Anatomy of a compensation offer

Rohan Vishwasrao (eMBA 9140)

The sum total of all forms of payments or rewards provided to employees for performing tasks to achieve organizational objectives

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

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

VARIOUS DEFINATIONS OF COMPENSATION

• Payment of wages Act, 1936

• The minimum wages Act, 1948

• The payment of Bonus Act, 1965

• Equal remuneration Act, 1976

LEGAL FRAMEWORK FOR PAYMENT OF SALARY- INDIA

CLASSIFICATION OF REWARDS

TOTAL Compensation

Direct

Indirect

Financial Non - Financial

Job Satisfaction

Praise / Rewards

Monthly SalaryAnnual IncentivesBonus

Provident FundGratuityTravel allowanceMobile expenseSales Promotional Expense

Compensation offer consists of 3 parts-

Base pay (Basic) – as per grade and scale for that level

Variable pay

Performance bonus

Base pay (Basic)

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

Two bases of calculation

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

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

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

• Job Evaluation

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

BASE PAY

Variable pay

Variable pay consists of the following components-

House rent allowance City compensatory allowance Dearness allowance-Fixed/Variable(for bargainable employees) Conveyance allowance Education allowance Medical allowance Leave travel allowance Leave pay Mobile allowance Provident fund Gratuity Superannuation

House rent allowance1. Percentage of base pay or lump sum amount payable per month

2. You can claim HRA if you fulfil these three conditions:  ~ You have an HRA allowance as part of your salary package.~ You are staying in a rented accommodation and paying rent for it. ~ The rent exceeds 10% of your salary.

3. The actual HRA you will be entitled to will be the least of the following. ~  The actual amount of HRA received.

~  40% of salary. This increases to 50% if you are renting out the house in Delhi, Mumbai , Chennai or Kolkata .~ Rent paid minus 10% of salary (basic component + dearness allowance)

4. HRA for bargain able employees is 5% of basic under Maharashtra industrial relations act(MIRA)

5. HRA for junior management could be between 18-25% of base pay

City compensatory allowance /cost of living allowance

1. Mostly not there for managerial level. Its aim is to help adjust to cost of

living in cities

2. It is for Tier-1 and Tier-2 cities.

3. The maximum limit for CCA is 850 

4. Normally, CCA will be equal to all employees right from the Manager to Sweeper barring some exceptions where companies may have different CCAs to different categories of employees.

5. That is why CCA is not calculated as percentage of Basic but paid as a fixed amount whereas DA (except Industrial Variable DA) is paid as percentage of Basic Salary.

Dearness allowance (bargain able employees)

Dearness allowance is divided into 2 parts- Fixed DA Variable DA 1) Fixed DA A small lump sum amount per month

2) Variable DA Determined by the consumer price index(CPI).Calculation is as follows-

Suppose we take base CPI as 2460  Current CPI is, say, 3460 then rise =1000 Then rise 1000/2460*100 = 40.65% Then DA will be 40.65% of Basic.

Conveyance allowance If Conveyance allowance is included in paycheck, it is non taxable up to 800 pm(rev to

3200) If reimbursement claimed, then you have to produce bills/vouchers

For middle/senior management- The conveyance can be broken down into 3 components-

1) Reimbursement of fuel cost -Nominal amount decided by company . -Example 100-150 liters of petrol is allowed then 100*56 = Rs. 5600 limit

2) Company car No cash in hand. Company handles everything from repairs to fuel bills. Generally after 5 years asked by company to get a new car.

3) Repair and maintenance including cost of insurance (own car) Nominal amount could be Rs 19000-25000 pm

4) Leased car Most beneficial-Fuel, maintenance AND lease paid by company

Education allowance Rs 150 per month per child for a maximum of 2 children is totally tax

emempt.Same for all categories

Medical allowance

1. Reimbursement of domiciliary medical expenses is tax exempt for a maximum amount of Rs. 15000 Per annum or Rs.1250 per month (same for all levels)

2. Medical insurance policy (Mediclaim) could be same for all levels or differ from level for example for junior management it could be Rs 100000-300000.Compulsary hospitalization for at least 24 hours

Leave travel allowance. LTA amount is lump sum payable annually in 2 years ,twice in 4 years,

which is tax exempt LTA amount varies across levels. Travel has to be undertaken within India and overseas destinations are

not covered for exemption The current block runs from 2010-2013

Leave pay Different from different acts, differes from company to company . Minimum according to Bombay shops and establishment act are 21

days for 240 days worked (for bargain able worker),and 1 day for 20 days worked under factories act(workers)

Mobile allowance Lump sum paid notionally to meet the expenses of official phone calls Rs

1500 pm limit

Provident fund 12% of wage contributed both by employer and employee wage = Basic+DA+food consession+retaining allowance

Gratuity An employee is eligible to gratuity if he has worked continuously for 5

years or more in the same organization. He gets 15 days pay for every year worked.6months or more of service

is counted as a year . Calculation - Gratuity payable= 15/26 * Number of years of

service*Last drawn salary Limit raised to Rs. 1000000 this year Its rate is 4.81 % of basic

Superannuation Superannuation Fund is a retirement benefit given to employees by the

Company The Company pays 15% of basic wages as superannuation contribution.

There is no contribution from the employee Some companies have the policy that employee has to work for at least 5

years before obtaining superannuation It is not tax exempt

Employees State insureance (ESIC) Employees earning up to Rs.15000 per month will be eligible for ESIC. Amount will be 6% of gross salary - 4.75 % paid by employee,1.75% paid by

employee Benefit is progressive neither concurrent nor retrospective

Variable components for Bargain able employees

Hazard allowance Hazard activity in day to day work Nomin al amount of Rs. 500-700 pm.

Washing allowance Given for washing uniforms .As low as Rs.125 pm

Hazardous operations allowance For Hazard which is once in a while. Example of workers in chemicals,

radiations in radiography .Notional amount of Rs.500-700 pm

Operating allowance Pro rata basis for employees performing higher grade jobs (eg Rs. 450-

600 pm)

Machine allowance Rs. 450-600 pm for operating high grade machines

Occupational hazard allowance Lead, dust, heat, asbestos have a limit. They have a tendency to cause

disease due to nature of job. So people working in these areas are paid an allowance of Rs.700 pm(notional)

Understudy allowance Comes from management concept. Applicable to highly specialized

workers example- Grade 4 worker ,who has a grade 3 worker as understudy.

Voluntary Benefits Benefits given by the company which are not mandatory, but which add

to employee morale

Educational benefits

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

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

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

Family

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

• Wedding anniversary allowance in NIIT, SPIC etc.,

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

• Family day at office- Bharti telecom.

VOLUNTARY BENEFITS EXAMPLES

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

SWEETNESS OF EXECUTIVE PERKS

Individual Incentives

Group/team Incentives

Organizational Incentives

INCENTIVES

Piecework Plans

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

Straight piecework:

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

Standard hour plan:

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

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

INDIVIDUAL INCENTIVE PLAN(For non mgmt/bargain able employees)

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 establishedperformance measure.

BONUS

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

• Intrinsic motivators are worthwhile as financial package

• Organization reward high performing employees

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

NON FINANACIAL COMPENSATION : COMPONENTS