Compensation

Overview
• Objectives : Reward for past performance and
provide stimuli for future.
• Very important and strategic tool to develop,
build and maintain human capital.
• Tool to foster values ,culture and desired
behavior.
• 2 broad components-direct and indirect.
Direct is the cash and indirect is the benefit.
 Principles of Compensation
Administration
1.Plan for differential pay based on different job
requirements.
2. Should be compatible with market/industry
3. Care for distinguishing people from jobs
4.Ensure equal pay for equal work –pay range is
allowed.
5. Plan to adapt equitable measures for
recognising individual differences in ability and
contribution.
 Principles of Compensation
Administration
6. Should have a mechanism for handling wage
grievances.
7. Ensure transparency in wage fixation process.
 Methods of Payment
1. Time rate system
• Paid at end of a determined period
• Normally for white/golden collar
• Disadvantage –no motivation ;recourse
:merit award
2. Payment by result system(Straight piece
work/differential piece work)
 Rewards
• Financial rewards enhances economic
contract.(Eg.Attrition in IT industry…)
• Non- financial rewards strengthen
psychological contract
• Linkages of Compensation with learning &
development and Competency enhancement.
Concept of “Total reward System”
• Direct financials(Base pay, variable pay,
incentives, stock options, bonuses, merit
increase, spot awards, defered pay etc)
• Indirect financials(Sabatticals, quality of work
life, paid holidays, schooling ,home office,
career counselling,gift vouchers,)
• Identification –praise,decision making councils
• Career opportunity(job rotation +promotion)
 3 P Concept
• Pay for Position –grades /bands etc
• Pay for performance(appraisal linked variable
pay)
• Pay for Person(Competence…)
 Macro issues….contd.
• Concept of min wage/fair wage/living wage.
• Legal acts-Payment of Wages Act/Min Wages
Act/ Equal remuneration act/payment of
bonus act.
• Regulation of Managerial remuneration
• Industry cum region/region cum industry
• Wage board
• Pay Commission
 Benefits and Services
Fringe Benefit(s)
• CTC concept
• Which benefits should one choose?
• Benefits needs analysis
• Benefits- Accident & Medical
insurance/Esops/Life insurance/maternity
leave/paternity leave/transportation/relocation
expenses/housing.
• Cafetaria approach
 Common legislations
Benefits provided for
• Factories Act ,1948(welfare schemes)
• Mines Act
• CL& R act
• Maternity benefit act
• ESI Act
• Workmen Compensation Act
• Payment of Gratuity act
 Compensation at Company level
Objectives/guiding principles & issues
surrounding Compensation
• Objective :Attraction and retention
Issue : Impact of disparities ?
• Objective : Motivation
Issue : Impact on intrinsic awards.
• Guiding principle :Internal equity
Issue : Impact of ignoring levels?
 Compensation at Company level…
contd.
• External parity-what is the prevalent rate in the market for
that skill?
Issue –new skill ?
• Capacity to pay
• Cost of living –Concept of DA and CCA and its fixation.
Issues around DA/CCA and its impact on
movement/productivity??
Compensation at Company level…
contd.
• Increase in Compensation on account of
seniority…..impact on internal equity.
• Pay for Performance
(Issues : Can I control Company’s results?
Would I be rewarded for the efforts put in??)
• Examples and notes.
 Compa ratio
• Compa- ratio is calculated as the employee’s
current salary divided by the current market
rate 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.
 Compa ratio….contd.
A Compa-Ratio of 1.00 or 100% means that the
employee is paid exactly what the industry
average pays and is at the midpoint for the salary
range, A ratio of 0.75 means that the employee is
paid 25% below the industry average and is at the
risk of seeking employment with competitors at a
higher pay that is perceived equitable. A ratio of
1.15 compa-ratio would mean the employee is
paid above the industry average
 External parity
• Pay Surveys
• Data collection technique
• What information is required in a survey
• Organizations to be included
 Major decisions in creating Pay
levels
• Determine Pay level policy
• Define purpose of salary
• Define relevant job market
• Design and conduct survey
• Interpret and apply result
• Design grades and ranges or bands.
 Set Policy
• Lead Market
• Lag market
• Match market
 What is a salary Survey?
• Systematic process of collecting and making
judgements about the compensation paid by
other employers.
• Provides the data for setting a pay policy
relative to competition and translating that
into pay levels and structures.
 Design the survey
• Who should be involved in the survey design?
• How many employees should be included?
• Which jobs to include?(Benchmark/low/high)
• What information to collect?
 Characteristics of benchmark jobs
• Contents are well known,relatively stable and
agreed upon.
• Supply and demand for these jobs are
relatively stable and not subject to shifts;
• Represent the entire job structure under
study.
• Majority of work force is employed in these
jobs.
 Analyzing Survey data
• No single best approach
• Check accuracy of data
• Two pieces of data on each benchmark
• Scatter plots show relationship
• Frequency distribution organises data
• Measure of central tendency
• Measure of distribution or dispersion.
 Pay Policy
Lead the market :Pay level should be higher
than the market and equal to the market at
the end.
Match : Pay level will be above the market for
first half of the year and below for second
half.
Lag : Pay level should be below the market for
the entire year.
 Constructing ranges
• Objective is for all jobs that are similar for pay
purposes to be placed within same grade.
• How many pay grades ?
 No of jobs
 Organization hierarchy
 Reporting relationship
• Pay ranges refer to the vertical dimensions of pay
structure
• Pay grade has a range with a min and max.
 Reward & Compensation Strategy
• System that calculates the monetary and non
monetary means for rewarding employees for
their contributions.
• How does it fit within the organizational,
industry and community context?
• Principle of equity.
• What does the organization want to reward?
• What types of rewards will it use or not use?
 ….contd.
• Strategy 1 : Pay the person and not the job.
• Strategy 2 : Reward excellence
• Strategy 3 : Individualize pay system.
 ….Contd.
• Skill based pay: Reward employees based on
number, type and depth of skill mastered.
-Horizontal skills : Broadening of Skills
-Vertical skills : acquiring higher level skills
- Depth skills : specialized skills
-Basic Skills : Maths,language.
 Job Evaluation
• Decides the worth of a job.
• Has following components viz;
- Job Description
- Job Analysis (process of examining the content of the
job ,breaking it down into its tasks, functions,
processes ,operations and elements)
- Job specification
- Job grading
- Job assessment :monetary value
 Job Evaluation procedure
• Select the group or staff
• Study the job content(interview job holder+
supervisor+ stakeholders) to assess impact,
equipment used, working conditions, time
taken to learn the job, extent of supervision
reqd, qualification reqd and responsibilities
involved.
• Prepare JD-Sample JD.
 Job Evaluation procedure
• Device an evaluation plan-what is the extent to
which all the factors( Skill/responsibility/working
condition & effort) are reqd.
• Establish a committee of raters
• Group or classify jobs into grades
• Assign monetary values to Job grades-wage survey
• Establish grievance procedure
 Broad banding
• Grouping of responsibility/accountability
levels.
• Do not have a single midpoint-min & max.
• Consolidation of traditional pay structures
with narrow & numerous pay ranges into
fewer wider bands.
• Spread of pay ranges is wider and there is less
overlap with other pay ranges.
• Number of grades are consolidated into fewer
but broader pay ranges.
• Flatter structure and provide non promotional
 Benefits of broad banding
• Facilitates pay for performance
• Supports dual cricket ladders , permitting
supervisory and SME’s to be recognized.
• Facilitates career development
• Additional competency acquisition can be
brought under same band.
• Provide greater latitude in pay decisions.
• Promotes career pathing
 Issues relating to broad bands
• Eliminates the need for precise job evaluation
• Can lead to abuse as too much latitude is
provided.
• Should handle the transition well.
• Control points are not precise for individual
jobs.
• Cost can go up.
 Compensation Practices-CTC
Components
• Basic
• Allowances(DA/CCA/OT/HRA)
• Terminal benefits-PF/gratuity
• Variable Compensation –annual
bonus/performance incentives
• Benefits(flexible benefit plan)-medical insurance+
car + house+ sign on bonus+ relocation
payments+ LTA.
• Car : Car lease/own
 Variable Pay
• Compensation is broken into fixed and
variable.
• Variable pay can take the form of
incentives/bonus/gain sharing /pay for
performance etc.
• Win –win for both.
• Evaluation of performance is essential.
• Philosophy is no longer “Socialistic”.
 Variable Pay
• Different ratios

