Compensation Management

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 COMPENSATION PLANNING
Basic Concept of Compensation
Introduction;
• Money is a crucial incentive and directly or indirectly
related with fulfillment of human needs.

• Effective management of compensation becomes critical

because of the total operating costs.

• Compensation directly influences key outcomes like job

satisfaction, attraction, retention, performance, skill
acquisition, co-operation, flexibility etc.
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• Employer’s objective- Productivity
Employees’ emphasis- higher comp.to offset their
increased cost of living and price his skill in the
competitive job market.

• Two objectives of Compensation;

a) as a reward for the past services.
b) stimulus to increase performance in future.

• Develop, build and maintain “human capital” by

following ways;
i) Comps. can serve to attract qualified applicants to
the organization.

ii) Comp. helps to retain competent employees (fair

internal pay structure & providing attractive
benefits.)
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 iii) Comp. serves as an incentive to motivate employees
to put forth their best efforts.

iv) Minimizing the cost of comp. can also contribute to

organizational effectiveness since comp. is a
significant cost for most employers.

• Effective Compensation policy should be ;

- Adequate governmental union & managerial levels
should be met.

- Equitable: fairly paid in line with his effort abilities

training so on.

- Balanced: Total reward package.

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- Cost Effective: enterprise should afford to pay.

- Secure: employee security need relative to pay.

- Incentive providing : pay motivators effective &

productive work.

- Acceptable to the Employer: Reasonable enterprise

for employee & employer.

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 CONCEPT OF COMPENSATION
• Fair days pay for fair day work.

• Time is the basis for payment ( hourly, weekly, monthly

or yearly.)

• Overtime- for extra work.

Under time-works less than stipulated hours.

• Compensation is purely extrinsic-quit pro quo.

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• Compensation refers to all forms of financial
returns and tangible services and benefits
employees receive as part of employment
relationship.

• Compensation may also be viewed as;

a) a system of rewards that motivates employees

to perform.

b) a tool used by organizations to foster the

values,culture and the behaviour they require.

c) an instrument that enables organizations to

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achieve their business objectives.
 Compensation Components

Direct ( Cash) Indirect

Basic pay (Wage supplements or
DA fringe benefits)
Overtime pay PF
Shift allowance Pension scheme
Incentive Medical & health insurance
Bonus Sick leave
Profit sharing bonus Other benefits & perks
Commissions etc.
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Establishing Pay Rates

Factors determining wage structure;

1. Organizations Capability to Pay

2. Supply & Demand for Labour

3. Prevailing Market Rates

4. Cost of Living

5. Productivity
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6. Trade Union Bargaining Power

7. Job Requirements

8. Product Ranges-Present & Potential

9. Requirements of Technology

10. Psychological & Sociological factors

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 Salary Structure
I -Graded Salary Structures
II-Salary Progression Curves

Graded Salary Structure:

• All jobs are allocated into a salary grade within the
structure.

2. Each salary grade should consist of a salary range or

grade.

3. Jobs can be regarded within the structure when it is

decided that their value has altered.

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4. General increases in the cost of living or in the market
rates are taken care of by proportionate increase in the
minimum & maximum levels.

5. The salary grades should be wide enough to provide

room to recognize that people graded at the same level
can perform differently and should therefore be
rewarded according to their performance.

6. A differential should be maintained between the

midpoints of each salary grade in order to provide
adequate scope for rewarding increased responsibility
on promotion to the next higher grade.

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7. The mid point of each grade is the target salary for the
grade . Average salary will correspond with the target
salary.

8. There can be an overlap between salary grade which

acknowledge that an experienced person doing a good
job can be of grater value than a new comer to a job in
the grade above.

9. All jobs allocated into a salary grade should be broadly

of the same level.

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10. Progression within a grade depends on the performance
of the individual. It is assumed that all fully competent
individuals in any type of job in a grade would eventually
reach the normal maximum for a grade if they are not
promoted.

11. The number of Salary grades or range will depend on :

● Number of distinct levels of jobs in the hierarchy.
● The width of each salary grade.
● The extent of the overlap if any, between grades.
● The salary levels appropriate for the most senior and
most junior jobs.

