Module Code: CIII-MPS-03

Module Name: Managing payroll system

Course Name: CIII in office management and administration

www.cyryxcollege.edu.mv I info@cyryxcollege.edu.mv I 3320004 I 3315872 I 3005872

Contents:

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Chapter One: Introduction to managing payroll system

1.1

Meaning and objectives: Payroll is defined as a method of administrating employees salaries in the

organizations. The process consists of calculation of salaries and tax deductions of the employees, administrating the retirement benefits and disbursements of salaries to employees. It can also be called as an accounts activity which undertakes the salary administration of employees in the organization. Administrating the employees salaries is not an easy task, the HR and accounts department work together to calculate and disburse the salary to the employees. Thus, payroll management can be further subdivided into two sub processes, i.e. Payroll accounting and payroll administration. Payroll Accounting: Payroll accounting involves calculations of employees salaries and tax deductions. It also undertakes the activities such as preparation of tax returns, maintaining the payroll records, etc. Payroll Administration: Payroll Administration involves managerial activities such as maintaining employees records, referring employment laws. Here, the HR comes into picture which maintains the daily record if employees attendance. Database of employees is maintained. Employees details such as name, employee ID, basic salary, daily attendance, etc are recorded. Gross Salary is calculated after adding the allowances and incentives to the basic salary of the employee. Net salary is calculated by deducting the tax and other calculated deductions (loan installments, etc). Objectives of pay roll system To calculate and generate payments for employee wages including complications like base wages, benefits, deductions, levies, superannuation contributions, health payments, taxes, holiday/sick leave entitlements, bonuses, overpayments, annual tax statements etc. It's complex and not simple to calculate manually using a spreadsheet even for the smallest business. To have an accountability.

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1.2 Purpose of pay roll system

For accountable purpose. To maintain the employees details Calculate the employees annual expenses that is Cost to the company (CTC). To measure an employees work To measure the track record of the employee for increment purpose.

1.3 Wage rate system

Meaning of wages or salary: The payment made to the labor in exchange for its service is called wages, which constitutes a major part of the total cost of production. Wages is one of the major elements of cost. Wages represents the expense incurred on both direct and indirect labor. However, Wages includes the total amount of financial benefits given by the concern to all its workers and employees for their time and effort used in producing goods and services. It is, in fact, the financial compensation provided to the workers for their physical and mental contribution for converting raw materials into finished outputs. Wages includes monetary and non-monetary (fringe) benefits. Monetary benefits include basic wages, dearness allowance, and employers contribution to provident find, production bonus, pension and gratuity. Fringe benefits include subsidized food, subsidized housing, subsidized education, medical facilities and holiday pay etc.

1.4

Procedures for fixing and revising wage rates:

Wage rate will fixed in two methods, they are as follows: Committee method: Under this method government has to appoint as many committees and sub -committees as it considers necessary to hold enquiries and advise it in respect of such fixation or revision. Notification method: In this method, government proposals are published in the official gazette for information of the wages likel y to be affected thereby and specify a date not less than two months from the date of the notification on which the proposals will be taken into consideration.

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1.5

Cost of living index

The cost of living index figures out the expense of a certain standard of living maintained over time. Basically it measures the changes of cost. If it rises over time, then it means that there is inflation. It reflects the current price level of goods and services related to some base year. Interpretation of Cost of Living Index: Cost of Living Index are determined to have a value of hundred in a base year to compare with the other values of that base year. If the index value exceeds hundred, it will be assumed that the cost of living is higher than that of the base year. Therefore, the result will have no unit. Terms related with the Cost of Living Index: Cost of Living Adjustment: Cost of Living Index can contain employment contracts, other benefits, social security. So, by this idea of adjustment the above mentioned issues can be squared according to the changes in the Cost of Living Index, such as, salaries which can be adjusted yearly. Other issues regarding the change of salaries, e.g change of location, can also be included in the salary adjustment. Bonus may be offered to the relocated candidates. Cost of Living Allowance: Relocated candidates can further be compensated by stipend or bonus to adjust there. Such kind compensation is named as Cost of Living Allowance. There might be a number of employees who have been relocated permanently. For them, a basic salary adjustment will be organized.

Essential characteristics of effective wage payment system: A sound system of wage payment is one that satisfies employer and employee by fulfilling following criteria: Wage payment system should be fair and justifiable to the workers and organization. Wage payment system should help in maximizing workers' satisfaction and minimizing labour turnover. Wage payment system should assure minimum guaranteed wages to all workers. Wage payment system should assure equal pay for equal work.

