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Q 1. Discuss the elements of compensation packagex? Ans. The basic elements of a compensation package are as follows: i).

Base Pay: Base Pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignments of a job. Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this organizations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs within the recognized competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated–that is, each job of similar size and scope. Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organization should be developed. Pay structures typically consists of series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth. Jobs of similar value from both the market point of view and an internal point of view are together. Then a competitive pay range is developed around the market rates for the particular jobs. ii). Variable Pay: Performance based variable pay continues to achieve momentum as a more successful way to identify and reward employees performance. Also known as pay-per-performance, variable pay is popular in today‟s corporate world. By including percentage of variable paying the compensation plan, organizations ensure that two people with different efficiency levels do not get the same benefits. By doing this the company rewards productivity and hardwork and motivates the under-performers to work hard. Once limited to senior management levels, the incentives and bonus plans are redesigned to reward the achievement of specific company or employee performance objectives. In a variable pay plan the size of award varies among the employees and from one performance period to another, based on levels of achievements measured, as well as against pre-established company and employee performance targets. Amounts are usually calculated as a percentage of base-pay depending on Job category and position. Rewards are normally paid in cash on an annual, semi-annual or quarterly basis depending on the plan design. Plan designs range from sales-commission types to individuals incentive or bonus plans or team awards. The main idea of these programs is to reward innovation and hard work and to discourage mediocrity in performance. iii) Skill and Competency-based pay: Skill-based pay offers employees extra compensation when they have new skills especially recognized by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviors and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves.

iv) Long-term incentive compensation: Long-term incentive compensation vehicles, such as stockoptions plans and other deferred-compensation plans, which are not usually to reward performance, are achieving plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are common form of long-term compensation at public organizations. In most private companies, incentives that reflect stock plans are used for key employees. Long-term compensation plans can be valuable preservation tools for the success of an organization. They help to focus on driving and improving the key employees to achieve the financial performance of the company over a longer term. 1

An employee was not paid in proportion to the time spent on work. The price of any product and the time needed for producing it was determined by an employee. also known as the “Iron Law of Wages” was proposed by David Ricardo. because the employees will be in a better position to support larger families. the number of employees available for employment will come down. but was paid much less. an employee was an article of commerce. The inventory of goods or capital is termed as the wages fund. employees would die of hunger. after all other factors of production have received compensation for their contribution to the process. since he assumed that rent would be deducted first and profits next. This would then cause the compensation to fall due to the increased supply of labour than demand. thus leaving the remainder for an employee in the form of wages. laborers will be unable to work. the amount of money left over will go to the remaining factors like wages. Hence. wages cannot fall below subsistence level because without subsistence. the wage rate is determined as: Wage rate= wages fund/labour force. without which they would not consent to keep up their numbers. even from those who have been regarded as its reliable advocates. thereby neither increasing nor diminishing the human race. Residual claimant theory The residual-claimant theory states that. Surplus value theory This theory was proposed by Karl Marx (1818-1883). and industrialist were determined independently and subtracted. it should be noted that any of the factors of production may be selected as the residual claimant assuming that independent determinations may be made for the 2 . and its source is the savings of the industrialists. if the compensation increases beyond the subsistence level. Walker worked on a residual theory of wages and suggested that the shares of the landlord. Malthus. and the surplus was utilized for paying other expenses. basing his theory of wages on his theory of population. According to this theory. Given the size of the labour force and the wages fund. When the compensation falls below the subsistence level. advocating the restraint of marriages as a means of decreasing the supply of employees and thus raising the standard of wages. would push up the demand for labour. followed the supply and demand theory. in turn. On the contrary. then the number of employees would also increase. List and explain various economic theories of wages.Q2. In other words. Differences in the statement of the subsistence theory of wages continued to arise. However. According to this theory." Wages fund theory This theory was proposed by Smith. Malthus stated it as "that amount of those necessaries and conveniences. malnutrition and diseases. Ans: The economic theories of wages are follows: Subsistence theory Subsistence theory. employees should be paid towards their labour in producing goods so as to enable them to survive. Smith suggested this theory for wages. This theory assumes that every organisation has a fixed fund of capital to pay wages. This increase in demand will push up the compensation beyond subsistence level. capital owner. which. which could be purchased on payment of the „subsistence price‟[2].

