COMPENSATION PRACTICES

VARIOUS DEFINATIONS OF COMPENSATION

The sum total of all forms of payments or

rewards provided to employees for
performing tasks to achieve organizational
objectives

Compensation is the process of providing

adequate, equitable and fair remuneration to
the employees. It is what employees receive in
exchange for their contribution to the
organization. It is a comprehensive term which
includes pay, incentives and benefits offered to
the employees.

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 performed and job satisfaction.
 PURPOSEOF COMPENSATION

Contribution based Ensure Equity

Remuneration

Attract talent Effective Administratively

Compensati Efficient Legal
on
Compliance

Motivate &
Retain Staff Reward Valued
Behavior
 THE PAY MODEL

Business Goals
Compensation
Philosophy/ activities
CEO

serve Business
Business
Objectives
Strategy

Business Strategy :
This defines the direction in which organization is going in relation to its environment
in order to achieve its objectives.

Compensation Philosophy :
Consists of a set of beliefs which underpin the reward/compensation strategy of the
organization and govern the reward policies that determine how reward processes
operate

4
 THE PAY MODEL

Business Goals
Compensation activities
serve Business
CEO

Objectives
Business
Strategy

Compensation strategy
HR Head

Compensation
Strategy is periodically
reevaluated and the
Non-Financial
Org.Structure
Compensation plan
Rewards
periodically developed
Compensation
Plan

Compensation Strategy
defines the intentions of the organization on reward policies, processes and practices
required to ensure that it has the skilled, competent and well-motivated workforce it
needs to achieve its business goals
 THE PAY MODEL

Business Goals
Compensation activities
serve Business
CEO

Objectives
Business
Strategy

Compensation strategy
HR Head

Compensation is periodically
Strategy reevaluated and the
Org.Structure Non-Financial
Compensation plan
Rewards
periodically developed
Compensation
Plan

 strategic perspective
 Compensation takes the position that how employees are compensated can be a source
of sustainable competitive advantage
 THE PAY MODEL

Business Goals
Compensation activities
serve Business
CEO

Objectives
Business
Strategy

Compensation strategy
HR Head

Compensation is periodically
Strategy reevaluated and the
Org.Structure Non-Financial
Compensation plan
Rewards
periodically developed
Compensation
Plan
C & B/S M

Performance Job Evaluation Market Surveys

Management
Unit Inputs

Pay levels /
structures Compensation
Contribution Manager, along with
Employee

/outputs team is responsible for

Total carrying out
remuneration compensation related
activities
Performance
linked Pay
Individual Pay
Internal Equity External Equity
7
 STRATEGIC COMPENSATION PLANNING

 Strategic Compensation Planning

• Links the compensation of employees to the

mission, objectives, philosophies, and culture of the
organization.

• Serves to identify the net monetary payments

made to employees with specific functions of the
HR program in establishing a pay-for performance
standard.

• Seeks to motivate employees through

compensation.
 COMPENSATION POLICY ISSUES

• Pay for performance

• Pay for seniority

• Salary increases and promotions

• Overtime and shift pay

• Probationary pay

• Paid and unpaid leaves

• Paid holidays

• Salary compression (A salary inequity problem, generally caused by

inflation, resulting in longer-term employees in a position earning less than
workers entering the firm today)

• Geographic costs of living differences

COMPENSATION ADMINISTRATION PROCESS
CLASSIFICATION OF REWARDS
COMPONETS OF FINANCIAL COMPENSATION
 BASE PAY

 The direct financial compensation an individual receives based on the time

Worked.

 Two bases of calculation

• Hourly/wage: payment for the number of hours worked.

• Salaried : receive consistent payments at the end of specific period regardless of

number of hours worked Nature.

• generally market driven ( D>S=increase in pay)

• Job Evaluation

• The formal systematic means used to identify the relative worth of jobs within an
organization.
 VARIABLE PAY/PAY FOR PERFORMANCE : INCENTIVES

 Variable Pay

• Any plan that ties pay to productivity or profitability. (i.e)The standard by which
managers tie compensation to employee effort and performance.

