Compensation and Benefits- REVISED

8/6/2019 Compensation and Benefits- REVISED

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Compensation and Benefits


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Compensation is the process of providing

adequate, equitable and fair remuneration to the

employees

Benefits are Non-Wage benefits, such as paid

vacations, pensions, health and welfare

provisions, life insurance, the cost of which isborne in whole or in part by the employer.


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Compensation System

Components

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.1


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Compensation System Components

Equity Issues

Equity Theory Pay Systems

Market-Based Pay

Job Evaluation Pay Systems Pay Policy Issues


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Compensation Overview

Q1: What are the basic goals of anycompensation system?

to attract high quality employees

to retain high quality employees to stimulate high performance

Q2: What are the basic components of

any compensation system? base pay (wages)

incentives

benefits


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Compensation Overview

Q3: What are the basic tools of anycompensation system?

Wage surveys

Job analysis/evaluation Performance appraisal

Q4: Why do wages differ?

Differences by industry

Differences by occupation

Differences based on individual performance,

seniority, etc.


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Compensation decisions are influenced by

both internal and external factors:

Internal:

financial conditions

corporate/managerial philosophy

corporate strategy/life cycle

External:

labor market factors

area wages/cost of living collective bargaining agreements

government regulations

* Fair Labor Standards Act (1938)

* Equal Pay Act (1963)


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All organizations face three

basic compensation decisions:

A. Pay-Level Decision:

Are we going to lead, meet, or lag the market?

Comparison: Employees working on similar jobs in otherorganizations

B. Pay-Structure Decision:

How do we determine differences in pay for various jobs in ourorganization?

Comparison: Employees working on different jobs within the

organization

C. Individual Pay Determination:

How do we determine how much to pay various people in ourorganization?

Comparison: Employees working on the same jobs within theorganization


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A. Pay-Level Decisions

Wage and salary surveys are one of themajor tools used to make externalcomparisons

Decision points:

Which jobs to make comparison for?

What is the appropriate labor market?

Which organizations to survey?


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B. Pay-Structure Decisions:

Pay-structure decisions are typicallymade in one of two ways:

a. based on attributes of employees:

-- knowledge- or skill-based pay

b. based on attributes of the job:

-- job evaluation:

the process of determining the relative worthof various jobs within an organization

Q: Why do job evaluation?


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Four Types of Job Evaluation Systems

1. Ranking Systems

2. Classification (Job Grade) Systems

3. Point Systems4. Factor Comparison Systems


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Job Evaluation Pay Systems

Job Ranking

Review job descriptions

Rank jobs in order of relative worth or

importance to the organization

Use the rank ordering to set pay for each

job

Pay higher ranked jobs more than lower rankedjobs


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Job Grading (Job Classification)

Create a sequence of job grades

For each job grade, define the job grade in

words Nature of the duties performed; Examples:

Importance

Difficulty

Nature of supervision; Example: Close supervision with limited judgment vs. little

supervision with extensive judgment

Use the job descriptions to classify each

job into a job grade


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Job Evaluation Pay Systems Job Grading (Job Classification) (contd.)

Select a set of benchmark (key) jobs

Jobs with well-known, stable job content

Jobs that are common in many organizations

Jobs that represent the range of jobs being

evaluated

Jobs for which market pay data is available

Use the market pay data on the benchmark jobs to

set the pay for each job grade

All the jobs (including the non-benchmark jobs) in

a specific job grade get the pay associated with

that job grade


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Factor Comparison


Jobs with well-known, stable job content

Jobs that are common in many organizations Jobs that represent the range of jobs being

evaluated

Jobs that represent the range of each

compensable factor Compensable factors: the characteristics about jobsthat are used to set pay

Example of compensable factors: skill, effort,

responsibility, and working conditions



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C. Individual-Pay Determination:

On what do we base our individual

pay determination?

performance

seniority

??? (politics, non-job relevant issues)


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Equity Issues

Individual Equity: comparisons acrossindividuals in the same job in the same

organization

Example: In a retail store, is the paydifference between 2 Assistant Store

Managers perceived as fair?

