Pay structure in india = Basic pay + Dearness allowance + HRA + Overtime pay

How to Calculate Dearness Allowance?

DA is calculated as a percentage of (basic pay + grade pay). After 1/1/2006 the calculation of DA for government employees is as follows:

Dearness Allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 12 months – 115.76]/115.76} x 100

Formula for calculating DA for Central public-sector employees after 1/1/2007 is:

Dearness allowance Percentage = {[Average of AICIP (Base year 2001 = 100) for the past 3 months – 126.33]/126.33} x 100

AICIP stands for All India Consumer Price Index

Beginning 1st of January 1996, the dearness allowance is granted to compensate for price increases to which the revised pay scales relate. This will be reviewed twice a year, on 1st January and 1st July.

Foreign Countries Experience

It is interesting to note that the practice of paying D.A. as a separate component appears to he confined only to India and some Asian countries and similar concept is not found elsewhere in other industrial countries. However in other countries to meet the demand of the increase cost of living, the real wages themselves are revised to provide for the desired level of standard of living. Some wage agreements contain ‘escalator clause’ to provide for the review of wages in the event of increase in price index. Such

practice is common in USA, Italy and Scandinavian countries. In Japan cost of living allowance and rent allowance is comprised in the wages. In some countries the wage agreements provided for the increase in wage as a separate component linked with the increase in the price index. In India such increase is referred as ‘Dearness Allowance’ keeping it as 3 component distinct from the wages. There are different pros and cons of retaining D.A. as a separate component in India as it would give flexibility in the determination of the quantum of D.A. corresponding to the increase in the Price Index number and to achieve desirable level of neutralisation.

Dearness Allowance is a legally enforceable right of State Govt. employees, Calcutta High Court

Read Judgement below

The Calcutta High Court has ruled the Dearness Allowance (DA) recommended by West Bengal’s 5th Pay Commission is a “legally enforceable right” of employees serving under the Government of West Bengal. The judgement was pronounced in an appeal by Confederation of State Government Employees, West Bengal against an order of the West Bengal Administrative Tribunal (Tribunal).

“It is the age old settled principle of law that the recommendation made by the Pay Commission is not binding upon the Government and non-acceptance of the recommendation does not amount to violation of Article 14 or 16 of the Constitution of India, but in the event reference is made in respect of all employees of the Government concerned and it accepts the recommendations of the Pay Commission, it is bound to implement those recommendations in respect of all employees of the Government concerned.”

The 5th Pay Commission was constituted by the West Bengal Government for recommending the revised pay structure of its employees. The Commission recommended that the State Government should clear the backlog of the DA sanctioned by the Central Government w.e.f. July 1, 2008, and then fall in line with the Central Government pattern of sanctioning two installments of DA each year.

Accepting its Report, the West Bengal Government framed West Bengal Services (Revision of Pay and Allowance) Rule, 2009 in the exercise of the power conferred by the proviso to Article 309 of the Constitution of India. The State Government also accepted the recommendation of the Pay Commission relating to payment of Dearness Allowance to its employees by incorporating DA as a component of the “existing emoluments” while revising their pay structures.

The Petitioner Confederation moved the Tribunal after the State Government failed to pay the DA in time, as envisaged by the Pay Commission and sought a direction to the State authorities to immediately comply with the report and the recommendations of the 5th Pay Commission Report.

The Court, thus held,

“As a consequence once the Government of West Bengal, accepts the recommendation of the 5th Pay Commission for payment of Dearness Allowance to the extent as indicated hereinabove, it confers legally enforceable right on its employees to get the Dearness Allowance."

House Rent Allowance

House rent allowance (HRA) is paid by an employer to the employee to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the employee.

Overtime Payment

Working overtime in industry is possibly as old as the industrial revolution. The necessity of the managements’ seeking overtime working from employees becomes inevitable mainly to overcome inappropriate allocation of manpower and improper scheduling, absenteeism, unforeseen situations created due to genuine difficulties like breakdown of machines. In many companies, overtime is necessary to meet urgent delivery dates, sudden upswings in production schedules, or to give management a degree of flexibility in matching labour capacity to production demands. The payment of overtime allowance to the factory and workshop employees is guaranteed by law. All employees who are deemed to be workers under the Factories Act or under the Minimum Wages Act are entitled to it at twice the ordinary rate of their wages for the work done in excess of 9 hours on any day or for more than 48 hours in any week. The major benefit of overtime working to workers is that it offers an increase in income from work. The Factories Act, 1948 >>

Annual Bonus

The bonus component of the industrial compensation system, though a quite old one, had assumed a statutory status only with the enactment of the Payment of Bonus Act, 1965. The Act is applicable to factories and other establishments employing 20 or more employees.

Eligibility: Every employee not drawing salary/wages beyond Rs. 10,000 per month who has worked for not less than 30 days in an accounting year, shall be eligible for bonus for minimum of 8.33% of the salary/wages even if there is loss in the establishment whereas a maximum of 20% of the employee’s salary/wages is payable as bonus in an accounting year. However, in case of the employees whose salary/wages range between Rs. 3500 to Rs. 10,000 per month for the purpose of payment of bonus, their salaries/wages would be deemed to be Rs. 3500. The Payment of Bonus Act, 1965 >>

Incentive Systems

The term “incentive” has been used both in the restricted sense of participation and in the widest sense of financial motivation. It is used to signify inducements offered to employees to put forth their best in order to maximise production results. Incentives are classified as financial and non-financial. Important financial incentives are attractive wages, bonus, dearness allowance, traveling allowance, housing allowance, gratuity, pension, and provident fund contributions. Some of the non-financial incentives are designation, nature of the job, working conditions, status, privileges, job security, opportunity for advancement and participation in decision making. However, a vast diversity exists in regard to policy and practice of incentive payments. Incentive systems also have been classified into three groups: individual wage incentive plan, group incentive scheme, and organisation-wide incentive system.