• It is linked to individual, group, or organizational performance and not to time

worked

 Incentive Pay Programs

• Establish a performance “threshold” to qualify for incentive payments.

• Emphasize a shared focus on organizational objectives.

• Create shared commitment in that every individual contributes to organizational

performance and success.
 TYPES OF INCENTIVES

Organizational Individual
Incentives Incentives

Group/team
Incentives
 INDIVIDUAL INCENTIVE PLAN

 Piecework Plans

•The worker is paid a sum (called a piece rate) for each unit he or
she produces.

 Straight piecework:

•A fixed sum is paid for each unit the worker produces under an established piece
rate standard. An incentive may be paid for exceeding the piece rate standard.

 Standard hour plan:

•An incentive plan that sets pay rates based on the completion of a job in a
predetermined “standard time.”

• If employees finish the work in less than the expected time, their pay is still based on
the standard time for the job multiplied by their hourly rate.
 INDIVIDUAL INCENTIVE PLAN(CONT’D)

 Pro and cons of piecework

• Easily understandable, equitable, and powerful incentives

• Employee resistance to changes in standards or work processes affecting output

• Quality problems caused by an overriding output focus

• Possibility of violating minimum wage standards

• Employee dissatisfaction when incentives either cannot be earned due to external

factors or are withdrawn due to a lack of need for output Merit pay

• A permanent cumulative salary increase the firm awards to an individual employee

based on his or her individual performance.
 BONUS

• Incentive payment that is supplemental

to the base wage for cost reduction,
quality improvement, or other
performance criteria.

Spot bonus

• Unplanned bonus given for employee

effort unrelated to an established
performance measure.
 GROUP INCENTIVE PLAN
 Team Incentive Plans

• Compensation plans where all team members receive an incentive bonus payment
when production or service standards are met or exceeded.

 Establishing Team Incentive Payments

• Set performance measures upon which incentive payments are based

• Determine the size of the incentive bonus.

• Create a payout formula and fully explain to employees how payouts will be
distributed.

 Gainsharing Plans

• Programs under which both employees and the organization share the financial
gains according to a predetermined formula that reflects improved productivity and
profitability.
EMPLOYEE BONUS AND GAINSHARING PLAN
 PROS CONS OF TEAM INITIATIVEPLAN
PROS

• Team incentives support group planning and problem solving, thereby building a team
culture.

• The contributions of individual employees depend on group cooperation.

• Unlike incentive plans based solely on output, team incentives can broaden the scope
of the contribution that employees are motivated to make.

• Team bonuses tend to reduce employee jealousies and complaints over “tight” or
“loose” individual standards.

CONS

• Individual team members may perceive that “their” efforts contribute little to team
success or to the attainment of the incentive bonus.

• Intergroup social problems—pressure to limit performance (for example, team

members are afraid one individual may make the others look bad) and the “free-ride”
effect (one
 ORGANIZATIONAL INCENTIVE PLAN

 Profit Sharing

• Any procedure by which an employer pays, or makes available to all regular

employees, in addition to their base pay, current or deferred sums based upon the
profits of the enterprise.

• Paid once in a year or deferred sums until retirement

Challenges:

• Agreement over division of profits between company and employees.

• Possibility of no payout due to financial condition of company.

 ORGANIZATIONAL INCENTIVE PLAN(CONT’D)

 Stock Options
• Granting employees the right to purchase as pecific number of shares of the
company’s stock at a guaranteed price (the option price) during a designated time
period.

•The value of an option is subject to stock market conditions at the time that option is
exercised.

• Apple , yahoo, coca cola, nike

 Employee Stock Ownership Plans (ESOPs)

• Stock plans in which an organization contributes shares of its stock to an established

trust for the purpose of stock purchases by its employees.( UK,USA and several other
industrialized countries). This provide tax concessions to corporate orgns. And to
trusts established for employee stock options. (i.e (difference between acceptance
price and market value)

• The employer establishes an ESOP trust that qualifies as a tax exempt

employee trust under Section 401(a) of the Internal Revenue Code
 WHY INCENTIVE PLAN FAIL

• Performance pay can’t replace good management.