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 Wage payment system should provide more wages to efficient and skilled workers. Wage payment system should follow government policy and trade union's norms. Wage payment system should be simple and understandable to all the workers. Wage payment system should help in improving performance and productivity of the workers. Wage payment system should be flexible enough to suit the needs of the organization.

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Chapter Two: Compensation

2.1 Meaning of compensation
Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees.

2.2 Components of Compensation System:

Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows; Job analysis Pay structure Salary survey

Job analysis: Job analysis is a systematic approach to defining the job role, description, requirements, responsibilities, evaluation, etc. It helps in finding out required level of education, skills, knowledge, training, etc for the job position. It also depicts the job worth i.e. measurable effectiveness of the job and contribution of job to the organization. Thus, it effectively contributes to setting up the compensation package for the job position. Importance of Job Analysis: Job analysis helps in analyzing the resources and establishing the strategies to accomplish the business goals and strategic objectives. It forms the basis for demand-supply analysis, recruitments, compensation management, and training need assessment and performance appraisal Components of Job Analysis: Job analysis is a systematic procedure to analyze the requirements for the job role and job profile. Job analysis can be further categorized into following sub components. Job Position: Job position refers to the designation of the job and employee in the organization. Job position forms an important part of the compensation strategy as it

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determines the level of the job in the organization. For example management level employees receive greater pay scale than non-managerial employees. The non-monetary benefits offered to two different levels in the organization also vary.

Job Description: Job description refers the requirements an organization looks for a particular job position. It states the key skill requirements, the level of experience needed, level of education required, etc. It also describes the roles and responsibilities attached with the job position. The roles and responsibilities are key determinant factor in estimating the level of experience, education, skill, etc required for the job. It also helps in benchmarking the performance standards. Job Worth: Job Worth refers to estimating the job worthiness i.e. how much the job contributes to the organization. It is also known as job evaluation. Job description is used to analyze the job worthiness. It is also known as job evaluation. Roles and responsibilities helps in determining the outcome from the job profile. Once it is determined that how much the job is worth, it becomes easy to define the compensation strategy for the position. Therefore, job analysis forms an integral part in the formulation of compensation strategy of an organization. Organizations should conduct the job analysis in a systematic at regular intervals. Job analysis can be used for setting up the compensation packages, for reviewing employees performance with the standard level of performance, determining the training needs for employees who are lacking certain skills. Pay structure: Once job analysis has been done organizations need to decide upon the pay structures. Pay structure refers to the process of setting up the pay for a job in an organization. The process deals with internal and external analysis to estimate the compensation package for a job profile. Internal equity, External equity and Individual equity are the most popular pay structures. Job description provides the in depth knowledge about the job profile and its worth. Pay structures are the strong determinant of employees value in the organization. It helps in analyzing the employees role and status in the organization. It provides for fair treatment to all employees. Pay structures also include the estimation of incentives. The

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level of incentives also depends on the level of job position in the organizational hierarchy. Salary survey: Organizations have to bridge the gap between the industry standards and their salary packages. They cannot provide compensation packages that are either less than the industry standards or are very higher then the market rates. For the purpose they undertake the salary survey. The Salary survey is the research done to analyze the industry standards to set up the compensation strategy for the organization. Organizations can either conduct the survey themselves or they can purchase the survey reports from a reputed research organization. These reports constitute the last 2-5 years or more compensation figures for the various positions held by the organizations. The analysis is done on the basis of certain factors defined in the objectives of the research Objectives of Salary Survey To gather information regarding the industry standards To know more about the market rate i.e. compensation offered by the competitors To design a fair compensation system To design and implement most competitive reward strategies To benchmark the compensation strategies Types of Compensation Surveys There are two types of compensation surveys undertaken by the organizations. Standard Surveys: Standard surveys are undertaken by organizations on a regular basis. These surveys are conducted annually based on the organizational objectives. These surveys attempt to cover the same companies every year and provide the same time of analysis. The reports are published annually by the research organizations. The organizations willing to formulate their compensations strategies based on the surveys purchase the reports from the research organization. Custom Surveys: At times, a few organizations need to know some specific information. The surveys which cater this need are known as custom surveys. The organizations either higher research organizations to conduct theses surveys for them or they themselves conduct the survey by sampling few of the competitors on their own. These surveys do not have any time interval. They are undertaken as the need arises. They focus on important issues usually one or two.

