Compensation is the total amount of the monetary and non-monetary pay provided

to an employee by an employer in return for work performed as required.

Essentially, it's a combination of the value of your pay, vacation, bonuses, health
insurance, and any other perk you may receive, such as free lunches, free events,
and parking.
How Is Compensation Determined?
Companies base compensation on numerous factors.
Some companies pay more attention to these factors than others do.
IMPORTANCE OF COMPENSATION

Compensation and Reward system

plays vital role in a business
organization. Since, among four Ms,
i.e. Men, Material, Machine and
Money, Men has been most
important factor, it is impossible to
imagine a business process without
Men. Every factor contributes to the
process of production/business. It
expects return from the business
process such as rent is the return
expected by the landlord, capitalist
expects interest and organizer i.e.
entrepreneur expects profits.
Similarly the labour expects wages
from the process.

Labour plays vital role in bringing about the process of

production/business in motion. The other factors being human, has
expectations, emotions, ambitions and egos.Labour therefore expects to
have fair share in the business/production process. Therefore a fair
compensation system is a must for every business organization. The fair
compensation system will help in the following:
o An ideal compensation system will have positive impact on the
efficiency and results produced by employees. It will encourage
the employees to perform better and achieve the standards fixed.

o It will enhance the process of job evaluation. It will also help in

setting up an ideal job evaluation and the set standards would be
more realistic and achievable.

o Such a system should be well defined and uniform. It will be apply

to all the levels of the organization as a general system.

o The system should be simple and flexible so that every employee

would be able to compute his own compensation receivable.

o It should be easy to implement, should not result in exploitation of

workers.

o It will raise the morale, efficiency and cooperation among the

workers. It, being just and fair would provide satisfaction to the
workers.

o Such system would help management in complying with the

various labor acts.

o Such system should also solve disputes between the employee

union and management.
o The system should follow the management principle of equal pay.

o It should motivate and encouragement those who perform better

and should provide opportunities for those who wish to excel.

o Sound Compensation/Reward System brings peace in the

relationship of employer and employees.

o It aims at creating a healthy competition among them and

encourages employees to work hard and efficiently.

o The system provides growth and advancement opportunities to the

deserving employees.

o The perfect compensation system provides platform for happy and

satisfied workforce. This minimizes the labour turnover. The
organization enjoys the stability.

o The organization is able to retain the best talent by providing them

adequate compensation thereby stopping them from switching
over to another job.

o The business organization can think of expansion and growth if it

has the support of skillful, talented and happy workforce.

o The sound compensation system is hallmark of organizations

 success and prosperity. The success and stability of organization is
measured with pay-package it provides to its employees.

Why Every Company Needs a Compensation Strategy

By: Linda Childers

While many small businesses have a solid business plan in place, they often falter

when it comes to implementing a compensation strategy. That is unfortunate.

As a result, its easy to offer too much or too little money to compete for the best

talent. Even worse, some businesses neglect to have a compensation strategy in

place that reflects their overall strategy and values.

Katie Busch of HR Communication Consultants in Boynton Beach, Florida, says

small businesses need to keep their salary structure current, while also offering a

competitive advantage over other small businesses in the same market.

Many small businesses mistakenly believe that having a compensation program in

place isnt something they need to worry about until their company gets much

bigger, Busch says. They often believe having a compensation plan will limit

their ability to make good business decisions in regards to employee pay, but often

the opposite is true.

To create a comprehensive compensation strategy for your small business, consider

the following steps:

Look at the job and its location. Salaries for small businesses are not necessarily

based on the same data used by large companies. When determining a jobs market

value, job location is often as important as the job title.

The Small Business Administration recommends doing an online search using

keywords such as Administrative assistant, salary range, [your location] to

determine how to better understand the market for particular jobs in your area.

Experts recommend taking it a step further. Look at where youre competing for

talent, says Tim Low, Senior Vice President of Marketing at Payscale.com in

Seattle, Wash. For many positions, especially in technology, companies may be

national, rather than regional.

The takeaway: if youre seeking candidates who live outside of your immediate

area, be sure to utilize a salary relocation calculator to help determine fair

compensation.

Be transparent about your compensation strategy. In the past many businesses

believed that talking about compensation should only be done behind closed doors,

but Low says that successful small businesses today believe in an open pay policy

that reveals a compensation strategy that is committed to investing in top talent.

Being honest and candid about your compensation practices and how you

benchmark salaries can have a positive impact on trust and employee morale,

Low says.

Consider implementing salary ranges. While not all small businesses feel as though

they are ready to implement salary ranges, Low says that creating pay ranges can

be good for your business.

By establishing a salary range, you can show employees where they are starting

on the range, and illustrate how they have room to grow, he says. If an employee

is at the top of the salary range, you can talk to them about a growth track, and how

they can thrive at your company, perhaps by getting the skills and training needed

to be a manager.

Anticipate employee expectations about raises and bonuses. Low says many small

businesses are moving away from annual reviews, preferring instead to offer more
frequent feedback. This strategy is particularly important for retaining Millennial

employees.

Many large companies including IBM, Microsoft and General Electric are leading

the trend by replacing annual performance reviews and offering employees more

frequent informal reviews, where they can set and update quarterly goals and offer

opportunities for individual growth.

At Grady Britton, a creative agency in Portland, Oregon, Paige Campbell, the

agencys president and partner, says employees receive quarterly rewards based on

performance including a bonus day off or a long leisurely lunch paid for by the

company.

Employees and work teams are also celebrated throughout the year when they have

demonstrated superior performance. If someone has done an outstanding job they

may receive a mid-year raise, we wont wait a full year to acknowledge their

achievements, Campbell says.

Get creative with rewards. Busch says one of the first rewards she encourages

small businesses to implement is a simple thank-you given to an employee who has

exceeded expectations. Its especially important to verbally acknowledge an

employees contributions in a group setting that also serves to demonstrate to other

employees your companys expectations.

 ariable pay, or a less-than-predictable income stream, has the potential to derail
budgeting and financial planning and make it tough to stay on fiscal track. This can
lead to a host of financial consequences that can harm your credit score and make
it challenging to live within your means.
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Maintaining a Budget

When youre unsure of the amount of your next paycheck, it can be difficult
to make a household budget and stick to it. According to author and financial
 expert Dave Ramsey, host of "The Dave Ramsey Show," this can be problematic
for people who work on a freelance basis, such as writers, or on a commission
structure, such as salespeople. To be fiscally responsible, you'll need to estimate
earnings and allocate a certain percentage of each paycheck to specific bills to
make sure you're covered in lean times.

Securing Credit

People with variable income streams may find it challenging to secure

credit, particularly for big-ticket items such as mortgages or auto loans. Potential
creditors may question your ability to repay debt in a timely and consistent fashion.
You may face higher-than-average requirements for down payments or live with
low starting credit lines until you establish a track record for on-time payment.

Paying off Debt

If you get into debt, it can be difficult to climb out when you live on a
variable income. If you get behind on revolving debt, you may be subject to late
fees, penalties and higher interest rates, all of which can compound a bad situation
and make your monthly payments even higher than anticipated. This can create a
vicious cycle and damage your credit rating.

Building Savings

Even if you allocate savings as a part of your regular budgeting, when you
come up short one month because of your variable pay structure, it can be easy to
 dismiss savings as a nonessential luxury. This can make it difficult to save money,
plan retirement or finance things like vacations, education or major purchases.

Handling Emergencies

According to Money Crashers, living on a variable income can put you at a

disadvantage when it comes to financial emergencies. If your car breaks down or
you have a medical emergency, you can't count on your next payday to cover the
costs when you dont know when that will be or how much you will earn. Creating
a financial cushion for unanticipated needs is vital.

Facing Financial Stress

According to Science Daily, financial worries can cause other forms of stress
in your daily life. You may be concerned about supporting yourself or your family,
meeting all of your financial obligations or planning for the future. A qualified
financial planner or credit counselor can help you find workable solutions to living
with and managing your finances on a variable income.
Advantages of variable pay
Improving performance represents a key goal for every business. Variable
pay programs can help businesses achieve that goal. Better known as pay-
for-performance, variable pay programs offer financial incentives on the
basis of accomplishing specific ends, such as revenue boosts, cost cutting or
even skill acquisition. Offering variable pay to management provides
businesses with several advantages.
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 Reduce Fixed Costs
Members of management receive the highest salaries of any business
employees and "Bloomberg Businessweek" reports CEO compensation often
exceeds 100 times that of a rank and file employee. Their salaries represent
fixed costs that business cannot avoid. Variable pay plans for management
often allow businesses to negotiate lower base salaries with the promise of
additional income if management creates the appropriate improvements in
the business. Lowering the base of management reduces the fixed cost of
wages.

Encourages Productivity
Just as workers sometimes grow complacent, management teams also grow
complacent about expanding their own skill sets, seeking out new
opportunities or staying abreast of a changing market environment. For
example, Borders failed to pursue a dedicated online sales channel and
didnt recognize the rapidly expanding e-book market, both of which
contributed to its downfall. By tying pay to individual or collective results,
such as mastering relevant skills or developing new markets, you encourage
management to stay productive with activities that benefit the business.

Establishes a Culture of Achievement

When a variable pay plan rewards the desired behaviors or results, it
reinforces the idea that you value achievement. As with rank and file
employees, members of management are not immune to skepticism about
what behaviors generate rewards. This often proves true in organizations that
encourage conformity over innovation. By demonstrating your commitment
to rewarding the right results, you encourage a culture of achievement, rather
than one of conformity or mediocrity.

Other Considerations
Many of the reported failures of variable pay plans trace back to poor
implementation factors, such as hazy objectives or subjective performance
measurements. Variable pay should tie back to specific results or behaviors
that lend themselves to direct measurement. If you want your management
team to expand their skill base, for example, they should know the exact
 types of workshops, courses or credentials that qualify for the additional pay.
Variable pay also needs to apply to areas of performance over which
members of management exert legitimate control. For example, a sales
manager exerts some legitimate control over the number of orders, but
cannot take responsibility for factors such as unit costs or fulfillment speeds.

Variable pay programs are an increasingly popular mode of compensation in

today's business world. These programs, which are also sometimes referred

to as "pay-for-performance" or "at-risk" pay plans, provide some or all of a

workforce's compensation based on employee performance or on the

performance of a team. Variable pay proponents contend that providing

tangible rewards for superior performance encourages hard work and

efficiency and serves as an effective deterrent to mediocre or otherwise

uninspired work performance.

Variable pay programs are made up of a variety of different compensation

methods. In the broadest sense, variable pay programs include annual

incentives or bonus payments; individual incentive plans; lump-sum

payments; technical achievement awards; cash profit-sharing plans; small

 group incentives; gainsharing; and payments for newly acquired skill and

knowledge. Some analysts argue that variable pay programs should be

defined far more restrictively, but most agree that all of the above share a

common emphasis on recognizing achievement, which is the ultimate goal

of variable pay plans.

VARIABLE PAY AND THE MODERN BUSINESS ENVIRONMENT

The growing prevalence of variable pay alternatives in business

compensation strategies has been attributed in part to a couple of other

business trends. Rapidly changing technologies have had an impact on the

ways in which we do work in the 21st century. Along with these changes

have come rapidly changing job descriptions and a need for people with

flexible skill sets to man these positions. At the same time, business

observers point out that increased emphasis on quick reactions to changing

 competitive conditions have triggered a growth in movement toward

employee empowerment. And as employees become more empowered,

employers have had to find new ways to compensate them for their

contributions to the overall enterprise.

Other analysts frame the issue of variable pay in terms of return on

investment (ROI). To minimize today's heightened business risk, businesses

must reduce their investment in fixed costs and maximize the use of variable

costs, which they incur only if they achieve certain results. Nowhere is this

situation seen more clearly than in the balance between fixed and variable

pay, since employee compensation in many industries is a company's single

largest expense.

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ADVANTAGES AND DRAWBACKS OF VARIABLE PAY

Most criticisms of variable pay can be traced to concerns about the nature,

implementation, and execution of such programs rather than the theories

upon which they are based. In practice, many companies fail to make

variable pay programs meaningful to individual employees, which in turn

robs the program of much of its power to facilitate increased productivity.

In a report published by the Institute of Management & Administration

entitled Companies Are Not Getting Full Value from Variable Pay Programs,

the findings showed, as the title implies, that companies report very mixed

results from variable pay programs. The survey reported on in the Institute

of Management & Administration article was carried out by the firm Hewitt
 Associates. The Hewitt data showed that about half of companies with

single-digit revenue growth believed that the cost of their variable pay

programs outweighed the benefit. Companies with double-digit revenue

growth, however, almost all reported positive outcomes from their variable

pay programs. "The fact that many companies don't benefit from variable

pay plans is a significant issue, as they're spending more than $54 million a

year on this type of pay. We've found that companies achieving high-revenue

growth have successful programs because they provide the appropriate

amount of administrative, communication, and monetary support. These

organizations know that if this type of pay plan is implemented correctly, it

will reinforce a performance culture."

One of the key differentials between companies with a positive and those

with a negative experience with variable pay programs was the selection of

appropriate performance measures. Those measures are the primary

 motivation for employees and they communicate to employees what the

objectives of the company are. Companies that focused variable pay

measures on the ability to reduce costs reported less satisfaction with the

programs than those companies using increases in sales as the measure upon

which variable pay was linked. According to Paul Shafer, a manager with

Hewitt Associates, "If a company wants growth, it can't reward for cutting

costs. Cost reduction and growth can be competing, rather than

complementary, goals, so by blending the two, companies run the risk of

confusing employees and, in all likelihood, accomplishing neither."

Variable pay[edit]
Variable pay is a non-fixed monetary (cash) reward that is contingent on discretion, performance, or
results achieved. There are different types of variable pay plans, such as bonus schemes, sales
incentives (commission), overtime pay, and more.
An example where this type of plan is prevalent is how the real estate industry compensates real
estate agents. A common variable pay plan might be the sales person receives 50% of every dollar
they bring in up to a level of revenue at which they then bump up to 85% for every dollar they bring
in going forward. Typically, this type of plan is based on an annual period of time requiring a
"resetting" each year back to the starting point of 50%. Sometimes this type of plan is administered
so the sales person never resets or falls down to a lower level. It also includes Performance Linked
Incentive which is variable and may range from 130% to 0% as per performance of the individual as
per his key result areas (KRA).

Benefits[edit]
Fixed pay is guaranteed and it will be paid to you every month by salary. This includes:
 1. Basic Pay
2. DA (Dearness allowance)
3. HRA (house rent allowance)
4. Conveyance Allowance etc.
Variable Pay mainly includes Performance Bonus that is not guaranteed and will be paid at the end
of the year provided your performance is good and the Unit you worked makes a profit.

Sometimes, the Dearness Allowance is also not fixed and linked to price index. So, DA keeps
fluctuating every quarter i.e. it may go up or come down but payment of DA is assured; only the sum
slightly varies.
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Importance of compensation
 Fixed Pay:
o Guaranteed Payable to Employee.
o This may include (Basic, DA, HRA, Special Allowances, EPF etc)
o Usually payable on monthly basis
o It would be always 100% payable in lieu of employee service.
Variable Pay:
o Not Guaranteed Payable to Employee.
o This may link/depends on company performance, individual performance or
company financials.
o Also may be also bind with company policy like retention bonus payable for
each complete service year etc. Means if you leave company before completing one year
retention bonus would be zero.
o Variable pay may vary from 0% to 100%.
o Generally payable on quarterly, half yearly or yearly basis.

Definition
Variable pay is the portion of compensation determined by
employee performance. When employees hit their goals, variable
payment is given as a type of bonus, otherwise known as incentive
pay or commission. Base salary, on the other hand, is fixed and is paid out
regardless of employees meeting their goals. Together,
incentive compensation and the fixed portion of an employees salary make
up what is known as pay mix.
Variable pay is an incentive or bonus employers pay to employees whose performance
meets or exceeds company expectations, provided the company meets its own goals for
productivity and profitability. That is, when both the company succeeds and the employee
succeeds, the employer hands out a performance-based check, and the amount depends on
how well the company performs during the year and how well the employee performs during
an evaluation period. For many companies, employee performance is measured at the end
of 12 months.
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Recency Error
Employee job performance factors into the benefits and drawbacks with variable pay plans.
One drawback is the effect that recency error has on employee performance and variable
pay. Many supervisors conduct annual performance appraisals that measure employee job
performance. An employee's performance rating is then used to determine how much the
employee receives according to the variable pay plan. Recency error refers to supervisors
who base performance ratings on an employee's most recent job performance instead of job
performance for the entire evaluation period. Mediocre job performance for the majority of
the evaluation period and excellent job performance closer to the performance appraisal can
result in a higher -- and, sometimes undeserved -- payout in a variable pay system.
Motivation
Variable pay plans can motivate employees, which is one of the pros of this type of
incentive. Although some employees aren't motivated by compensation and benefits, a year-
end bonus can prod many workers to a higher level of performance. In this case, a variable
pay plan is akin to dangling a carrot in front of workers who otherwise would perform just
satisfactory work rather than strive for excellent ratings come performance appraisal time.
High performance ratings are a boost for employees, but the challenge is to sustain
employees' job performance levels beyond the season when companies disburse
performance pay.
Competition
Friendly competition is healthy in most work environments, but fierce competition can
disrupt working relationships and cause tension among colleagues. Variable pay plans --
particularly when employees disclose their pay to co-workers -- foster unhealthy competition
and make it difficult to re-engage employees in collaborative work groups. To prevent this,
employers must enforce strict confidentiality policies that prohibit discussions about
compensation. Many employers favor teamwork as a means to accomplish organizational
goals, yet it's difficult for a team-centered work force to co-exist with a individual-
performance-based work environment. And it's the individual performance that goes into
determining the employee's variable pay amount.
Labor Costs
Variable pay isn't factored into an employee's annual compensation, although the amount
may be based on the employee's salary. For example, when the company reaches its
performance goal, a variable pay plan may call for an employee to receive 5.25 percent of
her annual salary. Variable pay doesn't compound employee wages by 5.25 percent because
it isn't a salary increase. For employers who want to maintain salary levels, this is obviously
a benefit of variable pay plans. On the other hand, pay that doesn't compound the salary
doesn't improve job value by increasing compensation.