• You get what you pay for.

• “Pay is not a motivator.”

• Rewards punish.

• Rewards rupture relationships.

• Rewards can have unintended consequences.

• Rewards may undermine responsiveness.

• Rewards undermine intrinsic motivation.

 IMPLEMENTING EFFECTIVE INCENTIVE PLAN

• Ask: Is effort clearly instrumental in obtaining the reward?

• Link the incentive with your strategy.

• Make sure effort and rewards are directly related.

• Make the plan easy for employees to understand.

• Set effective standards.

• View the standard as a contract with your employees.

• Get employees’ support for the plan.

• Use good measurement systems.

• Emphasize long-term as well as short-term success.

• Adopt a comprehensive, commitment-oriented approach.

 INDIRECT FINANACIAL COMPENSATION - BENEFITS

 Mandatory Benefits

• legally binding

Voluntary Benefits

• provided at the discretion of the employer

 VOLUNTARY BENEFITS EXAMPLES

 Educational benefits

• Employee’s spouse education assistance( Motorola on international assignments ).

• ONGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to
employees who wish to study.

• Meritorious Children of employees are provided opportunity of higher

education with loan benefits in BPCL, CPCL etc

 Family

• Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc.,

• Wedding anniversary allowance in NIIT, SPIC etc.,

• “Joyful Working Team” and “ Happy Moments Board”- LG Electronics

• Family day at office- Bharti telecom.

 NON FINANACIAL COMPENSATION : COMPONENTS

 Are most effective as motivators when the award is combined with a

meaningful employee recognition program.

• Intrinsic motivators are worthwhile as financial package

• Organization reward high performing employees

• Psychological rewards that employees receive in recognition of their

skills and contributions
 TYPES
Awards
• Often used to recognize productivity gains, special contributions or achievements, and service
to the organization.

• Employees feel appreciated when employers tie awards to performance and deliver awards in
a timely, sincere and specific way.

 Recognition awards
• Recognition has a positive impact on performance, either alone or in conjunction
with financial rewards.

 Combining financial rewards with nonfinancial ones produced performance

improvement in service firms almost twice the effect of using each reward alone.

• Day-to-day recognition from supervisors, peers, and team members is important.

•Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,

 Service awards
• Award for the length of service and exactly not on performance
• IBM: thanks award
• IDEA: appreciation card
 EQUITY AND MOTIVATION OF EMPLOYEES

 Pay Equity (also Distributive Fairness)

• An employee’s perception that compensation received is equal to the value of the

work performed.

• A motivation theory that explains how people respond to situations in which they
feel they have received less (or more) than they deserve.

 Individuals form a ratio of their inputs to outcomes in their job and then
compare the value of that ratio with the value of the ratio for other individuals in
similar jobs.
RELATIONSHIP BETWEEN PAY EQUITY AND MOTIVATION
 INSTRUMENTALITY AND REWARDS

 Vroom’s Expectancy Theory

 A person’s motivation to exert some level of effort is a function of

three things:

• Expectancy: that effort will lead to performance.

• Instrumentality: the connection between performance and the appropriate reward.

• Valence: the value the person places on the reward.

 Motivation = E x I x V

• If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.

• Employee confidence building and training, accurate appraisals, and knowledge of

workers’ desired rewards can increase employee motivation.
DETERMINANTS OF COMPENSATION
 INTERNAL DETERMINANTS

 Employer’s Compensation Strategy

• Setting organization compensation policy to lead, lag, or match competitors’ pay.

• Worth of a Job

 Establishing the internal wage relationship among jobs and skill levels.

• Employee’s Relative Worth

 Rewarding individual employee performance

• Employer’s Ability-to-Pay

 Having the resources and profits to pay employees.

 EXTERNAL DETERMINANTS

 Labor Market Conditions

• Availability and quality of potential employees is affected by economic conditions,
government regulations and policies, and the presence of unions.