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2.3 Fundamentals of compensation

In industry, workers are compensated in the form of following benefits: A monthly wages and salary or total pay includes basic wages, house rent allowances, dearness allowances and city compensatory allowances. Bonus at the end of the year. Economic benefits such as paid holidays and leave travel concession. Contribution towards the insurance premium. Contribution towards retirement benefits such as employees provident fund. Transport and medical facilities. 2.4 Monetary and Non-monetary benefits

Monetary benefits: Monetary benefits or pecuniary benefits are the most original of all the benefits. It is given in the form of money. The monetary benefits still form the most import influencing and motivating factor up to a certain limit. Because it is only by virtue of the monetary compensation that the workers can satisfy their fundamental needs such as food, clothing shelter etc. The monetary benefits may be either direct or indirect. Direct benefits include wages, bonus and other incentive directly given to the workers in the form of cash. Basic Salary: Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services. House Rent Allowance: Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work. Conveyance: Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them. Leave Travel Allowance: These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization.

Medical Reimbursement: Organizations also look after the health conditions of their employees. The employees are provided with medical-claims for them and their family

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members. These medical-claims include health-insurances and treatment bills reimbursements. Bonus: Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee. Special Allowance: Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity.

Non-monetary benefits: Non-financial or non-pecuniary benefits include all other influences planned or unplanned, which stimulate exertion. Mere monetary benefits cannot help the management in solving all the problems of industrial unrest. Further additional cash wage, may also tempt the workers to misuse the money in vices like gambling, drinking etc. Under such circumstances, the non-financial benefits have a significant role to play. Such benefits create a healthy atmosphere and change the mental outlook of the workers. They make the working class more stabilized and economically sound. Thus, in short the workers by virtue of the no financial benefits are enabled to enjoy a richer and fuller life. Experience of foreign countries particularly in countries like Britain, America and Japan have shown that there is a high degree of positive correlation between non-financial benefit schemes and labour productivity. Job Security: The management must try its best to create a sense of job security. There should be no risk of retrenchment, demotion and termination. Experience has also shown that the productivity is less in those concerns where workers have no feeling of safe and secure. But it is high in those concerns where they have a feeling of job security. Recognition: Recognition of work is the essence of securing good work. Efficient people would naturally like to get recognition for their skill and excellence in their work. Such recognition can do many things than what a cash reward can do. Of course it is not practicable for the superiors to praise everybody for everything done by them. But the technique of praise must be practiced as far as possible. Participation: Workers feel more satisfied when they are given an opportunity to raise their voice in handling the affairs of the enterprise. Since they actually take part in the decision making their cooperation is assured

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Sincere Interest in Subordinate as Individual Person: The workers will generally respond favourably when the management shows a keen interest in their experience and feeling. This immediate response in attitude shall lead to peak performance and thereby enlarge the productivity of the employee. Pride in Job: The workers must be made to feel pride in their job. Various techniques can be employed to develop pride to work. Food product dynamic leadership fair treatment, ethical conduct etc. can effectively stimulate the workers pride in their job and in the firm. Delegation of Responsibility: Delegation of rights and responsibilities to execute a given task often proves to be a strong motivating factor. By delegation the superior trust his workers and stimulates them to show better results. Other benefits: Other benefits like quick promotions provision of faculties for development and training, provision of labour welfare amenities etc. also safe a significant role to play in motivating the employees

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Chapter Three: Salary or wages and allowances

3.1 Meaning of wages or salary
The term wages might be defined as the aggregate earnings of an employee for a given period of time such as a day or a week or a month. Wages are basically the price paid for the service of the labour in the process of production. They are two composed of parts the basic wages and other allowances. The allowances include Dearness allowances (DA), city compensatory allowances (CCA), over time pay (OT), Medical Allowances (MA), etc The term wages is used to denote remuneration to workers doing manual or physical or mental work. Thus wages are given are given to compensate the unskilled workers for their services rendered to the organization. Wages may be based on hourly, daily, weekly or even monthly basic. Salary is compensation to an employee for services rendered on a weekly, monthly or annual basis. Its usually associated with office staffs, managers, supervisors, researchers, etc whose performance cannot be measured directly. Salary is the price paid for the job for a period of time. Its usually calculated to satisfy the basis of basic needs of an employee including food, clothing, sheltering, and fuel allowances. The basic wage must also be designed to meet the educational and medical requirements of the employees family.