Internal Equity: comparisons across

jobs in the same organization Example: In a retail store, is the pay

difference between the Store Manager and

an Assistant Store Manager perceived as

fair?


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Equity Issues (contd.)

External Equity: comparisons of similarjobs in different organizations

Match the market (match the competition)

No advantage or disadvantage in costs or in

attracting and retaining employees

Lead the market: higher costs offset by:

Easier to attract and retain employees

More applicants skim the cream (if valid) Lag the market: lower costs offset by:

Harder to attract and retain employees

Are there other goodies? (e.g., promotions)


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Equity Theory

Source of figure: Fisher, Schoenfeldt, & Shaw (2003), Figure 12.2


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Pay Systems: Market-Based

Pay Alternative names: Market-Based Pay =Market Pricing = Rank to Market

Steps for each job title:

Identify the relevant labor market:

Local

Regional

National

International


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Pay Steps for each job title (contd.): Obtain market pay data (contd.):

Or perform a market pay (wage & salary)

survey: Identify a sample of organizations in the relevantlabor market that have the job title

Contact each organization and ask how much they

pay the job title (minimum, average, maximum)

Avoid anti-trust (pay-fixing) concerns: Use an independent consultant to collect data

Collect data several months old (e.g., 3 months)

Include at least 5 employers for each job title

Have consultant report summary statistics only

Use the market pay data to set pay


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Pay Strengths: Not too complicated

Can adjust actual pay for each job to

match, lead, or lag the market

Weaknesses:

Assumes all jobs with the same job title

across different organizations are the same

Hard to use for unique jobs

Assumes market differences in pay

correctly captures internal equity issues


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Factor Comparison (contd.)

Rank the benchmark jobs on the basis of each

compensable factor

Collect market pay data for the benchmark jobs For each benchmark job, allocate benchmark

pay across the compensable factors

For each benchmark job, compare the factor

rankings to the pay rankings and make

adjustments as needed to bring the rankings

into agreement


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Factor Comparison (contd.)

Construct a job comparison scale, and slot

the benchmark jobs into the pay scale for

each compensable factor Apply the scale: slot all the non-benchmark

jobs into their proper places on the pay

scale for each compensable factor

Determine the pay for each job by addingup the pay from each compensable factor


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Point Method Define a set of compensable factors

Compensable factors: the characteristics of

jobs that are used to set pay Example:

(1) education

(2) experience

(3) knowledge

(4) physical demands

(5) mental demands

(6) responsibility for equipment & processes

(7) responsibility for materials & products

(8) responsibility for safety

(9) responsibility for the work of others

(10) working conditions

(11) job hazards


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Point Method (contd.)

Define a factor scale for each

compensable factor

Factor scale: define in words different levels (ordegrees) of the compensable factor Example: Factor scale for knowledge:

1st Degree: reading & writing; adding & subtracting of

whole numbers; following instructions; no interpretation

2

nd

Degree: arithmetic with decimals & fractions; usingmeasuring instruments; interpretation required

3rd Degree: mathematics; precision measuring instruments;

13 years applied trades training

4th Degree: advanced mathematics; 2 year technical

college

5th Degree: higher mathematics; engineering degree


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Point Method(contd.)

