COMPENSATION PRACTICES

VARIOUS DEFINATIONS OF COMPENSATION

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.

PURPOSEOF COMPENSATION

Contribution based Remuneration

Ensure Equity

Attract talent

Effective Compensation

Administratively Efficient

Legal Compliance

Motivate & Retain Staff

Reward Valued Behavior

THE PAY MODEL

Business Goals
Compensation Philosophy/ activities serve Business Objectives

CEO

Business Strategy

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 Goals
Compensation activities serve Business Objectives

CEO

Business Strategy

Compensation Strategy
Org.Structure Compensation Plan

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

HR Head

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 Goals Compensation activities serve Business Objectives

CEO

Business Strategy

Compensation Strategy Org.Structure Compensation Plan

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

HR Head

strategic perspective Compensation takes the position that how employees are compensated can be a source of sustainable competitive advantage

THE PAY MODEL

Business Goals Compensation activities serve Business Objectives

CEO

Business Strategy

Compensation Strategy Org.Structure Compensation Plan Performance Management Job Evaluation Unit Inputs Pay levels / structures Total remuneration Performance linked Pay

Compensation strategy is periodically reevaluated and the Non-Financial Compensation plan Rewards periodically developed

C & B/S M

HR Head

Market Surveys

Employee

Contribution /outputs

Compensation Manager, along with team is responsible for carrying out compensation related activities

Internal Equity

Individual Pay

External Equity
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STRATEGIC COMPENSATION PLANNING

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.

COMPENSATION POLICY ISSUES

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 by inflation, resulting in longer-term employees in a position earning less than workers entering the firm today) Geographic costs of living differences

COMPENSATION ADMINISTRATION PROCESS

CLASSIFICATION OF REWARDS

COMPONETS OF FINANCIAL COMPENSATION

BASE PAY
The direct financial compensation an individual receives based on the time Worked. 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 an organization.

VARIABLE PAY/PAY FOR PERFORMANCE : INCENTIVES

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.

TYPES OF INCENTIVES

Organizational Incentives

Individual Incentives

Group/team Incentives

INDIVIDUAL INCENTIVE PLAN

Piecework Plans

The worker is paid a sum (called a piece rate) for each unit he or she produces.
Straight piecework:

A fixed sum is paid for each unit the worker produces under an established piece rate 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(CONTD)

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.

BONUS

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.

GROUP INCENTIVE PLAN

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.

EMPLOYEE BONUS AND GAINSHARING PLAN

PROS CONS OF TEAM INITIATIVEPLAN

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 problemspressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the free-ride effect (one

ORGANIZATIONAL INCENTIVE PLAN

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(CONTD)

Stock Options Granting employees the right to purchase as specific number of shares of the companys 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 exempt employee trust under Section 401(a) of the Internal Revenue Code

WHY INCENTIVE PLAN FAIL

Performance pay cant 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.

IMPLEMENTING EFFECTIVE INCENTIVE PLAN

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.

INDIRECT FINANACIAL COMPENSATION - BENEFITS

Mandatory Benefits legally binding Voluntary Benefits provided at the discretion of the employer

VOLUNTARY BENEFITS EXAMPLES

Educational benefits Employees 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 higher education 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.

NON FINANACIAL COMPENSATION : COMPONENTS

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

TYPES
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 conjunction with financial rewards. Combining financial rewards with nonfinancial ones produced performance improvement 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

EQUITY AND MOTIVATION OF EMPLOYEES

Pay Equity (also Distributive Fairness) An employees 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.

RELATIONSHIP BETWEEN PAY EQUITY AND MOTIVATION

INSTRUMENTALITY AND REWARDS

Vrooms Expectancy Theory A persons motivation to exert some level of effort is a function of three 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.

DETERMINANTS OF COMPENSATION

INTERNAL DETERMINANTS
Employers 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. Employees Relative Worth Rewarding individual employee performance Employers Ability-to-Pay

Having the resources and profits to pay employees.

EXTERNAL 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 firms 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 Bargaining The term extends to all negotiations that take place between an employer, group of employers or one or more employers organizations on the one hand, and one 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

NEW DEVELOPMENTS
Competency based pay and reward programmes (also skill-based pay or knowledge-based pay)

Where the company pays for the employees 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.

WHY COMPETENCY BASED PAY ?

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 any companys performance management process.

COMPETENCY BASED PAY PROS & CONS

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.

TRENDS OF EXECUTIVE COMPENSATION

The Executive Pay Package Base salary Short-term incentives or bonuses Long-term incentives or stock plans Perquisites (perks)

EXECUTIVE COMPENSATION-EHICS & ACCOUNTABILITY

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.

SWEETNESS OF EXECUTIVE PERKS

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 Childrens 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

LEGAL FRAMEWORK FOR PAYMENT OF SALARY- INDIA

Payment of wages Act, 1936 The minimum wages Act, 1948 The payment of Bonus Act, 1965 Equal remuneration Act, 1976

COMPENSATION PACKAGE ASHOK LEYLAND

DIRECT COMPENSATION

Fixed Pay
Variable Pay : depending on no of optional days attended
Variable Pay : depending on last years performance

Mandatory ( Indirect )

CLASSIFICATION OF REWARDS
TOTAL Compensation Non - Financial

Financial

Direct Monthly Salary Annual Incentives Bonus

Indirect

Job Satisfaction

Praise / Rewards

Provident Fund Gratuity Travel allowance Mobile expense Sales Promotional Expense

CLASSIFICATION OF REWARDS
TOTAL Compensation Non - Financial

Financial

Direct

Indirect

Job Satisfaction

Praise / Rewards

Future Leadership Program (FLP): Executives earmarked and declared future leader based on their competency Development 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 Award Company Jeep at individual level Foreign Tour with family for the team achieving their yearly target Major medical claim for self and dependant