Compensation Management and Payroll
BY D GEETIKA APURVA
Compensation management
Defintions:
“Compensation management is the process of determining cost effective pay structure, designed to attract and retain, provide an
incentive to work hard, and structured to ensure that pay levels are perceived as fair. ” -Stephen P
Robbins
“ Compensation management refers to payment systems which determine employee wages or salary, direct or indirect rewards.”
- I. Kessler
“Compensation management system of compensating individuals for the work they perform in such a way that the organisation is
able to attract, retain and motivate them to perform well keeping in view organisational and market factors.”
- Deb
Compensation management is the act of providing monetary value to an employee for the work they
do by means of a company process or policy. Some types of compensation include salary, bonuses,
and benefit packages. Companies use compensation management in order to find, keep, and
motivate employees to do quality work. Process of compensation management is to establish &
maintain an equitable wage & salary structure & an equitable cost structure .it involves job
evaluation, wage & salary survey, profit sharing &control of pay costs.
Two important functions of compensation
Equity function
Motivation function
Equity is based on past & current performance
Motivation with which the work has been performed in the past & current performance
Objectives:
The basic objective of compensation management can be briefly termed as meeting the needs of both employees and the organisation.
Employees want to pay as little as possible to keep their costs low. Employees want to get as high as possible.
Acquire qualified personnel
Retain current employees
Ensure quality
Reward desired behaviour
Control costs
Comply with legal regulations
Facilitate understanding
Further administrative efficiency
Motivating personnel
Consistency in compensation
To be adequate
• Compensation is in given form WAGE & SALARY
Wage: It refers to economic compensation paid by the employeer to workers or employee.
wage is a remuneration, payment is done in exchange of service, paid generally on fixed
hourly.
Salary: It refers to payment to weekly or monthly rated employees like clerical, technical,
supervisory and managerial employees.
Salary is a economic compensation, it is a periodic fixed payment.
Components of Compensation
Basic wage/ Salary
Dearness allowance
Bonus
Incentives
Commissions
Mixed plan
Piece rate wages
Fringe benefits
Non – Monetary benefits
Types of Compensation:
1) Direct/ Base compensation
2) Indirect/ Supplementary compensation
1) Direct compensation 2) Indirect compensation
Basic salary Leave policy
House rent allowance Over time policy
Conveyance Hospitalization
Leave travel allowance Insurance
Medical reimbursement Leave travel
Bonus Retirement Benefits
Special Allowance Flexible timings
Laws related to compensation
Workmen’s Compensation Act, 1923
Payment’s Of Wages Act, 1936
Minimum Wages Act, 1948
Payment of Bonus Act, 1965
Payment of Gratuity Act, 1972
Employee’s Provident Funds & Miscellaneous Provisions Act, 1952
Employee’s State Insurance Act, 1948
Maternity Benefit Act, 1961
Equal Remuneration Act, 1976
Monetary benefits
Monetary rewards are the incentives which involve direct money to the employees.
Some of the monetary benefits are
Basic pay
Provident fund
Bonuses
Insurance schemes
Piece rates
Salary raise and more
Gratuity
Non Monetary benefits
Non monetary rewards are the incentives which do not involve direct money to the
employees
Flexible work hours
Working conditions
Career development
House lease policy
Health
Travel allowances etc
Payroll
Payroll is defined as the process of paying salary to the employees in the organisation. It
starts with preparing a list of employees to be paid and ends with recording those
expenses
This process involves arriving at what is due to the employees for a particular payroll
cycle after adjusting the necessary deductions like PF, Taxes, Loans, Insurance etc. It also
involves addition of allowances, incentives to the basic pay of the employee.
Payroll refers to the administration of employees' salaries, wages, bonuses, net pay, and
deductions. It consists of the employee ID, employee name, date of joining, daily
attendance record, basic salary, allowances, overtime pay, bonus, commissions,
incentives, pay for holidays, vacations and sickness, value of meals and lodging etc. There
are some deductions such as PF, taxes, loan or advances taken by employee.
Statutory compliance of Payroll
Statutory compliance refers to the legal framework put in place by the central or state
government to regulate business operations.
The word statutory means “of or related to statutes”- rules and regulations. Compliance
means adherence. Thus, Statutory Compliance means adhering to rules and regulations.
Statutory Payments are the minimum payments that any worker must receive according
to national or state legislation.