Assign points to

each degree of each

Compensable factor Example:

Source of table: Fisher, Schoenfeldt, &

Shaw (2003), Table 12.4


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Job evaluation: evaluate each job to

determine the number of points to assign

to that job on each compensable factor Frequently done by a job evaluation committee

Use the job descriptions as the source of job

information

For each job, add up the number of points oneach compensable factor to get the total job

evaluation points for the job

Jobs with more total points have more of the things

we value in setting pay


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Jobs with stable job content

Jobs that are common in many organizations Jobs that can be defined with precision

Jobs that are performed similarly across

organizations

Jobs that represent the range of jobs beingevaluated


Identify the relevant labor market for each

benchmark job


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Point Method (contd.) For each benchmark job, collect pay

information in the relevant labor market Use pay data collected by others

Or perform a market pay (wage & salary)survey:

Identify a sample of organizations in the relevantlabor market that have the benchmark job title

Contact each organization and ask how much they

pay the job title (minimum, average, maximum) Avoid anti-trust (pay-fixing) concerns:

Use an independent consultant to collect data

Collect data several months old (e.g., 3 months)

Include at least 5 employers for each job title

Have consultant report summary statistics only


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Estimate the market pay lines:

Run simple regressions using the benchmark

jobs as the data points:

Min pay line: regress minimum pay (dependent

variable) on points (independent variable)

Max pay line: regress maximum pay (dependent

variable) on points (independent variable)

Use the estimated market pay lines todetermine the pay ranges for each job

(benchmark and non-benchmark jobs)

Optional: create pay grades


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Broad banding

Definition:

Broad banding (or 'broad grades') is theconsolidation of traditional pay structures,

consisting of many, narrow pay rangesinto a few, wider ranges or bands.

Purpose:

Broad banding is intended to supportagile, flatter, faster-paced, de-bureaucratized organizational cultures.


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Use of Broad-banding

Broad-bands are imperative for companies with competency-based payprograms, but are also used in companies with longevity- andperformance-based pay programs.

Companies employ broad banding to:

facilitate change

avoid multiple pay structures drive pay decision-making downward (empowering managers)

provide greater latitude in management pay decisions

promote lateral moves or in-grade promotions

reduce use of promotions to increase pay

promote career development / learning

reduce the need for precise job analysis/evaluation

promote fewer, broadly-defined jobs

focus on the person instead of the job

facilitate quick responses to changing goals


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Structure of Broad- banding

Companies adopting a broadband structure

generally reduce the number of salary

ranges by one-half to two-thirds.

Most broad-banding companies use 10

bands:

2 for the executive level

4 for the managerial and professional level

4 for the non-managerial or hourly


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Prevalence:

Broad-bands (and career bands) are stillviewed as a novel approach to pay, yet to

be proven workable. While companiescontinue to move to broadband payprograms, anecdotal reports indicate thatmany early-adopters are returning to moretraditional (albeit relatively wide) paystructures.


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Broad- banding

Success:

Successful use of broad-banding requires that:

top management has a clear goals, understands the pros and cons,commitment

all managers are mature and highly trained in HRM and compensation

Pitfalls:Before moving to broad-banding, companies should consider the following:

Broad-banding demands that managers are aware of, and can interpret,market pay data

Broadband control points are not precise for individual jobs

Broad-banding increases the potential for employees to float to the top ofthe band, way out of sync with the market

Broad-bands lack the automatic cost-control mechanism inherent in narrowpay ranges

Broad-banding eliminates the possibility for precise job analysis/evaluation


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Various Types of Incentives

1. Profit-sharing plans

2. Gain-sharing plans

3. Lump-sum bonuses

4. Individual plans (e.g., piece-rate

plans, merit pay)


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ESOP

Employee Stock Ownership Plans

(ESOPs) involve granting some ownership

stake in the company to employees (some

or all) with a view to creating ownership

attitudes and aligning their interests with

that of the company and its shareholders.

ESOPs can be in the form of Stock OptionPlans, Phantom Equity Plans and Stock

Purchase Plans.


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Stock Options

Under a Stock Option Plan a company grants to an employee theright (option) to buy a certain number of shares in the company at afixed price for a certain number of years (option period). The fixedprice is called the 'grant' or 'strike' or 'exercise' price and is typicallythe market value / fair value of the shares on the date of grant. Sincethe grant price remains fixed over the term of the option, the

employee expects that the share price would increase and he wouldgain by exercising his option at a lower price.