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 DESIGNING THE SALARY STRUCTURE
STEP -1
Establish by market rate surveys and studies of existing
structures and differentials of the most senior and most junior
positions/jobs.
STEP -2
Draw up salary grade structure between the upper and lower
limits as established in step 1.
STEP-3
Conduct a job evaluation exercise preferably by means of
simple scheme ranking although this could be refined by using
paired comparisons.
STEP-4
Obtain market rate data bearing in mind that there is likely to be
a range of market rates rather than a precise figure.
STEP-5
Slot the jobs into the Grade structure in accordance with the15
results of the job evaluations and the market rate surveys.
 Salary Progression Curves
(Career Curves or Maturity Curves)
• Increases in salary over a fairly long period to increased
maturity or experience.

• Best used for professional/scientific or other highly qualified

staff.

• Contribution is almost entirely related to their professional

capacity rather than to a more or less fixed set of duties that
enable their job to be firmly placed in a rigid hierarchy.

• Starting salary is linked to the market rate for their degree or to

a professional qualification.

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• This system assumes that they will develop within their
discipline at some standard rate as a result of their experience.

• Aim of SPC is to allow plenty of scope to advancing people

according to their contribution.

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 COMPENSATION PLAN AND BUSINESS STRATEGY

1. ATTRACTION AND RETENTION

• Recruit and retain the best people available.
• Organizations should become Pay Masters or Wage leaders.
• Unlimited wage disparities cause distortions in the economy.

2. INTERNAL CONSISTENCY
• Compensation policies should take into account the
differential in skills and levels both in responsibility and
authority.

3. EXTERNAL PARITY
• Prevailing rate in the labour market for comparable jobs in
the industry / region.
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• PSU’s / Good orgn’s fix relatively lower wage rates than
private sector units because the former affords a greater
sense of job security . PSU’s might face problems in
attracting right talent.

4. CAPACITY TO PAY
• Minimum wages to be paid irrespective of their capacity to
pay.
• Depends upon the organizations ability to pay.
• More wages are paid depending on the bargaining power of
the Unions.

5. PAY FOR PERFORMANCE

• Linking pay to performance makes a good sense.
• Design the orgn jobs and work flow in such a manner where
performance linked pay system are able to make difference
to the outcomes of their work.
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6. LABOUR COST AND PRODUCTVITY
Wages and salaries to be linked with the productivity and
profitability.

7. COST OF LIVING
• DA and CCA forms an integral part of pay structure.
• The general principle underlying these allowances is to
neutralize at least a portion of the increase in the cost of
living.
• Increase in cost of living leads to additional burden on the
employer without corresponding improvement in productivity.

8. MERIT AND SENIORITY PROGRESSION

• Merit progression refers to the practice of rewarding a person
according to one’s contribution.
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• Based on Annual Performance Appraisal.
• Senior employees may get more pay than juniors as seniors
accumulate experience , skills and get sharpened and
productive efficiency goes up.

9. MOTIVATION
• Money may not be everything but everything else may be way
behind.
• Company Compensation policy can be an effective tool to
motivate people for Superior performance.

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The objective of the employee benefits policies and
practices of an organization might be:
• to increase the commitment of employees to the
organization;

• to provide for the actual or perceived personal needs of

employees, including those concerning security, financial
assistance and thus, provision of assets in addition to
pay, such as company cars and petrol.

• to demonstrate that the company cars for the needs of its

employees.

• to provide a tax-efficient method of remuneration which

reduces tax liabilities compared with those related to
equivalent cash payments.
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 Why Fringe Benefits
1. Altruistic/ Paternalistic consideration

2. Statutory requirements

3. Concern for well being

4. Damage and hazard of industrial working

5. Tax-planning consideration

6. Competitive consideration

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7. Concern for quality of work-life

