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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2

Q1. What are the elements of compensation? Ans. The primary elements of a compensation package are: i. Base Pay: Base Pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignments of a job. Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this organisations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs within the recognized competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated that is, each job of similar size and scope. Then a pay structure for managing the competitive base-pay levels for the jobs throughout the organization should be developed. Pay structues typically consists of series of pay ranges or bands that reveal competitive rates of pay for specific jobs, as well as allowing room for salary growth. Jobs of similar value from both the market point of view and an internal point of view are together. Then a competitive pay range is developed around the market rates for the particular jobs. ii. Variable Pay: Performance based variable pay continues to achieve momentum as a more successful way to identify and reward employees performance. Also known as pay-per-performance, variable pay is popular in todays corporate world. By including percentage of variable pay in the compensation plan, organisations ensure that two people with different efficiency levels do not get the same benefits. By doing this the company rewards productivity and hardwork and motivates the under-performers to work hard. Once limited to senior management levels, the incentives and bonus plans are redesigned to reward the achievement of specific company or employee performance objectives. In a variable pay plan the size of award varies among the employees and from one performance period to another, based on levels of achievements measured, as well as against pre-established company and employee performance targets. Amounts are usually calculated as a percentage of base-pay depending on Job category and position. Rewards are normally paid in cash on an annual, semi-annual or quarterly basis depending on the plan design. Plan designs range from sales-commission types to individuals incentive or bonus plans or team awards. The main idea of these programs is to reward innovation and hard work and to discourage mediocrity in performance. Skill and Competency-based pay: Skill-based pay offers employees extra compensation when they have new skills especially recognized by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviours and personal attributes. It helps out employees to grow in the company and helps them to close the knowledge gaps needed for creative moves.

iii.

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


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

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Q2. How does compensation effect employee satisfaction? Ans. Linking employee satisfaction to compensation is being practised since long time in most of the organisations. Compensation designs based on this link usually measure performance from a relatively objective side, such as sales or revenues, stock price, productivity gains and so on. The example of this effort in recent times is embedded in labour contracts recently negotiated at United Airlines (UAL). The unions were able to push for a major new approach in part because they own 65 percent of UALs stock. Under the terms of agreement more than half of the bonus pay received by the top 625 UAL managers was determined by criteria like time performance and employee satisfaction. While time performance is clearly an objective measure of performance, employee satisfaction is less objective and more unusual. In fact, only a small handful of other firms use satisfaction to determine executive pay. Employee satisfaction has to be measured and evaluated before a new compensation plan can be implemented. Usually, an outside survey firm is hired to perform the annual survey for employees. The results of this survey is shared through out the company. Thus, the top management will get to know how employees feel about the compensation. Employee satisfaction towards compensation is the most important discourse for any company, because it is directly related to the performance that can be achieved by employees. The more an employee is satisfied and happy with their compensation, the better they perform. In turn, this will influence the company performance too. Thus companies should strive to bring in a fair compensation plan so as to increase employee satisfaction. Employee satisfaction with respect to compensation and rewards depends on the level of intrinsic and extrinsic results and how the employee views those results. These results have different values for different employees. For most of the employees, a responsible and challenging job may have neutral or even negative value depending on their education and previous experience by work providing intrinsic results. These employees might have a higher value for monetary rewards, whereas for a few others, a responsible and challenging position or the learning involved in the job may have very high positive values. Appropriate type of compensation plans, rewards and benefits are important for employees. Financially, the employees must be satisfied that their salaries are justified and are according to their contribution to the company. In this respect, both employees and employer basically work towards the same goal for mutual benefit. Non financial rewards should also be given to employees for their contributions. For example, paid time off, recognition, employee of the month programs, nominations to training programs, career growth opportunities and so on. To provide incentives, these models support the existence of reward systems that structure compensation so that the employees expected value increases with observed employee productivity. Thus compensation can take many various forms, including appreciation from managers and co-workers, implicit promises of future promotion opportunities, feelings of selfesteem that come from superior achievement and recognition and current and future cash rewards related to performance. =========================X=======================X=======================

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Q3. How is employee benefit and labour market linked? Ans. Labour markets function through the contact of employees and employers. Labour economics looks at the providers of labour services (employees), the demanders of labour services (employers), and attempts to understand the resulting model of wages, employment, and income. In other words, from the labour market point of view, wages necessarily depends on the prevailing supply-demand conditions of the labour market. Earlier, the compensation management practices of Indian organisations focused on attracting, retaining, developing and compensation employees, not considering the labour market conditions. However, with the increase of economic activity and the subsequent increase in the competition between organisations, employee retention has taken the utmost priority. Moreover, globalisation has also contributed to the increased mobility of labour as talented and capable employees now change jobs more frequently, moving across the globe. Given the conditions, the demand and supply conditions in the labour market gain importance and organisations have to consider these factors while setting up the compensation policies. Designing compensation plans which keep pace with the demand and supply of labour is now becoming a corporate practice.

