A to Z Compensation

Compensation - "If you pick the right people and give them the opportunity to spread their
wings - and put compensation and rewards as a carrier behind it - you almost don't have to
manage them." -Jack Welch
Compensation (meaning) - Compensation is a systematic approach to providing monetary value
to employees in exchange for work performed. Compensation may achieve several purposes
assisting in recruitment, job performance, and job satisfaction.
How is compensation used? Compensation is a tool used by management for a variety of
purposes to further the existence of the company. Compensation may be adjusted according the
business needs, goals, and available resources.
Compensation may be used to:

Recruit and retain qualified employees.

Increase or maintain morale/satisfaction.

Reward and encourage peak performance.

Achieve internal and external equity.

Reduce turnover and encourage company loyalty.

Modify (through negotiations) practices of unions.

Recruitment and retention of qualified employees is a common goal shared by many employers.
To some extent, the availability and cost of qualified applicants for open positions is determined
by market factors beyond the control of the employer. While an employer may set compensation
levels for new hires and advertise those salary ranges, it does so in the context of other
employers seeking to hire from the same applicant pool.
Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that
must be reached between the monetary values, the employer is willing to pay and the sentiments
of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries
or salary levels at the expense of satisfaction and morale. Conversely, an employer wishing to
reduce employee turnover may seek to increase salaries and salary levels.
Compensation may also be used as a reward for exceptional job performance. Examples of such
plans include: bonuses, commissions, stock, and profit sharing, gain sharing.
What are the components of a compensation system? Compensation will be perceived by

employees as fair if based on systematic components. Various compensation systems have

developed to determine the value of positions. These systems utilize many similar components
including job descriptions, salary ranges/structures, and written procedures.
The components of a compensation system include:
Job Descriptions A critical component of both compensation and selection systems, job
descriptions define in writing the responsibilities, requirements, functions, duties, location,
environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs
individually or for entire job families.
Job Analysis The process of analyzing jobs from which job descriptions are developed. Job
analysis techniques include the use of interviews, questionnaires, and observation.
Job Evaluation A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main techniques:
Ranking, Classification, Factor Comparison, and Point Method.
Pay Structures Useful for standardizing compensation practices. Most pay structures include
several grades with each grade containing a minimum salary/wage and either step increments or
grade range. Step increments are common with union positions where the pay for each job is predetermined through collective bargaining.
Salary Surveys Collections of salary and market data. May include average salaries, inflation
indicators, cost of living indicators, salary budget averages. Companies may purchase results of
surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing
the results of salary surveys conducted by other vendors, note that surveys may be conducted
within a specific industry or across industries as well as within one geographical region or across
different geographical regions. Know which industry or geographic location the salary results
pertain to before comparing the results to your company.
Policies and Regulations
o What are the different types of compensation?

Different types of compensation include:

o Basic pay
o Commissions
o Over-time Pay
o Bonus, Profit-sharing & Merit Pay
o Stock Options
o Travel / Meal / Housing Allowance
o Benefits Including Dental, Insurance, Medical, Vacation, Leaves, Retirement,
Taxes, etc
Compensation Tips: Everything is Negotiable - It's all negotiable. Every new job -- every
performance review, in fact -- is an opportunity to negotiate base salary, various kinds of

bonuses, benefits, stock options, and other incentives that add to job satisfaction and provide
financial security. Taking control of your job search and conducting a smart search that takes into
account more than just financial considerations can also lead to that elusive condition called
happiness. Are you prepared to negotiate for happiness?
The negotiation process is an opportunity to define, communicate, and achieve what you want.
But to get the right job that pays what you deserve, you'll need to do your homework. The first
step in the negotiation clinic is to understand the negotiation basics.
Negotiation requires gathering information, planning your approach, considering different
alternatives and viewpoints, communicating clearly and specifically, and making decisions to
reach your goal. The author Maryanne L. Wegerbauer In her book, describes how each party in
a negotiation can fulfill specific needs and wants of the other party, a concept called "relative
power." According to Wegerbauer, understanding your strengths and resources; being able to
respond to the needs of the other party; and knowing your competition enable you to assess your
bargaining position more accurately.
Learn the power factors - What is your power over the other side of the table? Relative power,
Wegerbauer says, is a function of the following.
Business climate factors
Overall state of the economy and the industry in which you compete
Overall unemployment rate and the general employment picture
Demand for industry- and profession-specific knowledge and skills
Company factors
Profitability
Position in the business cycle (startup, growing, stable, turnaround)
Hiring manager factors
Urgency of the company's need to fill the position
Decision-making authority
Staffing budget
Applicant factors
Other opportunities
Technical expertise, unique knowledge/skill set
Resources (financial depth, networks, etc.)
Level of competition/availability of other candidates
Career risk
Plan and communicate - A negotiation is composed of two major steps: planning (research and
strategy) and communication (information exchange and agreement. In the planning step, get as
much information as you can up front and, using both the company's written and unwritten