8. Mitigate fatigue and monotony

9. Discourage labour unrest

10. Reduce attrition

11. Build companies image

12. Attract, retain and motivate employees

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 Benefit Need Analysis
A Benefit Need Analysis to make certain the mix of benefits is
doing what it should, might consider the following issues
• How much total compensation, including benefits, should be
provided.
• What part should benefits comprise of the total compensation
of individuals.
• What expense levels are acceptable for each benefit offered.?
• What is being received by the organization in return of each
benefits?
• How Do having a comprehensive benefits package aid in
minimizing turnover or maximizing recruiting and retention of
employees?
• How flexible should the package of benefits be?
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 CLASSIFICATION OF EMPLOYEE BENEFITS
1. Disability Income continuation
• Short term disability
• Long term disability
• Workers compensation
• Social security
• Travel accident insurance
• Sick Leave
• Supplemental disability insurance
• Accidental death and dismemberment
• Group Life Insurance -Total Permanent Disability
• Retirement Plans
2. Loss of Job Income continuation (Layoffs and
termination)
• Unemployment Insurance 26
• Supplemental Unemployment Benefit Insurance
• Guaranteed Annual Income.
• Guaranteed Income Stream
3. Deferred Income
• Social Security
• Qualified Retirement Plan – Pension Plan, Profit Sharing
Plan, Stock Bonus plan.
• Group Life Insurance Plans
• Stock Purchase Plan
4. Spouse and Family Income protection
• Life Insurance
• Retirement Plans
• Social Security and Medicare
• Travel Accident Insurance
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• Health Care Coverage
4. Health and Accident Protection
• Diagnostic visits to the Doctor’s office, outpatient X-Rays and
Laboratory coverage, Home visits by the doctor, ambulatory
or outpatient surgery, Annual check ups, health insurance
plans for the survivors of deceased company employee
retirees, non hospital psychiatric care.

CLASSIFICATION OF EMPLOYEE BENEFITS

1. Pay for Time Not worked
• Holidays, Vacations, Jury Duty Election Official, Witness in
Court, Civic Duty, Military Duty, Funeral Leave, Illness in
family leave, Marriage leave, Paternity leave, Maternity leave,
Sick Leave, Wellness Leave, Time off to Vote, Blood
donation, Grievance and Contract Negotiations, Lunch Rest
and Wash up periods, Personal leave, Sabbatical leave.

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2. Time off from Work without pay
• Employee has an opportunity to pursue a special interest area. Although
the employee is not paid he or she continue to be covered by the
employer’s medical , life Insurance and disability programs.

3. Income Equivalent payments and reimbursement for Incurred

Expenses (Non Statutory Benefits)
Provides for an opportunity for an improved and more enjoyable lifestyle
• Tax preparation opportunities
• Education Subsidies
• Child Adoption
• Child Care
• Elderly Care
• Subsidized Food Service
• Discounts on Merchandize
• Physical Awareness and Fitness Program

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• Social and Recreational
• Parking
• Transportation to and From work
• Travel Expenses- Car Reimbursement, Tolls and Parking, Tool
and Entertainment Reimbursement
• Clothing Reimbursement/Allowance
• Relocation Expenses
• Emergency Loans
• Credit Union
• Housing
Some popular forms of Non Monetary Rewards
• Treats - Free lunches, Festival bashes, Coffee breaks, Dinner
with the Boss, B’day treats.
• Knick knacks- Decoratives, Company watches, Tiepins,
Brooches, Diaries, Calendars, Wallets, T-Shirts. 30
• Awards – Trophies, Plaques, Certificates, Scrolls, Letters of
Appreciation.
• Environment – Renovation, Music, Flexible Hours, E-mail.
• Social Acknowledgement – Informal recognition, Recognition
at office get - togethers, Friendly greetings, Solicitation of
advice/suggestion, Membership of clubs, Company facilities
for personal projects.
• Tokens – Movie tickets, Vacation trips, Coupons redeemable
at stores, Early time offs, Anniversary birthday presents.
• On the job rewards – More responsibility, Job rotation,
Special assignments, Training, Representing the company at
Public forum.
MERITS OF NON – MONETARY REWARDS
• Motivates employees to perform better.
• Costs the org’n next to nothing.
• Build tremendous self esteem among employees 31
• Makes employees more loyal to the company.
• Creates an atmosphere where change is not resented.

DEMERITS OF NON MONETARY AWARDS

• Demotivates people if processes are not transparent.
• Could result in unhealthy competition among employee.
• May lead to shortsighted and hasty decision making.
• Work intrudes on the family life of employees.
• Will never work if monetary rewards are inadequate.

