Compensation Management

“If you pick the right people and give them the opportunity to spread their wings – and put compensation and rewards as a carrier behind it – you almost don’t have to manage them.”

-Jack Welch

Job Evaluation:

This is done by ranking the jobs in order to find out the relative worth of the job.

Steps in Job Evaluation

  • Select the group of jobs e.g. workmen/staff/ supervisory/ managerial
  • Study the job analysis
  • Prepare the job description
  • For each job identify the key factors, give weightage to each factors. Each factor is divided into degree. This constitutes the job evaluation plan.
  • Grade the jobs based on the point given to each job. Then the jobs are classified into different grades.
  • Convert the job grades to money value with wage survey ( Broad banding)
  • Obtain the approval of union & management

Methods of Job Evaluation

  • Ranking Method
  • Point Method
  • Classification method

Ranking Method:

  • All jobs are in the organisation are ranked in the order of relative worth, complexity & responsibility.
  • It is simple & less time consuming
  • It does not tell what it is about their jobs that is important

Classification Method

  • Job description & Job Specification are analysed & they are grouped in grades/levels considering similarity in skills, expertise & qualification.
  • After this, these grades are compared with the established standard of specification.

Point Method

  • Conduct the job analysis
  • Determine the compensable factors
  • Scale the factors
  • Weight the factors
  • Communicate the plan and train the users, prepare the manual
  • Apply to non- benchmarked jobs

Employee compensation: It is the remuneration received by an employee in return for his/her contribution to the organisation.

Where remuneration = Monetary & Non Monetary Benefits

In other words it is the sum total of financial returns plus tangible services & benefits which an employee receives as a part of an employment contract.

Compensation Objective

  • To attract, retain & motivate employees
  • To establish different levels of salary based on the roles and responsibilities
  • To base the salary adjustments on individual contribution & performance
  • To pay salaries that are competitive within the industry
  • To pay establish a fair and equitable remuneration within the organisation.

Wage concepts and principles

  • Wage and salary plans and policies should be sufficiently flexible
  • Job evaluation must be done scientifically
  • Wage and salary administration plans must always be consistent with overall organizational plans and programs
  • Wage and salary administration programs should be in conformity with the social and economic objectives of the country like attainment of equality in income distribution and inflationary trends
  • Wage and salary administration plans and programs should be responsive to the changing local and national conditions.
  • These plans should simplify and expedite other administrative processes.

Factors affecting compensation plans

  • Organisations ability to pay
  • Supply and demand of labour
  • Government rules and regulations
  • Prevailing Market Rate
  • Cost of living
  • Productivity
  • Trade Unions bargaining power
  • Culture & Values of the organisation
  • Psychological and Social Factors

Three Techniques of Wage Fixation

Individual Incentive System:

  • Time Wage Plan : The wages are paid according to the time spent by workers irrespective of his output of work done. The wage rate is fixed for an hour, day or month.
  • Piece Wage Plan: The wages are paid based on the output and not on the time. A fixed rate is paid for each unit produced, job completed or an operation performed.
  • Incentive Plan: This is applicable on the extra work performed apart and achievement of the fixed target as agreed during the fixing the performance goals for the next year during appraisal period.

Group Incentive System: In this case the productivity is seen a group level. This system has been designed to foster performance in situations where team work is vital and interdependence on each other is high. Scanlon and Rucker Plan are the popular group incentive systems.

Fringe Benefits: These are non monetary benefits for the employees and their family given voluntarily by the employer. It includes welfare benefits, health, safety, security provisions, social security measures, medical, canteen facility, retirement benefits etc.

Wage and salary policies in India

Wage policy refers to all systematic efforts of the government in relation to the national wage and salary system. It includes notifications, orders, legislations etc to regulate the levels or structures of wages and salaries with a view to achieve the economic and social objective of the government.

The following are initiatives have been taken by government of India towards wage administration and regulation:

Payment of Wages Act : the objective of the act is to prohibit any delay or holding of wages which is due to employees

Industrial Dispute Act: This act authorizes all state governments to set up industrial tribunals which would look into disputes relating to remuneration.

Minimum Wages Act: This act aims at fixation of minimum wages to workers which will vary according to the standard of living state-wise, category of employees wise in any industry.

Equal Remuneration Act: It prohibits any discrimination of remuneration paid on the basis of gender or religion

Maternity benefit Act: This act  allows payment of wages to women employees in maternity leave. Wages can’t be put on hold during the maternity leave period neither any termination nor suspension is possible during such leave.

Pay Commission: Wages and allowance of central and state government employees are determined through the pay commission appointed by the government.