signals; map your skills against what the company values.

Give it time - Timing is also important. Remember that the best time to negotiate is after a
serious job offer has been made and before you have accepted it. Once you are clear about the
initial offer, you can express interest and even enthusiasm, but ask for more time to consider the
job offer. Wegerbauer suggests that this request is made "in light of the importance of the
decision." Sometimes you can split up the negotiating session into two meetings: one to firm up
the job design and responsibilities and the second to go over compensation and benefits. The key
message here is not to make an impulsive decision. If they really want you, there's time.
Consider the alternatives
You should be prepared with a rationale for everything to strengthen your position. Counteroffers
are an expected part of many negotiations, so be sure to remain flexible. Keep in mind that
different companies can give negotiations more or less latitude. Smaller companies may be more
flexible than large, bureaucratic companies. Unionized companies usually have very little room
for individual negotiations.
Negotiate for a win-win - Remember that the negotiation is not about strong-arm tactics or
win/lose. It is a two-way process where you and your prospective employer are each trying to get
something you need. In a negotiation, you're both designing the terms of a transaction so that
each of you will receive the maximum benefit from the final agreement.
Compensation trends in India -Indias transition to a market driven economy began in 1991
with the introduction of liberalization (pro-market economic reforms). Prior to 1991, the
Government was (and still is) the biggest employer and job creator, accounting for over 85% of
post-matriculation (High School) jobs. Pay was largely determined by high-level agreements
between employee unions and the Government and was largely guaranteed in nature. A similar
situation was prevalent in the private sector, where Government pay scales were often used as a
benchmark in fixing and revising pay. Compensation packages were low on cash and high on
fringe benefits such as accommodation, cars, and subsidized loans. Variable pay was largely
restricted to top and senior management in few private sector enterprises. Grading systems were
largely industry-wide and salary progression was purely determined by length of service.
Current trends - Productivity gains (4% in 2003-04), fast growth in real wages (40% over the
last 5 years), a booming but extremely competitive economy (GDP growth of 6%), simplification
of tax rules and emergence of knowledge-based industries such as Information Technology &
Outsourcing Services, Healthcare etc are key factors that have influenced compensation in India
post liberalization. Compensation is now characterized by a Total Cost of Employment approach,
a rapid movement to flexible benefits, and increasing levels of variable pay (variable pay now
forms about 7% - 35% of fixed pay). Grade structures have become organization specific and
salary progression is driven by market forces and individual performance. Average salary

