SUBMITTED TO: SUKHJINDER BARING ASSISTANT PROFESSOR PCTE.

SUBMITTED BY: KETAN GARG MBA-1A

PUNJAB COLLEGE OF TECHNICAL EDUCATION

EMPLOYEE COMPENSATION In exchange for job performance and commitment, an employer offers rewards to employees. Adequate rewards and compensations potentially attract a quality work force, maintain the satisfaction of existing employees, keep quality employees from leaving, and motivate them in the workplace. A proper design of reward and compensation systems requires careful review of the labor market, thorough analysis of jobs, and a systematic study of pay structures. There are a number of ways of classifying rewards. A commonly discussed dichotomy is intrinsic versus extrinsic rewards. Intrinsic re wards are satisfactions one gets from the job itself, such as a feeling of achievement, responsibility, or autonomy. Extrinsic rewards include monetary compensation, promotion, and tangible benefits. Compensation frequently refers to extrinsic, monetary rewards that employees receive in exchange for their work. Usually, compensation is composed of the base wage or salary, any incentives or bonuses, and other benefits. Base wage or salary is the hourly, weekly, or monthly pay that employees receive. Incentives or bonuses are re wards offered in addition to the base wage when employees achieve a high level of performance. Benefits are rewards offered for being a member of the company and can include paid vacation, health and life insurance, and retirement pension. A company's compensation system must include policies, procedures, and rules that provide clear and unambiguous determination and administration of employee compensation. Otherwise, there can be confusion, diminished employee satisfaction, and potentially costly litigation. DETERMINANTS OF COMPENSATION Fair and adequate compensation is critical to motivating employees attracting highpotential employees, and retaining competent employees. Compensation has to be fair and equitable among all workers in the same company (internal equity). Internal equity can be achieved when pay is proportionate to the individual employee's qualifications and contributions to a company. On the other hand, compensation also has to be fair and equitable in comparison to the external market (external equity). If a company pays its employees below the market rate, it may lose competent employees. In determining adequate pay for employees, a manager must consider the three major factors: the labor market, the nature and scope of the job, and characteristics of the individual employee. Potential employees are recruited from a certain geographic areahe labor market. The actual boundary of a labor market varies depending on the type of job, company, and industry. For example, an opening for a systems analyst at IBM may attract candidates from across the country, whereas a secretarial position at an elementary school may attract candidates only from the immediate local area of the school.

Pay for a job even within the same labor market may vary widely because of many factors, such as the industry, type of job, cost of living, and location of the job. Compensation managers must be aware of these differences. To help compensation managers understand the market rate of labor, a compensation survey is conducted. A compensation survey obtains data regarding what other firms pay for specific jobs or job classes in a given geographic market. Large companies periodically conduct compensation surveys and review their compensation system to assure external equity. There are professional organizations that conduct compensation surveys and provide their analysis to smaller companies for a fee. Several factors are generally considered in evaluating the market rate of a job. They include the cost of living of the area, union contracts, and broader economic conditions. Urban or metropolitan areas generally have a higher cost of living than rural areas. Usually, in calculating the real pay, a cost-of-living allowance (COLA) is added to the base wage or salary. Cost-of-living indexes are published periodically in major business journals. During an economically depressed period, the labor supply usually exceeds the demand in the labor market, resulting in lower labor rates. The characteristics of an individual employee are also important in determining compensation. An individual's job qualifications, abilities and skills, prior experiences, and even willingness to work in hardship conditions are determining factors. Within the reasonable range of a market rate, companies offer additional compensation to attract and retain competent employees. In principle, compensation must be designed around the job, not the person. Person-based pay frequently results in discriminatory practices, which violates Title VII of the Civil Rights Act, and job-based compensation is the employer's most powerful defense in court. For job-based compensation, management must conduct a systematic job analysis, identifying and describing what is happening on the job. Each job must be carefully examined to list the necessary tasks and actions, identify skills and abilities required, and establish desirable behaviors for successful completion of the job. With complete and comprehensive data about all the jobs, job analysts must conduct systematic comparisons of them and determine their relative worth. Numerous techniques have been developed for the analysis of relative worth, including the simple point method, job classification method, job ranking method, and the factor comparison method. Information resulting from the comprehensive job analysis will be used for establishing pay or wage grades. Assume that twenty-five jobs range from 10 to 50 points in their job scores based on the job point method. All twenty-five of these jobs are reviewed carefully for their relative worth and plotted on Figure 1. The x-axis represents job points and the ordinate (y-axis) represents relative worth or wage rates. Once a manager

Figure 1 can identify fair and realistic wages of two or more jobs, desirably top and bottom ones, then all the rest can be prorated along the wage curve in the diagram. In order to simplify the administration of a wage structure, similar jobs in the approximate cluster are grouped together into a class or grade for pay purpose. Figure 2 shows how twenty-five jobs are grouped into five pay grades. Employees move up in their pay within each grade, typically by seniority. Once a person hits the top pay in the grade, he or she can only increase the pay by moving to a higher grade. Under certain unusual circumstances, it is possible for an outstanding performer in a lower grade to be paid more than a person at the bottom of the next-highest level. INNOVATIONS IN COMPENSATION SYSTEMS As the market becomes more dynamic and competitive, companies are trying harder to improve performance. Since companies cannot afford to continually increase wages by a certain percentage, they are introducing many innovative compensation plans tied to performance. Several of these plans are discussed in this section. Incentive Compensation Plan. Incentive compensation pays proportionately to employee performance. Incentives are typically given in addition

