Nuts & Bolts

E-MBA - HR in Practice
Bells & Whistles

Compensation & Benefits (C&B)

Patrick Collins

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 Compensation
&
Benefits

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Learning outcomes / Content

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Equity

X
Reward

Performance
Contribution to company success

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Equity

Equity means that there is a relationship between Performance & Rewards

External Equity refers to how a job’s pay rate in one company compares to the job’s pay rate in other
companies. Compensation Surveys are an example of a process that is designed to ensure external
equity.

Internal Equity refers to how fair the job’s pay rate is when compared with other jobs within the same
company, i.e., in relation to peers (e.g., is the Sales Manager paid fairly when compared with the
Production Manager). Pay grades/Job Sizing are an example of a process that is designed to ensure
internal equity.

Individual Equity / Distributive Equity refers to the fairness of the individual’s pay as compared with
what his/her coworkers are earning for the same or very similar jobs within the company, based on
each persons performance.

Procedural Equity refers to the “perceived fairness” of the processes and procedures used to making
decisions regarding allocation of pay. Do procedures (Rationale, Formula) determine compensation
lead to fair results

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Factors that determine Compensation

Responsibility Strategic Relevance Performance

Qualification Market Company Success

Cost of Living Civil Status Tenure/Experience

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Total Reward
Total Reward

Total Compensation Non-financial Reward

Recognition

Base Pay Variable Pay Benefits Vacation/WFH

Salary Insurances Status/Titles

Individual/Group Organization
PF/Gratuity Office Space
DA / COLA
Piece Rate Profit Sharing Job Security
Allowances Pension

ESOPs Learning
One-time Bonus
Vehicle/Phone Opportunities
Stock Challenging
Annual Bonus
Ownership Work
Housing
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Arriving at the Base Pay

Compensation Philosophy (Policy)

Job Analysis Compensation Strategy Performance Management

Job Evaluation / Sizing & Programs & Appraisal

Compensation
Survey Determine Salary Range Determine Target Position in Range (PIR)
(Market & Grade Compa Ratio (CR)
Analysis)

Determine Individual Pay Level

Implementation Communication Monitoring

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Compensation
Philosophy

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 Establishing a Compensation & Benefits Philosophy & Strategy

When?: Best time is as early as possible in the company’s

lifecycle. In the case of a global C&B policy and strategy, this
should be done as soon as the company establishes or
acquires its first international office or subsidiary
Pressure on HR to make quick hiring decisions, especially locals
Short-term hiring decisions create precedents that later will be
regretted because of subsequently trying to reverse policies
Key Questions
Who are competing in the market for different types of staff we need.
What is the availability of labour in the market with the skill sets needed
for our business?
Where do we want to position our pay and benefits programs in the
marketplace?
What balance of salaries, bonuses and benefit plans is most appropriate
for our business needs?
How do we ensure that we are in compliance with applicable local
employment rules, regulations and practices?
Need to implement agreement on C&B strategy to address near-term/long-term business goals
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 Elements of a Pay & Benefits Philosophy
Defining the marketplace
Internal equity issues
Relative level of pay in the marketplace
Balance of cash compensation & benefits (aka: Defined Benefits, Contribution,
Retirement Plan)
Pay for performance (Variable Pay)
Short-term incentive plans (one year)
Annual incentive bonus targets – (Company & Individual)
Long-term incentive plans (three-five years)
Equity-based incentives: Stock options, restricted share grants,
performance shares, phantom stock
Long-term cash incentives: Contingent awards based on the
achievement of company objectives, usually over a 3-5 year period
Others: Joining Bonus, Retention Bonus

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 Compensation Philosophy

Compensation philosophy normally includes…

Pay at Market (Alignment with market – Competitive Positioning).
Employees who have the same performance rating can get different
increment percentages based on their “Position in Range (PIR)”
(Compa Ratio)
Pay for the Job. Achieved through job sizing, thus determining grades
in the organization and thereby calculating the compensation bands,
mid-point and PIR for that particular grade / job size
Pay for Performance: Through annual performance evaluation
Company’s ability to Pay: Based on company performance,
increments and bonus are determined as per the remuneration and
bonus plan

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Global C&B Philosophy Statement (Pharma Company)

The company’s business objective is to be one of the world’s most successful

pharmaceutical companies. To support that intent, the company’s compensation and
benefits objective is to provide a superior level of compensation and benefits for
outstanding performance.
Compensation programs are benchmarked against other pharmaceutical companies as
well as other leading multinationals.
Base salary range midpoints will generally be targeted at median or average levels
compared to market practice.
Annual incentive plans will be based on achievement of specified financial and business
objectives. When these objectives are met or exceeded, bonus payments will be
significantly above 90th Percentile.
Long-term incentive payments including stock options and restricted stock awards will
be based on gains realized by shareholders, achievement of long-term business
objectives and performance compared to other major pharmaceutical companies.
Benefit plans such as pensions, life insurance and health care will be comparable to
plans provided by other comparable benchmarked companies.
Compensation and benefits programs will be structured in accordance with the legal
requirements, customs and local practices of each country
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Determining & Comparing

Value of Work

Job Evaluation

Job Sizing

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Why EVALUATE Jobs?

Reflect the values of the organization

Clarify organization structures and job accountabilities
Determine hiring criteria and qualifications
Develop a basis for performance management
Establish a credible and consistent hierarchy of job values to the organization
Facilitate the development of a pay structure
Enable comparisons to assess internal pay equity based on measured job
content
Facilitate making pay comparisons to the external labor market
Support legal compliance

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Definition of Job Evaluation

• Determining the intrinsic value of work to the organization using a
methodology containing measurement scales of common compensable
factors
• A process to measure the size of jobs against appropriate and consistent
criteria
• Focuses on the content of the job as currently designed
Compensable Factors are those characteristics in the work that the organization
values that helps pursue its strategy and achieve its objectives. These factors reflect
how work adds value to the organization. They flow from the work itself and the
strategic direction of the business

Factors not considered in the process

• Individual qualifications, performance and longevity
• Existing pay
• External market (e.g., supply and demand)
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Inputs for job evaluation/price of a job?

Job Purpose

Why does this job exist?

End result expectation

What is the outcome expected? How is this

position expected to achieve that end result?

Budget

What is the magnitude of this job’s responsibility? What is the

job’s role in setting and managing to and/or within that budget?
How much latitude do they have to work within this budget?

Reporting Structure

Who does this job report to? Who reports to this job? What
latitude to achieve an end result is permitted within this job?

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Inputs for job evaluation/price of a job?

Skills, experience and knowledge

What does this job holder need to know in

order to deliver upon the output expectations?

Degree of Autonomy

What governs the job holder’s actions? PETER DRUCKER

Geographic scope

How far reaching is this position? Are there cultural nuances

and / or sensitivities that increase the complexity of this job?

Nature & Environment

What is the nature and environment in which this job operates?

Creativity required in the Job

How creative can this job get and still produce the expected end results?
Are there principles/policies/procedures, etc. that guide the job holder?
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Job Evaluation – Impacts….

Job evaluation is an integral component of the work valuing process …
… impacting pay decisions is only one of the purposes of work comparison
Strategic

• Organization Analysis & Design

Impact

• Organization Benchmarking
• Defining Organization Accountabilities
Organization
Value-Added

• Career Planning
• Succession Planning
• Job Family Modeling
Foundational

• Internal Equity Management

Tactical

• Market Pricing Processes

• Defining Job Accountabilities

Focus Area
Individual Job Job Families Entire Organization
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Job Evaluation - Premise

All jobs exist to contribute in some way to the organization

Job evaluation allows measurement of the contributions of jobs
in terms of internal value and further enables linking these
internal values to external market data

Hay Group methodology measures three aspects of a job

Knowledge required Problem Solving involved Results expected

INPUT THROUGHPUT OUTPUT

The outcome of this methodology is a measurement of job size in terms of points

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Job Evaluation - Premise

Therefore, the job
holder requires a
level of
To achieve this knowledge and
end result, job experience
holders must commensurate
address problems with the scale and
Jobs exist to create, analyze, complexity of the
achieve an end and apply result to be
result. judgment achieved.