Area Wage Rates

• A firm’s formal wage structure of rates is influenced by those being paid by other area
employers for comparable jobs.

Cost of Living
• Local housing and environmental conditions can cause wide variations in the cost of
living for employees.
• Inflation can require that compensation rates be adjusted upward periodically to help
employees maintain their purchasing power.

Collective Bargaining
The term extends to all negotiations that take place between an employer, group of
employers or one or more employers’ organizations on the one hand, and
one or more workers’ organizations on the other to
(a) Determine the working conditions and terms of employment and / or
(b) Regulate relations between employer and employee/workers and / or
(c) regulate relations between employer organization or employee/workers organization
 NEW DEVELOPMENTS

 Competency based pay and reward

programmes (also skill-based pay or
knowledge-based pay)

• Where the company pays for the

employee’s range, depth, and types of
skills and knowledge, rather than for the
job title he or she holds.

 Competencies

• Demonstrable characteristics of a
person, including knowledge, skills, and
behaviors, that enable performance.
 WHY COMPETENCY BASED PAY ?

• Pay plans that aim for high-performance

work system.

• Paying for skills, knowledge, and

competencies is more strategic.

• Measurable skills, knowledge, and

competencies are the heart of any
company’s performance management
process.
 COMPETENCY BASED PAY – PROS & CONS
 Pros

• Higher quality

• Lower absenteeism and fewer accidents

 Cons

• implementation problems

• Cost implications of paying for unused knowledge, skills and behaviors

• Complexity of program

• Uncertainty that the program improves productivity Broadbanding

• Consolidating salary grades and ranges into just a few wide levels or “bands,” each of
which contains a relatively wide range of jobs and salary levels.
 TRENDS OF EXECUTIVE COMPENSATION

 The Executive Pay Package

• Base salary

• Short-term incentives or bonuses

• Long-term incentives or stock plans

• Perquisites (perks)
 EXECUTIVE COMPENSATION-EHICS & ACCOUNTABILITY

• Incentive payments are excessive compared with return to stockholders.

• Time periods for judging and rewarding performance are too short.

• Subjective in nature

• Emphasis is placed upon equaling or exceeding executive salary survey

averages.

• Benefits do not relate closely to individual performance.

 SWEETNESS OF EXECUTIVE PERKS
• Company car
• Company plane
• Executive eating facilities
• Financial consulting
• Company-paid parking
• Personal liability insurance
• Estate planning
• First-class air travel
• Home computers
• Chauffeur service
• Children’s education
• Spouse travel
• Physical exams
• Mobile phones
• Large insurance policies
• Income tax preparation
• Country club membership
• Luncheon club membership
• Personal home repairs
• Loans
• Legal counseling
• Vacation cabins
 LEGAL FRAMEWORK FOR PAYMENT OF SALARY- INDIA

• Payment of wages Act, 1936

• The minimum wages Act, 1948

• The payment of Bonus Act, 1965

• Equal remuneration Act, 1976

COMPENSATION PACKAGE ASHOK LEYLAND
 DIRECT COMPENSATION

Fixed Pay

Variable Pay : depending on no of optional days attended

Variable Pay : depending on last year’s performance

Mandatory ( Indirect )
 CLASSIFICATION OF REWARDS

TOTAL Compensation

Financial Non - Financial

Direct Indirect Job Satisfaction Praise / Rewards

Monthly Salary Provident Fund

Annual Incentives Gratuity
Bonus Travel allowance
Mobile expense
Sales Promotional Expense
 CLASSIFICATION OF REWARDS

TOTAL Compensation

Financial Non - Financial

Direct Indirect Job Satisfaction Praise / Rewards

Future Leadership Program (FLP): Executives earmarked and declared future leader
based on their competency
Development based Career Plan (DLCP): Competent executives committing 5 years
service to company in the form of bond will be given minimum 2 elevation during the
bond period.
Executive of the year Award
Company Jeep at individual level
Foreign Tour with family for the team achieving their yearly target
Major medical claim for self and dependant