Figure 2

to the base wage; they can be paid on the basis of individual, group, or plant-wide performance. While individual incentive plans encourage competition among employees, group or plant-wide incentive plans encourage cooperation and direct the efforts of all employees toward achieving overall company performance. Skill-Based or Knowledge-Based Compensation. Skill-based pay is a system that pays employees based on the skills they possess or master, not for the job they hold. Some managers believe that mastery of certain sets of skills leads to higher productivity and therefore want their employees to master a series of skill sets. As employees gain one skill and then another, their wage rate goes up until they have mastered all the skills. Similar to skill-based pay is knowledge-based pay. While skill-based pay evolved in the manufacturing sector, pay-for-knowledge developed in the service sector (Henderson, 1997). For example, public school teachers with a bachelor's degree receive the lowest rate of pay, those with a master's degree receive a higher rate, and those with a doctorate receive the highest. Team-Based Compensation. As many companies introduce team-based management practices such as self-managed work teams, they begin to offer team-based pay. Recognizing the importance of close cooperation and mutual development in a work group, companies want to encourage employees to work as a team by offering pay based on the overall effectiveness of the team. Performance-Based Compensation. In the traditional sense, pay is considered entitlement that employees deserve in exchange for showing up at work and doing well enough to avoid being fired. While base pay is given to employees regardless of performance, incentives and bonuses are extra rewards given in appreciation of their extra efforts. Pay-for-performance is a new movement away from this entitlement concept (Milkovich and Newman, 1996). A pay-for-performance plan increases even the base payo-called merit increase so reflect how highly employees are rated on a performance evaluation. Other incentives and bonuses are calculated based on this new merit pay, resulting in substantially more total dollars for highly ranked employee performance. Frequently, employees also receive an end-of-year lump sum bonus that does not build into base pay. EXECUTIVE COMPENSATION Recently, people have been concerned with the excessively high level of executive compensation. According to Business Week 's annual executive pay survey, in 1997 Sanford Weill, CEO of Travelers Group, collected $7.5 million in salary and bonuses plus $223.2 million for long-term compensation, totaling $230.7 million. In the same year, Roberto Goizueta, CEO of Coca-Cola, earned a total of $111.8 million, including annual salary, bonuses, and long-term compensation. Compensations of the twenty highest-paid executives ranged from $28.4 million to $230 million.

Frequently, executive compensation becomes controversial. Are these compensations excessive? What justifies such a large compensation for executives? Justification of such a large sum of compensation is linked to the company's performance. In fact, a significant portion of executive compensation results from exercising stock options, which were quite valuable in the recent "bull" market. And yet ordinary working-class Americans are outraged by the shocking contrast in pay raises: Annual executive pay at large companies rose 54 percent in 1996, whereas the pay raises of most working-class people were in the 3 percent to 5 percent range during the same period. An executive compensation package is typically composed of (1) base salary, (2) annual incentives or bonuses, (3) long-term incentives (e.g., stock options), (4) executive benefits (e.g., health insurance, life insurance, and pension plans), and (5) executive perquisites. Considering the high turnover rate of competent executives, offering a competitive salary is crucial in attracting the top candidates. Frequently, annual bonuses play a more important role than base salary in executive compensations. They are primarily designed to motivate better performance. In order to underscore the importance of financial performance, usually measured by the company's stock price, top executives are offered stock options. Sometimes, exercising stock options yields more cash benefits to executives than do annual salaries. In addition to monetary compensation, executives enjoy many different types of perquisites, commonly called "perks." Such executive perks include the luxurious office with lush carpets, the executive dining room, special parking, use of a company airplane, company-paid membership in high-class country clubs and associations, and executive travel arrangements. Many companies even offer executives tax-free personal perks, including such things as free access to company property, free legal counseling, free home repairs and improvements, and expenses for vacation homes or boats. Another perk that became popular recently is the so-called golden parachute protection plan for executives in the event that they are forced out of the organization. Such severance frequently results from a merger or hostile take over of the company. The golden parachute provides either a significant one-time sum to the departing executive or a guaranteed executive position in the newly merged company. PERFORMANCE MANAGEMENT A. Introduction Performance Management5 includes annual appraisal of employee job performance and procedures used to communicate job expectations and provide feedback on performance on an ongoing basis and through a year-end performance rating. The performance rating is used for compensation, promotion and other employment decisions.