GUIDELINES TO MAKE BENEFIT PROGRAM MORE

EFFECTIVE
1. Fringe benefits programs should be looked at as a worthwhile
corporate instrument in HRM.
2. Future policy planning in this area will have to keep in view32
some fresh reference points.
Non – unionization and skills shortage are no more relevant for
policy considerations.
3. Any meaningful package of benefits must reflect some
perspective planning. Inflexibility brings stagnation.
4. Separate programs directly beneficial to workers from those
that are directed towards community welfare. Clubbing them
together adds to their cost. This may not be liked by workers.
5. It is advisable not to have a facility rather than neglecting it in its
administration
6. Poor internal communication hurts the programme in at least
three ways i) more money is spent for officers’ welfare
ii) Excess money spent on corporate image building at the cost of
more bonus iii) priority of officers’ children in admission to
schools. Therefore, make the internal communication system
effective.
7. Devise new ways to involve workers and their representatives
at all levels of planning and implementation.
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 Pay for Performance & Financial Incentives
Incentives are monetary benefits paid to workmen in recognition
of their improved performance.
An incentive scheme is a plan or program to motivate individual
or group performance.
An incentive program is most frequently built on monetary
rewards but also include a variety of non monetary rewards or
prizes.
Classification of Incentives
Incentives can be classified into
1) Direct Compensation
2) Indirect Compensation
Direct Compensation includes the basic salary or wage that the
individual is entitled to for his job.
Indirect Compensation includes protection programs, pay for
time not worked, services and prerequisites. 34
Incentives are also classified into Monetary and Non Monetary
Monetary Incentives – They provide extra financial motivation,
by rewarding the worker over and above his regular
remuneration for performing more than the targeted work.

Financial motivation are overtime wages, higher basic wages,

incentive bonus, merit increments, suggestion rewards, various
allowances, promotion and fringe benefits.

Non Monetary incentives are good human relations, self

respect, recognition, status, sense of belonging, appreciation,
higher responsibility, greater authority, job satisfaction,
improved working conditions, great leisure etc. All these
motivate workers to raise their productivity.

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 CLASSIFICATION OF INCENTIVES
Individual Incentives – An extra compensation paid to an
individual over a specified amount for his production effort. If an
individual can increase the quantity and quality of his output by
his own individual efforts and where his output can be
measured.
Group Incentives
Group incentives provide for the payment of a bonus either
equally or proportionately to individuals within a group or area.
The bonus is related to the output achieved over an agreed
standard or to the time saved on the job –the difference
between allowed time and actual time.
Group bonuses are calculated on the basis of the output of the
team and are divided among the members either equally or in
specified proportions.
Organization wide Incentives Involves cooperation and
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 Collective effort of the employees and management , in order to
accomplish broader organizational objectives such as
i) To reduce labour, material and supply costs
ii) To decrease turnover and absenteeism
iii) To strengthen employee loyalty to the company
iv) To promote harmonious labour management relations.

PREREQUISITES OF EFFECTIVE INCENTIVE SCHEME

1. The cooperation of workers in the implementation of an
incentive scheme is essential.
2. The scheme must be based on scientific work measurement.
The standards set must be realistic and must motivate
workers to put in better performance. Workers must be
provided with necessary tools, equipment and materials so as
to enable them to reach their standards.
3. Indirect workers should also be covered by the incentive
schemes.
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4. There should be management commitment to the cost and time
necessary to administer incentive schemes properly, and
these must be carefully assessed before embarking on an
incentive program.
5. There is a greater need for planning. Many incentive schemes,
started hurriedly, planned carelessly, and implemented
indifferently have failed and have created more problems for
the organization than they have tried to solve.

Types of Incentive Schemes

Categories
1. Schemes where the workers’ earnings vary in the same
proportion as output.
2. Schemes where earnings vary less proportionately than
output.
3. Schemes where earnings vary proportionately more than 38
output.
4.Schemes where earnings differ at different levels of output.
Scheme 1: Earnings vary in the same proportion as
output
• Straight piece work
• Standard hour system
Rate per unit of output is fixed and the total earnings of a
worker are arrived at by multiplying the total output by the
rate per unit. Earnings depend directly on performance.
Production difficulties -- Low earnings
Scheme 2: Earnings vary less proportionately than
output -Gain Sharing schemes
Halsey, Rowan, and Bedaux systems
The common feature is that time is used as the measure of
output and bonus is paid on the time saved, that is, the
difference between the standard time set for the job and the
time actually taken. Both the employer as well as the
employee share the gains resulting from the saved time.
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1. The Halsey System : Fixation of a standard time for the
completion of the task.
• Work done in correct time or more, the actual time rate is
paid.
• Minimum wages is guaranteed even if the output falls below
the standard.
• If the job is completed is less than the standard time, the
worker receives a bonus payment at his time rate for a
specific percentage of the time saved.
• 50% of Bonus to employee and 50% of bonus to employer.
Bonus = ½ of Time Saved x Daily wages
of Time Taken
2. The Rowan System - Standard time is allowed for a job and
bonus is paid for the time saved.
• The premium is calculated on the basis of the proportion
which the time saved bears at a standard time. 40
Bonus = Time Saved x Time taken x Hourly rate
Time Allowed
If a worker does work in six hours against 10 hrs standard, the
wages payable in six hours wages plus 40%of wages as
bonus.