• 80: 20/70:30/60: 40

• Reduces fixed cost which in turn means lesser

outgo on long term.
 Compensation trends
• Competency related Compensation

Compensation linked to possession of

Competencies.

Payment related to “how” of performance

rather than “what “,more qualitative and is
development oriented.
 ESOPs
• Value creators.
• Large lock in period.
• Terminology : Options/vesting/exercise/lockin
period/grant price or exercise price.
• SEBI guidelines
 Esops
• Key drivers
 Retention of key employees
 Motivate and reward
 Foster sense of ownership
 Wealth creation opportunity
 Creates positive perception amongst investing
community
 Esop-terms
1. Grant of stock options which vest with
employees over a period of time
2. On vesting ,employees can exercise options
within exercise period, thus acquiring shares
in company.
3. No money transaction-no cash outflow.
4. Employees can sell shares in the market.
5. FBT is attracted.
 SEBI guidelines on Esops
SEBI guidelines
• Any employee except the promoter or
director is covered.
• Mandatory Compensation Committee
• Shareholder approval
• Disclosure in the director’s report
• Options are non transferable.
 ESOPS
Guidelines of 2004
• Market price = Closing price ,prior to the
meeting of the Company board in which
options are granted.
• Approval of Stock exchange
• Merchant banker needs to be appointed.
 ESOPS(Employee Stock options )
• Grant of an option to acquire the shares of a
company at a predetermined exercise price.
Exercise price could be at prevalent market
price or could be higher/lower. Vesting period
follows an option eg Employee X is granted
300 options which would vest in him at end of
3 years or 100 options can vest every year.
 ESOPs(SARs)....contd.
• A stock appreciation right (SAR) is a form of
bonus compensation given to employees that is
equal to the appreciation of company stock over
an established time period.
• After the vesting period, employee is free to
exercise his options and he is given shares equal
to the appreciate value. He can sell them after
the lock in period.
• Cash less transaction for the employee
 Esops ....Sweat Equity
• Sweat Equity refers to the equity shares
issued to employees at a discount or for
consideration other than cash. Given for
knowhow or value addition or to promoters.
 Managerial remuneration
• Issues-retention/individual/confidentiality.
• CTC concept
• Flexible benefit plan- cafetaria approach
• Sign on bonus/golden handcuff
• Ratio between the CEO and the jr most guy.-
ceiling of CEO’s salary.
• Industry norms
• Global salary
Thanks