Basic Salary =

Basic salary no of working days in the month X No of days worked

3.2 Allowances
Meaning of allowances: Different kinds of allowances sanctioned in Government service and private sector have been examined. The Commission is of the view that rationalization of the allowances and fixation of measurable criteria should be introduced for sanctioning various types of

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allowances. With this view in mind certain modifications have been suggested to the existing rates of allowances and deviations have been recommended from existing pattern. Types of allowances: The Commissions recommendations on each of the allowances are as follows:Dearness Allowance: The Dearness Allowance paid to the employees is in the nature of compensation for erosion in the real value of their salaries resulting from price rise. The State Government is following the practice of paying Dearness Allowance at the same rate to their employees as is being paid by central Government. Central Pay Scales were related to the Consumer Price Index. The Dearness Allowances was to protect wage earners real income by neutralize the increased cost of living. It has to give relief to the worker during the inflationary period. Dearness Allowances = Basic salary x DA Percentage

House rent allowances: This is the allowances paid to improve the housing conditions of the employee or workers in the organization. This allowance is paid based on the standard of job basis performed by an employee. House Rent Allowances = Basic Salary x HRA percentage

City compensatory allowances: This allowance is given to the higher officials for staying within the limits. The payment made by the organization to the employees for stay of the higher official within the city limit whose service is to be made available at the required time for the organization. City compensatory allowances = Basic Salary x CCA percentage

Conveyance allowance: Conveyance Allowance meaning thereby the expenses for going from employees residence to office or vice versa must be deemed to be included in our pay scale. The only direction that we give is that where an employee incurs expenditure in the performance of work he should be reimbursed to the extent that the expenditure is fairly and legitimately incurred.

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Special allowance: Special allowance is a salary head thats usually used to accommodate variable pay. E.g. if your employer allows it and you opt for receiving LTA (leave travel allowance) as a monthly taxable amount, then it can be added to special allowance. Special allowance is fully paid monthly and taxed at your slab rate. There are no tax breaks available for this head as its only used for convenient payroll calculation and not separately recognized for income tax calculation.

Employee contributions In some circumstances, an employee may make a payment to their employer as a contribution towards the cost of providing fringe benefits. These payments, referred to as employee contributions, are generally assessable income in the hands of the employer. An employee contribution may be made only from an employees after-tax income. Contributions in respect of a particular fringe benefit reduce the taxable value of that benefit, and therefore the amount of FBT (Fringe benefit tax) payable. They may not be applied to reduce the taxable value of any other fringe benefit. Any operating expenses incurred by the employee in relation to a car supplied by the employer that are not reimbursed may also reduce the taxable value. Employers are not required to lodge FBT returns when the employee contributions reduce the total FBT liability to nil.

In general terms, employee contributions are any form of contribution that employees make to their own benefits programs. They may not come with matching contributions from employers. In most cases, employee contributions come out of workers' paychecks before taxes, allowing them to reduce tax liability in the short term and invest in a benefit that will pay out in the long run. Employee contributions are voluntary but necessary if employees wish to participate in employer-sponsored benefits programs. Retirement Contributions One of the most common specific types of employee contributions involves retirement savings plans. These contributions come out of employees' paychecks at a predetermined rate and before the employer deducts income tax withholdings. The result is a lower paycheck that the employee must claim as taxable income and a growing retirement account. Employers also can take tax deductions if they match employee contributions with their own contributions to retirement plans. Employee contributions that go into

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retirement savings plans are subject to income taxes but only once the employee receives the funds. Other Types of Employee Contributions Other employee contributions go toward additional benefits. For example, some group health insurance plans rely on combinations of employer and employee contributions. Employees also can contribute pretax income to medical savings accounts. In other cases, employers allow employees to contribute money toward sick pay plans, which earn them paid time off in the future. Tax withholdings, such as Social Security and income tax withholdings, usually don't use the term employee contribution, even though they use the same process of deducting funds from employee paychecks. Employers are responsible for tracking the money employees contribute from their paychecks. Managing employee contributions is an important element of a payroll system. It's also among the automated features in most computer payroll programs. At the end of each year, employers must calculate the total value of each type of employee contribution, along with total wages and tax withholdings, and report the data to tax authorities and to employees themselves for figuring their income taxes.

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Chapter Four: Fringe benefits and incentives

4.1 Meaning of fringe benefits
The employer, through not bound, provides several benefits and services to the employees, working in the organisation to maintain and promote the employees favorable attitude towards the work and work environment, because maintenance of favourable attitude is an essential part of motivation and high morale. Such benefits and services, being a part of wage and salary administration, include all expenditure designed to benefit employees over and above regular wages and direct monetary incentives related to output and are generally referred to as 'fringe benefits'. The real wags of workers are increased by the benefits provided by the employer and thus they are regarded as supplement to their wages. So, they are also labelled as 'Wage-Supplement'. These benefits may include, leave with pay, pension, gratuity, medical benefits etc. fringe benefits may be given to individual, or to groups; they may be long-term benefits or sort term benefits, may be Financial or non-financial etc.