Know How

b Problem Solving Problem Solving

Accountability Accountability Accountability

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Know How Factor

The Knowledge Required of a Job or “Input”

To achieve results, jobs must require a certain level of

knowledge, skills and experience
Know-How is the factor we use to measure the sum total of
knowledge required of a job, however gained
Three Dimensions of Know How

Technical and Specialized Knowledge

Managerial Integration Human Relation Skills

• Technical and Specialized Knowledge: Practical procedures, specialized techniques
and knowledge within occupational fields, commercial functions, professional and
scientific disciplines
• Managerial Integration: Planning, organizing, coordinating, integrating, staffing,
directing and or controlling the activities and resources associated with the function
of the unit, position, section, etc.
• Human Relation Skills: Face to face skills needed for various relationships with other
people
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Problem Solving Factor

The Thinking, Processing, Analyzing or “Throughput” of a Job
In utilizing Know-How to achieve results, jobs are designed to
analyze and resolve problems
Problem Solving is the factor we use to measure the nature and
complexity of the problems and challenges that jobs must face
Two Dimensions of Problem Solving

Thinking Environment

Thinking Challenge

• Problem Solving is the amount and nature of the thinking required in the job in the
form of analyzing, reasoning, evaluating, creating, using judgment, forming
hypotheses, drawing inferences, arriving at conclusions, etc. It considers:
• Thinking Environment: The environment in which the thinking takes place
• Thinking Challenge: The challenge of the thinking to be done. The novelty and
complexity of the thinking required
Thinking Environment: attention, appreciation, ease, encouragement, diversity, information, feelings, equality, place, incisive questions

Thinking
Patrick CollinsChallenge: attention, orientation, memory, sequencing, insight, judgement
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Accountability Factor
The Accountability or “Output” of a Job

Based on the premise that all jobs exist to achieve results

Accountability is the factor we use to measure the output of jobs

Three Dimensions of Accountability

Freedom to Act Impact

Magnitude

Accountability is the answerability for action and its consequences. The measured effect
of the job on end results in the organization.
• Freedom to Act which is the extent of personal, procedural or systematic guidance
and control on the job.
• Job Impact on End Results which is the degree to which the job affects or brings
about the results expected of the unit or function being considered.
• Magnitude is the size of the function or unit measured in the most appropriate
fashion.
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Hay System – Compensable Factors

Functional / Technical Expertise 8

Managerial Knowledge 7
Know-how (Planning, Organizing, Integrating)

Communicating & Influencing

3
Skills

Thinking Environment
Problem (Freedom to Think)
8

Solving Thinking Challenge 5

Freedom to Act 8

Nature of Impact
4
Accountability (On end results)

Magnitude Dyn
(Area of Impact)

Σ
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Relationship between AC and PS

Research Balanced Results

PS > ACC PS = ACC PS < ACC

Thinking, Analysis Doing, Action

Problem Solving Dominant Accountability Dominant

P2 P1 = A1 A2 A3 A4

Pure Applied Staff Accountability Technical (Line Typical (Line / Heavy

Research Research Position Emphasis Staff / Production) Production) Production

Heavy Thinking Comparable emphasis on High emphasis on end results

Low regard for end results thinking and end results

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Hay System – Compensable Factors

Machine Operator Shift Supervisor
Functional / Technical Expertise 8 4 3

Managerial Knowledge 7 1 3
(Planning, Organizing, Integrating)

Communicating &
3 1 2
Influencing Skills

Thinking Environment
8 2 3
(Freedom to Think)

Thinking Challenge 5 2 3

Freedom to Act 8 2 4

Nature of Impact
4 1 2
(On end results)

Magnitude 5 1 2
(Area of Impact)

Σ 14 Σ 22
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Job Evaluation (Example)

Consulting Company

Assistant Junior Consultant Senior Consultant Project Lead Manager

Requirements Weight
Rating* Value Rating Value Rating Value Rating Value Rating Value

Knowledge 2 2 4 4 8 8 16 6 12 4 8
Leadership 3 0 0 0 0 2 6 4 12 8 24
Budget Responsibility 1.5 0 0 0 0 0 0 4 6 10 15
Results Responsibility 3 2 6 2 6 4 12 6 18 10 30
Cognitive Challenges 2 3 6 4 8 6 12 6 12 6 12
Mobility 1 2 2 7 7 7 7 8 8 5 5
Strategic Impact 2 2 4 1 2 2 4 3 6 8 16

Job Value 22 31 57 74 110

* Scale Ranking from 0 (=does not apply) to 10 (=totally applies)

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Competitive Positioning

Compensation
Survey

Benchmarking
C&B

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 Benchmarking C&B
Pay at Market
Which companies will form part of the
benchmark pool?
Multinationals have a well-established list of
competitors and other organizations that
they use as benchmark comparators.
Own type of industry – Specialist positions
like Food Technologist, Currency traders, etc.
Industry agnostic: Generalist skills like
Finance, HR, Sales, etc.
However, in different countries they are
competing with local companies with very Include a
different C&B philosophies and programs. representative mix of
companies from whom
you would like to hire
or even lose talent to

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Compensation Survey
A salary survey is a compilation
of wage data collected from
other organizations that are
perceived as comparable to
your organization.
This comparability is achieved
with a job matching process
using survey benchmark job
descriptions and internal job
descriptions
Using this information, the
organization can determine
the competitive market rate for
its own jobs.
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Purpose
Used for strategic decisions of determining the pay
level of the organization
Directly impacts the quality of the organization’s work
force; most importantly its labor costs
Used to establish the wage differentials between jobs,
an essential aspect of establishing organization’s salary
structure
Ultimate goal is to identify the market rate
Aid in the internal questions of equity that arise in pay
decisions
Guides annual salary increase planning
An important tool in labor negotiations, especially
establishing proper differential between two jobs
Helps evaluating employee benefits, cost-of-living, or
salary level with market rate in the area, the industry,
or both
Key inputs for diagnosing existing, or potential, wage
problems
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Compensation Survey - Dimensions

Job: Salary surveys use jobs as the comparison standard. It is

important to ensure that your job and the salary survey are the
same or highly similar. For this purpose the salary survey must
have a job description or at least a job brief for comparison
purposes. Further the Job Title should be more specific
Cash /Non-cash Compensation: What is included in the
compensation reported? Base salary, Allowances, Incentive pay,
Benefits, Total cash compensation
Determining Pay Rates: In addition to mean and median,
percentile data at 10th, 25th, 75th and 90th percentile is
included

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Compensation Survey - Dimensions

Experience: Difference in pay rates depending upon the

experience, more important variable if the organization has
many new employees and long tenured employees
Labor Market Determination: The location, size and industry all
have an impact on the labor market rates
Planning Date: All data is synchronized to the date the
organization/industry is using to make salary decisions. Other
data will need to be aged
Salary Trend: Percentage by which pay is expected to change
(Increment) during the year being considered

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Compensation Survey - Process

Identify Jobs to be included: Benchmark jobs are selected based
on the following -
• represent the entire range of jobs in the organization or just a
few jobs for a customized one-time survey
• be readily definable
• be relatively stable in content
• be well known to managers and HR leaders
• be jobs that some organizations fill from external labor markets
• include jobs that you are having trouble hiring or retaining
talent for
• in all cases be important jobs for the organization's operations
Benchmark jobs are typically found across many companies

Normally 25 – 30 jobs are included. If more emphasis is placed on external

competitiveness, then as many as 80 jobs may be included.
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Compensation Survey - Process

Carry out Job Analysis of all jobs to be benchmarked: The point
where work and the worker come together is the role played by
the worker in the organization that is called a job. It should
include –
• What does or should the person do?
• What knowledge, skill and abilities does it take to do this job?
• What is the result of the person's performing the job?
• How does this job align with other jobs in the organization?
• What is the contribution toward the organization's goals of
this job?
What the worker does describes the activities or tasks of the job.
How deals with the methods, procedures, tools, and information sources
used to carry out the tasks.
Why refers to the objective of the work activities; this should be included in
the job summary and in each task description.

