Compensation

COMPENSATIONWhat is compensation?All forms of pay or rewardsgiven to employees and arising from their employment.there are direct financial payments in the form of wages salaries allowancesincentives CommissionPerquisites bonuses etc. andIndirect payments in the form of financial benefits like employer paid insurance or paid leave/holiday

What do you mean by WagesSalariespayRemunerationRewardsIncentivesPerquisites allowances

Basic classification of compensation methods

Time rated- employees are paid on the basis of the time they put in on the job. Performance is not a basic criteria.

Piece rated- employees are paid based on the number of units produced/serviced/sold by them. Time spent on the job is not a basic criteria.

Duration of paymentDailyWeeklyMonthlyAnnuallyOnceAdvance paymentOn completion of the assignment

Factors influencing the determination of compensation

Statutory requirementsEmployee unionsPolicy of the organizationAbility to payEquity-internal and externalDemand supply gap in labour market

Statutory requirements in IndiaExamplesArticle 39(d) of Constitution suggests equal pay for equal work for both men and women.Minimum wages Act 1948 empowers the government to fix minimum wages irrespective of the ability of the employer to pay and toFix the hours of workFix overtime wages

Statutory requirements in India

Payment of wages Act 1936 prescribes the method of payment of wages


Payment of bonus Act 1965 requires employers to pay bonus to eligible employees every year.

Beedi and Cigar Workers[conditions of employment )Act 1966 requires payment of overtime at double the normal rate[s.18] and

One day paid holiday for every six days of work [s.21]

Statutory requirements in IndiaFactories Act 1948

Sec.52 of the provides weekly holiday for workmen.

Sec.59 provides extra wages for overtime

Industrial Employment standing orders Act1946 Requires the employers to prescribe wage rates and mode of payment Prescribes subsistence allowance during suspension


Section 33 of Mines Act 1952 requires payment of overtime to workmen

Working journalists Act 1955 provides for weekly holiday[s.6] over time [s.10] annual holidays [s.13].

Apprentices Act 1961 requires payment of overtime and weekly holiday.


Weekly holidays Act 1942 and the Shops and commercial establishments Acts of the states provide for weekly holidays.

Statutory requirements in IndiaAnnual Leave with wages ExamplesThe Factories ActThe Mines ActThe Plantation Labour ActThe working journalists ActThe sales promotion employees ActBeedi Cigar workers ActMotor Transport workers Act

Employee Unions

The Trade Union Act 1926 allows formation of union by employeesUnionized employees bargain collectively with the employer for higher wages.Unions can avail the statutory remedies like settlements or award provided under the industrial dispute Act. Unions can boycott work demanding better wagesIndustrial employment standing orders Act provide for

certified standing orders to prescribe service conditions

Compensation policies

Employers’ compensation policy influences the determination of compensation.Each organization has its own policy whether they want to be seen as high paying employer or low paying.The other issues of compensation policy are the difference between managerial and non managerial salaries, apprentice’s salary etc.

The method of deciding increments, incentives etc.

Equity issues in pay

External equity- pay must be comparable favourably with other organizations for similar jobs

Internal equity- Each employee should feel that his pay is equitable compared to others in the organization

How to determine equity

Conduct a salary survey [formal, informal, government, consultants] to find out external equity

Determine the worth of job within the organization by job evaluation by taking into account the compensable factors like efforts required, responsibility, skills, working conditions,Accountability

For external equity

Methods of job evaluation

Ranking methodranking each job relative to all other jobsObtain informationSelect the raters and job to be ratedSelect compensable factorsRank jobs


Classification or grading method

Categorizing jobs into groups based on the compensable factors

Point method

Identify several compensable factors and the degree to which each of these factors present in the said job.


Factor comparison methodRanking jobs according to a variety of skill and difficulty factorsAdding up these ranking to arrive at an overall numerical rating for each given job.

Group similar jobs into pay grades

Jobs are classified according to the compensible factors, thenGrouped them into relative pay grades depending upon the similarities of compensable factors.

Fine tune the pay scales

Develop rate ranges for similar jobsCorrecting out of line rates

Current trends in compensation

Skill based pay- employees are paid for the range, depth and types of skills and knowledge they are capable of using rather than the job currently they hold.

Differences between skill based and job based pay

In job based pay (JBP) testing competence is not required but it is required under skill based payIn JBP, normally the pay changes with the change of jobs but This is not the case for SBP In JBP seniority has the role to pay in determining the wages but this is not the case CBPUpward mobility is faster and easier in SBP than JBP

Broad Banding

Broad banding of salary meansReducing the many narrow pay grades into few wide levels.Which allows employees greater flexibility to workout the pay range they wish to move into.In broad banding employees will have significant scope for salary increase based on performance.