3. The Bedaux Point System: The standard time set is divided

into number of points at the rate of one minute per point.
• The bonus is calculated at 75% of the points earned in excess
of 60 per hour.
• Thus if the standard time is 10 hrs and the worker completes
his job in 7 hrs and if his hourly rate is 0.96 money units the
standard number of points for completing the job is 600 points
in 7 hours. His bonus therefore will be 75% of 180 x 0.96/60
which is equal to 2.16 money units. If the worker doesn’t reach
the standard ,he is paid at his time rate.
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Scheme 3: Earnings vary proportionately more than output
1. High piece Rate
2. High standard hour system
• The earnings of the worker are in proportion to his or her
output but the increment in earnings for each unit of output
above the standard is greater.
• The higher rates start applying after the standards have been
reached. Similar logic applies to high standard hour system.
• The main feature of these two schemes is that since direct
labour costs per unit increase for levels of output above the
standard, the worker also shares the earnings in overhead
costs which results from an increased output.
• The amount of this share depends on the size of the
increments in earnings which are payable at different levels of
output.
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Scheme 4: Earnings differing at different levels of output
The Taylor Differential Piece Rate System Two objectives
• To give sufficient incentive to workmen to induce them to
produce up to their full capacity.
• To remove the fear of wage cut.
1. Under this system – There is one rate for those who reach
the standard ,they are given a higher rate to enable them to
get the bonus.
2. Lower rate for those who are below the standard so that the
hope of receiving the higher rate may serve as an incentive to
come up to the standard.
3. This system is designed to encourage the specially efficient
worker with a higher rate of payment and to penalize the
inefficient by a lower rate of payment.
The Merrick Differential piece rate system.
• One large step is broken into two as to encourage new and
average workers.
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• Straight piece rates are paid upto 83% of standard output, at
which a bonus of 10% of the time rate is payable, with a
further 105 bonus on reaching the standard output. For output
above the standard ,high piece rate are paid.

THE ACCELERATED PREMIUM SYSTEM

THE SCANLON PLAN is a system of Total Organization
development which consists of assumptions about human
behaviour , a set of principles for the management of
organizations and a participative process of implementation.
The purpose of this incentive plan is to develop team work. It has
two main aspects
a) Adopting a measure for increased productivity.
b) Sharing the gain accrued from that increased productivity.
Salient features of the plan
• It encourages group work. 44
• There is high flexibility in the generation of decisions and
execution of the plan
• It integrates the company’s objectives with group activity.
• It involves all the workers in the exercise and they make
their maximum personal contribution to the process of
production.

THE SCANLON PLAN TODAY

Through research and experience, four principles have
been validated that define the Scanlon plan and serve as
conditions of Scanlon Plan success
Identity : The continual process of clarifying and
understanding the organization’s “mandate” (i.e.
requirements to serve customers, owners/ shareholders and
employee. This process includes recognition and
reaffirmation by the majority of employees of the need to
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change in order to manage physical and human.
• Participation: Acceptance by all employees of the
responsibility for the mandate and the opportunity to
responsibly influence the decision making process. Participation
includes accountability for one’s job and to all who have a
vested interest in the
enterprise.
• Equity: The assurance of a fair and balanced return to
customers (Product value, quality delivery, Fair price), owners
(profitability, return on investment, growth), and employees (job
security, competitive wages and benefits, sharing in productivity
gains)
• Managerial Competence: The unequivocal requirement of
leadership to define the “right job” to be open to influence, and
to create a climate for productivity improvement. The identity,
participation, and equity process are demanding tests of
managerial attitudes, abilities, and performance.
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 GROUP INCENTIVE PLANS
If the group consists of members with equal skills, the earnings
are divided equally among them. When the members are of
unequal skills, the earnings of the group may be divided among
the members in proportion to their individual time rates, or
according to specified percentages, or in some cases among
only a certain number of members of the group.
Advantages of Group Incentive plans
• Better cooperation among workers.
• Less Supervision.
• Reduced incidence of absenteeism
• Reduced clerical work
• Shorter training time.
Disadvantages of Group Incentive Plans
• An efficient worker may be penalized for the inefficiency of
other members in the group. 47
• The incentive may not be strong enough to serve its purpose.
• Rivalry among the members of the group defeats the very
purpose of teamwork and cooperation.