there are several rules which define the range of choices. It also assumes that the supply of factors is fixed. It is necessary to develop a proper pay structure because of the following objective:  to align reward strategy with the business strategy of the organization. Q3. The theory shows that when the employment increases. It is difficult to calculate the marginal productivity of a factor in most of the areas. This theory assumes that all units of the factors are homogeneous. The factors used can be continuously varied.shares of the other factors. the trade unions and employers. wages are determined by the relative bargaining power of workers. linking related jobs within a hierarchy or series. benefits. in matters of employee benefits. the wages decreases. Bargaining theory of wages Bargaining theory of wages was developed by Davidson. However. 3 . the rate of wages paid to the employees tends to be equal to the marginal net product of employees employed at the margin. for example by adopting an approach that avoids gender discrimination in pay. Further. According to this theory. A neoclassic competitive theory The neoclassic economic theory argues that it will be good if employees can choose their own wage benefits among various alternatives. Marginal productivity theory According to marginal productivity theory. This theory is based on the law of falling marginal returns. if employees are sufficiently compensated. This theory is applicable only under perfect competition. then the economic welfare of society as a whole is increased. job differentials and employee differences tend to be determined by the relative strength of the organisation and the trade union. What is pay structure? Explain why it is necessary to develop a proper pay structure. When a trade union is involved. levels or bands. (2+ 4+ 4 marks) Ans: A pay structure is a collection of pay grades. The basic idea for this argument is that employees can decide what is best for them. that provides a framework for the implementation of reward strategies and policies within an organization. basic wages. Explain the method to develop pay structure. wages or compensation. such as encouraging high performance levels  to bring order and clarity to an organization and its employees in managing pay increases and career progression  to help ensure fairness and lawfulness.

• Number of reporting staff members. • Undesirable shifts. It demonstrates and pays for the business results on which an organisation places value. a mid-point and a maximum point for amounts allotted within the range and determine the pay for each job grouping. An organisation‟s compensation philosophy and pay strategy determines the approach that should be taken to allocate pay across job ranges. It pays to get it right. • Organisations can also use a combination of a tenure-based plan and a merit-based plan. • Professional certifications. 4 .  Create a salary range that has a minimum point. unit. either based on individual. • Organisations can use a tenure based approach which focuses on from how long an employee has been employed in a particular job. A successfully developed pay structure identifies career development in addition to promotion. How an organisation structures its base salary program is basically a matter of organisational philosophy. • Performance evaluation results. • Education and degrees.  Measure these groups to find out the number of pay ranges needed to group the jobs on the basis of their value to the organisation. several options are available: • Organisations can use a single rate structure in which the employees performing similar jobs will receive the same pay rate. • Hazardous working conditions. Factors to be considered are: • Number of years of experience. • Management opinions. or company performance. and then progress to higher rates during their first year based on the number of years spent in the job. team. • Organisations can use a pay system based on productivity. then any additional pay increase is awarded only on the basis of performance. although marketplace practices are very essential to consider in highly competitive situations. An effective pay structure is worth the time and attention. An example for this would be an employee who is paid only a sales commission. For example usually employees begin their job at a fixed rate. • An increasingly popular option is some form of base pay with an incentive opportunity. In structuring this base pay program.The following method adopted to develop Pay Structure:  Group the jobs with those that have a similar value in the organisation.

daily or weekly basis. The percentage is re-evaualated and may be changed every six months. 3) Bonus: It is an extra paid given to employees in appreciation to there performance. 4) Fringe Benefits: The term Fring Benefits refers to the extra benefits provided to employees. It is a part of the original salary.Q4. Explain the components of wages. the benefits directly attributable to the employees such as companies contribution to the provident fund. These benefits are not related to the employees performance. especially payment on hourly.e. cost of living allowance and cash value of allowance. The wages of employees are fixed depending on the following  A basic rate of wages in addition to the special allowance(i.  A basic rate of wages which may include either cost of living allowance or cash value of concessions for supplies of essential products. 5 . Ans: The components of Wages are as follows: 1) Basic Wage: It can be defined as payment for labour or services to an employee. sharing increases there earnings and therefore helps in bridging the gap between the actual wage and the need-based wage. That is. CTC includes the salary paid to the employees. apart from the compensation paid in the form of wages or salary. Cost of living allowance). Describe Cost-to-Company and its components. 2) Dearness Allowance: The Dearness allowance is the part of the total compensation of the employees received for having performed there job.  A rate that includes basic rate. The advantage of bonus is that in case of low paid workers. Ans: Cost to Company (CTC) is the amount that you cost your company. it is the amount that the company directly or indirectly spends on you because of employing you. productive effort service or sacrifice Q5.

