Hi,
The leave encashment is governed by the factories act.
As has been suggested by other members, while the policy may vary in each company, you may design a leave encashment which will motivate employees to both avail their leave in time ( will boost morale ) and also stay back in the company for a longer time.
There fore you may like to design a policy on the following lines
(a) compute encashment on last basic pay drawn
(b) Have a maximum limit for encashment and tie it with number of years of service rendered. For example, if an employee has rendered 5 yrs service and accumulated 100 leaves, have a policy which says for Service<= 5 yrs, max leave encashment would be for 60 days.
(c) In addition, you can also have a cap on the leaves that can be encashed each year. If EL = 25, you can have a policy which mandates a max of only 15 days for encashment.