Understanding Ex-Gratia vs. Bonus: Can You Help Clarify Their Differences?

Hi everyone,

I often get confused with these two terms - Ex-gratia & Bonus. Could anyone tell me the concept and difference of these two terms, their applicability, calculation, etc.?

Your information will be precious to me.

Regards,
Pushpendra

The two terms are distinct.

Ex-gratia is a voluntary payment often given as a mark of compassion. For example, when someone is injured, disabled, or in cases of death. Since the payment is voluntary, it is not bound by any legality. In other words, there is no obligation to make an ex gratia payment.

Bonus literally means 'extra'. In the organizational context, a bonus is any payment made beyond the salary and perks, usually linked to individual or collective productivity. Unlike ex-gratia, a bonus is statutory, as the government has fixed the minimum rates for it. In practical effect, bonuses are fixed through collective bargaining and are not necessarily linked to actual productivity.

I hope I have shed some light on this.

Rajeev.V

Hi,

Bonus is essentially a "share in the profits" of the organization. To streamline many dissimilar practices in industries so that dissatisfaction over the payments by employers to the employees could be contained. In the past, such payments were dependent on the whims and facies of the employer, and there was no thought about rationality in payments and equitability.

As an answer, the country passed the law, "Payment of Bonus Act 1965," and it became mandatory for an employer to pay a bonus in terms of the act which provided mode and modality for calculating a bonus. I am attaching a brief note on the subject. The note covers the topic but cannot provide all details.

Ex-gratia is a term that refers to any payment made by the employer "gratis," which means, "of his own free will," and under no obligation of any law. The practices regarding this are many, and I will cite only some so that the conceptual difference is easily understood.

1) When the profits do not support a large bonus, the employer may give some amount from out of the revenues of the firm, in acknowledgment of the workmen's contribution.

2) On an event of significance to the organization, like completing a specific period of existence, completion of a large export order, etc.

3) Any other reason that is NOT binding on the employer, but the employer "wishes" to make such a payment.

All in all, these two terms look related, but in reality, they are conceptually different! Are we now clear?

Regards,

Samvedan

December 13, 2006

Dear Rajeev and Samvedan Sirs,

Thank you very much for clarifying these two terms for me. I now would like to know if both Ex gratia and Bonus are included in the employees' CTC or not.

Thank you once again for your help; I now have a better understanding of these terms.

Regards,
Pushpendra Soni

Hi,

There is no law regarding the inclusions and exclusions from the CTC. Essentially, CTC is a management's way of looking at the entirety of "Employee Related Costs" that it incurs to employ the number of employees it has at any given time. It is an indicator of whether the company is more or even less in relation to the output/profits. It is a part of the checks and balances system that management follows.

In my opinion, considering the nature of the payment (being ex-gratia), it should not be a part of CTC. It may be so in a particular year when it is paid. However, if it is going to be paid each year, then it loses the nature of being "ex-gratia" and needs to be designated as something else before being included in the CTC.

Fine?

Samvedan
December 13, 2006

Dear Samvedan,

Yes, you are correct. However, if we start paying something, it becomes a part of the organization's culture, and everybody expects the payment every year. In industries like ours (hospitals), since we are not covered under the Payment of Bonus Act, we pay in the form of ex-gratia every year, and therefore, we include it in the CTC.

I think I am clear now.

Mangai

Hi,

If the Payment of Bonus Act 1965 is NOT applicable to you and the organization wants to make a payment in lieu (as it were), then it is perfectly in order to include such a payment in the CTC. On that, I am with you.

Regards,
Samvedan
December 14, 2006

Hi everyone,

I often get confused with these two terms - Ex-gratia & Bonus. Could anyone tell me the concept and whether PT is applicable to Bonus or not? I am confused; the company was established 8 years ago and has already completed 5 years. In my company, there are another 3 units that were started last year. Is it applicable for bonus or ex-gratia? Could anyone provide me with details as soon as possible?

Your information will be precious to me.

Regards,
Ramakrishna

Dear All,

A bonus is a share of profit paid to employees by the employer as per the Bonus Act of 1965. The minimum bonus is 8.33%. There are certain modalities of payment of the bonus, and the employer is required to submit returns to the authorities, which are also subject to audit and inspection.

However, an ex gratia payment is not covered under any statute since it is entirely a discretionary payment. Many companies pay a bonus in the name of ex gratia to employees who are not entitled to a bonus as per the Bonus Act of 1965.

Regarding the inclusion of the bonus in CTC, my answer is "yes." Statutory payments like PF contributions and the cost of gratuity are included in CTC. If you look at it from that angle, I find no reason why a bonus would not be covered under CTC.

Hi,

Please let me know what the differences are between a bonus and ex gratia, as well as the percentage of bonus and ex gratia.

Please provide information.

With regards,
RAM

Dear Friends,

Your interpretations are very informative. However, some organizations choose to avoid providing bonuses by stating that there are no profits for the year. Since it is mandatory, how is the management justifying such incidents? My point of inquiry is whether it is correct that 8.33% is mandatory to be given as a bonus to employees.

Your comments are highly valuable; please provide them.

Regards, PBS KUMAR