicians, computer specialists and professional managers. High remuneration to skilled labour is necessary to attract and retain it. But exploitation of unskilled labour, like, for instance, paying poor wages because it is available in plenty, is unjustifiable. The Minimum Wages Act, 1948, is precisely meant to prevent this kind of exploitation.

ii)

Going rate of pay is another labour-related factor influencing employee remuneration. Going rates are those that are paid by different units of an industry in a locality and by comparable units of the same industry located elsewhere. This is the only way of fixing

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salary and wage in the initial stages of plant operations. Subsequently, a comparison of going rates would be highly useful in resolving wage-related disputes.

iii)

Productivity of labour also influences wage fixation. Productivity can arise due to increased effort of the worker, or as a result of the factors beyond the control of the worker such as improved technology, sophisticated machines and equipment, better

management and the like. Greater effort of the worker is rewarded through piece rate or other forms of incentive payments. This form of productivity, due to individual effort, cannot form a criterion of general wage movements.

Productivity arising from advanced technology and more-efficient methods of production will influence wage fixation. While productivity can be measured in terms of any one of the several factors such as capital, equipment, materials, fuel and labour, what matters most is labour productivity. It is the relationship between the input of labour measured in man-hours and the output of the entire economy, or of a particular industry or plant measured in terms of money or in physical terms. It may be stated that productivity has only subordinate role in wage fixation. It can, at best, help determine fair wages. b) Cost of Living Next in importance to labour market is the cost of living. This criterion matters during periods of rising prices, and is forgotten when prices are Vishitha D Souza
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stable or falling. The justification for cost of living as a criterion for wage fixation is that the real wages of workers should not be allowed to be whittled down if prices increase. A rise in the cost of living is sought to be compensated by payment of dearness allowance, basic pay to remain undisturbed. Many companies include an escalatory clause in their wage agreement terms of which dearness allowance increases or decreases depending upon the movement of Consumer Price Index (CPI). c) Labour Unions The presence or absence of labour organisations often determines the quantum of wages paid to employees. Employers in non-unionised factories enjoy the freedom to fix wages and salaries as they please. Because of large-scale unemployment, these employers hire workers at little or even less than legal minimum wages. An individual in nonunionised company may be willing to pay more to its employees if only to discourage them from forming one, but will buckle under the combined pressure from the other non-unionised organisations. The employees of strongly unionised companies too, have no freedom in matters of wage or salary fixation. They are forced to yield to the pressure of labour representatives in determining and revising pay scales. d) Labour Laws We have a plethora of labour laws at the central as well as at the state levels. Some central laws which have a bearing on employee remuneration are the Payment of Wages Act, 1936, the Minimum Wages Vishitha D Souza
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Act, 1948, the Payment of Bonus Act, 1965, Equal Remuneration Act, 1976 and the Payment of Gratuity Act, 1972. The Payment of Wages Act was passed to regulate payment of wages to certain classes of persons employed in the industry. It also seeks to protect workers against irregularities in payment of wages and unauthorised deductions by the employers. In addition, the Act ensures payment of wage in a particular form and at regular intervals. The Minimum Wages Act enables the central and the state governments to fix minimum rates of wages payable to employees in sweated industries. The Payment of Bonus Act provides for payment of a specified rate of bonus to employees in certain establishments. The Gratuity Act provides for payment of gratuity to employees after they attain superannuation. The Equal Remuneration Act provides for payment of equal remuneration to men and women workers for same or similar work. The Act stipulated stringent punishments for contravention of its provisions. In addition to legal enactments, there are wage boards, tribunals and fair wages committees which aim at providing a decent standard of living to workers. In fact, India is the only democratic country in the world which has attempted wage regulation on so large a scale through state-sponsored agencies. e) Society Remuneration paid to employees is reflected in the prices fixed by an organisation for its goods and services. For this reason, the consuming public is interested in remuneration decisions.

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The Supreme Court, since its very inception, has had to adjudicate industrial disputes particularly, disputes relating to wages and allied an ethical and social

problems of financial concern to the worker

outlook liberally interpreting the spirit of the Constitution. f) The Economy The last external factor that has its impact on wage and salary fixation is the state of the economy. While it is possible for some organisations to thrive in a recession, there is no question that the economy affects remuneration decisions. For example, a depressed economy will probably increase the labour supply.

This, in turn, should serve to lower the going wage rate. In most cases, the cost of living will rise in an expanding economy. Since the cost of living is commonly used as a pay standard, the economy s health exerts a major impact upon pay decisions. Labour unions, the government, and the society are all less likely to press for pay increases in a depressed economy.

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Q.2. Discuss the Executive Remuneration in Indian Industry.

A. Executive remuneration has been a hot topic for debate in the corporate circles for long. The remuneration is one tool used extensively by corporates to poach talent from a competitor and also in an effort to retain talent. Salaries and perks paid to highest decision-makers in organisations are only spiraling upwards as a result of economic deregulation and the consequent entry of MNCs into the country. Brain drain is now an issue of the past. One no longer has to travel shores to have exciting salaries. It is happening in developing country like India and in fact a reverse brain drain has started. The fact that the USA is increasing the number of H1B visas for Indians is a good proof for this.