Establishing Strategic Pay Plans

STEPS IN FORMULATING COMPENSATION STRATEGY

STEP 1: Determine the factors that affect a compensation plan

  • Organisations ability to pay
  • Supply and demand of labour
  • Prevailing Market Rate
  • Cost of living
  • Productivity
  • Trade Unions bargaining power
  • Culture & Values of the organisation

STEP 2: Compensation Techniques

  • Decide the Compensation Objectives ( as discussed above)
  • Internal Alignment
  • Internal Equity – Pay comparison within the hierarchy in the same organisation
  • Individual Equity – Pay comparison within the same level of job based on the degree of contribution to the business

Factors Affecting the Internal Alignment:

  • Strategy (Innovation/growth/cost centric)
  • Technology (Labour intensive vs. Machine intensive, skill level/competencies will differ
  • Human Capital (Education/ knowledge/ competencies)
  • HR Policy (Fringe Benefits /Perquisites)
  • Employee Acceptance (Eg. Food Coupons for employees)
  • Cost/Budget (For Eg – Everyone in retail sector can’t afford to offer shuttle service for employees)

Advantages of Internal Alignment:

  • Reduce pay related grievances
  • Reduce employee turnover
  • Training participation/nomination increases
  • Employees feeling of equity (fairness)
  • Maintain Compliance

External Alignment: Pay comparison with the competitors i.e External Equity

The external alignment will make an employer decide the pay mix/ pay structure, the various forms of payment & how much to pay keeping in mind to attract, retain & motive employees.

Factors affecting the external alignment

  • Labour Market Factors ( Demand & Supply of labour)
  • Product Market Factors ( degree of of competition -> More intense competition then innovative pay mix, level of product demand -> More demand, more pay /ability to pay)
  • Organisation factors
  • Industry (Technology – If high tech, complex profiles, more pay)
  • Employer Size ( Large Company , more ability to pay)
  • People’s Preferences ( Employees Expectation & Employees Acceptance)
  • Organisation Strategy ( Innovator, cost centric)

Employee Contribution

  • Pay for performance
  • Pay for seniority
  • Pay for Team based
  • Corporate Profit sharing
  • Management: Ensure right employees get right pay at the right time which enables maximum retention resulting maximum production.

STEP 3: Compensation Strategy

Strategy at 3 levels

  • Strategy in complete Macro Environment i.e different business, different customers, different talent pool For Eg. (Google/ SBI/NTPC/Birla/Tata)
  • Strategy within the same industry ( IBM/TCS/HCL/WIPRO)
  • Strategy within same company ( Corporate office vs. business units/support functions vs. line functions)

Compensation Aligned to Business Strategy

  • Innovator – Reward for innovations on products & services
  • Cost Centric – Focus on variable pay
  • Customer Centric – Incentive for customer satisfaction
  • Growth – very aggressive bonus, competitive base pay
  • People as Asset – ESOP, Unique benefits including family members

STEP 4: Re-Assess

  • Realign with conditions change
  • Realign with strategy change

 

Compensation Trends in India

It is interesting to track the changes—some quite radical—in the Indian compensation scene. The following are true of most organizations today:

  • Compensation is now viewed as the total “cost to company,” (CTC) rather than an employee’s net pay alone. As the environment gets competitive, such an approach helps organizations take a holistic view of what could be the costs and the operating margins.
  • Variable pay based on individual performance is the norm, and a larger percentage of the Indian salary is based on performance.
  • Organization performance also is factored in while structuring salary increases.
  • Some organizations also have implemented highly evolved systems, such as the “economic value added” (EVA) framework, ensuring a performance-oriented culture throughout the organization applicable to all employees.
  • Basic, guaranteed pay has seen a gradual reduction.
  • Benchmarking against organizations, both nationally and internationally, has become common.
  • Employee stock options (ESOPs) that were, a few years back, considered as valuable compensation components have stopped to be so given the erratic nature of the stock market and the lock-in periods.
  • Non-taxable benefits, which increased the net “take-home” of an employee, are now subject to the Fringe Benefits Tax (FBT), and so organizations are forced to take second looks at these components.
  • Retirement benefits are left to what is mandated by the government. Organizations that were contributing to a superannuation fund for the employee now have to pay the FBT.
  • Pension benefits and other similar social security benefits are not on the radar screen of compensation experts in India today, but this component could be under significant discussion and speculation in the coming years.
  • Deloitte India, Human Capital Advisory Services (HCAS) recently concluded a cross-industry. Compensation Trends’ survey that provided key insights on salary increments and variable pay trends. Three of the key findings of the survey were: 1) organisations are keenly adopting cost-optimisation measures; 2) offshoring/outsourcing of activities has been rated highest amongst measures adopted and 3) interestingly, employers are not keen on reducing spends on recognition or training programmes.

Pricing Managerial and Professionals Jobs

There are some big differences though Managerial jobs tend to stress harder to quantify factors like judgment and problem solving more than do production and clerical jobs. There is also more emphasis on paying managers and professionals based on results based on their performance or on what they can do rather than on the basis of static job demands like working conditions. And there is also the considerable challenges of having to compete in the market place for executives by some standards are paid like rock stars. So, job evaluation while still important usually plays a secondary role to non salary issues like bonuses, incentive, market rates, and benefits

Compensation for a company’s top executives usually consists of four main elements; base pay, short term incentives, long term incentive and executive benefits and perks.