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Q4. Describe flexible workforce in detail. Ans. Thanks to the changing employment situation, today, the average workforce of an organisation is far different to that of a few years ago. More and more companies are going for different kinds of employee engagements like temporary staff, consultants, freelancers, contractors, sub-contractors and so on. This brings with it its own particular sets of advantages and disadvantages for organisations. Managing the flexible workforce of a company needs a different set of policies and strategies. Some of the key reasons or trends for the emergence of flexible workforce below: 1. Retention of women employees: Over 60 % of women opt out of full-time work within 6-8 years of employment, but 93% of these women want to return to work part-time. Companies that tap into this talent pool by accommodating their request for flexibility in working hours will create a competitive advantage in the labour market. 2. Retirement of baby boomers: Companies in certain sectors will face a significant skilled labour shortage with a huge number of experienced people eligible for retirement in the next ten years. Many of these baby boomer (people born between 1945 and 1965) employees, however, would prefer working in a flexible capacity rather than going for retirement. Many companies would prefer to retain them on flexi-hours engagement, as they prove to be highly beneficial, especially in the absence of a proper knowledge management system. 3. The Retention of the voluntary workforce: In certain high-tech sectors, many highly skilled employees no longer have to work as they would have earned and saved enough for a life time and are leaving because they are unhappy with a lack of work- life balance. Companies are ready to accommodate their need for flexibility in working hours rather than losing out on highly skilled workforce. 4. Challenges of global teams: Today, due to globalization, more and more people are required to work continuously in order to communicate and collaborate with colleagues around the world. Due to this, people are experiencing a feeling of burnout and employers have no option but think beyond 9 to 5 and implement flexible schedules to accommodate these challenging logistics. Some of the different types of work arrangements that accommodate a flexible work force below: Job sharing: Here, the full time job is split between two co-workers and benefits are given in proportion based on the number of hours put in by each employee. Daily flexible choice: In this the log-in and log-out time may vary daily. Open flexible choice: In this the employees can choose the total number of hours required to complete the specific task. Compressed week choice: Here, employees have a choice to work for less than five days in a week. Comp-off: In this, the employees can extend their timings on busy days and use that later for compensatory time off. Types of locations: Satellite options: These are remote work centres like satellite work centres which are provided by the employers. Telecommuting: Employees work from home for a few days in a week via telecommunications and then work out of office on the remaining days. Winter Drive November 2011 Sikkim Manipal University 5

Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Teleworking: Employees work from home on all the days of the week via telecommunications. This flexi-time arrangement has a lot of benefits for both the employers and the employees. The benefits for the employees are: Provides an opportunity for workers who are disabled. Working parents can meet their family obligations. Saves commuting time. Provides time and location flexibility. Reduces job related stress and also interruptions at the workplace. The benefits for the employers are: Influences employees in a positive way. Improves productivity. Reduces absenteeism. Improves employee job satisfaction, job performance and work quality. Reduces costs related to environmental requirements, time, space, employee safety, relocation of the employees, and productivity. Helps in retention of voluntary workforce, women and baby boomers. Companies can terminate contingent workers services more easily. With respect to compensation and benefits paid to the flexible workforce, most companies pay an hourly wage, which is fixed on the basis of the complexity of work as well as the skill sets of the employee. No amount of paid leave, insurance and legally required benefits like gratuity and retirement benefits are paid.