increases over 2003-04 ranged from 5% - 20%. The average increase was 11%. While most
organizations benchmark compensation nationally within a select group of competitors, a few
organizations are beginning to benchmark themselves internationally at senior management
levels. India has the fastest compensation increase rate in the Asian region at 11.7% and it also
has the highest labour turnover in the region.
Different compensation plans - how do they affect your financial results - With the
introduction of FRS 102 Share-based Payment, companies are required to recognize the expenses
of employee equity compensation schemes with effect from 1 January 2005. This article
highlights the major implications to the financial results of the three most common equity
compensation schemes, namely share option scheme, performance shares scheme, and Share
Appreciation Rights (SAR, also known as phantom share scheme).
Key Characteristics - The key characteristics of each scheme are as follows:
Share option scheme
The company grants employees the right to subscribe for new shares in the company at a fixed
price.
Employees are required to pay the company the exercise price in consideration for the shares.
Employees can generally only exercise the right after remaining in service with the company
for a period of time and/or after meeting certain performance targets.
The right would generally expire after a period of 5 to 10 years from the date of the grant.
Performance share scheme
The company grants employees shares in the company.
Employees will generally receive the shares, at no cost, after remaining in service with the
company for a period of time and/or after meeting certain performance targets.
Share Appreciation Rights
Similar to the share option scheme except that: Upon exercise of the option, the employees do
not pay the exercise price to the company nor receive the shares; instead, they are paid the
difference between the exercise price and the market price of the shares in cash.
While all three schemes require the use of fair values of the share options or shares for the
recognition of the compensation expense over the vesting period, the impact on the companys
financial position and financial results is different.
Impact on net assets - The three schemes have a different effect on the net asset values of
companies. Under FRS 102, share option scheme and performance share scheme are considered
equity-settled. This means that in recognizing an expense for the compensation costs, a
corresponding increase in shareholders equity is recognized. Hence, the net asset position of the
company is unchanged. In contrast, obligations under SAR schemes are considered liabilities of

the company, as there would be a cash settlement when the right is exercised. The recognition of
the compensation cost under SAR results in a decrease in the net asset of the company.
Impact On Earnings Volatility
(1) Revaluation of share options/shares during life of grant - With share option and
performance share grants, fluctuations in the values of the share options and shares during the
life of the grant do not affect the results of the company. This is because the measurement of the
share option or share is determined at the date of the grant and is not subsequently revalued. In
contrast, for SAR, the company is required to revalue the SAR at every reporting date until the
right is settled or expires. This is because the company has to measure its liability (cash payment
to employees) at the expected settlement amount. Hence, SAR schemes create more volatility to
the financial results. In addition, more resources are also required to perform the revaluation at
every reporting date.
SAR will continue to impact earnings even after the vesting period because the liability is remeasured until the exercise date.
(2) Treatment of unvested rights - The compensation cost is a function of number of options or
shares that are expected to vest by the vesting date and the fair value of the option or share. In
estimating the number of options or shares expected to vest, only non-market based conditions,
which are not based on the market performance of the shares, are considered. These non-market
based conditions include the continuance of service over a period of time, and the meeting of a
certain revenue target. If no employees meet the non-market based vesting condition by the
vesting date, the company does not incur any expense. No performance shares would be issued
for performance share schemes and no share options or SAR would vest. If share options or SAR
are vested by vesting date, the financial impact of the two schemes is different.
For share option schemes, if the share options are not subsequently exercised by the employees
(for instance, because the options are out of the money), the company is not allowed to reverse
the expenses already charged to the income statement. For SAR schemes, the liabilities are stated
at the expected cash settlement. If the SAR is not subsequently exercised, the company is
allowed to reverse the expenses previously charged to the income statement.
Impact on Tax - Regardless of the above changes, charges to an entitys income statement
relating to share option or performance share schemes, in form of capital or notional cost (such
as cost of options granted), are not tax-deductible. Compensation charges that represent actual
outgoings (cash outflow or actual liability) to the company may be deductible such as the buying
back of its own shares, i.e. treasury shares, to satisfy the obligation to the employees.
In addition, such share-based compensation costs must be directly related to the employees
employment compensation benefits in Singapore to be tax-deductible. The compensation costs to

