Direct compensation or Indirect Compensation?

Direct compensation

 refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time.

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.

HRA
HRA stands for House Rent Allowance, it is an allowance that almost every salaried employee receives as part of there salary package from there employer to meet the cost of rent that they pay for their home. In other words, HRA is a compulsory part of salary of an individual which every salaried person receives irrespective of the type of property he resides in. Which means, if your employer chooses to offer HRA then you will get this as part of your salary whether you stay in a rented house or reside in your own house. As being a taxable part of salary, HRA gets special treatment in income tax law and is exempt from income tax to a certain extent.

Conveyance
Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

Holidays and Leave
Payment for holidays and leave is also included in direct compensation. Leave includes sick time, funeral leave, maternity leave, military duty or other paid time away from work.

Bonuses
All forms of bonuses are included in direct compensation. Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages. Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to employees, but are considered an expense of doing business and are, in most cases, a tax benefit to the employer.

Facts [+]

According to The Payment of Bonus Act 1965, in Indian organizations irrespective of  profits or losses it is  mandatory for payment of bonus to the Every employee (receiving salary or wages up to RS. 10,000 p.m). engaged in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative, technical or clerical work is entitled to bonus for every accounting year if he has worked for at least 30 working days in that year.  For employees Minimum payment of bonus is 8.33% and maximum bonus payable is 20% on the allocable surplus derived form available surplus of the organization. [Allocable surplus= 67% of the available surplus (other than banking companies) or 60% of the available surplus (banking companies and companies linked with abroad)]. This act exempts certain class of employers prescribed under [Section 32]of this act.

Other Allowances
Other paid or reimbursed allowances are included in direct compensation, including ravel (including meals) and some medical care when it is paid by the employee and reimbursed.

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.

Indirect compensation

What doesn't fall under direct compensation is indirect compensation, of which the employee is the beneficiary, but does not receive directly.

Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes.

Leave Policy
It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.

Overtime Policy
Overtime is the amount of time someone works beyond normal working hours. Normal hours may be determined in several ways:. Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Overtime pay rates can cause workers to work longer hours than they would at a flat hourly rate. Overtime laws, attitudes toward overtime and hours of work vary greatly from country to country and between different economic sectors. Overtime means extra productivity from employee that should be equal or more than the overtime payment made.

Facts [+]

In the United States, the Fair Labor Standards Act of 1937 applies to employees in industries engaged in, or producing goods for, interstate commerce. The FLSA establishes a standard work week of 40 hours for certain kinds of workers, and mandates payment for overtime hours to those workers of one and one-half times the workers' normal rate of pay for any time worked above 40 hours. The law creates two broad categories of employees, those who are "exempt" from the regulation and those who are "non-exempt". Under the law, employers are not required to pay exempt employees overtime but must do so for non-exempt employees.

European Union (EU) directives

The directives require:

• maximum average working week (including overtime) of 48 hours over a 17 week reference period
• minimum daily rest period of 11 consecutive hours in every 24
• breaks when the working day exceeds 6 hours
• minimum weekly rest period of 24 hours plus the 11 hours daily rest period in every 7-day period
• minimum of 4 weeks paid annual leave
• night work restricted to an average of 8 hours in any 24-hour period

The directives apply to:

• all sectors of activity, both public and private
• Doctors in training used to work a maximum week of 58 hours until 2009. From 1 August 2009 their maximum working week fell to 48 hours

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According to The Factories act, 1948 [section 59] in India worker works in a factory for more than nine hours in any day or for more than forty-eight hours in any week, he shall, in respect of overtime work, be entitled to wages at the rate of twice his ordinary rate of wages.

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Biometric system leads to reduction in sum paid as overtime

INDIA, March, 2012: The amount paid on an average per month as overtime allowance to the employees of Finance Ministry has come down by around one fourth after installation of biometric attendance system, the Ministry has said in response to an RTI query.

The Ministry used to pay an average overtime allowance of Rs 2,26,978 each month, which after installation of biometric attendance system has reduced to Rs 62,600 approximately, the RTI (The Right to Information Act 2005 ) reply.

Biometric attendance system was installed in the Ministry to ensure that the employees and officials come to their office on time and do not leave early.

The application to seek the information on overtime allowance paid by the Ministry was filed by RTI activist Gopal Prasad.

He had also sought information on the modernisation plans undertaken by the Ministry at its offices here.

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Hospitalization
The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.

Insurance
Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization.

Leave Travel
The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free.

Retirement Benefits
Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age.

Holiday Homes
Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house.

Flexible Timings
Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons.