compensation practices

COMPENSATION PRACTICES

The sum total of all forms of payments or rewards provided to employees for

performing tasks to achieve organizational objectives

Compensation is the process of providing adequate, equitable and fair remuneration to the employees. It is what employees receive in exchange for their contribution to the organization. It is a comprehensive term which includes pay, incentives and benefits offered to the employees.

Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. compensation may achieve several purposes assisting in recruitment, job performed and job satisfaction.

VARIOUS DEFINATIONS OF COMPENSATION

Motivate & Retain Staff

Attract talent

Contribution based Remuneration

Administratively Efficient

Reward Valued Behavior

Effective Compensation

Ensure Equity

Legal Compliance

PURPOSEOF COMPENSATION

4

Business GoalsBusiness Goals

Business Strategy

Business Strategy

CE

OC

EO

Compensation Philosophy/ activities

serve Business Objectives

Compensation Philosophy/ activities

serve Business Objectives

Business Strategy :This defines the direction in which organization is going in relation to its environment in order to achieve its objectives.

Compensation Philosophy :Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate

THE PAY MODEL


Business Strategy

Business Strategy

Compensation Plan

Compensation Plan

CompensationStrategy


Non-FinancialRewards


Org.StructureOrg.Structure

CE

OC

EO

HR

Hea

dH

R H

ead

Compensation activities serve

Business Objectives


Business Objectives

Compensation strategy is periodically

reevaluated and the Compensation plan

periodically developed




Compensation Strategy defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs to achieve its business goals

THE PAY MODEL


Business Strategy

Business Strategy

Compensation Plan

Compensation Plan






CE

OC

EO

HR

Hea

dH

R H

ead


Business Objectives


Business Objectives







strategic perspective Compensation takes the position that how employees are compensated can be a source

of sustainable competitive advantage

THE PAY MODEL

7


Business Strategy

Business Strategy

Compensation Plan

Compensation Plan

Market SurveysMarket Surveys



Job EvaluationJob Evaluation

Unit InputsUnit Inputs

Total remuneration

Total remuneration

Performance Management

Performance Management




Performance linked Pay

Performance linked Pay

Individual PayIndividual Pay

Contribution/outputs

Contribution/outputs

Internal EquityInternal Equity External EquityExternal Equity

CE

OC

EO

HR

Hea

dH

R H

ead

Em

plo

yee

Em

plo

yee

C &

B/S

MC

& B

/S M

Pay levels /structures

Pay levels /structures


Business Objectives


Business Objectives







Compensation Manager, along with

team is responsible for carrying out

compensation related activities

Compensation Manager, along with

team is responsible for carrying out

compensation related activities

THE PAY MODEL

Strategic Compensation Planning

• Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization.

• Serves to identify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-for performance standard.

• Seeks to motivate employees through compensation.

STRATEGIC COMPENSATION PLANNING

• Pay for performance

• Pay for seniority

• Salary increases and promotions

• Overtime and shift pay

• Probationary pay

• Paid and unpaid leaves

• Paid holidays

• Salary compression (A salary inequity problem, generally caused byinflation, resulting in longer-term employees in a position earning less thanworkers entering the firm today)

• Geographic costs of living differences

COMPENSATION POLICY ISSUES

COMPENSATION ADMINISTRATION PROCESS

CLASSIFICATION OF REWARDS

COMPONETS OF FINANCIAL COMPENSATION

The direct financial compensation an individual receives based on the timeWorked.

Two bases of calculation

• Hourly/wage: payment for the number of hours worked.

• Salaried : receive consistent payments at the end of specific period regardless of number of hours worked Nature.

• generally market driven ( D>S=increase in pay)

• Job Evaluation

• The formal systematic means used to identify the relative worth of jobs within anorganization.

BASE PAY

Variable Pay

• Any plan that ties pay to productivity or profitability. (i.e)The standard by which managers tie compensation to employee effort and performance.

• It is linked to individual, group, or organizational performance and not to time worked

Incentive Pay Programs

• Establish a performance “threshold” to qualify for incentive payments.

• Emphasize a shared focus on organizational objectives.

• Create shared commitment in that every individual contributes to organizational performance and success.

VARIABLE PAY/PAY FOR PERFORMANCE : INCENTIVES

Individual Incentives

Group/team Incentives

Organizational Incentives

TYPES OF INCENTIVES

Piecework Plans

• The worker is paid a sum (called a piece rate) for each unit he orshe produces.

Straight piecework:

• A fixed sum is paid for each unit the worker produces under an established piecerate standard. An incentive may be paid for exceeding the piece rate standard.