the entity should match the services rendered by the employee to the same entity. Certain steps
must be taken to support the claim for a deduction.
Impact on Earnings Per Share
Share option and performance share grants have a dilutive effect on EPS, as shares will be
issued. For SAR schemes, shares are not issued; hence there is no dilutive effect on EPS.
Moving forward - Prior to the implementation of FRS 102, the design of the share
compensation plan is often dependent on non-financial factors as the company is not required to
recognize an expense on the equity instrument granted. However, with the implementation of
FRS 102, it is critical for companies to consider and analyse the financial impact, arising from
the design and structure of the scheme, at an early stage.
Rewards and Benefits at IBM - Whether you're joining IBM as a fresh graduate or a seasoned
professional, we believe that everyone who works here should feel valued and appreciated. That
is why we offer a Total Compensation package that includes both Cash Compensation and
Benefits.
Cash compensation - We want to ensure that IBM continues to attract, retain and motivate highperforming people. As such, we offer a cash compensation structure that will recognise your
specific skills and business expertise. After all, they allow us to deliver best-of-class solutions for
our clients. Our compensation structure takes different forms to reflect individual performance
levels. It includes Base Pay, Fixed Bonuses, Allowances, or Other Payments relevant to the local
market. Performance Bonus and Sales Incentives may also be included in your total cash
compensation, and are used to ensure you are paid competitively within the market.
Performance bonus - Another principle we follow to attract, motivate and retain the most
talented employees is to offer a Performance bonus. If you are a regular employee, you will have
some portion of your annual compensation tied directly to business results. This is to ensure you
receive the appropriate recognition and rewards.
Global recognition program - This is the pinnacle of sales excellence within IBM! We want
you to know that we value your contributions and appreciate your leadership. Our Global
Recognition Program is designed to bring out your best, and encourage you to inspire and
motivate others.
Employee stock purchase plan - Since 1958, IBM has offered stock purchase plans because we
believe in the value of employee ownership. All regular employees, including IBMers who are
regular part-timers, are eligible to participate in the plan if they choose. Let's grow the company
together!
Note: Governmental regulations may prohibit offering the plan or may dictate different plan
provisions in certain countries.

Healthcare, well-being and personal benefits - We offer a range of personal benefits such as
medical schemes, dental schemes, health screening, wellness programmes, retirements and
insurance programmes. You may even be able to include your spouse/partner and dependants
under your coverage for greater peace of mind. We try to be as flexible as possible, so you
choose what is appropriate for your personal needs.
Flexibility and work-life balance
Quite simply, you are IBM's key to business success. We are committed to creating a workplace
culture and environment in which you can balance your career with your personal priorities. We
offer a number of programmes, ranging from staggered work hours to working from home to part
time regular work, which give you the opportunity to achieve a better work/life balance.
Additional programmes
You will find that many of the benefits at IBM are designed to make life a little easier and a lot
more fun! IBM offers employees various discounts for goods and services - IBM Personal
Computer Purchase, Housing Assistance Purchase Plan, Car Purchase Assistance Plan, Child
Care Services, Mobile Phone Plans, Fitness Centres, and Educational courses. You are also
automatically eligible to join our many recreational, social and cultural clubs, and events. Best of
all, they're not just for you, but for your entire family as well.
Staggered working hours
If you would prefer to work from home or start later in the day, you can at IBM. We give you the
flexibility to manage your work hours, so you can meet the needs of your personal life.
COMPENSATION & BENEFIT PRACTICES, PROGRAMS, AND POLICIES.
Employee Benefits:
Benefit Plan Costs
Health Care Plans
(PPO, POS, HMO, HSA)
Dental Care Plans
Retirement Plans
Flexible Benefit Plans
Disability Benefit Plans
Group Life & AD&D Insurance Plans
Benefits for Part-Time Employees
Domestic Partner Benefits Employee Policies and Programs:
Paid-Time Off (PTO)
Alternative Work Schedules
(including Telecommuting)
Recruiting and Hiring
Hiring Bonuses
Referral Bonuses
Retention Bonuses

Severance Practices
Workplace Environment
Career Planning & Professional Development
Military Leave Policy
Benefit Plan Costs
Benefit Costs as Percent of Payroll
o Medical, Dental, Vision, Disability, Life, AD&D Plans
o Retirement Plans
Benefits Costs as a Monthly Amount Per Employee
o Medical, Dental, Vision, Disability, Life, AD&D Plans
o Retirement Plans
Health Care Plans (PPO, HMO, POS)
Monthly Premiums
o Premium Cost
o Percent of Premiums Paid by Company
Deductibles
o Percent of Plans with Deductibles
o Annual Deductible Amounts
Coinsurance
o Percent of Expense Covered by Plan
Out-of-Pocket Maximums (OOP)
o Percent of Plans with OOP Maximums
o Annual OOP Amounts
Lifetime Reimbursement Limits
o Percent of Plans with Lifetime Limits
Office Visit and Prescription Co-Payments
Domestic Partner Medical Benefits
HSA Qualified Health Plans
Impact on Other Healthcare Options
Monthly Premium Costs
Percent of Premiums Paid by Company
Annual Deductibles
Out-of-Pocket Maximums (OOP)
Lifetime Reimbursement Limits
Prescription Expense Coverage
Company Contributions
Dental Care Plans
Types of Dental Plans Offered
Timing of Employee Eligibility to Enroll
Expenses Covered
Costs of Monthly Premiums