Base pay includes the person’s fixed salary as well as, often guaranteed bonuses such as 10% of pay at the end of the fourth fiscal quarter, regardless of whether or not the company makes a profit.

Short term incentives are usually cash or stock bonuses for achieving short terms goals, such as year to year increase in sales revenue.

Long term incentives aim to encourage the executive to take actions that drive up the value of the company’s stock, and include things like stock options; these generally give the executive the right to purchase stock at a specific price for a specific period.

Finally, executive benefits and perks might include supplemental executive retirement pension plans, supplemental life insurance and health insurance without a deductible or coinsurance.

With so many complicated elements employers must also be alert to the tax and securities law implications of their executive compensation decisions.

What determines executive pay?

The traditional wisdom is that company size and performance significantly affects top managers’ salaries. Studies show that company size and company performance explain only about 30% of the variation in CEO pay.

In reality CEO pay is set by the board taking into account a variety of factors such as the business strategy, corporate trends and most importantly where they want to be in a short and long term.

Another study concluded that CEOs pay depends on the complexity and unpredictability of the decisions they make. In this study, complexity was a function of such things as the number of businesses controlled by the CEO’s firm, the number of corporate officers in each firm, and the level of R&D and capital investment activity.

In practice CEOs may have considerable influence over the boards of directors who theoretically set their pay.

Elements of Executive Pay

Salary is traditionally the cornerstone of executive compensation it’s element on which employers layer benefits, incentives and perquisites – all normally conferred in proportion to base pay.

Executive compensation emphasizes performance incentives more than do other employees’ pay plans, since organizational results are likely to reflect executives’ contributions more directly than lower echelon employees.

International Compensation: It is understood as provision of monetary and non monetary rewards including base salary, benefits, perquisites, long term and short term incentives in accordance with their relative contribution to performance.

The nature of the assignment of the employees to a large extent determines the method of compensation. These terms of assignments are:

  • Short Term Assignments: For relatively short period such as the case of a feasibility study etc. This type of assignment does not exceed more than 6 months. Families generally do not accompany the employees to the foreign assignment.
  • Long Term Assignments: Here the assignment is more than 6 months to one year. It usually results in employee’s moving along with his/ her family.
  • Permanent Assignments: In this case, the employee signs a permanent employment contract with a foreign subsidiary. Here the contract is usually meant for a fixed period of time for a longer duration.

Problems in International Compensation

  • Economic condition of the host country
  • Employment condition of the host country
  • Taxation laws of the host country
  • Currency fluctuation of the host country
  • Inflation situation in the host country

Objectives of International Compensation

  • Attract & retain employees qualified for service abroad
  • Facilitate transfers between foreign affiliates and home country
  • Establish and maintain a consistent & reasonable relationship between compensation of all the employees whether posted at home or abroad.
  • Arrange reasonable compensation in the various locations, in relation to the practices of leading competitors
  • Compensation for reasonable foreign services, tax equalization, reimbursements of reasonable costs
  • Be cost effective by minimizing the unnecessary expenses
  • Ensuring consistent pay levels at the headquarters, domestic affiliates and foreign subsidiaries.
  • To maintain the expatriate’s expectation in terms of career advancement and repatriation.
  • The policy should offer financial protection in terms of benefits, social security and living costs in the foreign location.

Approaches to international compensation

Three Expatriate Compensation Approaches

There are a few methods commonly used to determine global compensation. These include:

  • The home-based approach (also known as the balance sheet approach),
  • The host-based approach,
  • The global market approach.

Home-Based Approach

The balance sheet approach provides international employees with a compensation package that equalizes cost differences between the international assignment and the same assignment in the home country of the individual or the organization. The balance sheet approach is based on some key assumptions and is designed to protect expatriates from cost differences between their home and host countries.

Host-Based Approach

The host-based approach means the assignee transfers to the host country payroll and receives base and incentive pay based on host country compensation practices and regulations. There are limited, if any, assignment related allowances. The host payroll typically delivers base pay and incentive pay and above-base allowances. With organizations looking for cost-cutting opportunities, they have looked to localize assignees. The host-based approach may be a cost-effective option to the traditional home-based approach, including local plus policy components. Difficulties can occur in repatriating assignees, if applying this approach, because it integrates employees into the local host salary structure. It can make it very difficult to move the assignees to another destination or back to their home country.

Global Market Approach

Unlike the balance-sheet approach, a global market approach to compensation requires the international assignment be viewed as continuous, even though the assignment may be for various periods of time and the employee may be in various countries. All assignees are on the equivalent compensation scale, regardless of their home country. This approach is much more inclusive. Regardless of which country the assignee is assigned, the main benefits are provided.

There are benefits and drawbacks to each approach. The objectives of each assignment, among other issues, should be measured before choosing the right compensation approach. Variations in laws, living costs, tax policies, and other factors all must be considered in establishing the compensation for expatriates. You want to maintain equity and consistency among the expatriate group. Many organizations look for a company specialized in this practice, as it is clear that international compensation is very complex.

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