However. telephones. Calculating the annual CTC is important from the employees and the organisation perspective. Most companies usually talk in terms of the CTC as the figures look more impressive. if the other components are arranged differently. You also have to look at both CTC as well as take like work timings. Even the company will guide you on this. This will ultimately home pay while negotiating. life insurance premium. This helps the organisation ascertain the HR cost and the employees understand what they are being offers. For employees to decide on other job offers. Sometimes. cost of loans offered to the employees. Employees can decide on other job offers depending on the CTC. as they can be benchmark there CIT with other comparable organisation. and so on). telephone expenses for mobile phone collections and landline connections. it is difficult to arrive at the CTC as many components of the CTC considered by the company may not be considered as a part of total compensation package. cars. You have to assess each offer separately. even a lower take home pay company will guide you on this. it is very important that they understand how the CTC is calculated.pension fund. After all. benefits offered for the visiting the home country or hometown or so on. Similarly. medical insurance premium. to arrive at a comprehensive CTC value. Therefore. number of holidays employee centric schemes for further education and so on. It is important to note that even a lower CTC might mean a higher take home pay that an offer with higher CTC. There factors must not be ignore even though you cannot put a money value to these factors. you must note that with increase in salary or position you pay as percentage of salary will increase or decrease. The total compensation includes the value of all the perks and benefits the employee is offered by the company in addition to the employee’s salary. You should carefully look at their offer and calculate yourself how much your take home pay will be. However. they are often misleading. Sometiems even a lower take home pay may be beneficial if the other payments are made against voucher/bills(for example. 6 . all deductions are based on fixed percentages and you can easily arrive at the right figure. refreshments.

Q6. chief financial officers(CFO’s). options and any other company benefits. Special Allowance Vehicle Allowance. Leave Travel Allowance or Concession (LTA/LTC). Components of CTC are as follows:           Basic Dearness Allowance (DA). Telephone/Mobile Phone Allowance. occasionally directors and other upper level managers. shareholder. Flexible benefits. Incentives or bonuses. Statutory benefits Includes Cash. chief executive officers(CEO’s). valueadded measures. value focus. What is Executive Compensation? Mention the different components of executive compensation Ans: Executive Compensation is the financial compensation that a top executive receives with a corporation. The compenents of executive compensation are divided in three board groups. Includes delivery in cash. 7 . deferral. It also includes short there incentives and a share in the equity of the company. vice presidents. Components Base pay Long-Term incentives Annual Incentives Benefits Includes Cash salary. Medical Allowance. Conveyance Allowance. It includes company presidents. This includes basic salary and all bonuses. shares. House Rent Allowance (HRA). referenced against peer group.organisation need to be careful and add all the components of compensations or their equivalent cash value.

For ex. This is an executive benefit which includes sick leaves .Base Salary: This is the basic salary paid to the executives excluding the bonuses. Stock Option incentives: The amount of stock options given to the senior level employees will depend on the type of the industry and the valuation of the company stock. such as after the employees retirement. an additional pay for the month of service and medical. dental or life insurance. Bonuses: Bonuses are standardised in executive compensation plans where there is often more pay for good performance. This is highly beneficial for the employees with respect to tax burden. Deffered compensation plan: This refers to a plan established by an employer to provide benefits to an employee at a later date. This is similarly to the prepaid balance in the mobile. Prepaid Compensation: This is a compensation given to the employees 3 or 5 years earlier than it actually gets payable. This is paid exclusively to full time employee of a company. Severance Package. This is paid at the end of the month. 8 . Based on the company performance and profit additional amount of higher percentage of equity will be paid. Signing Bonus: It is a some of money paid to an employee to join the company. It is paid in advance to retain the employees in the organization.

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