 Percent of Monthly Premium Paid by Company

Deductibles and Co-Insurance
Out-of-Pocket (OOP) Maximums
Orthodontic Expense Coverage
Orthodontic Reimbursement Limits
Retirement Plans
Types of Retirement Plans Available to Employees
o Defined Benefit Plan
o 401(k)
o Simple-IRA
o Profit Sharing Plan
o ESOP
o SEP-IRA
o Salary Reduction SEP
Eligibility Requirements
When do Employee Contributions Fully Vest
Retirement Plan Costs
o as a Percentage of Payroll
o per Employee
401(k) Matching Policy
Flexible Benefit Plans
Premium Conversion/Premium Only Plan (POP)
Unreimbursed Medical Expenses (UME)
Dependent Child Care Expenses (DCC)
Dependent Adult Care Expenses (DAC)
Adoption Assistance Expenses (AAE)
Cafeteria Plan
Transportation Benefit Plan
Disability Benefit Plans (Short- and Long-Term)
Who Pays the Premium
Eligibility for Disability Benefits
Waiting Periods
Duration of Plans
Setting Amount of Disability Benefits
Disability Payouts
Group Life & AD&D Insurance Plans
Group Life Plans
o Benefit Amounts
o Cost Coverage
o Supplemental Life Insurance
Accidental Death & Dismemberment (AD&D) Insurance

o Benefit Amounts
Benefits for Part-Time Employees
Benefits Available
Work Requirements for Eligibility
Covering the Costs
Domestic Partner Benefits
Domestic Partner Healthcare Benefits: Coverage
Eligibility Requirements
Employee Policies and Programs covered:
Paid-Time Off Policies
Number of Days Paid Time Off Provided by Type of Day:
o Holidays
o Floating Holidays
o Sick Days
o Vacation Days
o Personal Days
o Annual Leave Pool
o Other Paid Time Off
Number of Days Paid Time Off Provided by Type of Model:
o Traditional Model with Specified Sick Leave
o Traditional Model without Specified Sick Leave
o Annual Leave Model
Treatment of Unused Paid-Time Off:
o Unused Vacation Days
o Unused Sick Days
o Unused Annual Leave Days
o Time Limits on the Use of Carried-Over Paid Time Off
o Accrual of Paid Time Off
o Upon Termination
Alternative Work Schedules
Types of Alternative Work Schedules Offered:
o Telecommuting
o Flexible Work Hours
o Compressed Work Weeks
o Job Sharing
o Part-time Professional Employment
Eligibility
Productivity of Employees in Alternative Work Schedules
Methods Used to Monitor Productivity
Tools/Assistance Provided to Telecommuting Employees
Requirements for Telecommuting Employees

Recruiting and Hiring

Recruiting Budgets
Recruiting Sources
Job Posting Websites
Recruiting Tools
Interviewing Applicants
Pre-Employment Testing
Pre-Employment Screening
Referral Bonuses
Referral Bonus Eligibility by Employee Type and Level
Referral Bonuses Awarded by Type of New Hire
Referral Bonus Payments by Type of Hire
Amount of Referral Bonus
Timing of Referral Bonus Payouts
Hiring Bonuses
Hiring Bonus Eligibility by Employee Type and Level
Calculating Hiring Bonuses
Hiring Bonus Amounts by Employee Type and Level
Timing of Hiring Bonus Payouts
Hiring Bonus Forfeiture and Repayment Policies
Retention Bonuses
Retention Bonus Eligibility by Employee Type and Level
Calculating Retention Bonuses
Retention Bonus Amounts by Employee Type and Level
Payment of Retention Bonuses
Severance Practices
Severance Practices by Company Size
Calculation of Severance
Severance Pay Amounts
Placement Services Offered
Release Agreements
Trends in Severance Amounts
Workplace Environment
Dress Codes
Work Space Allocation
Company Sponsored Events and Activities
Career Planning and Professional Development Programs
Career Planning Programs
o Conference Attendance
o Professional Memberships