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Q5. What are the major issues related to repatriation? Ans. The term repatriation refers to bringing the employees who are on an international assignment back to the home country. It is very important to manage repatriation of employees in a very careful way. A poorly managed repatriation can lead to a feeling of frustration and cynicism in the employees. These feelings can be worse than the culture shock experienced in the first weeks of the assignment. It requires transparency in repatriation policy, sharing information on the career progression path, degree and support from the organisation during the international tenure and so on. Many organisations develop and share documented guidelines with respect to overseas assignment, so that the employees understand the rules and regulations and also know what to expect. Expatriate managers often return to the home office with a wealth of experience and perspectives. Yet, poor repatriation processes are blamed for underutilizing talent, losing human capital, and discouraging skilled managers from accepting overseas assignments (Gregersen and Black, 1995). Often the impact of repatriation for the employee is far greater than that of the original move to the host location. The move abroad is usually exciting, involving a promotion or at the very least, an increase in peer status. Also, the day to day impact of life in the new culture is more keenly felt by the spouse and children, who interact with it on a far more personal basis. Moreover, the employee will be chosen for a particular skill set, which are generally appreciated by the new team as an asset. As the project comes to an end, the expatriate starts the closure process of the post, probably handing over to a locally based team or manager. At this point, home country HR should be back in touch with the employee, to start the career planning for the home move. However, most companies provide no post assignment guarantees, and this has a dual impact on the employee. Firstly, they will feel deeply insecure since they may have taken their family away from extended family and friends, interrupted education programmes and careers, and for what? To return home with no job? Another issue is the change in living standards. While settling down in a foreign country, they would have been offered financial incentives for the family to relocate from generous housing allowances to the payment of school fees. On returning home, these are taken away and the lifestyle that the family has become used to is radically reduced. This is particularly a factor for Europeans coming home from the USA, where living standards are very high in comparison with the cost of living in most European cities. It is the children of expatriates that the impact can be the most pronounced, and the most dramatic, especially for teenagers caught between school systems, deep friendships and hormonal angst! Where the assignment has been a long one, there is the risk of the child becoming a Third Culture Kid far more familiar with the host culture than the home one. For them the return is a far greater challenge, as they are already at home and will be going somewhere completely foreign. Not only will they face a profound culture shock, they will also struggle with a sense of loss of identity as they leave their friends and peers behind.

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Master of Business Administration-MBA Semester 4 Assignment - MU0015 Compensation Benefits - Set 2


Q6. Ms. Deepa Mehra is the VP-HR of Induslink Network. She is assigned the task of finding a new CEO for the company and fixing the compensation. What are the trends that she will have to look into before finalizing the compensation package for the CEO? Ans. Though we have a lot of literature based on extensive research available on CEO compensation, most of these efforts are focused on the UK and the USA. Very little is known about the trends in India. One thing that is evident from this research is that CEO compensation in India is positively related to the age and organisational abilities of the CEOs. However, it is found that family ownership is negatively related to CEO pay. Further, it was found that CEO duality and proportion of insider directors had no significant bearing on CEO compensation in family-owned firms but did play a key role in non-family organizations. In countries such as India, societal norms accord a great deal of respect for age since it is believed to be related to wisdom (Esterby Smith et. al. 1995, Lawler/Jain/Ratnam/Atmiyanandana 1995). It is therefore considered an important qualification and largely determines an executive's progress up the corporate hierarchy (Dutta 1997, Kuppuswamy 1993, Sinha/Sinha 1995). Thus, in the Indian context it can be hypothesized that: The chronological age of the executive will be positively related to his/her compensation. The length of an executive's tenure in the organization will be positively related to his/her compensation. In countries like India, wisdom is always measured based on the age. Based on Becker postulates, the level of executive compensation is linked to age first. In addition, many researchers found that there is a positive relationship between age and compensation. Hence, age is considered as one of the important qualification and is used as a key component to determine the compensation. The other major link for chief executive compensation is on the tenure of CEO engagement. This is because a CEO who has worked for a very long time would have built the necessary base for the organisation. Organisations give importance to tenure because it is a reflection of the CEOs knowledge which is accumulated over time with experience. The total compensation in CEO pay includes the sum of the executives salary, current bonuses, long term incentive plans, and stock options. They also receive defined benefit plans, various perquisites, and severance payments in case of international assignments. Todays bonuses are generally part of the variable pay, which are based on annual accounting performance. Long term incentives are usually based on multi year performance. The rewards are given based on years of service and also according to their performance either by cash or by stock. Ghemawat and Khanna (1996) report that roughly 60% of all business activity in India is conducted by organisations that are either family owned or family controlled. Another recent study by Dutta (1997) reports that roughly 70% of the largest firms in the country are family businesses. Reflecting its developing nature, the Indian economy has grown as a result of the remarkable impetus provided by an investor class of individual families.

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