Compensation Management

Compensation Management

Compensation may be defined as

money received in performance of
work & many kinds of services &
benefits that an organization provide to
their employees
Objectives of Compensation
 To recruit & trained qualified employee.
 To increase or maintained moral/ satisfaction.
 To motivate employees for better performance.
 To attract & retained skilled & talented work force.
 To determined basic wages & salary administration.
 To achieve internal & external enquiry.
 To ensure equal pay for equal work ,i.e., each
individual’s pay is fair in comparison to that of another
person doing a similar job.
 To support, communicate & reinforce an organization
culture, value & competitive strategy.
 To reduce turn over encourage company loyalty.
 To reward for exceptional job performance with plans
including bonuses, commissions, profit sharing,
stocks, gain sharing etc.
 To control cost –A rational compensation helps in the
organization to obtain & retained workers at a
reasonable cost.
 Comply with legal regulation –A sound wage & salary
system consider the legal challenges imposed by the
government & ensures the employees compliance.
Basics of Compensation Policy

Job Description.
Job Analysis.
Job Evaluation.
Pay Structure.
Salary Surveys.
Classifications of Compensation:
Direct compensation.
Indirect Compensation.
Non-Monetary Compensation.
Direct Compensation:
Base Pay
Bonus
Long term incentives or stock
options.
Perks or perquisites.
Indirect Compensation:
 Flexible working schedules.
 Elder care.
 Retirement programs.
 Moving expenses.
 Insurance (health, eye, dental).
 Subsidized utilities.
 Tickets to events (ball games, concerts).
 Magazines subscription.
 Boots & clothing.
 Laundry Services.
 Company Parties.
 Use of machinery ,farm produce
goods/meals.
 Cellular phones/ pagers.
 Child Care.
 Model of Non-compensation System

Non-compensation System

Enhance dignity & Promote Constructive Allocate sufficient Offer supportive

Satisfaction from work social relationships resource to perform leadership &
performance management
with co-workers work assignment

Enhance Physiological
Design jobs that Grant sufficient
health, intellectual growth
control over the job to
& emotional maturity require adequate
meet personal
attention & effort
demands
Example of Non-Monetry Incentive
 A person with strong need for affiliation may respond
readily to job assignments, that provide with
opportunities to relate to socially attractive &
satisfying individuals or groups.
 The opportunity to communicate with hand relate to
others is a factor many workers emphasize & seek.
 Persons who are very status conscious can be
motivated with the ability of a paneled office or
various kinds of status symbols.
 An employee with high level desires for power may
,respond easily to opportunity where by he can gain
leadership & administration responsibilities.
 The use of job enlargement provide added incentives
to some employees because they feel capable of
controlling wider sets of activities than previously
performed.
 Workers in safety minded organization are often
attracted by competition on awards for best safety
performance records.
 Individuals proud of their past accomplishments may
feel recognized & rewarded if their superiors extend
opportunities for participation on more complex
important job assignments.
Factors Effecting Employee’s
Compensation:
 External Factor:
1. Demand & Supply of Labour.
2. Cost of living.
3. Society.
4. Labour Unions.
5. Legislation.
6. Economy.
7. Compensation survey.
Contd:
 Internal Factor:
1. Compensation Policies.

2. Organizational ability to Pay.

3. Job analysis & job description.

4. Employees Related factors.

 Executive Compensation:

 Components of executive compensation:

 Base Salary.
 Annual incentives.
 Long term capital accumulation.
 Deffered Compensation.
 Supplemental benefits & perquisites.
 Special severances & retirement arrangements.
 Employment & change of control arrangement.
Calibration of Executive
Compensation to Performance:

High Pay /Law High Pay /Law

Performance
Performance

Low Pay/Law Low Pay/Law

performance performance
Transparency of Executive
Compensation:
 Increase in the number of corporate collapses
is now dragging executive pay & corporate
governance into the public domain.
 Business conditions are putting pressures on
existing pay levels & structures.
 Corporate restraint & accountability in tough
economic times make executive
compensation a major issue to control.
 Executive Compensation movements at the
median of the market are getting subdued
over the years.
Executive Compensation Theories:
Agency Theory
Tournament Theory
Social Comparison Theory
Balance Sheet Approach
Head quarters-Based Pay
Golden Handcuffs
Competency based Pay
Golden Parachutes
Cafeteria Plans
Profit Sharing Plans
 Executive Compensation Design:
I) Use of Performance Criteria

Criteria Parameters
Performance targets Key result areas (KRA), key performance areas (KPA), key sales
objectives (KSO), or even some protocol bound performance
specification

Behaviour Performance impact

Job requirements Quality of action in terms of job requirements, or fulfilment of a
prescribed role

Experience of the executives Experience, talent, and skills

Job role Hierarchy and role requirements
Peer compensation Pay differences between the executives

Market considerations Benchmarked compensation information

Size of the organization Large, medium, or small

Nature of the organization Public limited, closely held, or family business
 Contd:
A) Context of Executive Compensation
Design

B) Decision Context

C) Culture & executive compensation

Relationship between Fixed & Variable
Pay:
Base Pay •Cash Salary
•Flexible Benefits
•Statutory benefits
•May include expatriate payments

Annual Incentives • Linked to business plan

• Delivered in cash &/or equity
• May include deferral
• May be linked to value added measures

Long Term Incentives •3 to 5 Year timeframe

•Cash
•Equity shares &/or options
•Shareholder value focus
•Referenced against peer group
 Performance Measurement in
Executive Incentives Programs:
Criteria Shareholder return based company-specific financial
measures (TSR, share price measures (ROE, EPS, etc.)
growth)

Aligned with shareholder Directly aligned Indirectly aligned. Proper

measure may reinforce interest
performance that drives value
creation over long term.
Definable yes Typically definable, assuming
adequate financial reporting
standards.
Measurable Easily measured. Relative TSR Easily measured. Progress can
presents issues related to be communicated quarterly.
choosing appropriate peer Harder to measure relative
groups. performance in timely manner.

Controllable Somewhat, unless economic Typically more controllable

and/or market factors than those subject to market
dominate price. Influence may volatility.
be limited to top tier executive
group.
Easily communicated and Yes, if properly designed. Yes, if properly designed.
understood
Contd: performance objectives
Timeframe Short-term Mid-term(3 to 5 years) Long-term (5 to 10
measurement (1years) years)
criteria
Measurement Profit, Reinforce performance, Assess market
Focus efficiency, and Which drives value in the return
operational long run
objectives

Measurement Operational ROE, EVA, ROI, TSR, TSR or share price or

profit , EBIT, and EBITDA share price
Examples

Measurement Cash Performance cycle plan, Options and/or shares

Vehicle payable in cash or shares
Different Criteria of executive
Compensation:
 Strategy Criterion.
 Role of Position Criterion.
 Individual characteristics criterion.
 Performance Criterion.
 Behaviour Criterion.
 Size Criterion.
 Market Criterion.
 Peer Compensation Criterion.
International Compensation:

 Short Term Assignment, which may be

for a relatively short period such as the
case of a feasibility study, etc. This type
of assignment does not usually exceed
six months. Families also do not
generally accompany.
 Long Term Assignment, if the assignment is
more than six months or one year. It will
usually result in employee’s moving along
with his family.
 Permanent Assignment is when an employee
signs a permanent employment contract with
a foreign subsidiary, the contract is usually
meant for a fixed period of time of longer
duration.
Problems of international
Compensation Management:
 Economic condition of host country.

 Employment condition of host country.

 Taxation laws of host country.

 Currency fluctuation in the host country.

 Inflation situation in the host country.

Objectives of International
Compensation Mgt:
 Attract & retain employees qualified for service
abroad.
 Facilitate transfers b/w foreign affiliates & b/w home
country & foreign affiliates .
 Establish & maintain a consistent & reasonable
relationship between compensation of all the
employees of any affiliate, whether posted at home or
abroad & b/w leading competitors.
 Compensation for reasonable foreign services ,tax
equalization, reimbursement of reasonable cost.
 Be cost-effective.
Elements of Expatriates Compensation
Packages:
 Basic pay

 Benefits
Housing
Utilities
Car
Helping Hands
Club Subscriptions
Education benefits
 Allowances
cost of living allowances
relocation allowances
hardship allowances
clothing
status or added responsibility allow
Home leave allowance, Spouse assistance
 Incentives
 Tax relief
Housing:
Location Estimated Yearly
Housing Costs
Responsibilities of an International
Compensation Manager:
 Partner closely with intentional HR, business
managers & executives to resolve grievances related
to HR compensation & systems.