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Compensation Survey - Process

Carry out Job Sizing/Evaluation: All jobs should be sized to
compare similarly sized jobs in the external market.
Determine relevant Labour Market for chosen jobs: The labour
market can be:
• Organization’s Product Market: consists of the organization’s
industry, those organizations that compete with your
organization in selling the same or similar goods and services
• Geographical Market: The geographical market helps
determine the minimum wages it will take to attract and retain
employees to carry out the organization’s work. The labor
supply for some jobs is local, for others regional, and for still
others national or international. Most companies confine their
salary surveys to local or regional markets. Technical,
administrative, and professional employees are less often
attached to the local area.
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Compensation Survey - Process

Choose the most appropriate survey: Choose a survey that

matches the needs of the organization.
Determining factors are –
Cost of survey (free to very expensive); manner in which data is
collected, analysed and presented; organization sponsoring the
survey.
Types of surveys can be – Government sponsored (impact
DA/COLA, Minimum wage determination); Internet survey (by
organizations devoted to providing compensation information or
as an adjunct to their main purpose, or even as an advertising
tactic); Employee groups (geographical or industry);
Compensation Consultants Surveys (Most sophisticated, high
costs, tailor made, most accurate.

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Compensation Survey How to calculate Percentiles
Org AM Mgr Sr. Mgr. DGM GM VP INDEX Org AM Step:1 - Sort data (Min to Max)
A 6.5 10.0 12.5 25.0 25.0 40.0 1 O 6.0
B 7.5 7.5 10.0 22.0 22.0 37.0 2 A 6.5 Step:2 - Formula for Percentile
C 8.0 14.5 13.4 18.0 38.0 53.0 3 B 7.5
D 11.5 19.0 24.0 38.0 39.0 54.0 4 C 8.0
E 9.5 22.5 22.5 35.5 46.0 58.0 5 T 8.5 Total Values: 25
Rs. Lacs

F 18.0 13.6 14.0 33.0 41.0 56.0 6 K 9.0 25P

G 20.0 19.4 19.0 29.5 55.0 70.0 7 U 9.0 K% = Percentile
H 15.5 20.0 13.4 28.5 36.0 51.0 8 E 9.5
I 12.0 9.5 15.6 40.0 62.0 77.0 9 N 10.5 Index = Total Values x K%
J 19.0 16.4 11.0 39.4 52.0 65.0 10 Z 11.0
K 9.0 15.5 21.0 36.0 65.0 75.0 11 D 11.5 Look up the number returned
L 14.5 18.7 18.5 25.0 57.0 72.0 12 I 12.0 (CTC) at the closest index value
Benchmark Pool: 25 Companies

N 10.5 13.5 19.8 26.0 38.0 53.0 13 V 12.0 50P

O 6.0 19.6 20.0 26.6 44.0 59.0 14 P 12.5
15 R 13.5 K%= 25 50 75 90 100
P 12.5 9.0 25.0 29.0 49.0 64.0
16 W 14.0 Index 6.25 12.5 18.75 22.5 25
Q 17.0 11.0 26.5 28.5 62.0 77.0
17 L 14.5 CTC 9.0 12.0 15.5 18.5 20.0
R 13.5 21.5 23.5 32.0 39.5 54.5
S 18.5 17.0 28.5 25.0 46.5 61.5 18 H 15.5
T 8.5 15.0 29.0 27.0 51.0 66.0 19 X 15.5 75P
U 9.0 13.6 16.0 37.0 33.5 46.0 20 Y 16.5
V 12.0 11.0 17.6 38.4 51.5 66.0 21 Q 17.0
W 14.0 14.0 18.5 29.0 60.5 72.0 22 F 18.0
23 S 18.5 90P
X 15.5 15.5 16.0 26.0 47.5 62.5
Y 16.5 16.5 20.5 30.0 37.6 53.0 24 J 19.0
Z 11.0 11.0 19.0 32.0 44.0 59.0 25 G 20.0

Min 6.0 7.5 10.0 18.0 22.0 37.0

Max 20.0 22.5 29.0 40.0 65.0 77.0 Red Waters
10th P 7.7 9.7 12.9 25.0 34.5 48.0
25th P 9.0 11.0 15.6 26.0 38.0 53.0 Median
50th P 12.0 15.0 19.0 29.0 46.0 59.0
75th P 15.5 18.7 22.5 35.5 52.0 66.0
90th P 18.3 19.8 25.9 38.2 61.4 73.8
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Competitive Positioning
Red Waters (Compensation Data)
AM Mgr Sr. Mgr. DGM GM VP 1
Count 66 69 45 93 44 6 Compensation Philosophy
Decision to position and
Rs. Lacs

Minimum 14.0 16.3 19.3 26.0 30.4 42.6 pay at 90th percentile of
Median 14.4 16.8 19.9 27.7 34.1 44.6 Market
Maximum 20.2 21.3 26.7 34.9 40.7 45.7
2
AM Mgr Sr. Mgr. DGM GM VP
Rs. Lacs

Determining Mid-Point of
Mid Point 18.3 19.8 25.9 38.2 61.4 73.8 Salary Bands
Assuming 90th percentile
Compensation Bands
data as the Mid-Point of
20% 14.6 15.9 20.7 30.6 49.1 59.0
Rs. Lacs

the Band
Mid Point 18.3 19.8 25.9 38.2 61.4 73.8
20% 22.0 23.8 31.1 45.9 73.7 88.6
3 Percentile Data from Compensation Survey
AM Mgr Sr. Mgr. DGM GM VP
Create Band Spreads (Range) Min 6.0 7.5 10.0 18.0 22.0 37.0
Difference between the lowest highest in the Band Max 20.0 22.5 29.0 40.0 65.0 77.0
40% Spread taken as band for each grade/level. 10th P 7.7 9.7 12.9 25.0 34.5 48.0
25th P 9.0 11.0 15.6 26.0 38.0 53.0
(Min - 80% ; Midpoint - 100% ; Max -120%) 50th P 12.0 15.0 19.0 29.0 46.0 59.0
75th P 15.5 18.7 22.5 35.5 52.0 66.0
90th P 18.3 19.8 25.9 38.2 61.4 73.8
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 Process – Competitive positioning
Compensation Benchmarking
Carry out Compensation Survey (CS) of all positions.
CS will give Percentiles of the benchmarked companies.
As per Company Competitive Positioning (say Pay at 90th Percentile); set
“Mid-Point” compensation at the 90th Percentile number. Note: “At
Market” compensation is at 100 percentile.
A 40% Spread is taken as compensation band for each grade/employee.
(Min - 80% ; Midpoint - 100% ; Max -120%).
If Banding spread is higher, i.e., . 40%, then the compensation structure
results into “Broad Banding”. This is found in company with flat hierarchies
and very few levels.
Determine Compa-Ratio (Position in Range)
Determine PIR of each position. This is actual CTC v/s Targeted level (MP).
Compa-Ratio reflects as to how far behind (or ahead) is a particular person
from the Mid Point.
Based on the CR Positioning, Performance Appraisal Rating, the new
compensation (increments) is determined.

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Percentile (Additional information)

Percentile: Where you stand compared to the rest of the
herd, you need a statistic that reports relative standing.
The kth percentile is a value in a data set that splits the data
into two pieces: The lower piece contains k percent of the
data, and the upper piece contains the rest of the data (which
amounts to [100 – k] percent, because the total amount of
data is 100%). Note: k is any number between 0 and 100.
The median is the 50th percentile: the point in the data where
50% of the data fall below that point, and 50% fall above it.
Quartile?

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Percentile - Calculation
To calculate the kth percentile (where k is any number between zero and
one hundred), do the following steps:
1.Order all the values in the data set from smallest to largest.
2.Multiply k percent by the total number of values, n. This number is called
the index.
3.If the index obtained in Step 2 is not a whole number, round it up to the
nearest whole number and go to Step 4. If the index obtained in Step 2 is a
whole number, go to Step 6.
4.Count the values in your data set from left to right (from the smallest to
the largest value) until you reach the number indicated by Step 3.
5.The corresponding value in your data set is the kth percentile.
6.Count the values in your data set from left to right until you reach the
number indicated by Step 2.
7.The kth percentile is the average of that corresponding value in your data
set and the value that directly follows it.