Managerial or executive compensation Plans

How are the managerial compensation plans different from employee compensation plans?What are the main components of managerial compensation?What are the objectives of managerial compensation plans?

Managerial compensation Managerial compensation is different from employee

compensation in many ways for example

Employee compensation is governed by many labour legislations like minimum wages Act or bonus Act, but this is not the case with managerial compensation.

employee compensation is mainly based on productivity of the employees within the organization but managerial compensation is determined normally on the basis of market performance of the organization.

the number of people covered under employee compensation are larger compared to managerial compensation plans

Are any statutory requirements for managerial compensation

Total managerial remuneration payable by a public company in a financial year shall not exceed 11% of the net profitIf any professional services are rendered, they are to be paid separatelyIf no profits in any year no remuneration payable except with prior approval of central government The 11% limit is inclusive of Rent free accommodationAny other free amenitiesAny expenditure incurred on behalf of directors.Directors are not eligible for any tax free remuneration or allowances [section 198-200 Companies Act 1956]The remuneration of MD shall not exceed 5% of the net profit [s.309]

Basic components of managerial remuneration

Basic/ base salary: fixed compensation paid regularly with periodical increase say once in a year regardless of the rate of growth of the business

short term incentives: cash paid/ company paid trips and picnics for achieving short terms goals like achieving sales targets for the year

Long term incentives: Stock option plans

Special executive benefits: insurance policies at company cost, health insurance

Benefits: paid leave, health care, survivor’s protection, retirement plans.

Perks : company car, housing, club membership, entertainment, news

paper, house maintenance, maid servant’s charges.

Objectives of managerial compensation plan

To

•Attract

•Develop

•Motivate and

•Retain

Superior performers for sustained growth and development of the organization

Factors that determine managerial compensation

Some important factors

•Value of the person’s work to the organization

•Demand and supply gap in the job market

• The nature of business

•Nature of work

•Place of work

•Organizational policy

•Prevailing rate of compensation in the industry

•Knowledge and skill level of the manager

Compensating expatriate employees

Home based salary policy – retaining the home country salary structure of any manager by attaching additional allowances for cost of living differentials, depending upon the place of posting. Employees from different countries working in the same office and same work may be paid different salaries

Host based plan: the manager gets salary prevailing in the host country. Managers from advanced country posted in backward countries are at a disadvantage

There is no single best plan. It differs from case to case and from company to company

Incentive plans

Individual incentive plans: give money over and above base salary to individual employees who meet specific performance standard. Example; Spot bonus

group incentive plans: give money over and above bas salary to all members of the group for meeting specific performance standard.

profit sharing plans: provide employees with a share of the organization's profit in a specified period.

Gain sharing plan: reward employees for improvements in organizational productivity

Incentive plans

Piecework plans

Straight piece work plan: each worker receives a set payment for each piece produced or processed in a factory/shop

Guaranteed piecework plan: the minimum hourly wage plus an incentive for each piece produced above a set number of pieces per hour.

Standard hour plan: the worker is rewarded by a percent premium that equals the percent by which his or her performance exceeds the standard

Team based incentives

METHOD 1

•Set work standards for each member of the group and

• maintain a count of the out put of each member.

•Then pay in one of the following ways

•All members receive the pay earned by the highest producer or

•All members receive the pay earned by the lowest producer or

•All members receive payment equal to the average pay earned by the group.

Team based incentives

METHOD 2

•set a performance standard based on the final output of the group as a whole

•then all member will receive the same pay based on the rate fixed.

METHOD 3

•Tie team performance to the company’s strategic goals.

•Teams which achieve the goals get the stated incentive.

Long term incentives

Stock option: the right to purchase a stated number of share of a company stock at today's price at some time in the future.

Stock appreciation rights: either to buy the stocks in future as per the stock option or or take any appreciation in the stock price.

Performance achievement plans: get shares for achieving predetermined performance targets

Restricted stock plans: shares allotted for free or discount but not allowed to sell immediately

Phantom stock plans: receive units not shares and in future date they receive the appreciated value of money on those units

Incentive plans-important points to note

Link the incentive with your business strategy

Ensure that efforts and rewards are directly related

Make the plan understandable and easily calculable by the employees

Set effective standards

Guarantee your standards

Guarantee base pay

Have objective measurement systems

Emphasize long term as well as short term success

Take the market conditions into consideration

Business

Compensation