Determining Optimal Fringe Ben

8/8/2019 Determining Optimal Fringe Ben

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WHAT IS CALLED A BENEFIT?

Benefits are indirect financial and non financial payments which

employees receive for continuing their employment with the

company.

Benefits are a major expenses for most of the employers. The pressure of rising costs and greater competition is driving

employers to find out ways of using the workforce more

effectively.



MEANING OF FRINGE BENEFITSMEANING OF FRINGE BENEFITS

TheThe termterm FringeFringe BenefitsBenefits refersrefers toto variousvarious extraextra benefits benefits

provided provided toto employees,employees, inin additionaddition toto thethe compensationcompensation paid paid

inin thethe formform of of wagewage or or salarysalary..

FringeFringe benefits benefits areare thosethose monetarymonetary andand nonnon monetarymonetary benefits benefits

givengiven toto thethe employeesemployees duringduring andand post post employmentemployment period period

whichwhich areare connectedconnected withwith employmentemployment but but notnot toto thetheemployeesemployees contributionscontributions toto thethe organisationorganisation..

FringeFringe benefits benefits areare alsoalso calledcalled asas welfarewelfare measures,measures, socialsocial

charges,charges, socialsocial securitysecurity measures,measures, supplements,supplements, subsub wages,wages,

employeeemployee benefits benefits etcetc.. ItIt coverscovers bonus, bonus, socialsocial securitysecurity measures,measures, retirementretirement benefits benefits

likelike provident provident fund,fund, gratuity,gratuity, workmen¶sworkmen¶s compensation,compensation,

housing,housing, medical,medical, canteen,canteen, coco--operativeoperative credit,credit, consumer consumer

stores,stores, educationaleducational facilities,facilities, recreationalrecreational facilities,facilities, financialfinancial

adviceadvice etcetc..



DEFINITION OF FRINGE BENEFITDEFINITION OF FRINGE BENEFIT

Balcher Balcher definesdefines fringefringe benefits benefits as,as, ³Any³Any wagewage costcost notnot directlydirectly

connectedconnected withwith thethe employeesemployees productive productive effort,effort, performance, performance,

serviceservice or or sacrificesacrifice..´́

Cockmar Cockmar defineddefined fringefringe benefits benefits as,as, ³Those³Those benefits benefits whichwhich areare

provided provided by by anan employer employer toto or or for for thethe benefit benefit of of anan employeeemployee

andand whichwhich areare notnot inin thethe formform of of wages,wages, salariessalaries andand timetime--

relatedrelated payments payments..´́



NEED OF FRINGE BEENFITSNEED OF FRINGE BEENFITS

EmployeeEmployee demandsdemands::EmployeesEmployees demanddemand aa moremore andand differentdifferent typestypes of of fringefringe

benefits benefits insteadinstead of of increaseincrease inin salarysalary because because of of reductionreduction inin

taxtax burden burden ..

TradeTrade UnionUnion DemandsDemands::

TradeTrade unionsunions competecompete withwith other other for for gettinggetting moremore andand aa newnew

varietyvariety of of fringefringe benefits benefits toto their their employeesemployees.. ThusThus thethe

competitioncompetition amongamong tradetrade unionsunions withinwithin anan organisationorganisation resultsresults

inin moremore andand variedvaried benefits benefits..

Employer¶sEmployer¶s preferencepreference::

Employer¶sEmployer¶s prefer prefer toto pay pay fringefringe benefits benefits asas itit isis oneone typetype of of

motivationmotivation toto thethe employeesemployees for for their their better better contributioncontribution toto thethe

organizationorganization.. ItIt improvesimproves moralemorale andand worksworks asas anan effectiveeffective

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NEED OF FRINGE BEENFITSNEED OF FRINGE BEENFITS

As a social security:As a social security:SocialSocial securitysecurity isis aa securitysecurity thatthat societysociety furnishesfurnishes throughthroughappropriateappropriate organizationorganization againstagainst certaincertain risksrisks.. TheseThese risksrisks areareaccidents,accidents, occupationaloccupational diseasesdiseases etcetc.. Employer Employer hashas toto provide providevariousvarious benefits benefits likelike safetysafety measures,measures, compensationcompensation inin casecase of of

involvementinvolvement of of workersworkers inin accidents,accidents, medicalmedical facilitiesfacilities etcetc..withwith aa viewview toto provide provide securitysecurity toto hishis employeesemployees againstagainstvariousvarious contingenciescontingencies..

ToTo improveimprove humanhuman relationsrelations::

HumanHuman relationsrelations areare maintainedmaintained whenwhen thethe employeesemployees areare

satisfiedsatisfied economically,economically, sociallysocially andand psychologically psychologically.. FringeFringe benefits benefits satisfysatisfy thethe workersworkers economic,economic, socialsocial andand psychological psychological needsneeds.. ThusThus fringefringe benefits benefits improveimprove humanhumanrelationsrelations asas itit minimizesminimizes economiceconomic problems problems of of thethe employeesemployees..



TYPES OF FRINGE BENEFITSTYPES OF FRINGE BENEFITS

Payment for time not worked:Payment for time not worked:BenefitsBenefits under under thisthis categorycategory includeinclude sick sick leaveleave withwith pay, pay,

vacationvacation pay, pay, paid paid restrest andand relief relief time,time, paid paid lunchlunch periods, periods,

grievancegrievance time,time, bargaining bargaining time,time, traveltravel timetime etcetc..