The individual wage incentive plan is the extra compensation paid to an individual over a specified amount for his production effort. Individual incentive systems are based upon certain norms established by work measurement techniques such as past performance, bargaining between union and the management, time study, standard data, predetermined elemental times and work sampling. There are four types of individual incentive systems such as measured day-work, piece-work standard, group plans and gains-sharing plans. Under the measured day-work incentive wage system, an individual receives his regular hourly rate of pay, irrespective of his performance. Piece-work system form the most simple and frequently used incentive wage. In this, individual’s earnings are direct and proportionate to their output. Group plans embody a guaranteed base rate to the workers in which the performance over standard is rewarded by a proportionate premium over base pay. Gains-sharing system involves a disproportionate increase in monetary rewards for increasing output beyond a predetermined standard. As the gains are shared with the entrepreneurs, the worker gets less than one per cent increment in wage for every one percent increase in output. The group or area incentive scheme provides for the payment of a bonus either equally or proportionately to individuals within a group or area. The bonus is related to the output achieved over an agreed standard or to the time saved on the job – the difference between allowed time and actual time. Such schemes may be most appropriate where:

(a) people have to work together and teamwork has to be encouraged; and

(b) high levels of production depend a great deal on the cooperation existing among a team of workers as compared with the individual efforts of team members.

The organisation-wide incentive system involves cooperation among employees and the management and purports to accomplish broader organisational objectives such as:

(i) to reduce labour, material and supply costs;

(ii) to strengthen loyalty to the company;

(iii) to promote harmonious labour-management relations; and

(iv) to decrease turnover and absenteeism.

One of the aspects of organisation-wide incentive system is profit sharing under which an employee receives a share of the profit fixed in advance under an agreement freely entered into. The major objective of the profit sharing system is to strengthen the unity of interest and the spirit of cooperation. Some of the advantages of such a scheme are:

(i) it inculcates in employees’ a sense of economic discipline as regards wage costs and productivity;

(ii) it engenders improved communication and increased sense of participation;

(iii) it is relatively simple and its cost of administration is low; and

(iv) it is non-inflationary, if properly devised.

One of the essentials of a sound profit sharing system is that it should not be treated as a substitute for adequate wages but provide something extra to the participants. Full support and cooperation of the union is to be obtained in implementing such a scheme.

Fringe Benefits

The remuneration that the employees receive for their contribution cannot be measured by the mere estimation of wages and salaries paid to them. Certain supplementary benefits and services known as “fringe benefits” are also available to them. The characteristics of fringe benefits are:

• 1. These benefits are distinctly additional to the regular wages paid to the workers. As such, they are not provided as a substitute for wages or salaries of the employees.

  2. These benefits are meant primarily to be of advantage to the employees.

  3. The advantages accrued to the employees through the provision of fringe benefits are as such they cannot be secured through their own individual efforts.

  4. Only those benefits fall within the purview of fringe benefits which are or can be expressed in cash terms.

  5. The scope of fringe benefits is different from that of welfare services. Fringe benefits are provided by the employers alone whereas welfare services may be provided by other agencies as well. Benefits that have no relation to employment should not be regarded as fringe benefits.

  6. Fringe benefits have been classified in several ways. In terms of their objectives, Meggison classifies them into two groups: those providing for employees’ security and those purporting to increase employees’ job satisfaction causing reduction in labour turnover and improvement in productivity. The former group includes retirement programmes, workmen’s compensation, unemployment compensation, social insurance, and other provisions. The later group incorporates vacations, holidays, sick leave, discounts on company goods and services, and allied tangible and intangible benefits. Fringe benefits are also categorised as statutory, contractual, and voluntary. Statutory benefits include social security and medical care, unemployment compensation, workmen’s compensation, provident fund, and gratuity. The benefits provided by the employers in pursuance of agreements with workers may include dearness allowance, house rent allowance, city compensatory allowance, medical allowance, night-shift allowance, heat allowance, transport, housing and educational allowances. Voluntary fringe benefits which are provided unilaterally by the company include group insurance, death benevolent fund, washing allowance, leave encashment, leave travel concession, conveyance allowance, incentive for family planning, service awards, and suggestion awards. Currently fringe benefits are a significant part of employee compensation system and the employees tend to take them for granted and do not link these items with wages or income as they do not have any direct bearing on payments. They are no more on the fringe of compensation but form an integral component of individual’s earnings involving spiraling costs for the company. However, the fringe benefit system can become effective if attempts are made to gear them to the needs of human resource in organisational settings.

Conveyance allowance

Conveyance allowance is one of the compulsory employee benefits provided for meeting an expenditure incurred by an employee ( especially government employee) for commuting from home to office and office to home. In order to claim conveyance allowance by an employee, he or she should reside and work in towns only.

City compensatory allowance

City compensatory allowance is one of the employee benefits provided for meeting additional cost of living for working in cities.