Some statutory compliance in payroll
The Employees’ Provident fund and Miscellaneous Act, 1952
Employee State Insurance Act, 1965
The Payment of Gratuity Act, 1972
Payment of Wages Act, 1936
Minimum Wage Act, 1948
Payment of Bonus Act, 1965
Maternity Benefit Act, 1961
Tax Deductions at source (TDS)
Workmen’s Compensation Act, 1923
Equal Remuneration Act, 1976
The Employees’ Provident fund and Miscellaneous Act, 1952
The Employee Provident Fund and Miscellaneous Act is one of the biggest social welfare
contributions for an employee.
As part of this, both the employer and the employee contribute 12% of basic pay and
dearness allowance (DA) to the employee’s retirement chest.
Statutory Employer Employee
Provident Fund
12% 3.67%
(PF)
Employee Pension
NA 8.33%
Fund
Employee State Insurance Act, 1965
This act aims to help employees overcome unforeseen
circumstances, including medical emergencies, maternity leave, or
disability situations related to the workplace.
For each paycheck, the employer contributes 3.25% and the
employee contributes 0.75%. ESI is mandatory for employers who
have employees working in a non-seasonal factory with more than
10 employees, but only for employees who are earning less than
₹21,000 per paycheck.
The Payment of Gratuity Act, 1972
Along with EPF, gratuity is one of the biggest factors of an
employees’ welfare, and it’s one of the most important statutory
regulations for organizations.
An employee is applicable to receive gratuity only if they’ve
completed a minimum of 5 years of service within an organization.
Gratuity = (15 * Last drawn salary * tenure of working) / 26
Last drawn salary includes basic pay, dearness allowance, and sales
commissions.
Payment of Wages Act, 1936
The Payment of Wages Act ensures that employees from various industries are paid on
time by having penalties for wages paid late by a month.
According to this rule, employees should be paid before the 7th of every month for
organizations with less than 1,000 employees. If the organization has more than 1,000
employees, they need to be paid by the 10th of every month.
Minimum Wage Act, 1948
The Minimum Wages Act is a central legislation designed to prevent the exploitation of
labour by fixing a minimum wage rate.
The minimum wage varies from state to state or sector to sector since provincial
governments also have a say in this.
Some of the most common factors considered before fixing minimum wages include the
cost of living, wage period (hourly, weekly, or monthly), and job type.
Payment of Bonus Act, 1965
Minimum bonus: 8.33% if salary or wage earned during accounting
year or Rs. 100 whichever is higher, whether or not the employer has any allocable surplus
in the accounting year.
Maximum bonus: 20% of salary or wage only if allocable surplus exceeds the amount if
minimum wages bonus payable under the act.
wages less than Rs.10000 (Basic + DA).
The Payment of Bonus Act,1965 provides for the payment of bonus to persons employed
in certain establishments.
Under the Bonus Act an employer is required to pay bonus within 8months from the
close of the accounting year.
Maternity Benefit Act, 1961
This act protects the employment of women during the time of her maternity and grants
her full paid absence from work. This act is applicable for all organizations that have
more than 10 employees.
For a female employee to be eligible for the benefit, they must have been working as an
employee in an establishment for a period of at least 80 days within the past 12 months.
• Duration of maternity leave is 26 weeks
• Prenatal leaves can be applied up to a period of 8 weeks
• The Maternity Benefit Amendment Act has also introduced an enabling provision relating to “work from
home” for women, which may be exercised after the end of the 26-week leave period. This is dependent
on the nature of work.
Tax Deductions at source (TDS)
It was introduced to collect tax from the source of an individual’s
income. TDS is applicable on various income types such as
salaries, interest, and commission. Income Tax
New Tax
Slab for FY
Rate
Every employee is taxed at a different tax 2020-21
rate depending on their
Up to ₹2.5L
salary. With the latest union budget announcements, No tax in
employees
₹2.5L to ₹5L 5% *
India can choose between two different tax regimes.
₹5L to ₹7.5L 10%
₹7.5L to
15%
₹10L
₹10L to
20%
₹12.5L
₹12.5L to
Workmen’s Compensation Act, 1923
The Workmen's Compensation Act, 1923 was made to offer
compensation to the workers who have encountered injuries due to
an accident during their employment.
The Act has it that employers should have duties and obligations
that include the welfare of workers after an injury resulting from
employment in the same way they have reserved the right to make
profits. The Act aims to see workmen have a sustainable life after an
employment-related accident.
Equal Remuneration Act, 1976
The objective of this legislation is to ensure the payment of equal remuneration to men
and women workers and for the prevention of discrimination.
Applicability:
• It extends to the whole of India and applies to all establishments.
• No employer shall show any discrimination against women while
recruiting or framing service conditions after recruitment except
where the employment of women in such work is prohibited or
restricted under law.