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Percentile - Example
Suppose you have 25 test scores in order from lowest to highest
43
54 To find 20th percentile
56
61 Multiply 20% times the total number of scores
62 20% ∗ 25 = 0.20 ∗ 25 = 5.0 (the Index).
66
68 This is a whole number
69 The 20th percentile is the average of the 5th and 6th values in the ordered
69
70 data set (62 and 66). The 20th percentile then comes to (62 + 66) ÷ 2 = 64
71
72
77
78
79 To find 90th percentile
85
Multiply 90% times the total number of scores
87
88 90% ∗ 25 = 0.90 ∗ 25 = 22.5 (the Index).
89 Rounding up to the nearest whole number, you get 23.
93
95 Count from left to right (from the smallest to the largest value in the data
96 set) and find the 23rd value in the data set.
98
99
That value is 98, and it’s the 90th percentile for this data set.
99
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 Market positioning – C&B
Critical to decide on a well thought out, market position for
each market that the company operates in.
It is even more critical to establish separate target position
for – base salaries, total compensation (base plus incentive
bonuses) and benefits policies. Establishing a uniform goal
that all policies should, for example, be targeted at say 50th or
75th percentile of the market may potentially result in policies
being established that are out of line with the company’s
business needs.
Software company with a young workforce: Does not need to have
retirement plans at 75th percentile.
Aggressive sales driven consumer goods company should target its
base salaries at or even slightly lower than market median, but its
total compensation including incentives should be at 75th percentile.

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Assumptions & Approach (Recap)

Approach Ability to
Pay

Note: Decision to Pay at 90th Percentile

• Pay-band has the advantage of flexibility while

90th Percentile as Mid-point
hiring, promoting and deciding pay increases.

Compa-Ratios for each position Pay for

•The Recommended Mid-point is the 90th
Job
percentile of the benchmarked organizations
Compensation based on
• A 40% Spread is taken as compensation band for
each grade/employee. (Min - 80% ; Midpoint -
100% ; Max -120%)
CR Positioning Cost of Living
• A high overlap across adjacent grades reflects
that job size/complexity/dimensions do not Bonus Plan COLA
change radically. Anedvice-versa
Pay for
Performance

Pay at Market

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Compa-Ratio

Compa-ratio is the employee's current salary divided by the mid-

point as defined by the company's competitive pay policy.

Compa-Ratios are position specific.

Each position has a salary range that includes a minimum, a midpoint, and a
maximum. These three values represent industry averages for the position.
CR = 1.00 (employee is paid exactly what the industry average pays and is at the
midpoint for the salary range)
CR = 0.75 (employee is paid below the industry average and is at the risk of
seeking employment with competitors at a higher pay that is perceived equitable)
CR = 1.15 (employee is paid above the industry average)

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 48

Compa-Ratio (Example)
Decision to position and pay at 90th percentile of Market Red Waters

Position being evaluated: Executive - Sales Job Size: 150 points

For that position and job size, the market CTC at 90th percentile is Rs. 10 Lacs

Mid-Point = Rs. 10 Lacs Band Spread = -20% to +20% around M.P (40% spread)

Band Spread
CTC 8 10 12
(Rs. Lacs)

CTC
(Rs. Lacs) 6 7 9 11 13 14

CR .6 .7 .8 .9 1 1.1 1.2 1.3 1.4

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 49

Compa-Ratio (Example)
Name Designation
CTC Mid Point
Compa Ratio Sample data extracted from about 330
S.No. Rs. Lacs Rs. Lacs
A B C D E = C/D employee database
1 AM 14.0 18.3 0.77
2 AM 14.4 18.3 0.79
3 AM 14.8 18.3 0.81
4 AM 17.0 18.3 0.93
5 AM 18.0 18.3 0.98
6 AM 20.2 18.3 1.10
7 Manager 16.3 19.84 0.82
8 Manager 16.8 19.84 0.85
9 Manager 17.3 19.84 0.87 Compa-Ratio gives a quick number to
10 Manager 17.8 19.84 0.90
11 Manager 18.3 19.84 0.92 identify the employee’s pay relative to
12 Manager 18.6 19.84 0.94
13 Manager 21.3 19.84 1.08 the midpoint of the range
14 Senior Manager 19.3 25.9 0.75
15 Senior Manager 26.7 25.9 1.03
16 DGM 26.0 38.24 0.68
17 DGM 26.6 38.24 0.70
18 DGM 29.4 38.24 0.77
19 DGM 34.9 38.24 0.91
20 GM 30.4 61.4 0.50
21 GM 31.0 61.4 0.51
22 GM 39.5 61.4 0.64
23 GM 40.7 61.4 0.66
24 GM 40.7 61.4 0.66
25 Vice President 42.6 73.8 0.58
26 Vice President 43.9 73.8 0.59
27 Vice President 44.7 73.8 0.61
28 Vice President 45.1 73.8 0.61
29 Vice President 45.7 73.8 0.62

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 50

Determining salary increase using only Performance Rating

Rating Compensation Increase

Type of Culture Does not value High value on
on Performance
Middle of the Road
Performance Performance

SEE 12 14 18

EE 11 12 14

ME 10 10 10

BE 9 8 6

SBE 8 0 0
Numbers above denote % increase on gross wages

High Performance companies also implement a SEE: Significantly Exceeds Expectations

EE: Exceeds Expectations
forced rating scale in which the percentage of SEE ME: Met Expectations
and EE will be significantly lower and similarly BE: Below Expectations
SBE: Significantly Below Expectations
significantly higher for BE and SBE ratings

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 51

Determining salary increase using Compa-Ratio & Performance Rating

Example - I Example - II

Building the table Compa-Ratio

Rating
1.Determine how much you would like to differentiate high
< 0.8 0.8-0.9 0.91-1.0 1.01-1.1 1.02-1.2
performers from the average performers and determine
reward differentiation SEE 18 16 14 13 12
2.Determine how quickly you would like those with lower
compa-ratio to catch up(2-4 years, or more) . EE 15 13 12 11 8
3.Set the mid % increase, i.e., performance at Met Expectations
(ME) and CR= 1.0. Setting the MID-CELL (Yellow Cell)
4.Build the rest of the cells around the Mid-Cell
ME 12 11 10 9 7
5.Build live appraisal data of all employees with rating and CR
and put in a formula for each employee to determine salary
BE 3 2 0 0 0
increase % based on the Increment table (looking up CR and
Rating)
SBE 0 0 0 0 0
6.Based on approved budget for salary increases, alter SEE: Significantly Exceeds Expectations
percentages in the cells to meet the budget EE: Exceeds Expectations Numbers above
7.Higher % increase for higher performers will result in lower % ME: Met Expectations denote % increase on
increase for lower performers BE: Below Expectations gross wages
Patrick Collins SBE: Significantly Below Expectations
 52

Compa-Ratio – Establishing differences between policy & practice

Compa-ratios establish differences between policy and practice. The reasons for
such differences need to be established. They may be attributable to one or more
of the following factors:
• differences in performance levels or performance ratings
• differences in average job tenure - average tenure may be short when people
leave the job through promotion, transfer or resignation before they have
moved far through the range and this would result in a lower compa-ratio. Or a
higher ratio may result if people tend to remain in the job for some time
• the payment of higher rates within the range for market reasons
• the existence of anomalies after implementing a new pay structure (band mid-
points have been changed to meet competitive positioning)
• the rate of growth of the organization - fast-growing organization might hire
more people towards the bottom of the range or, conversely, may be forced to
hire at high points in the range because of market forces. In a more stable or
stagnant organization, however, people may generally have progressed further
up their ranges because of a lack of promotion opportunities.
Some differences may be entirely justified, others may need action such as
accelerating or decelerating increases or exercising greater control over ratings
and pay reviews
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 53