The Company in this area has done a substantial amount of work. The Company has implemented a new performance management process for Corporate and Coca-Cola North America employees in the 2002 review cycle (covering job performance in calendar year 2002) and will complete implementation for all employees covered under the Agreement in the 2003 review cycle. Appendix A contains the specific provisions of the Agreement related to performance management and details the Company.s progress in making such changes in its process. B. Program Design and Implementation The Company has selected a single performance management system for all U.S.-based employees, following a model that was used at the corporate level prior to the Agreement. The goal of the process is to ensure a fair, documented performance evaluation based on specific, job-related measurements. The process also provides for improved internal oversight and control over the performance management system as a whole by the corporate human resources department and the Companys EEO department. As designed, each employee is supposed to meet with his or her manager at the beginning of the review cycle to define specific measurable performance objectives for the year, along with a series of competencies that will be required to execute those performance objectives. This mutually agreed upon performance plan forms the basis for ongoing performance feedback throughout the course of the year, as well as for year-end annual performance ratings. In addition, developmental opportunities are identified, and progress against a development plan is tracked throughout the year. At the end of the review cycle, employees provide self-assessment information to their managers, and managers evaluate and rate employee performance. The rated employee receives a copy of the performance appraisal form, which includes an opportunity for employee comment and notice of the employees right to appeal. Consistent with best practices, the performance management system includes a midyear review; mandatory two-day training of both managers and employees in how the system works; active employee involvement in planning, tracking and reviewing their own performance; and an appeals process. Additional mandatory training in coaching and feedback has been provided for managers. At the end of each review cycle, managers are also trained in how to provide accurate ratings, followed by separate "rater calibration" sessions to support consistent use of the rating scales. The Performance management system will provide performance management refresher Training through annual working sessions. It is expected that all managers will complete mandatory training in the use of the new process by December 2002, and that all managers will attend coaching and feedback and rater accuracy training by the end of 2003. The Company also is currently conducting a thorough work analysis of all jobs

held by non-hourly U.S.-based employees in salary grades 15 and below, to be completed by December 2002. Consistent with best practices, the Company plans to incorporate work analysis data into the performance management process to ensure that employees are rated on job-related content. The work analysis data will be used as the basis for developing behaviorally-anchored rating scales for substantial population jobs in Grades 1-15. These scales are expected to be completed by the first quarter of 2003, with substantial population jobs reviewed using the behaviorallyanchored evaluation form beginning in the first quarter of 2004. Going beyond the specific requirements of the Agreement, the Company has further committed to train all non-hourly U.S.-based employees on the new performance management system. Such training will include how to set goals and how to monitor one.s own performance against those goals. It is expected that all employees will complete this training by December 2002. The new system also is designed to increase accountability of senior management for ensuring the accuracy and fairness of performance evaluations. Not only will managers review ratings provided by their management teams, managers. own performance evaluations and their compensation will be based on a set of .people metrics. which measure effectiveness in diversity, performance management, employee development and organizational engagement. Finally, the Company will conduct annual adverse impact analyses on all performance appraisal ratings for U.S.-based employees, also consistent with best practices. Adverse impact analyses have been designed into the Company.s EEO monitoring requirements, following review and approval from the Task Force. The Company also has committed to audit randomly 10% of all U.S.-based performance appraisals annually. In addition, the Company.s EEO department will independently audit 2% of these appraisals annually. The Task Force anticipates including the data from these analyses in its future reports. C. Task Force Assessment and Recommendations The design, planning and initial implementation of the performance management system meet Task Force expectations stemming from the terms of the Agreement. Moreover, the Task Force recognizes that the Companys commitment to train both employees and managers in the use of the new process goes beyond the requirement in the Agreement to train only managers. While partial implementation of the new process has occurred already, the Task Force believes it still is premature to evaluate its effectiveness at this time. Since the new process has been implemented for a large part of the Company, however, the results of the employee engagement survey provide some interesting data regarding employee perceptions of the new process. In general, managers and employees using the new performance management process hold a more positive view of its fairness and effectiveness than those using other systems. While African

Americans were somewhat less positive than whites about the performance management process, both groups were more positive about the new process than previous processes. Moreover, African American managers using the new process were more likely to indicate that they and their employees were being evaluated based upon factors relevant to their jobs. One area for improvement is ongoing two-way Communication between managers and employees about performance so that the final review rating does not come as a surprise. The Task Force makes the following specific recommendations for the performance management process: 1. Continue to implement the performance management process as presented in the proposed system design. 2. Integrate the work analysis data (when available) into the performance management process to ensure the job relatedness of the criteria on which employees are evaluated. 3. Develop the behaviorally-anchored rating scales for all substantial population jobs, as required by the Agreement. This will ensure that each rating scale will describe concrete behaviors on which employees will be rated. 4. Monitor the individual performance objectives developed by managers and employees for quality and consistency across individuals in the same jobs. 5. Monitor employee-supervisor processes, such as the mid-year review and the preappraisal meetings to set objectives, to ensure they are implemented as designed. 6. Monitor the appeals process and continue to monitor the engagement survey data to ensure that the performance appraisal process is functioning as planned. 7. Continue training supervisors and employees so that all persons are adequately trained and ensure communication about performance is ongoing. 8. Conduct adverse impact analyses of performance appraisal data and results to determine whether other systems, such as training, need to be modified or whether new systems need to be implemented.