Before the employee can exercise the option he is usually requiredto complete the vesting period (or fulfill other vesting restrictions)which typically require that he continue to work for the Company fora minimum number of years (three to five years) before part or all of

the options can be exercised. Many a times, certain performancetargets are set before the options can be exercised


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Phantom Equity Plans (PEPs)

Phantom Equity Plans (PEPs) or Stock AppreciationRights (SARs) provide employees with one or morebenefits of stock ownership without actually making theman actual owner. It is a performance based incentive thatis linked to the performance of the company as a wholeas reflected in its Share Value. An employee who hasPhantom Equity Stock can receive the upside benefits ofstock ownership, without having to invest any money andthereby eliminating an owner's risk of losing invested

capital. PEPs/SARs are used where the existing owners,say in a closely held company, do not intend partingownership control, but nevertheless intend to derivebenefits of an ESOP.


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Stock Purchase Plans

Stock Purchase Plans are generally usedin listed Companies, wherein theemployees are given the right to acquire

shares of the company at a price lowerthan the prevailing market price. Thediscount could vary from 5% to 25% and isexpected to act as a sufficient incentive for

the employee to acquire the stock, therebycreating ownership attitudes and a focustowards corporate performance


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The current legal framework setting up ESOPs in India

The entire legal framework for setting up ESOPsis now in place. Indian Companies Act permitsgrant of shares and sweat equity to employees.SEBI has also announced detailed guidelines for

grant of Stock Options and Stock PurchasePlans by listed companies. The taxability ofgains arising out of exercise of stock options etc.has been clarified through necessaryamendments to the Indian Income Tax Act. The

Reserve Bank of India also permits employeesof Indian subsidiaries of foreign companies toacquire shares of the foreign holding company.


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Basis of ESOPs to various

employeesSome companies grant

the same number of options etc. across theboard to all employees.

Most grant it on the basis of salary and gradelevels. It is possible to set /fine tune the grantlevels on performance criteria which may be setat an individual level, group a division level or forthe company as a whole.

Essentially ESOPs are a pay-for-performancerewards - the level of grants should be calibratedon the extent of performance and responsibilityhandled


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Leverage the power ofESOPs

Successive research in the USA and elsewherehas shown that employee ownership can bringphenomenal results, if sharing ownership isaccompanied by a committed effort to create a

culture in which employees are trained andencouraged to think and perform like owners.Educating employees about the plan, thebroader aspects of business, providing relevantinformation and encouraging employees to

make informed decisions are some of the keyelements in deriving the best mileage from anESOP.


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Why do companies set up

ESOPs forEmployees ?

It is a tremendous motivator and can get employees highly involvedin their jobs and focused on corporate performance.

It is vital tool to attract and retain quality employees, fostering inthem long term attitudes.

As a compensation tool, ESOPs offer rewards that can exceed theexpectations of employees but are still affordable to the company asthey are highly performance driven.

Internationally, ESOPs are used for granting retirement benefits toemployees and as succession plan for owners.

Increasingly, sheer competition dictates setting up ESOPs foremployees.

Strategically, economically, financially or philosophicallyESOPs are a win-win combination.


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Minimum Wages Act

The enactment of the Minimum Wages Act in

1948 is a landmark in the labor history of India.

The Act provides for fixation of minimum wages

for notified scheduled employment As per Government of India, for all the States,

the minimum wages have been fixed at about Rs

40 to 60 per day per person, average about Rs

50 per day for 25 days per month.


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Accident / Health care Benefits

The employee benefits realized through these

services include:

Enhancing workplace safety

Decreasing the risk of employee injuries Improving employee health and morale

Decreasing turnover

Minimizing workers comp and healthcare costs

Increasing productivity

Saving money


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Accident / Health care Benefits

Corporate health promotion programs can bring a positivereturn on investment

The company needs to build their investment strategies byanalyzing :

What type of return on our wellness Rupee investmentdo we expect?

What degree of investment are we willing to place ondeveloping our employee health asset?

