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PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS
Hosur Road (1Km before Electronic City), Bangalore -560100
COMPENSATION & BENEFITS
INTERNAL TEST # 1
– 12MBAHR342
Course: MBA Semester III
Faculty: Mr.Nagabhushana
Date:
27 /08/2013
Note:
Time Allowed: 90 Minutes
Max. Marks: 50 (Fifty Marks)
Time:11.30 AM – 1PM
Answer all the Questions.
What are fringe benefits?
Fringe benefits (perks) include most benefits given to employees in addition to their
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(a)
salary or wages. You should also be aware of attributed and non-attributed benefits.
Pensions, welfare funds, social security, vacations and holidays, are regarded as fringe
(3 marks)
benefits.
Explain types of Compensation.
 Direct compensation: refers to monetary benefits offered and provided to
employees in return of the services they provide to the organization. There are
two types of direct compensation:
 Base pay : the fixed salary or wages
(b)
 Variable pay: it is performance based.
(7 marks)
 Indirect compensation : refers to non monetary benefits offered and provided to
employees in lieu of the services provided by them to the organization.
 Employee benefits are the type of indirect compensation.
 Benefits include pensions, sick pay, company cars, insurance cover and
other perks.
Write short notes on stock options, joining bonus, retention bonus and severance pay
with reference to executive compensation.
A stock option granted to specified employees of a company. ESOs carry the right, but
(c)
not the obligation, to buy a certain amount of shares in the company at a predetermined
price. An employee stock option is slightly different from a regular exchange- traded
option because it is not generally traded on an exchange, and there is no put component.
Furthermore, employees typically must wait a specified vesting period before being
allowed to exercise the option.
(10 marks)
Stock options align the interests of CEOs to those of shareholders, since options are
valuable only if the stock price remains above the option's strike price.
Joining bonus is a bonus amount which is offered to a prospective employee to join early
or immediately. Also paid to compensate switch over cost involved and opportunity cost.
Definition of Retention Bonus
A payment or reward outside of an employee's regular salary that is offered as an
incentive to keep a key employee on the job during a particularly crucial business cycle,
like a merger or acquisition, or during a crucial production period. In recent years,
retention bonuses have become increasingly popular as corporate poaching has increased.
A severance package is pay and benefits an employee receives when he or she leaves
employment at a company. In addition to the employee's remaining regular pay, it may
include some of the following:







An additional payment based on months of service
Payment for unused vacation time or sick leave.
A payment in lieu of a required notice period.
Medical, dental or life insurance
Retirement (e.g., 401K) benefits
Stock options
Assistance in searching for new work, such as access to employment services or help
in producing a résumé.
What are the components of executive compensation?



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(a)