Job Levelling

Job Sizing

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 54

Job Levelling Framework

A global job leveling program is the foundation for creating a compelling, fair and
market-oriented approach to managing talent for optimal business results
Job leveling systems can address a number of common business concerns
Business Concerns Job Leveling Solutions Business Results
• Poor transparency regarding • Create job descriptions for • Clear communication of job
job requirements and career each job family with career requirements, promotional
progression matrices defining opportunities and
• Inconsistent approach to pay progression at each job development requirements
decisions for new hires, level— both with the job • Structure that provides
promotions and annual family and laterally across job guidelines to ensure equal
increases families or functions pay for equal or substantially
• Uncertainty about • Benchmark market pay for similar work
appropriate pay each job and aggregate for • Consistent, unbiased and
differentiation, particularly similar job families at the market-oriented
for similar roles with same job level into functional compensation decisions to
comparable skills pay ranges attract and retain talent
Business challenges are even more prominent in the high-growth technology and life sciences sectors, where
companies live and die based on their ability to innovate.
Job leveling tools must have enough built-in flexibility to handle cultural differences, local and regional
regulations, diverse business needs and changing talent requirements
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 55

Job Architecture v/s Job Leveling

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 56

Market Line

Benchmark Jobs
Benchmark jobs are Jobs in other
companies with similar roles &
Market Line
responsibilities
Average Salaries in the Market

Market Pay

Market Line represents the

relationship between job value and
market pay

Compute Market Line by using

Regression Analysis (Relationship
between Job Value and Market Pay)
Job Value

Separate market-lines may also be made for different job families/functions

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 57

Base Pay Structure

Pay Policy Line

Based on Job Value

Job Grade

Job Ranking
• A method to compare all jobs based on their
9 value (importance in the organization)

7
6 Range
• The difference between the
5 highest and lowest paid for a
A particular job
4 Mid-Point
B
3
Market-Based Job Evaluation
2 • Evaluation that compares the salaries for
particular jobs offered on the external market
1
Base Pay

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 58

Broad-banding
Features
• Number of Bands: 4 to 5.
Based on Job Value

Job Grade

• Width of Bands: 100%; May vary from level

to level
9 • Band Overlap: Large - > 50%. Helps in
providing career development pay increases
4
8 without being upgraded

7
3
6
5
2
4
3 Broad-banding is the compression of a
hierarchy of pay grades/salary ranges into
2 1 a smaller number of wider bands, thus
collapsing job clusters or tiers of positions.
1
Base Pay

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 59

Broad-banding - Aims
Provide pay structures that fit delayered (flatter) organization
structures
Enable processes originally created to sustain hierarchy and vertical
movement to be replaced
Support operational and role flexibility and team working
Reflect the new emphasis on horizontal processes (Business
Process Reengineering)
Develop alternative methods of payment that reflect a broader
spectrum of employee development and contributions, including
increased levels of competence, skill acquisition, career
development, continuous learning, adaptability and flexibility
Facilitate lateral career moves (internal mobility), thus
advancement takes place not just by vertical movement, but
horizontal too
Helps simplify administrative processes by decreasing dependence
on elaborate job evaluation systems

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 60
Broad-banding
Advantages
Enhances organizational flexibility by
reducing number of break-points
Reduces time spent on job evaluation
because of fewer levels
Addresses employees concerns of
personal growth by paying for skills and
competencies
Provides greater flexibility with wide array
of career building opportunities
Reward system that motivates to develop
new skills, master new competencies
Rewards employees for work that is
beyond their JD’s
Supports team-working – boundaryless
Allows more responsibilities to line
managers to make pay decisions
Patrick Collins
Disadvantages
Restricts the number of promotional
opportunities
Employees formerly in higher grades may
find their jobs devalued as subordinates
may be merged into the same band. Team
Leaders may find themselves in the same
band as their staff
Employees may be concerned about lack
of structure and precision
May lead to escalating payroll costs
Requires significant commitment of
training and communication resources to
implement
 61

Pay Structure
Pay Structure defines the different levels of pay for jobs/groups of jobs by reference to their relative internal value as established by
job evaluation, to external market relativities as established by market rate surveys, and where appropriate to negotiated rates for
the job.
Graded Pay Structure Rs. Lacs
Levels
% L-11 L-10 L-9 L-8 L-7 L-6 L-5 L-4 L-3 L-2 L-1
Range Band 195
Level Designation Min M.P Max Increase 190
Spread Overlap 185
(MP)
Pay Spine
180
175
170
L-11 VP 65.0 130.0 195.0 50% 27% 136% 165
160
155
L-10 GM 33.0 55.0 77.0 40% 33% 83% 150
145
140
L-9 DGM 21.0 30.0 39.0 30% 24% 58% 135
130
125
L-8 Sr. Mgr. 15.2 19.0 22.8 20% 29% 36% 120
115
110
L-7 Manager 11.2 14.0 16.8 20% 20% 40% 105
100
95
L-6 Dy. Mgr. 8.0 10.0 12.0 20% 14% 43% 90
85
80
L-5 Asst. Mgr. 5.6 7.0 8.4 20% 20% 40% 75
70
65
L-4 Sr. Executive 4.0 5.0 6.0 20% 50% 25% 60
55
50
L-3 Executive 3.2 4.0 4.8 20% 79% 14% 45
40
35
L-2 Officer 3.0 3.5 4.0 15% 53% 17% 30
25
20
L-1 Jr. Officer 2.6 3.0 3.5 15% 17
16
15
14

Min (of Band) = M.P - (M.P x Range Spread %) LL: Lower Level
13
12
11

Max (of Band) = M.P + (M.P x Range Spread %) HL: Next Higher Level 10
9
8
7
6

(Max of LL – Min of HL) 5

4
Band Overlap = X 100 3

Patrick Collins (Max of LL – Min of LL) 2

1
 62

Sample Career Ladder within a Global Leveling System

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 63
Opportunities & Threats (Job Evaluation & Base Pay)
Opportunities
Common foundation for
compensation-related decisions
Job-related distributive and
procedural equity
Transparency of compensation
related decisions
Active elaboration of job values
and contribution to company’s
success
Patrick Collins
Threats
Significant bureaucracy during
implementation
Acceptance of all stakeholders
involved (stakeholder buy-in)
Reduces flexibility of
compensation-related decisions
May reduce innovation and
employee engagement
 64

Pay Structure - Design

Level L1 L2 L3 L4 L5 L6 L7 L8 L9 L10 L11
Sr. Asst Deputy Sr. Vice
Designation Jr. Officer Officer Executive Manager DGM GM
Executive Manager Manager Manager President

CTC (Mid Point) 300000 350000 400000 500000 700000 1000000 1400000 1900000 3000000 5500000 13000000

Component Frequency

Base Pay
Basic Pay % of CTC 60% 60% 60% 60% 50% 50% 40% 40% 30% 25% 25%

Basic Amount PA 180000 210000 240000 300000 350000 500000 560000 760000 900000 1375000 3250000

PM 15000 17500 20000 25000 29167 41667 46667 63333 75000 114583 270833

Allowances
HRA(10% * Basic) PM 10% 1500 1750 2000 2500 2917 4167 4667 6333 7500 11458 27083

Special Allowance PA 41742 48699 55656 69570 186165 265950 479864 151244 758710 1906363 4878675

Flexible Allowance PA 500000 500000 750000 750000

Incentives
Perf. Incentive (%) % of CTC 10% 10% 10% 10% 10% 10% 15% 15% 20% 20% 25%

Perf. Incentive PA 30000 35000 40000 50000 70000 100000 210000 285000 600000 1100000 3250000

Gross 269742 314699 359656 449570 641165 915950 1305864 1772244 2848710 5268863 12453675

Social Security
PF (% of Basic) PM 12% 1800 2100 2400 3000 3500 5000 5600 7600 9000 13750 32500

Gratuity (% of Basic) PM 4.81% 722 842 962 1203 1403 2004 2245 3046 3608 5511 13027

CTC 300000 350000 400000 500000 700000 1000000 1400000 1900000 3000000 5500000 13000000

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 65

Tax Calculation (Net Take Home)

Tax Calculation (Net Take Home) Scenario - I (Asst. Mgr.) Scenario - II (G.M)
Compensation Monthly (Rs.) Annual (Rs.) Monthly (Rs.) Annual (Rs.)
Basic 29167 350000 104167 1250000
HRA 2917 35000 10417 125000
Special Allowance 15514 186165 130406 1564875
Flexible Allowance 62500 750000
Performance Incentive 70000 1100000