Are we willing to invest in the long or short-term based onexpected returns?

Requirements of the Business to adhere to regulations/compliances


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Some Accident /Health care

benefits

Health education & awareness

Dieticians for their canteen menu

Medical room / sick bay manned by qualified

staff Importance of work life balance

Healthy life style changes

Medical insurance for spouse, children &

parents ( dental / vision coverage) Accident insurance( disability / death) covers for

groups/ individual and families of employees


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I T I T R t / Sl b 2007 08


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Income Tax - Income Tax Rates/ Slab 2007-08

PERSONALTAX RATES

For individuals, HUF, Association of Persons (AOP) and Body of

individuals (BOI):

Up to 1,10,000 NIL

Up to 1,45,000 (for women)

Up to 1,95,000 (for resident individual of65 years or above)

1,10,000 1,50,000 10%

1,50,001 2,50,000 20%

2,50,001 1,000,000 30%

1,000,001 upwards 30*%

A surcharge of 10% of the total tax liability is applicable where the total income exceeds Rs 1,000,000.


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Profession Tax

Who is liable to pay Profession Tax

(a) Every person getting salary or earning wages about Rs.5000/- permonth

(b) All legal practitioners including solicitors and Notary public standingin profession for more than 5 years in Municipal Area and more than10 years in other areas

(c) Medical practitioners standing in profession for more than two years.(d) Dealers whose Gross Turnover exceeds Rs.1,00,000/-.

(e) Agents having annual gross income of Rs.15,001/- or above

(f) Estate agents, brokers, promoters, commission agents, andcontractors whose business exceeds Rs.1 lakh.

(g) clearing agents, customs agents, licensed shipping brokers

(h) Owners and lessee of beauty parlors, health resorts, slimmingcenters, air conditioned hair dressing saloon.

(i) Technical and professional consultants, tax consultants, charteredaccounts, cost accountants.


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Profession Tax

Profession tax is different from state to state.

Maharashtra it is:

if the salary is less than Rs. 2500 nil

2500- 3500 60/-3500- 5000 120/-

5000-10000 175/-

10000 & above 200/-

Ref: Maharashtra state tax on trade, callings and employment act, 1975


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Fringe Benefits Tax

FBT Provisions in Brief

Levi able on Employer.

Levi able on Fringe benefits provided or deemed to have

been provided to employees @ 30% on value of fringe

benefits. Fringe Benefits divided in two categories

Fringe Benefits directlyprovided to employees

consisting of benefit, amenity, facility, free/concessionaltickets & contribution to approved superannuation fund

section 115WB(1). Deemedfringe benefits to employees on certain

expenditure incurred by employer as specified insection 115WB(2).


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Fringe Benefits Tax

Deemed Fringe BenefitsSection 115WB(2) Value of FringeBenefits

20 %

Free/concession ticket to employees

Contribution to Superannuation Fund

Entertainment Expenditure

Provision of Hospitality of every kind to any person

Conference Expenditure

Sales promotion expenditure Employees' Welfare expenditure

Conveyance, Tour & Travel (incld. Foreign Travel)

Hotel, Boarding, Lodging facilities

Motor Car expenses (including depreciation)

Telephone (including mobile phone)

Guest House expenses

Festival celebrations 50 %

Health club & similar facilities

Any other Club facilities

Gifts

Scholarships


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CTC or cost to company

Cost to Company can also be used to refer to the total cost that anorganization is spending towards their employee including theSalary, Perks, Cost related to benefits, Cost related to hiring,Training, Statutory Contributions etc.

A salary quoted as CTC may include some/ all of the following:

~ Cash component of salary

~ The rental value of the ( Individual/shared) accommodation provided

~ Interest on the deposit paid for your flat

~ Allocated cost of furnishings

~ Company's contribution towards your provident fund~ Your contribution towards PF

~ And, of course, the taxes that you have to pay

Compensation and Benefits- REVISED

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