Base salary
Incentive pay, with a short-term focus, usually in the form of a bonus
Incentive pay, with a long-term focus, usually in some combination
of Stock awards, option awards, non-equity incentive plan compensation
Enhanced benefits package that usually includes a Supplemental Executive
Retirement Plan (SERP)
Extra benefits and perquisites, such as cars and club memberships
Deferred compensation earnings
(3 marks)
Write down statutory upper limit on executive compensation as per Companies Act
1956.
(b)
Directors' remuneration can be determined only by the AOA or by the shareholders
meeting. In some cases, the AOA may require that the shareholders pass a special
resolution. A company can modify remuneration only at a general meeting. The Board
can only recommend. The directors cannot themselves fix the remuneration of all or any
one of themselves. In any event, it should be within the overall 11% ceiling stipulated
(7 marks)
under section 198 of the Act. This section aims to monitor the quantum and covers two
specific aspects viz. the overall maximum ceiling and remuneration in case of absence or
inadequacy of profits. It sets an upper limit of 11% of net profits payable in
a financial year and where a company has inadequate or no profits, it has to pay
remuneration in accordance with Part II of Schedule XIII.10 If the stipulated conditions of
the Schedule are not met, prior central government approval is necessary. Section 198 is
applicable to public companies and a private company which is a subsidiary of public
company. Thus, private companies are not subject to any statutory ceilings for
managerial compensation.
The directors' remuneration, as determined in the manner stated above, is all-inclusive
payable for all services rendered either in the capacity as director or in professional
capacity. Professional services include that of a lawyer, engineer or accountant. Sitting
fees payable to directors for attending Board and committee meetings is excluded.
Within the overall 11% ceiling, the limits prescribed for monthly remuneration under
sections 309 and 387 have to be fulfilled too. While section 309 exclusively deals with
the manner of remuneration of directors, section 387 specifically provides for
remuneration to managers. The statutory limits so prescribed are tabulated below, which
can be exceeded only with prior central government approval:
2.2 Schedule XIII - This Schedule was introduced with the aim of obviating the need to
seek central government approval provided the prescribed parameters are satisfied. It is
divided into three parts. Part I deals with the dos and don'ts of appointment viz. age,
which should be between 25 and 70 years, resident status i.e. the person should have
stayed continuously for twelve months in India immediately before his appointment,
clean background i.e. no imprisonment, detention or fine for any offence. Part II deals
with the remuneration payable in various circumstances as tabled below. Finally, Part
III stipulates the mandatory procedural aspects viz. the requirement of shareholders'
approval, resolution for appointment and remuneration and a compliance certificate from
auditor or a company secretary.
The Schedule has periodically undergone changes in line with the evolving needs and
increased corporate governance standards. The intent is to provide optimum
compensation to managerial workforce while ensuring adequate control and protection of
stakeholders' interest. Schedule XIII has endeavored to set a uniform standard for public
companies. It will be worthwhile to consider and bring private companies under a
similar, if not the same, lens of checks and balances.
Explain any two Economic Theories Of Wages?
1) Just wage theory.
(c)
 The just price is a theory of ethics in economics that attempts to set standards of
fairness in transactions. With intellectual roots in ancient Greek philosophy, it
was advanced by Thomas Aquinas based on an argument against usury, which in
his time referred to the making of any rate of interest on loans.
 The argument against usury was that the lender was receiving income for
nothing, since nothing was actually lent, rather the money was exchanged. And, a
dollar can only be fairly exchanged for a dollar, so asking for more is unfair.
 Aquinas later expanded his argument to oppose any unfair earnings made in
trade, basing the argument on the Golden Rule. He held that it was immoral to
gain financially without actually creating something.
It also means that the workers should be paid on the level of maintaining himself and his
family.
2) Subsistence wage theory of Adam Smith and David Ricardo
 The theory was adumbrated by economists, elaborated by Adam smith and
developed fully by David Ricardo.
 The subsistence theory of wages owes its origin to Physiocratic School of France.
The theory’ is also named as Iron or Brazen. Law of Wages.
 According to this theory, the wage in the long run tends to be equal to the
minimum level of subsistence. By ‘minimum. level of subsistence’ is meant the
amount which is just sufficient to meet the bare necessities of life of the worker
and his family.
 It is argued that if wages exceed the subsistence level, the labour will marry
earlier and will produce more children. This will result in the increase in number
of workers than what is required by employers. So the money wages will fall to
(10 marks)
the level of subsistence.
If wages remain below the subsistence level, the labour will not be able to maintain their
families. Due to starvation and malnutrition, etc. the death toll will increase. The-supply
of labour will fall short of demand and the wages would go up to the subsistence level.
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Case Study:- Clean clothes campaign : A Living Wage = A Human Right
Working alongside garment workers, trade unions, consumers and campaigners we are
calling for those working in the garment industry to be paid a wage they can live on.
A major industry
The garment industry is a major employer across the world - in Asia for example over 15
million people are employed by the industry. With global brands making millions in
profits every year this booming industry has come to rely on, and exploit, the cheap
labour of millions of garment workers whose wages fall far short of a living wage.
The right to a living wage: A living wage should be earned in a standard working week
(no more than 48 hours) and allow a garment worker to be able to buy food for herself
and her family, pay the rent, pay for healthcare,
clothing, transportation and education and have a small amount of savings for when
something unexpected happens.
The lack of a living wage means many garment workers are forced to work long hours to
earn overtime or bonuses and cannot risk taking refusing work due to unsafe working
conditions or taking time off due to ill health. The low wages mean that workers often
have to rely on loans just to make ends meet and have no savings to use if they find
themselves out of work.
Questions
1. Write down relevant compensation management concepts in the case.
2. Suggest your ideas/strategies to promote the above philosophy.
Ans: Subsistence wage theory, Just wage theory, Surplus value theory are some relevant
concepts here.
(5*2=10
marks)