INCENTIVE PLANS FOR INDIRECT WORKERS

• Indirect workers such as crane operators, helpers, charge
hands, canteen staff, security staff, maintenance staff also
deserve incentives at par with direct workers.
• Incentives should be paid to such workers either on the
ground that they contribute to the increased production which
the direct workers may achieve or on the ground that their
work has increased because of increased production, or both.
• Whether the output of indirect staff can be measured or not, a
single system of bonus payment is made applicable to all of
them.
• In some cases, the bonus is calculated according to some48
agreed percentage on the output of the plant or of a
Department.
• In others the bonus is a specified percentage of the incentives
of all or some of direct workers.
• Many managements, however prefer to apply a merit rating
system to indirect workers which rewards these workers for
other qualities, in addition to their output.

WAGE INCENTIVE PLANS

Incentive plans for Blue Collar Workers - Short term incentive
plans for blue collar workers
• Plans under which the rate of extra incentive is in proportion to
the extra output.
• Plans under which the extra incentive is proportionately at a
lower rate than the increase in output
• Plans under which the rate of incentives is proportionately
higher than the rate of increase in output. 49
• Every employer wants his workmen to do the maximum work
they are capable of doing.
• On the other hand, there is a feeling among the workers that an
increasing effort benefits only the employer even when they are
employed on a piece rate basis.
• The result is that they never produce to their full capacity and in
most cases, put in the minimum necessary work.
• This feeling on the part of the workers may be removed either
through fear or through expectation of gain.
• Fear can never produce the desired effect, but a hope of
earning a bonus does induce them to work harder and produce
more.
• Incentive plans are therefore known as premium plans because
they offer premium for outstanding performance.
• The payment of bonus for indirect workers poses a serious
problem because the output of many of them cannot be
accurately measured. Merit rating system is followed.
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Incentive plans for White collar Employees / Salespersons
The sales persons are given incentives in the form of sales
commission.
Straight salary method for sales person
Advantages
• The sales person knows in advance what their income will be
• The expenditure on sales person is known beforehand
Disadvantages
• This method tends to shift salesman’s emphasis in just making
the sale rather than prospecting and cultivating long term
career.
• Pay is not related to results. This lack of relationship reduces
salesmen performance.
Straight Commission Method
• They are paid only and only for results.
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• High performance salesmen are generally attracted.
Disadvantages
• Salesmen focus on making a sale on high volume items and as
a result cultivating dedicated customers and working to push
hard -to- sell items are often neglected.
• Salesmen tend to be less company oriented and more money
oriented and the company has less control over them.
• Salesmen’s income generally fluctuates widely.