Gross 47597 641165 307490 4789875

Provident Fund - 12% of basic Employer's contribution 3500 42000 12500 150000
Gratuity - 4.81% of basic 1403 16835 5010 60125

Cost to Company 52500 700000 325000 5000000

Income Tax
Taxable Income (Basic + HRA + Special + PI) 47597 641165 244990 4039875
Earning up to Rs. 5 Lacs Flat tax rate of Rs. 12,500 12500 12500
Between Rs. 5 to 10 Lacs Tax Rate of 20% 40000 100000
Above Rs. 10 Lacs Tax Rate of 30% 911963
Total Tax 4375 52500 85372 1024463

Salary after tax 43222 588665 222118 3765413

Provident fund deduction Employee's contribution 3500 42000 12500 150000

Net take home 39722 546665 209618 3615413
% of Tax to CTC 7.5% 20.%
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 66

Flexible Benefits (flexi-basket)

Flexible Benefits Plan Flexi Allowances Range (Rs.) pa
A plan that allows employees to select the LTA 50,000 100,000
benefits they prefer from a basket of benefits Business Promotion 75,000 125,000
established by the employer Vehicle R&M 120,000 240,000
Books Periodicals 25,000 50,000
Reasons for using “Flex Plans” Cost of Education 12,000 12,000
• Perceived value of benefits depends on CEA + Hostel 4,800 4,800
employees’ age, family status
Drivers Wages 144,000 216,000
• By tailoring the right benefits package,
Total (Flexi) 430800 747800
employees stand to gain maximum value
without additional cost on the employer
• Flex plans heighten employees awareness of Annualised Flexible Allowance
Level
the costs and value of the benefits offered Range (Rs. Lacs)
Middle (L-8 to L-9) 5.0
Problems with Flexible Plans Senior (L-10 to L-11) 7.5
• Inappropriate benefits package choices
• Administrative and communication efforts
• Benefits requests are hard to predict

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 67

Income Tax
Taxable Allowances Partially-Taxable / Non-Taxable Allowances
•Dearness allowance •HRA except when it qualified as exempt under Section 10
•Entertainment allowance •Academic/Research Allowance
•Overtime allowance •LTA/LTC
•City compensatory Allow. •Mobile reimbursement
•Interim allowance •Books & Periodicals
•Medical Allowance •Conveyance allowance up to Rs.1600/month or Rs.19200 \annum
•Project allowance •Children education allowance
•Tiffin/meals allowance •Hostel expenditure allowance
•Uniform allowance
•Cash allowance
•Non-practicing allowance
•Servant allowance

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 68

Taxable Allowances
• Entertainment Allowance: Payments towards hospitality of their customers for drinks, meals,
business outings, client meetings, hotels, etc. Fully taxable for all private sector employees.
• Overtime Allowance: Received by employees who work beyond operational hours. Fully
taxable.
• Dearness Allowance (DA): Paid to government/public sector employees/pensioners as a cost of
living adjustment to neutralize the impact of inflation and difference in cost of living for
employees living in different cities/towns.
• Meal Allowance: Paid for meals/refreshments/tiffin services to their employees. Fully taxable.
• City Compensatory Allowance (CCA): Given to compensate for a relatively high cost of living in
metropolitan cities. Fully taxable
• Interim Allowance: Provided by the employer instead of final allowance. Fully taxable.
• Cash Allowance Cash allowance for expenditure like marriage allowance, holiday allowance and
other similar allowances provided by employer, it is fully taxable in the hands of employees.
• Servant Allowance: Provided for hiring the services of servant. Fully taxable.
• Project Allowance If an employer provides allowance to employees to liquidate a project's
expenses, then it called project allowance and it is completely taxable.
• Non-Practicing Allowance When a doctor gets associated with clinics/laboratories/medical
institutes, any non practicing allowance paid to them is taxable.

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 69

Partially Taxable Allowances

• House Rent Allowance: To meet rent expenses of the employee. As per the Sec 10 (13A), the
least of the following is exempted, and rest amount is taxable
• Actual HRA received
• Rent Paid – 10% (Basic + DA)
• 40% of Basic + DA (50% in metro cities)
• Children Education Allowance: Allowance towards expenses incurred on a child’s education.
Exempted up to Rs. 100 per month per child up to a maximum of 2 children
• Hostel Expenditure Allowance: Allowance to meet expenses incurred on the hostel fees of
their children. Exempted up to Rs. 300/month/child up to a maximum of 2 children.

Patrick Collins
 70

Non-Taxable Allowances
Leave Travel Allowance (LTA)
LTA tax exemption to salaried employees, restricted to travel expenses incurred during leaves by
them. Exemption doesn’t include costs incurred for the entire trip such as shopping, food
expenses, entertainment and leisure among others. Can claim LTA twice in a block of four years
In case an individual doesn’t use this exemption within a block, he/she could carry the same to
the next block. Restrictions applicable to LTA:
• LTA only covers domestic travel and not the cost of international travel
• The mode of such travel must be either railway, air travel, or public transport

Mobile reimbursement
Mobile and telephone used at residence can be claimed as tax free reimbursement up to the
actual bill amount paid or amount provided in the salary package, whichever is lower

Books and Periodicals

Expenses on books, newspapers, periodicals, journals, etc., can be claimed as tax free
reimbursement to the lower of the bill amount or the amount provided in the salary package

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 71

Pay for Position (Job)

Pay for Position (Job)
Pay for position, Position based pay or Job-based pay
Pays employees for the job to which they are assigned
Regardless of skills they possess
Pay is centered on the job/position and not on the person
Traditional pay structure
Each position is assigned a pay range
Pay is based on education and seniority
Employee compensation is set in a broadband based
on qualifications, education, training and experience.
Through broad banding narrowly structured pay grades determined
through job evaluation, are replaced by fewer and wider bands
Employees progress up through broad band if their performance
ratings are good rather than steps based on time in the grade
It reduces different compensation categories to broad
compensation bands, grouping jobs together be common
characteristics (Job Families)
Patrick Collins
 72

Pay for Person

Pay for Person
Pay for person, Person focused pay, Skill-based pay or
Knowledge-based pay or Competency-based pay
Structures link pay to depth or breadth of the skills, abilities, competencies
and knowledge a person applies to the work.
Pay individuals for all the skills they have been certified regardless of
whether the work they are doing requires all or just a few of those
particular skills
Wage is attached to the person
Pay increases are tied to:
Horizontal skills – involves broadening of skills in terms of range of tasks
Vertical skills – involves acquiring skills of a higher level
Depth skills – involves a high level of skills in specialized areas relating to the
same job
Skill-based pay encourages and rewards a broad range of skills, hence the
employee becomes multi-skilled and more flexible and valuable
Job rotation is used to fill in temporary gaps in the workforce
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 73

Performance
Linked Incentive

Variable Pay

Performance
Bonus

Patrick Collins
 74

Pay for Performance

Pay for Performance
Pay for performance, Performance related pay, Performance
based pay is a financial reward system for employees where
some or all of their monetary compensation is related to how
their performance is assessed relative to stated criteria/goals
The criteria for performance-related pay scheme may be based
on individual, group organizational performance, or on a mixture
of them
Individuals receive incentive as increases to basic pay or cash
bonuses, linked to performance
High level of achievement may be rewarded by one-time cash
bonuses that are not consolidated
Individuals are eligible for such bonuses when they have reached
top of pay bracket and completely progressed along their
learning curve

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 75

One-Time Bonus / Statutory Bonus

One-Time Bonus
Is a one-time payment that does not become part of the
employee’s base pay
Used to reward employees for contributing new ideas, coping with
critical challenges, acquiring new skills
Bonuses usually recognize performance of the employee and the
company
Bonuses provide great flexibility in rewarding valued behaviours in
particular situations

Statutory Bonus
Paid in some countries as 13th Month salary, normally 8.33% of
annualized gross (1/12)x100 = 8.33%
Paid to all employees
Not performance driven
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 76