Large state-run lenders are seeking to break away from the system of negotiating periodic,
industry-wide wage settlements with the unions and decide their own pay structures.
Lenders such as State Bank of India (SBI) and Punjab National Bank (PNB) are exploring the
idea of moving to a variable pay structure, which will be based on the performance of
employees.
SBI is looking to introduce an employee stock ownership plan and grading system based on an
employees performance, said a senior SBI official on condition of anonymity. PNB plans to
approach its board with a proposal to introduce performance-based pay for all officials above the
level of chief manager.
Today, an employees salary is predictable. There is a need to recognize performance and give
remuneration. We have formed an internal committee of general managers to work on this matter
and submit the proposal to the board, Usha Ananthasubramanian, managing director and chief
executive officer of PNB, said at an analysts meeting, after the lenders earnings announcement.
Usha also added that PNB had earlier tried to move to a variable pay structure for all employees
under the chairmanship of K.C. Chakrabarty, but failed in its attempt.
PNB ran up Rs1,967.16 crore in employee costs for the quarter to September, up from
Rs1,877.56 crore a year ago. SBIs staff expenses rose to Rs6,257 crore from Rs5,906 crore in
the same period.
Banks are discussing moving to their own pay structures after the finance ministry asked them to
start the process for the 11th bipartite wage pact before the current five-year settlement expires in
October 2017.
The ministry has asked banks to start early, instead of waiting for the culmination of the current
wage pact, an official with the Indian Banks Association (IBA), which groups all banks in
India, said on condition of anonymity.
As large banks explore the idea of moving to their own pay structure, a few smaller ones
including Union Bank, Syndicate Bank and Vijaya Bank have sent their consent to IBA to be a
part of the process for negotiating a new wage agreement, added the official.
The transition to a productivity-linked settlement is easier said than done. Such a move will face
stiff resistance from bank employees unions, which are used to a uniform wage hike.
We will oppose a variable pay structure if banks go ahead and introduce this system. We are for
more efficiency and productivity, but we dont want differentiation in salary, said C.H,
Venkatachalam, general secretary of the All India Bank Employees Association.
Bank employees unions have, meanwhile, started preparing a charter of demands that will be
submitted to IBA by January 2017.
We are looking at an adequate hike in salary this time, in conformity with rising inflation. We
are also looking at a higher starting salary for attracting new talent, special facilities for women
and improvement in post-retirement benefits, said Venkatachalam.
Around one million bank employees across public sector banks, old private sector and a few
foreign banks are part of the industry-level wage settlement.
According to the 10th bipartite wage settlement, banks and unions agreed to a 15% hike in
wages, which resulted in an outgo of Rs5,000 crore for the system. Also agreed to were bank
holidays on second and fourth Saturdays.
Also, PSU banks have been reeling under losses and mounting NPAs and implementing the
variable pay structure may be ill-timed.
Concept of variable pay structure is sound. It will encourage employees to make the right
decision. However, implementation will be a challenge, said Ashvin Parekh, managing partner,
Ashvin Parekh Advisory Services.