o Tuition Reimbursement
o Trade Journal Subscriptions
o Technical Career Ladders
o Job Rotation / Cross Training
o Management Succession Planning
o Formal Mentoring
Tuition Reimbursement
o Course Requirements to Receive Tuition Reimbursement
o Conditions of Tuition Reimbursement
Professional Development Programs
o Management or Supervisory Skills
o Leadership Development
o Project Management
o Interpersonal Communication
o Team Building
o Conflict Management
Training Budgets
Military Leave Policy
Military Leave Policy
Key Compensation Components
Compensation has become a far more complicated issue than just deciding how much to pay
your employees. In addition to salary, employers must consider many other components
401(k) plans, stock options, bonuses and vacation that have become part of compensation
packages today.
Employees also have greater expectations of what should be included in their compensation
packages, and they may demand specific benefits that can be costly for small businesses.
Costly or not, building a fair and attractive compensation packages is critical for attracting and
retaining employees. When setting up your compensation package, consider the following
components:
Salary and wages. This is usually the single largest component of a compensation package and,
not surprisingly, the most common point of comparison used by employees and potential
employees. Salary should be tied to a person's skills and experience. Subsequent increases need
to be based on an employee's performance, value and contribution to an organization.
Check salary surveys and want ads, and scout out competitors to see if they are underpaying or
overpaying their staff. Paying too much is an unnecessary drain on your resources, but paying
too little will make it difficult to find and keep the best people.
Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the year, are
one way of providing performance incentives. Profit-sharing plans are a more formal way of
doing this, but they're not as effective for rewarding individual performance and compensating
employees for meeting their goals.
Long-term incentives. Stock options or stock grants not only provide long-term incentives to

employees, but they can also help retain valuable team members through your organization's
crucial start-up phase.
Health insurance. Employer-sponsored health insurance is fairly standard among medium-size
companies. And it's a benefit that has great value to employees. An employer-sponsored plan
saves employees money and gives them peace of mind in knowing that they won't be denied
coverage, even if they have existing health problems.
If you think you can't afford it, think again. Providing insurance to your employees sends the
message that you care about their health and the health of their families. To minimize costs,
consider having employees pick up part of the tab. Employees who have coverage through a
spouse may want to opt out of a plan, particularly if there's a cost associated with it.
Life and/or disability insurance. This is also a benefit that usually costs less when it's purchased
by an employer rather than an individual.
Retirement plans. 401(k) plans have become popular because they are relatively easy to
administer and are less expensive than traditional pension plans. Many employees like these
plans because they maintain some control over the amount of their contribution and how the
money is invested. Most small companies try to put some kind of savings or 401(k) plan in place,
even if they don't contribute money to them.
Time off and flexible schedules. This includes holidays, vacations, sick days and personal days.
An employer unable to offer competitive salaries may close part of the gap by offering more time
off or flexible work hours. Some employers make no distinction between sick, vacation and
personal days and allow employees a set number of days off each year to be used at their
discretion. This prevents employees from abusing sick days and keeps employees from feeling
that they need to lie when a child is ill or a personal emergency arises.
Miscellaneous compensation. Other forms of compensation to consider include employee
assistance programs, which can provide everything from psychological counseling to legal
assistance; discounts on company products; use of a company cars; and any other incentives that
motivate employees and give your company a competitive advantage.
Compensation package of a top executive
The total compensation package of a top executive will generally have some Combination of the
following components: base salary, short-term bonus based on Performance over the past twelve
months, long-term bonus based on performance over the past 3-5 years, stock options (qualified
and/or non-qualified), restricted stock, stock
purchase and profit sharing. Everything in addition to base salary is not typical of what the
average worker receives, and each item should be examined in dividable. On op of the above
there will also be a pension, all the usual insurance (health, dental, disability, life) and special
fringe benefits ranging from tax preparation to country club membership. Any practicing
economist who has ever dealt with the compensation package of a highly paid executive will
have an understanding of the complexities involved in valuation, compared to a normal wage
earner.