Standard hour plan:

• An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”

• If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.

INDIVIDUAL INCENTIVE PLAN

Pro and cons of piecework

• Easily understandable, equitable, and powerful incentives

• Employee resistance to changes in standards or work processes affecting output

• Quality problems caused by an overriding output focus

• Possibility of violating minimum wage standards

• Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output Merit pay

• A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.

INDIVIDUAL INCENTIVE PLAN(CONT’D)

• Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.

Spot bonus

• Unplanned bonus given for employee effort unrelated to an established

performance measure.

BONUS

Team Incentive Plans

• Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.

Establishing Team Incentive Payments

• Set performance measures upon which incentive payments are based

• Determine the size of the incentive bonus.

• Create a payout formula and fully explain to employees how payouts will be distributed.

Gainsharing Plans

• Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.

GROUP INCENTIVE PLAN

EMPLOYEE BONUS AND GAINSHARING PLAN

PROS

• Team incentives support group planning and problem solving, thereby building a team culture.

• The contributions of individual employees depend on group cooperation.

• Unlike incentive plans based solely on output, team incentives can broaden the scope of the contribution that employees are motivated to make.

• Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards.

CONS

• Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.

• Intergroup social problems—pressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the “free-ride” effect (one

PROS CONS OF TEAM INITIATIVEPLAN

Profit Sharing

• Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.

• Paid once in a year or deferred sums until retirement

Challenges:

• Agreement over division of profits between company and employees.

• Possibility of no payout due to financial condition of company.

ORGANIZATIONAL INCENTIVE PLAN

Stock Options• Granting employees the right to purchase as pecific number of shares of the

company’s stock at a guaranteed price (the option price) during a designated time period.

• The value of an option is subject to stock market conditions at the time that option is exercised.

• Apple , yahoo, coca cola, nike

Employee Stock Ownership Plans (ESOPs)

• Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.( UK,USA and several other industrialized countries). This provide tax concessions to corporate orgns. And to trusts established for employee stock options. (i.e (difference between acceptance price and market value)

• The employer establishes an ESOP trust that qualifies as a tax exemptemployee trust under Section 401(a) of the Internal Revenue Code

ORGANIZATIONAL INCENTIVE PLAN(CONT’D)

• Performance pay can’t replace good management.

• You get what you pay for.

• “Pay is not a motivator.”

• Rewards punish.

• Rewards rupture relationships.

• Rewards can have unintended consequences.

• Rewards may undermine responsiveness.

• Rewards undermine intrinsic motivation.

WHY INCENTIVE PLAN FAIL

• Ask: Is effort clearly instrumental in obtaining the reward?

• Link the incentive with your strategy.

• Make sure effort and rewards are directly related.

• Make the plan easy for employees to understand.

• Set effective standards.

• View the standard as a contract with your employees.

• Get employees’ support for the plan.

• Use good measurement systems.

• Emphasize long-term as well as short-term success.

• Adopt a comprehensive, commitment-oriented approach.

IMPLEMENTING EFFECTIVE INCENTIVE PLAN

Mandatory Benefits

• legally binding

Voluntary Benefits

• provided at the discretion of the employer

INDIRECT FINANACIAL COMPENSATION - BENEFITS

Educational benefits

• Employee’s spouse education assistance( Motorola on international assignments ).

• ONGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to employees who wish to study.

• Meritorious Children of employees are provided opportunity of highereducation with loan benefits in BPCL, CPCL etc

Family

• Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc.,

• Wedding anniversary allowance in NIIT, SPIC etc.,

• “Joyful Working Team” and “ Happy Moments Board”- LG Electronics

• Family day at office- Bharti telecom.

VOLUNTARY BENEFITS EXAMPLES

Are most effective as motivators when the award is combined with a meaningful employee recognition program.

• Intrinsic motivators are worthwhile as financial package

• Organization reward high performing employees

• Psychological rewards that employees receive in recognition of their skills and contributions

NON FINANACIAL COMPENSATION : COMPONENTS

Awards• Often used to recognize productivity gains, special contributions or achievements, and service

to the organization.

• Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way.

Recognition awards• Recognition has a positive impact on performance, either alone or in conjunctionwith financial rewards.

Combining financial rewards with nonfinancial ones produced performanceimprovement in service firms almost twice the effect of using each reward alone.

• Day-to-day recognition from supervisors, peers, and team members is important.

• Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,

Service awards• Award for the length of service and exactly not on performance• IBM: thanks award• IDEA: appreciation card

TYPES

Pay Equity (also Distributive Fairness)

• An employee’s perception that compensation received is equal to the value of the work performed.