4.2 Objectives of fringe benefits

To attract and maintain efficient human resources with the organization To motivate the human resources i.e. employees To effective utilization of manpower To attract the experienced employees 4.3 Types of fringe benefits Organizations provide a variety of fringe benefits. The fringe benefits are classified under four heads as given here under: Employment Security: Benefits under this head include unemployment, insurance, technological adjustment pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs to the sons/daughters of the employees and the like.

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 Health Protection: Benefits under this head include accident insurance, disability insurance, health insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc. Old Age and Retirement: Benefits under this category include: deferred income plans, pension, gratuity, provident fund, old age assistance, old age counseling, and medical benefits for retired employees, traveling concession to retired employees, jobs to sons/daughters of the deceased employee and the like. Personnel Identification, Participation and Stimulation: This category covers the following benefits: anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, beauty parlor services, housing, income tax aid, counseling, quality bonus, recreational programs, stress counseling, safety measures etc. Payment for Time Not worked: Benefits under this category include: sick leave with pay, vacation pay, paid rest and relief time, paid lunch periods, grievance time, bargaining time, travel time etc. Extra Pay for time Worked: This category covers the benefits such as: premium pay, incentive bonus, shift premium, old age insurance, profit sharing, unemployment compensation, Christmas bonus, Ramadan bonus, food cost subsidy, housing subsidy, recreation.

4.4 Incentives
Meaning: Incentive plans are part of an employee's compensation or pay. The incentive plan gives an employee the opportunity to increase his annual pay based upon either company performance or individual performance. Incentive plans are a way for companies to keep employees motivated to perform to the best of their abilities, thus increasing company profit. Types of incentives Incentives are important to motivate employees, increase efficiency at work and enhance performance. Incentives keep the employees focused toward achieving a goal and help to

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maintain employee support. They can be of different types, but the purpose should be to motivate all types of individuals in an organization. It is not necessary that incentives are luxurious, but a simple reward can help the employer win employee loyalty. Gift Incentives: A popular incentive used in organizations these days are gifts. These can be small gifts prepared by a company, like T-shirts, cakes on special occasions, cards and flowers to celebrate employee birthdays, cookies for kids etc. Such incentives can be awarded to all employees to motivate them, or to specific employees in appreciation of their performance.

Bonus Incentives: Bonuses are offered to individuals when they are able to reach specific goals. For example, in companies that are involved in sales of products and services, bonuses are often awarded on the basis of sales made by the individual. This incentive depends on the performance of the employee and is usually paid in cash. The bonus increases and decreases according to the individuals performance. Bonuses are usually offered once a year, however the frequency varies from company to company.

Health care Incentive: One of the most important incentives for employees are the health care facilities. Such an incentive is also important for the employer, as healthier employees will increase productivity. Organizations offer personal insurance, maternity and child-care cost as incentives. Most companies will insure the family members of an employee, including her spouse and children.

Travel and Transport Incentive: Travel incentives are popular; they help the employee relax without any financial concerns during the holiday. Such rewards are appreciated by the employee as well as his family. Travel incentives, can include local destinations or travel abroad depending on the employee performance and position in the company. It can either be a weekend trip or a long vacation. Transportation is a highly valued incentive and employees are often rewarded with company maintained cars. This makes traveling convenient and saves travel time.

Commission Incentive: Another type of incentive is commission. In some organizations salaries are based on a flat wage plus a commission. While for other jobs, the only payment might be made in the form of commissions. The amount usually depends on the

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number of sales a team or individual completes. For example, in a call center, agents are offered commission on the completion of an order alongside their regular wage to further motivate them to increase sales performance.

Profit-sharing Incentive: Another common incentive utilized by organizations is profit sharing. This is an effective form of incentive for group motivation. In profit sharing, employees are offered a percentage of profits. The distribution amount depends on the salary of employees or the predetermined share of profit that they are entitled to receive.

Retirement Incentive: One of the most popular incentives today is the retirement benefit contribution by the company. In such an incentive plan, the company deposits money in an employees retirement account. This has an added advantage as employee gets tax-free or tax-deferred savings. This amount increases to a large amount at the time of retirement and helps the employee pay daily bills after retirement. This incentive is effective and is usually offered to all employees.

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Chapter Five: Wage assessment methods

5.1 Meaning:
It is the way of giving financial compensation to the workers for the time and effort invested by them in converting materials into finished products. It indicates the basis of making payment to the workers, which may be either on time basis or output basis. The selection of the system depends on the type and nature of the concern and its products. The wage payment systems can be divided into two main systems as follows. 1. Piece rate system 2. Time rate system

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