EmployeeEmployee SecuritySecurity ::PhysicalPhysical andand job job securitysecurity toto thethe employeeemployee shouldshould alsoalso be be

provided provided withwith aa viewview toto promoting promoting securitysecurity toto thethe employeeemployee

andand hishis familyfamily membersmembers.. TheThe PaymentPayment of of wagewage Act,Act, 19361936,, TheThe

MinimumMinimum WagesWages Act,Act, 19481948,, TheThe PaymentPayment of of BonusBonus Act,Act,

19651965,, provide provide incomeincome securitysecurity toto thethe employeesemployees..



Safety and Health:Safety and Health:

Employee¶sEmployee¶s safetysafety andand healthhealth shouldshould be be takentaken carecare of of inin order order toto protect protect employeeemployee againstagainst accidents,accidents, unhealthyunhealthy workingworkingconditionsconditions andand toto protect protect worker¶sworker¶s capacitycapacity.. InIn India,India, thetheFactoriesFactories Act,Act, 19481948 provides provides certaincertain requirementsrequirements regardingregardingsafesafe workingworking environmentenvironment.. AlongAlong withwith safetysafety andand healthhealthmeasures,measures, TheThe Workmen¶sWorkmen¶s CompensationCompensation Act,Act, 19231923,, provides providescompensationcompensation toto thosethose employeesemployees whosewhose wageswages areare lessless thanthan

R sR s.. 500500 per per monthmonth.. TheThe amountamount of of compensationcompensation dependsdependsuponupon thethe naturenature of of injuryinjury andand monthlymonthly wageswages of of thetheemployeesemployees..

EmployeesEmployees StateState InsuranceInsurance ActAct 19481948 provides provides sicknesssickness benefits, benefits, maternitymaternity benefit, benefit, disablementdisablement benefit, benefit, dependant¶sdependant¶s benefit, benefit, medicalmedical benefit benefit..



WelfareWelfare andand recreationalrecreational facilitiesfacilities::

ItIt includesincludes datingdating allowances,allowances, canteens,canteens, consumer consumer societies,societies,

housing,housing, legallegal aid,aid, employeeemployee counsellingcounselling,, welfarewelfareorganization,organization, holidayholiday homes,homes, educationaleducational facilities,facilities,transportation,transportation, parties parties andand picnics, picnics, miscellaneousmiscellaneous..

OldOld ageage andand retirementretirement benefitsbenefits::

EmployersEmployers provide provide somesome benefits benefits toto thethe employees,employees, after after retirementretirement andand duringduring oldold age,age, withwith aa viewview toto createcreate aa feelingfeelingof of securitysecurity aboutabout oldold ageage.. TheseThese benefits benefits areare calledcalled oldold ageage andandretirementretirement benefits benefits.. TheseThese benefits benefits includeinclude a)a) ProvidentProvident Fund,Fund, b) b) Pension,Pension, c)c) DepositDeposit linkedlinked insurance,insurance, d)d) Gratuity,Gratuity, e)e)MedicalMedical benefit benefit..



COST CONCEPT OF A BENEFIT & SALARY PACKAGE

The cost concept of an employee is made up of 3 components:Salary, Benefits and Overheads.

Companies are increasingly taking the view that they should

offer the senior executive a total compensation package, i.e.

ceiling is set to an employee¶s total compensation.

So each employee can choose the benefits which are useful to

them.



WHAT IS FRINGE BENEFIT TAX

The taxation of perquisites or fringe benefits provided by an

employer to his employees, in addition to the cash salary or

wages paid, is fringe benefit tax.



EXECUTIVE REMUNERATION

Executive remuneration is paid to an individual who is in a

management position at the highest levels.

The remuneration consists of 4 elements:

Salary

Bonus

Long term incentives

Perquisites



DISCOUNTED CASH FLOW METHOD (DCF)DISCOUNTED CASH FLOW METHOD (DCF)

DiscountedDiscounted cashcash flowflow isis aa capitalcapital budgeting budgeting techniquetechnique dealsdeals

withwith thethe actualactual cashcash flowflow..

TheThe termterm capitalcapital budgeting budgeting refersrefers toto thethe process process of of investmentinvestment

decisionsdecisions inin capitalcapital expendituresexpenditures or or fixedfixed assetsassets..

CapitalCapital budgeting budgeting isis aa techniquetechnique usedused toto evaluateevaluate expenditureexpenditure

decisionsdecisions whichwhich involveinvolve currentcurrent moneymoney spentspent onon anyany project project

but but thethe benefits benefits areare likelylikely toto comecome over over aa period period of of timetimeusuallyusually after after oneone year year..



METHODS USED FOR EVALUATING CAPITALMETHODS USED FOR EVALUATING CAPITAL

BUDGETINGBUDGETING

Payback period method

Accounting rate of return (ARR ) method

Discounted cash flow method:

Net present value (NPV) method

Internal rate of return (IRR ) method

Benefit cost ratio (BCR ) method



DISCOUNTED CASH FLOW TECHNIQUE

DCFDCF isis aa capitalcapital budgeting budgeting techniquetechnique whichwhich considersconsiders thethe timetime

valuevalue of of moneymoney whilewhile evaluatingevaluating thethe costscosts andand benefits benefits of of aa

project project..

DCFDCF recognisesrecognises thethe timetime valuevalue of of moneymoney.. AccordingAccording toto DCFDCF aa

rupeerupee inin handhand todaytoday possesses possesses moremore valuevalue thanthan aa rupeerupee toto be be

receivedreceived inin futurefuture..



THANK YOUTHANK YOU

Determining Optimal Fringe Ben

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