• A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.

Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.

EQUITY AND MOTIVATION OF EMPLOYEES

RELATIONSHIP BETWEEN PAY EQUITY AND MOTIVATION

Vroom’s Expectancy Theory

A person’s motivation to exert some level of effort is a function ofthree things:

• Expectancy: that effort will lead to performance.

• Instrumentality: the connection between performance and the appropriate reward.

• Valence: the value the person places on the reward.

Motivation = E x I x V

• If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.

• Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.

INSTRUMENTALITY AND REWARDS

DETERMINANTS OF COMPENSATION

Employer’s Compensation Strategy

• Setting organization compensation policy to lead, lag, or match competitors’ pay.

• Worth of a Job

Establishing the internal wage relationship among jobs and skill levels.

• Employee’s Relative Worth

Rewarding individual employee performance

• Employer’s Ability-to-Pay

Having the resources and profits to pay employees.

INTERNAL DETERMINANTS

Labor Market Conditions• Availability and quality of potential employees is affected by economic conditions,

government regulations and policies, and the presence of unions.

Area Wage Rates• A firm’s formal wage structure of rates is influenced by those being paid by other

area employers for comparable jobs.

Cost of Living• Local housing and environmental conditions can cause wide variations in the cost of

living for employees.• Inflation can require that compensation rates be adjusted upward periodically to help

employees maintain their purchasing power.

Collective BargainingThe term extends to all negotiations that take place between an employer, group of employers or one or more employers’ organizations on the one hand, andone or more workers’ organizations on the other to(a) Determine the working conditions and terms of employment and / or(b) Regulate relations between employer and employee/workers and / or(c) regulate relations between employer organization or employee/workers organization

EXTERNAL DETERMINANTS

Competency based pay and reward programmes (also skill-based pay or

knowledge-based pay)

• Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.

Competencies

• Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.

NEW DEVELOPMENTS

• Pay plans that aim for high-performance work system.

• Paying for skills, knowledge, and competencies is more strategic.

• Measurable skills, knowledge, and competencies are the heart of anycompany’s performance management process.

WHY COMPETENCY BASED PAY ?

Pros

• Higher quality

• Lower absenteeism and fewer accidents

Cons

• implementation problems

• Cost implications of paying for unused knowledge, skills and behaviors

• Complexity of program

• Uncertainty that the program improves productivity Broadbanding

• Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels.

COMPETENCY BASED PAY – PROS & CONS

The Executive Pay Package

• Base salary

• Short-term incentives or bonuses

• Long-term incentives or stock plans

• Perquisites (perks)

TRENDS OF EXECUTIVE COMPENSATION

• Incentive payments are excessive compared with return to stockholders.

• Time periods for judging and rewarding performance are too short.

• Subjective in nature

• Emphasis is placed upon equaling or exceeding executive salary survey averages.

• Benefits do not relate closely to individual performance.

EXECUTIVE COMPENSATION-EHICS & ACCOUNTABILITY

• Company car• Company plane• Executive eating facilities• Financial consulting• Company-paid parking• Personal liability insurance• Estate planning• First-class air travel• Home computers• Chauffeur service• Children’s education• Spouse travel• Physical exams• Mobile phones• Large insurance policies• Income tax preparation• Country club membership• Luncheon club membership• Personal home repairs• Loans• Legal counseling• Vacation cabins

SWEETNESS OF EXECUTIVE PERKS

• Payment of wages Act, 1936

• The minimum wages Act, 1948

• The payment of Bonus Act, 1965

• Equal remuneration Act, 1976

LEGAL FRAMEWORK FOR PAYMENT OF SALARY- INDIA

COMPENSATION PACKAGE ASHOK LEYLAND

Fixed Pay

Variable Pay : depending on no of optional days attended

Variable Pay : depending on last year’s performance

Mandatory ( Indirect )

DIRECT COMPENSATION


TOTAL Compensation

Direct Indirect

Financial Non - Financial

Job Satisfaction Praise / Rewards

Monthly SalaryAnnual IncentivesBonus

Provident FundGratuityTravel allowanceMobile expenseSales Promotional Expense


TOTAL Compensation

Direct Indirect

Financial Non - Financial

Job Satisfaction Praise / Rewards

Future Leadership Program (FLP): Executives earmarked and declared future leader based on their competencyDevelopment based Career Plan (DLCP): Competent executives committing 5 years service to company in the form of bond will be given minimum 2 elevation during the bond period.Executive of the year AwardCompany Jeep at individual levelForeign Tour with family for the team achieving their yearly targetMajor medical claim for self and dependant