Piece-rate System

Piece-Rate System Provision

Daily Wage

Salary
Variable Variable

Fixed Fixed

Daily Performance Revenue

Mainly for mundane repetitive tasks Sales: Higher sales will get a variable
pay on top of the fixed element
Structured, consistent work settings

Beyond threshold output, higher Production: Higher production

performance attracts more pay output will get a variable pay on top
of the fixed element
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 77

Target Bonus (Pay for performance)

Performance-based Pay Applicable for Managers, Senior
140
employees, Knowledge workers
Target Bonus (%)

B
Work in complicated settings, solve
problems, work on projects
120
A
Employee and Supervisor agree on
employee targets and the relation
100 between target achievement and
target bonus

A: Lower risk, lower return

80
B: Higher risk, higher return
Same method can be applied to
60
groups
Target Achievement (%)

60 80 100 120 140

Patrick Collins
 Performance Incentives (Individual & Company)
Incentive Weightings: Company to Individual Performance
Level Company Performance Individual Performance
Senior Management 60% 40%
Middle Management 50% 50%
Junior Management 40% 60%

Individual Performance (IP)

Rating Scale E D C B A

Individual Performance
Incentive Payable (%) 0.0 70 100 115 130
Company Performance Targets
Weightings
Company Performance Incentive Applicable
EBIT,
35% Way Below Way Above Exceptional
Below Range In Range Above Range
Revenue, Range Range Performance
25%
Company Performance
< 80 80 – 89.99 90 – 99.99 100 – 109.99 110 – 119.99 > 120
Percentage Level (%)

Company Performance
Gross
Incentive Payable (%) 0 75 95 120 140 170
Margin,
40%

0% Eligible Eligible Eligible Eligible Eligible

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 79

Performance Incentive - Example

Total On-Target
Incentive
Company Performance Individual Performance
Category

Total
Eligibility Actual Performance Eligibility Actual Performance Incentive
Payable

Incentive Incentive
Weightage Amount Company Amount Weightage Amount Rating Amount
(%) (%)

Exceptional
170% 1122000 A 130% 572000 1694000
Senior Mgt

Perf.

1100000 60% 660000 Below 40% 440000

Range
75% 0 C 100% 440000 440000

Way Below
0% 0 D 70% 308000 308000
Range

Way Above
140% 147000 B 115% 120750 267750
Middle Mgt

Range

210000 50% 105000 In Range 95% 0 50% 105000 A 130% 136500 136500

Way Below
0% 0 E 0% 0 0
Range

Exceptional
170% 34000 E 0% 0 34000
Perf.
Junior Mgt

Above
50000 40% 20000 120% 0 60% 30000 C 100% 30000 30000
Range

Way Below
0% 0 A 130% 39000 39000
Range

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 80

Designing a Sales Incentive Plan

Straight Line Incentive Plan

Manager Sales Target Annual Sales: Rs. 10 Cr. On-Target Incentive: Rs. 1 Lac

Annual Sales Sales Incentive

Jump %’s
Volume (Crores) % of Target % Rs. Lacs
<8 0% 0% 0.00
8 80% 80% 0.80
9 90% 90% 0.90 10%
10 100% 100% 1.00 10%
11 110% 110% 1.10 10%
12 120% 120% 1.20 10%
13 130% 130% 1.30 10%
14 140% 140% 1.40 10%

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 81

Designing a Sales Incentive Plan

Ballooning Incentive Plan

Manager Sales Target Annual Sales: Rs. 10 Cr. On-Target Incentive: Rs. 1 Lac

Annual Sales Sales Incentive

Jump %’s
Volume (Crores) % of Target % Rs. Lacs
<8 0% 0 0.00
8 80% 70% 0.70
9 90% 80% 0.80 10%
10 100% 95% 0.95 15%
11 110% 113% 1.13 18%
12 120% 135% 1.35 22%
13 130% 160% 1.60 25%
14 140% 190% 1.90 30%

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Incentive Plans: (Graphical Representation)

Straight-line Incentive Plan Ballooning Incentive Plan

Performance Incentive (As % of Target Incentive)

Performance Incentive (As % of Target Incentive)

200% 200%
180% 180%
160% 160%
140% 140%
120% 120%
100% 100%
80% 80%
60% 60%
40% 40%
20% 20%
0% 0%
70% 90% 110% 130% 150% 70% 90% 110% 130% 150%

Sales Volume (As % of Target Sales) Sales Volume (As % of Target Sales)

Ballooning Incentive Plan

Performance lower than target performance, gets lesser than a straight-line plan
Every 10% higher performance than target will attract increasing levels of incentive.

Law of Diminishing Returns: There comes a point when an additional factor of production results in a lessening of output or impact
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 83

Long Term Incentives

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 84

Overview

A long-term incentive, as the name suggests, is a vehicle that has an extended time
horizon (generally greater than one year) and that can be a strategic compensation
vehicle to promote long-term retention and alignment with company goals.

LTI can be a win-win for all participants

For employers, LTI present an opportunity to reward the achievement of long-term
plans, promoting buy-in to corporate performance.
For employees, LTI can be a reward for outstanding performance and are a vehicle for
capital accumulation.
For shareholders, LTI are a vehicle that aligns employees with the performance of
shares (for market-based equity vehicles) and the long-term vision of the company.
When employees become shareholders themselves, they have incentive to increase
company value as the performance of the shares directly affects their own
compensation.

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 85

Types of LTI’s

Appreciation-based: Value is delivered based on the increase in the company’s

underlying value, which in the case of a public company, is reflected in share price. Per
unit, employees will receive the difference between the value of the underlying unit at
some point in the future, and the underlying value when the stock options/stock
appreciation rights (SARs) were granted.

Stock-based: Value is delivered in shares of the company stock. Payout may be tied to
achievement of performance goals, but ultimately, employees will receive a share of
company stock. Note that some companies may grant “phantom shares.” Which track
the movement of value of the underlying shares but pay out in cash.

Cash-based: Value is delivered in cash and is not tied to the performance of shares;
employees will receive a cash payout, based on service, achievement of predefined
performance goals, or both.

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Stock Option

A stock option entitles the grantee the right to purchase shares of a company at a
fixed price (known as the exercise price) in the future. Generally, the option’s exercise
price will be the stock’s closing price on the date of the grant. Once a stock option
vests (see “What is Vesting?” below), the grantee can exercise the right to purchase
stock at the exercise price. For example, if a share is trading at $10, and the exercise
price is $5, the grantee can purchase a share at $5 and sell at $10 in the open market,
resulting in a $5 profit per unit.

The window of time that a grantee can exercise the option is referred to as the term.
Most companies grant options with 10-year terms. An option has no value if in the
future the share of the company is below the exercise price (since the grantee would
be paying above-market price, and there would be no impetus to exercise the option).
These options are referred to as being “underwater.”

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Stock Appreciation Rights (SARS)

Stock Appreciation rights, or SARs, function very similarly to a stock option in that a
recipient of a SAR will receive the value of the increase in stock price in cash (though
sometimes it is received in stock). The major distinction between a SAR and a stock
option is that a SAR does not require the actual purchase of shares.

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Time-based Restricted Stock/Restricted Stock Units

Time-based restricted stock/units vest based on a predetermined length of time. A

company can choose to grant equity based on a predefined value on the grant date or
predefined number of shares (the former is more popular). Unlike an appreciation-
based award, a restricted stock will still have value upon vesting even if the per-stock
value decreases.

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Performance Shares/Units

These are also full-value shares; however, the vesting of these types of shares is
contingent upon meeting predetermined performance goals. These goals can be
internal or external, and can be measured on a relative basis (compared to other
companies), absolute basis (compared to predefined achievement levels), or both.
These have grown in popularity over recent years due to the ease of linking payout to
long-term performance. Metrics used by companies differ but are generally consistent
within each industry, since the metrics that define good performance tend to be
similar. One of the most popular metrics is total shareholder return (TSR), which
measures the increase in share price over a predefined period (most commonly three
years).
Companies will generally grant 100% of shares at a target level and give the shares
both downward and upward leverage (meaning shares can vest at less than 100% for
poor performance, and shares can vest at greater than 100% for outstanding
performance).