Components of Executive Remuneration From the point of remuneration, an executive is an individual who is in a management position at the highest level. This category includes Presidents, Vice-Presidents, Managing Directors and General Managers. Their remuneration generally comprises four elements. They are:

a) Salary b) Bonus Vishitha D Souza

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c) Long-term incentives d) Perquisites (perks) Executive Salary Salary is the basic component of executive remuneration. Salary, though supposed to be determined through job evaluation and serves as the basis for other types of benefits, it may be only a partial solution. This is because executives must be paid for their capabilities and competence rather than for job demands. For this precise reason, norms of wage and salary fixation are generally not observed while fixing salaries for executives. Salary as a component of total remuneration is insignificant as it is subject to deductions at source and is also capped by government regulations. In order to make good the cuts and ceilings, executives are offered hefty incentives and attractive perks. Executive Bonus This is an important component of modern day remuneration for executives. This type of incentive is usually annual in nature and is performance-based. For this reason, the definition of performance is crucial. There are almost as many bonus systems as there are companies using this form of executive remuneration. In some systems, the annual bonus is tied by the formulae to the share price or the return on investment. Other bonus plans are based on the subjective judgement of the Board of Directors and the Chief Executive Officer. More complex systems establish certain targets, for example, a 10 per cent increase in corporate earnings from the previous year, and then a bonus pool after the Vishitha D Souza
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target is attained. The bonus is then distributed, either in accordance with a preset formula or on the basis of subjective judgements. Executives deserve bonus because they have much more opportunity to influence organisational success than non-managerial staff.

Long-term Incentives for Executives Generally, stock options are offered as long-term incentives. Companies allow executives to purchase their shares at fixed prices. Stock options are valuable as long as the price of share keeps increasing. The share price crashes when the company starts incurring loss, and executives stand to lose in the process. The following aspects are relevant as regards stock options:

a) An option is not a bonus. Executives have to use their own resources to exercise their right to purchase the stock. b) The executives are assuming the same risk as all other shareholders, namely, that the price could move in either direction. c) Options are a form of profit-sharing that links the executive s financial success to that of the shareholders. d) Stock options are one of the few ways to offer large rewards to executives without the embarrassment of "millions of dollars of obvious money changing hands." Nevertheless, the risk factor in this type of incentive may be too great for it to be attractive to executives. Perquisites Vishitha D Souza
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Perks constitute a major source of income for executives. In addition to the normally allowed perks like provident fund, gratuity and the like, executives enjoy special parking, plush office, vacation travel, auto expenses, membership in clubs and well-furnished houses. Perks take care of all possible needs. Executives are rarely required to spend money from their pockets. Their holidays, servants, telephone bills and even electricity and gas bills are taken care of by their companies Executive Remuneration in Indian Industry Certain broad generalisations can be made with respect to executive remuneration in Indian industries. These are: -

a) Norms of wage and salary fixation such as job description, job evaluation, grades of pay and wage parities are generally ignored. What an executive receives depends on employer s ability and employee s bargaining strength.

b) Salaries and perks of executives are subject to annual reviews and hikes, unlike the remuneration of employees, which is reviewed once in three years.

c) A study reveals that, executives are offered composite salaries instead of menu salaries. The latter refers to a package of items, numbering nearly hundred, from which the CEO is asked to choose.

d) There is a tendency to link salaries (at least 20 per cent) to performance. Vishitha D Souza
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e) Holidaying abroad is gaining increasing acceptance. In a year, a typical executive works 10 months on his job, holidays one month abroad with his family, and attends training classes in the remaining one month.

f) For executives posted abroad, relatively higher salaries are paid during their foreign assignments. Once they are back in India, the same executives are paid less to maintain parity with those working in the home office.

g) Competition among companies to attract competent personnel is resulting in a virtual hijacking of managerial personnel. Executives in the public sector stand nowhere in comparison to their counterparts in the private sector in respect of salaries and perks. There has, therefore, been an exodus of executives from government-owned organisations to private sector enterprises.

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Q.3.

Explain the objectives of features of Fringe Benefits.

A.

Fringe benefits form an important part of the compensation of an employee. Different terms are used to denote fringe benefits. They are welfare measures, social charges, social security measures, supplements, sub-wages, employee benefits etc.

Workers commonly receive such benefits as holiday with pay, low cost meals, low-rent housing etc. Such additions to the wage proper are sometimes referred to as fringe benefits . Benefits that have no relation to employment or wages should not be regarded as fringe benefits even though they may constitute a significant part of the worker s total income.

Thus, fringe benefits are those monetary and non-monetary benefits given to the employees during and post employment period which are connected with employment but not to the employees contributions to the organization.

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The viewpoint of employers is that fringe benefits form an important part of employee incentives to obtain their loyalty and retain them. The important objectives of features of fringe benefits are :

a) To create and improve sound industrial relations. b) To boost up employee morale.

c) To motivate the employees by identifying and satisfying their unsatisfied needs. d) To provide qualitative work environment and work life. e) To provide security to the employees against social risks like old age benefits and maternity benefits. f) To protect the health of the employees and to provide safety to the employees against accidents. g) To promote employee s welfare by providing welfare measures like recreation facilities. h) To create a sense of belongingness among employees and to retain them. Hence, fringe benefits are called golden handcuffs . i) To meet requirements of various legislations relating to fringe benefits

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A sound benefits program should be based on specific objectives that are in line with organisational philosophy and policies. It should be affordable and cost-effective. Benefit Objectives It is essential for the management to establish objectives for its fringe benefit program. In establishing objectives, the management must consider several factors like employee preference for benefits, attendance,

length of service, performance, etc. The benefits accomplish four objectives : a) Fostering external competitiveness. b) Increasing cost effectiveness. c) Meeting individual employee s needs and preferences. d) Complying with legal compulsions. Whatever the objectives, they must reflect the organisation s ability to pay.

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