Combination method of salary and Commission

Salesmen not only get a fixed salary but also a commission in
proportion to the sale effected.
Advantages
• Since salesmen are assured of minimum earnings, they are
relieved of financial worries.
• The company has more control over its salesmen, as there is
sizable salary component in most combination plans. 52
Disadvantage
Salary is not related to performance only; only incentive value
of money is being traded off for its security value.
Incentives for Management
• Managers are paid bonus.
• Two types of bonus plans – one determined by formula( like
increased sales) and other determined by some discretion used
in allocation of bonus.
• Bonus plans are reviewed annually.
• Bonus is generally linked with overall corporate results.
• The bulk of bonus is higher for top level executives and lower
for the lower level executives.
• Bonuses are paid in cash. Company may use stock plans that
offer the executive, the company’s stock at a fixed purchase
price.
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 Such plans are designed to encourage ownership in the
company and indirectly serve as an incentive for good work and
represent a form of saving.
• In the manufacturing and retailing fields it is common for
executive and managerial personnel to be compensated partly
in the form of a base salary and partly in the form of year end
bonus.
TOTAL COMPENSATION PROGRAM
Total Compensation and Reward strategy is a statement of an
organization’s compensation and rewards philosophy. It defines
the objectives of the rewards programs, the individual elements
of these programs, and the ways in which those elements relate
with each other to fulfill reward objectives.
The formulation of a total compensation program should
incorporate 1) A comprehensive audit or assessment of current
programs 2) Internal business factors 3) external environment
and market factors. 54
1. A comprehensive audit or assessment of current
programs- to determine which programs have achieved their
objectives.
2. Review the competitive posture of the current total
compensation package in relation to the market by determining
the value of each element or component of cash and non cash
compensation such as basic, incentives, benefits, perquisites,
pension etc.
3. Rate each element of the program on the degree to which it
supports key objectives.
This audit examines the combined effect of the total package
and identifies gap between programs and objectives.
2) Internal business factors – Possible internal factors are
business strategy , management philosophies and values,
workforce demographics (turnover rate, age profile and family
status profile), life cycle position of the organization,
organization’s vision, mission, values and culture, management
philosophy
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3) External environment and market factors - Economic
environment (globalization, unemployment rate, supply-
demand situation in labour market), market compensation
trends, tax regulatory environment etc.
Internal and external factors need to be balanced when
designing the compensation package.
A total compensation package and rewards strategy helps the
organization
1. Align its compensation and reward strategy with its HR and
business strategy.
2. Develop new compensation and reward program or update
existing ones by serving as a guide for HR practitioners.
3. Compete better when recruiting new talent.
4. Moderate its labour cost by trading off some components
5. Enhance performance.
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 WAGE POLICY
Wage means any economic compensation paid by the
employer to his workers for the service rendered by them.
Economic objectives of Wage Policy
This is for the achievement of maximum economic welfare of
the people. This requires
• National income should be maximized
• National income should be divided equally among all the
members of the economy
• There should be a fair amount of stability in the national
income.
Economic welfare will be maximized if the highest and the most
stable standard of living is attained by all sections of the
community.
In order to secure this, it is necessary to achieve
• Full employment and optimum allocation of all resources. 57
• The highest degree of economic stability consistent with an
optimum rate of economic progress.
• Maximum income security for all sections of the community.

Social Objectives
• The elimination of exceptionally low wages.
• The establishment of “fair” labor standards.
• The protection of wage earners from the effects of rising
prices.
• The incentive for workers to improve their productive
performance.
Key considerations for Wage Determination
1. To end exploitation and provide remuneration to capital and
labour.
2. To fix statutory minimum wages in selected industries and
promote fair wage agreements in the more organized
industries. 58
3. To ensure equal pay for equal work.
4. To provide for wage differentials.
5. To regulate wages and salaries to eliminate/ reduce undue
disparities.
6. To link remuneration to productivity.
7. To compensate for the rise in cost of living.
8. To determine fair wage over and above minimum wages with
due regard to 1) productivity of labour 2) the prevailing level
of wages 3) the level of national income and distribution 4)
the place of industry in the economy of the country.
9. The capacity to pay.
10. The basic needs of labour.
11. To secure a living wage for workers.

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 DETERMINANTS OF WAGE POLICY
1. Compliance of Statutory and Government Requirements: Labour laws
relating to wages have an important influence on wages and salaries paid
by employers.
2. Fair external comparison / alignment of wages – Wage paid for similar
jobs in the industry.
3. Capacity to pay and corporate philosophy to pay wage rates.
4. Inflation and cost of living.
5. Job requirements and Cost of living.
6. Job Requirements and Internal consistency.
7. Influence of Trade unions in collective bargaining on Wages.
8. Productivity of Employees and its Linked Incentive systems.
9. Provide Wage differentials in Salary structure.
10. Individual Wage determination.
11. Fringe Benefits.
12. Demand and Supply of Labour.
13. Good Will of the company ,its Org’n culture and Managerial style.
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 TAX IMPLICATION OF EMPLOYEE COMPENSATION BY THE
EMPLOYER
Income Tax makes provisions for the following deductions in
respect of employee remuneration
1. Payment of salary/ allowances and perquisites.
2. Insurance premium on health employees.
3. Bonus and commission
4. Employer’s contribution to the staff welfare fund.
5. Family planning expenditure.
6. Entertainment Expenditure.
Tax Efficient Compensation Package
TAX PLANNING
Tax planning is an arrangement of one’s financial affairs in
such a way that without violating any legal provision, full
advantage is taken of the tax exemptions , deductions,
concessions, rebates, allowances and other relief or benefits
permitted under IT Act. 61
 Tax planning is to maximize “take home pay” by availing
tax exemptions, deductions and relief available. Also,
avoiding some of the taxable items by alternative
arrangements.
I .SALARY
The term salary defined for the purpose of Income Tax
include within its scope
1. Wages
2. Any Annuity or pension
3. Any gratuity
4. Any fee, commission, perquisite or profits in lieu of or in
addition to any salary or wages
5. Any advance of salary
6. The annual accretion to the balance at the credit of an
employee participating in a recognized provident fund to
the extent to which is chargeable to tax 62
7. Aggregate of all sums that are comprised in the transferred
balance to the credit of an employee participating in a
recognized PF to the extent to which is chargeable to
income tax.
All payments made by the employer by whatever name these
are called, which are attributable to the services rendered by
the employee would fall within the meaning of salaries and
would as a consequence be taxable.