 Work with HR generalists HRIS benefits &

compensation to maintain consistent international
approach & support.

 Evaluate design HR process & programs to support

business results.

 Research ,develop & administer appropriate

international compensation plan.
 Develop monitor international data base by individual
country.
 Develop people process to support entry into new
global markets.
 Participate in and analyze results of compensation
surveys for international management positions.
 Work with staffing to maintain expatriate
administration & develop expatriate packages with
our culture & philosophy.
 Maintain summaries of all international compensation
plans by location.
Tools for managing International
Compensation:
 Design an international compensation
management grading system that
corresponds identically to your domestic
grading system.
 International salary ranges by country that
allow you to smoothly expatriate a manager
overseas or from country to country & back
home again without disruption.
 Reliable external compensation market data
on competitive pay level for each major
function.
 A Standardized performance measurement system
that weighs the contribution made by management in
a consistent fashion regardless of where the
executive is stationed.
 Salary increase guidelines that properly motivate &
reward performance & are in line within your
worldwide compensation strategic plans.
 A base delivery method that complies with local
country laws & still remain integrated with your overall
base pay system.
Requirement of an Effective
International Compensation Manager:
 Strong Analytical skills & ability to work with
matrices, numbers & trends.
 Power ability to manage a growing
organization.
 Ability to work in a fast paced rapidly
changing environment.
 Significant prior recruiting and management
experience
 Very bright & assertive with the ability to pick
up new technology & assess situation
questions in existing international regions &
entry into new countries.
 Great people skills at all levels of the
company.
 Strong emphasis on team play rather than
politics.
 Creative problem solver.
Components of International
Compensation:
 Base salary & Base pay
 Indirect monetary compensation
Fringe Compensation including standard
benefits
Relocation assistance
education reimbursement for expatriate
children
Home leave benefits & travel
reimbursements.
Rest & relaxation leave & allowances.
Contd:
 Equalization Benefits:
Cost of living allowance
Education allowance for children
Foreign services premium
Emergency leave
Club membership
Spousal employment
Cross cultural training
Contd:
 Incentives:
Stock options
Mobility premiums
perquisites
performance related rewards
Indirect Monetary Compensation
Benefits:
 Fringe compensation including standard
benefits.
 Relocation assistance.
 Education reimbursement for expatriates
children
 Home leave benefits & travel reimbursement.
 Rest & relaxation leave & allowance.
 Equalization benefits.
 Cost of living allowance
 Housing allowance
 Foreign services premium
 Hardship allowance
 Emergency Leave
 Club Membership
 Allowances for spouse assistance
 Cross cultural training
 Incentives.
Various approaches to International
Compensation:
 The Going rate approach

 The Balance sheet Approach

Repatriation:
 Repatriation Process:
a) Preparation
b) Physical Relocation
c) Transition
d) Readjustments
The Structure of Compensation
Strategy:
 A statement of intentions:

 A rationale:

 A plan:

 A definition of guiding principles

Components and Significance of
Compensation Strategy
 Pay
 Benefits
 Careers
 First tenet
 Second tenet
 Third tenet
Developing Compensation Strategy:
 The diagnosis phase, when reward goals are agreed, current
policies and practices assessed against them, options for
improvement
considered and any changes agreed.

 The detailed deign phase, when improvements and changes

are detailed and any changes tested (pilot testing is
important).

 The final testing and preparation phase.

 The implementation phase, followed by ongoing review and

modification.
Policies those are Strategically
Relevant:
 Competitiveness
 Internal Structure
 Forms of Pay
 Basis for increases
 Role in HR Strategy
 Administrative Style
Company Examples:
 NIIT Inc., is a global IT service corporation.
NIIT’s compensation plan has given the
company a competitive edge in attracting and
retaining talent. The plan, instituted worldwide
with minor cultural variations, has resulted in
a turnover rate of less than 9% significantly
lower than the industry average of more than
30% NIIT has developed compensation
package that, apart from basic salary, serves
as an additional benefit for the employees.
Contd.
 Spirit found
President’s club
Managing Director’s Quality Club (MDQC)
Excellerator Award
Contd.
 Intel India located primarily in the city of Bangalore, is
Intel’s largest non-manufacturing site outside of the
United States. Intel’s goal is to pay above – average
total cash compensation. Components of cash
compensation include:

 Base Pay
 Commission
 Shift Premiums
 Overtime Premiums
 Stock Grants
 Stock purchase plan
SAS
 The compensation strategy of SAS Institute,
world’s largest privately owned software
company, has the following unique features:

1. It emphasizes work/life programmes over cash compensation

2. It provide limited bonuses and no options

3. It offers free onsite child care centers, subsidized private schools for
children of employees, 2 doctors on site for free medical care

4. It provides recreation facilities

5. It discourages working more than 35 hour per week.

Aztecsoft
 Aztecsoft is a company driven by passion for
technology and innovation that provide the
opportunity to work with some of world’s bet
known companies and their products.
Aztecsoft offers a friendly work atmosphere,
compensation and benefits in the industry.
Aztecsoft is acknowledged as one of the best
places to work at in india. Their HR policies
have been designed keeping the business as
well as individual goals in mind.
Contd.
 The following are few of the employee –
friendly policies and practices that are
preent there at aztecsoft:
1. Global employee referral progrmme
2. Medical and life insurance
3. Open channels of communication and transparent method of sharing
of information
4. Personal loan policy
5. Strong emphasis on employee safety and security
6. Excellent reward and recognition programmes
7. Aztecsoft competency framework
8. Vibes – A quarterly company-wide get-together
IBM
 prior to the 1990s, IBM emphasized internal
alignment, e.g, elaborate job evaluation plan,
clear hierarchy for decision-making, work/life
balance benefit, policy of no layoffs.
 In the 1990s, IBM redesigned its strategy,
described as a” solutions-led business
offering diversified information technology
capabilities.”
Contd.
 To “fit” the revised strategy IBM changed its
pay strategy and system that emphasized
the following features:

a) Creating a high-performance work culture via incentive pay.

b) Increasing employee and organization flexibility via work

design.

c) Winning in the marketplace to attract and retain talent.

d) Containing.
Norwich union insurance
(Armstrong,2006, p 653, 654)
 Norwich Union Insurance’s reward strategy
comprise four main elements:

1. Reward: salary and benefits, variable pay, all-employee share

option plan and incentive awards.

2. Career framework: meaningful job content and career

opportunities.

3. Performance: challenging work; recognition and brand supporting

behaviors

4. Development: learning opportunities and personal development

INFOSYS
 Infosys technologies ltd. The IT major of
india, is famous for its employee welfare and
benefit measure, for example, recently, it has
taken one of the largest group cover policy in
corporate india from life insurance corporation
of india for its 97,000 employees for Rs.
24.000 crore. Apart from the company-wide
standard compensation and benefits, Infosys
also offers region-wide benefits to fcilitate
smooth life style of its employees. Some of
them are as follows:
Contd.
(A) Employees working in canada
Extended Healthcare
Medical Travel Assistance
Dental Care
Group RRSP Plan

(B) Employees working in the us

Medical Insurance
Dental Insurance
Vision Care Plan
Life Insurance
Accidental Death And Dismemberment
Contd.
(C) Income Protection Plans

Short-term Disability Insurance

Long-term Disability Insurance

(D) 401(K)

vacation time
AEGON UK
 ADOBE INDIA
 Adobe India offer a brilliant work environment
that thrive on innovation, a great corporate
culture, core value and some of the brightest
co-workers anywhere. Adobe offer a total
compensation Plan consisting of fixed salary,
variable salary, and a host of benefits. The
compensation philosophy is to pay for
performance, position compensation levels at
the top end of the market and share Adobe’s
success with the employees benefits offered
by adobe include:
Contd.
 Employee Stock Option Plan

 Employee Stock Purchase Plan

 Group Medi-claim Insurance

 Group Personal Accident Insurance

 Group Term Life Insurance

 Provident Fund
Contd.
 Spirit found the spirit fund (self propelled
initiative for renewal and individual
transformation) is a fund provided to each
employee for acquiring additional
qualifications on the job, such as, learning
new skills and languages, membership in
professional organizations, publishing and
presenting paper and attending personal
growth and development programmes.