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Cash Units

Long-term Cash Units

These are non-equity-based long-term grants that pay out in cash. The grantee will
receive a cash payout after the vesting period.

Performance Cash Units

These are cash-based long-term grants that vest based on performance achievement.
These are more common at private companies, due to the difficulty of share valuation.

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Vesting

LTI are typically granted with what is known as a vesting period. What this means is
that grantees are conditionally granted equity, but they do not actually own it until the
vesting period expires. This is the retentive feature of LTI; unless the grantee fulfils the
applicable vesting requirement (e.g., staying with the company for three years after
grant or meeting a performance goal), they forfeit the grant.
There are two types of vesting: cliff and ratable.
Awards that cliff vest are paid out all at once, at the conclusion of a predetermined
time period.
Awards that vest ratably vest a portion at a time (e.g., an award that vests 25% each
year for four years). If an employee terminates prior to the end of the final vesting
period, the employee still owns the portion that has vested.

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Who receives LTI?

Commonly, LTI are more prevalent for employees at higher levels of an organization
because the value of the company is predominately affected by those with line-of-sight
into the long-term strategic vision of the company. Let’s say a company grants
performance shares that are contingent on achieving a net income target. Would the
CEO be able to influence corporate profitability? Yes (at least we hope so).
But an entry-level accountant? Probably not. There is less value in administering
performance-based LTI to lower-level positions, since these roles do not have the
impact that effect that type of change. For this reason, LTI for lower-level employees
typically focus more on retention.
LTI are more prevalent at public companies because of their liquidity and ease of
valuation (i.e., a share of a public company is valued by and can be sold on the open
market, whereas the value of a share at a private company can differ widely based on
valuation methodology).

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Pros and Cons of Different Incentive Strategies

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Pay for Organization Performance

Profit Sharing
Proportions of organizational profits are distributed among employees according to
their base pay
Employee Stock Ownership
Giving employees stock ownership in the organization or the right to acquire stocks at a
price below market. Employees must keep their stocks for a specific period of time

Employee Stock Options

The right to buy (exercise) a certain number of shares of stock at a specific (higher)
price.

Phantom Stock
Pays a future cash bonus equal to the value of a certain number of shares

Restricted Stock
Restricted stock/restricted stock units give employees the right to acquire or
receive shares, by gift or purchase, once certain restrictions, such as working a
certain number of years or meeting a performance target, are met
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Employee Stock Options (Example)

Stock Price = Rs. 800

Stock Price

Employee gets the option to buy 1000

stocks at Rs. 1000
1200
If company is not doing well, and stock
prices go down, you loose nothing, neither
do you gain
1000
If company is doing well and stock price
hits Rs. 1200, you buy it at Rs. 1000 and
sell it at Rs. 1200. You make Rs. 200 x 1000
800
stocks = Rs. 2,00,000

The employee never owned the stocks

Startup Companies require very brilliant

600
employees. Startup’s cannot pay big salary
to the employees, so they give options.
The employee can become rich if the
company does well. The employee has to
Time have a belief in the company and partner
in the risk of the company.
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Benefits Plan

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Reasons why companies offer Benefits

Shield employees and their dependents from financial risks
associated with illness, disability and unemployment
Most benefits are not taxed. Hence they will represent a more
valuable reward to the employee than an equivalent cash
payment
Contribute to attracting, motivating and retaining talent.
Some benefits add value to the employee without additional
cost to the employer. Benefits may serve as substitutes for
financial compensation
Some benefits are required by law.

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Types of Benefits

Security Financial
• Unemployment compensation • Interest-free housing loan
• Life insurance • Company credit car
• Disability insurance • Financial counselling
• Early retirement options
• Disability retirement benefits
• Pension Plans Offerings
• Company car
• Children’s education
Health • Cell phone
• Health-care insurance • Laptop
• Sabbatical • Free lunch
• Gym/Fitness club memberships • Child care / Crèche
• Medical care / Medical insurance • Cost advantage of company products
• Psychiatric counselling • Company accommodation
• Transportation

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Defined Benefits Retirement Plans

Aka: Balance Cash Benefits Plan
Pension plans that specify the eventual benefits employees will
receive, but not the level of the contribution. Mostly expressed as a
percentage of “final salary”.
Advantages:
As they are based upon a percentage of salary, they are easy to predict. Hence relatively
simple for the company to integrate social security entitlement into the final pension
formula.
Salary increases during employment protect pension rights against inflation.
Disadvantages:
Employers bear the investment risk, which can be difficult to predict. For example, this
situation has led to serious underfunding of pensions in a number of major U.S.
corporations, notably in the auto industry.
Pensions benefits from such plans are not easily transferable (portable) among employers.
Employees who change jobs frequently can find themselves with fragmented pension rights
from different employers, which amount to far less than if they remained on one pension
plan.
Example
Pension calculated as 1.5% of final average salary (highest 5 of last 10 years) times years of
company service (less offset for all or part of government pension)
Company contributions based on actuarial evaluations of cost of eventual pensions paid.
Employees may in some plans be required to contribute a percentage of salary, but in many
cases plans are non-contributory.
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Defined Contribution Retirement Plans

Pension plans that require a fixed contribution by employees and/or
employer. Retirement benefits equal to total contributions plus
investment earnings accumulated at retirement.
Advantages:
They are generally relatively simple to understand.
Employers can easily estimate and budget the payroll costs of their contributions
As employees can easily take any vested lump-sum pension investment with them when
they leave a company, these plans can be very attractive to "mobile" employees.

Disadvantages:
Employees have no guaranteed pension level on retirement and assume the risk that
their lump-sum funds might be eroded by high inflation or poor investment returns.

Future Trends
Because of financial constraints and concern over unfunded pension liabilities, there is a clear
global trend toward defined contribution retirement plans on the part of both governments and
private employers.

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Managing
Compensation in a
Global Organization

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 Global v/s Local practice
Despite all trends towards globalization, there remains wide differences in
nature of local national pay programs between countries.
Companies that have attempted to implement their headquarters’ pay policies
in overseas subsidiaries have typically encountered major problems for both
legal and cultural reasons., before deciding that a uniform worldwide
approach is just impractical.
Which C&B policies should be driven by local practice? And which should be
determined on a global basis?
Local: Base salaries, Bonuses, Perquisites and Benefits
Global: Stock options, Restricted stock awards
Company cultures can have a significant strategic impact.
Companies with very strong pay-for-performance philosophies with highly
leveraged management incentive plans will position their incentive targets and
awards well ahead of local market practices.
It is important to invest time to understand the history behind each country’s compensation
system. Introduction of EURO in 2002 envisaged that it would result in a convergence of C&B
policies. C&B policies in Europe have traditionally been influenced by negotiations between
governments and labour unions.
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Managing Local Pay
Leave it to the Local office
Institute some process (light touch)
Local data
Job structure & Hierarchy
Structure movement
Annual compensation administration
Institute process with budget control
Approval year-to-year budget change
Approve local parameters
Matrix
Average structure movement
Total Budget
Market definition and Market position
Audit & Approval process
Control from HQ’s over all local pay
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Decentralized
Highly decentralized MNC’s
delegate responsibility for
local C&B policies to the
local GM. They do not
interfere if the local company
is meeting its goals.
Most MNC’s take the middle path
and establish an overall global C&B
philosophy and strategy.
Example: Stating intention to
provide programs in each country
at the median of the local
competitive market. Management
then expects local subsidiaries to
develop their policies in
accordance with this strategy.
Highly centralized
multinationals review and
approve local salary
structures, merit increases,
and local incentive plans at
Centralized the Corporate HQ.
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Health Care
The need for company-sponsored health care plans depends
largely on the adequacy of government-provided systems
The quality and extent of government health care systems
vary widely among countries. For example
Europe: most of the nationalized systems increasingly face financial
pressure to ration services and reduce costs
United Kingdom, France and Canada: frequently provide
supplemental private plans to address gaps in their national health
care systems.
Brazil and India: where government systems are clearly inadequate,
companies often have to become the main healthcare providers by
establishing their own private plans.

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Thank You
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Patrick Collins

Patrick Collins