II . ALLOWANCES All Allowances granted by the employer for

the personal benefit of the employee will form a part of his
salary for the purpose of assessment of income tax.
i) HRA – Tax exemption for HRA is available only if the same
is received as reimbursement for payment of rent in respect
of accommodation occupied by the employee as a tenant.

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ii) Conveyance allowance – exempted to the extent that it is
actually utilized for the performance of duties of an office.
iii) Traveling allowance and expenses – Any such allowance
whether granted on tour or for the period of journey in
connection with transfer to meet the traveling or the
ordinary daily expenses incurred by the employee on
account of absence from his normal place of duty is
exempted from Income tax.

III) PERQUISITES – (Non taxable) Take care to distinguish

whether a particular perquisite is taxable or not.
1. Rent free accommodation – rent of accommodation does
not exceed 60% of salary.
2. Provision of company owned car – perquisite value is nil if
the car is used wholly for official purposes.
3. Furniture- 10% per annum of original cost of furniture.
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4. Leave travel concession- immediate dependents.
5. Medical facilities – does not constitute a part of salary.
6.Other non taxable perquisites
• Refreshment provided by the employer during working hours in
office premises.
• Subsidized lunch or dinner.
• Recreational facilities.
• Goods manufactured by the company sold to the employee.
• Subsidized transport
• Employee’s contribution to Group Insurance scheme.
• Payment of premium for personal accident policy.
• Education allowance and hostel allowance subject to a
maximum of two children.
IV) EXEMPTIONS
• LTC
• Transport Allowance
• Foreign Allowance
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• Gratuity upto 3.5 lakhs.
• Leave salary or unavailed leave on retirement
• Pension is fully exempted
• Retirement compensation is exempted
• Retrenchment compensation
• Payment from statutory PF
• HRA is exempted
• Awards are exempted
• Salary paid by UNO or its bodies is exempted.
• VRS payment upto 5 lakh is exempted
• Senior citizens are exempted upto 1.53 lakh.

V) TAX REBATE
• Payment of Insurance premium
• Any contribution to PF.
• Any deposit with the PO savings bank
• National saving certificates. 66
• Unit linked insurance plan
• Unit linked insurance plan of LIC
• Any subscriptions made to any pension fund.

VI STANDARD DEDUCTIONS
Standard deduction is permissible to salaried employees at the
rate of 33% of the salary subject to a maximum of Rs.30,000 if
the salary does not exceed Rs.1.5 lakh. It will be 25,000 for
exceeding Rs.1.5 lakh but up to Rs.3 lakh. It would be 20,000
for salary in excess of Rs.3 lakh but within Rs.5 lakh. Those
who draw salary in excess of 5 lakh do not enjoy any standard
deduction.

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 Performance Linked Pay
Performance linked pay is a financially measurable reward
paid to an individual based on his or her overall performance.
This measure includes the cumulative performance of the
individual, his strategic business unit and of course , the
organization.
KEY OBJECTIVES AND BENEFITS
1. Induces a performance oriented culture. PLP contributes to
business objectives.
2. Links overall compensation strategy with the organization’s
business strategy.
3. Is employed to differentiate between an average and a star
performer.
4. PLP is a motivational technique and improves productivity.

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5. PLP helps team members understand their job expectations
better.
6. PLP is valuable as a retention tool.
7. PLP helps upgrade skills of team members by inducing a
competitive environment.

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