compensation

compensationOUR ASSESTS WALK OUT OF THE DOOR EACH EVENING.WE HAVE TO MAKE SURE THAT THEY COME BACK THE NEXT MORNING

- NARAYAN A MURTHY CHIEF MENTOR OF INFOSYS

WHAT IS THE MEANING OF

Salary

Wages

Compensation

Significance Effective CompensationMotivate & Retain StaffAttract talentImage BuildingAdministratively EfficientReward Valued BehaviorEnsure EquityInstitutional effectivenessLegal Compliance Employee Management

Piece ratedSkill basedTime basedEffective compensation plans build an allowance for company profit at the high end of the range of profitability appropriate to the market stageEffective compensation plans focus on motivating salespeople to meet both tactical and strategic company needs: profit, growth, market share, volume, etc.Effective compensation plans include both fixed and variable elements that are easily managed by the company and quickly understood by the salesperson

Characteristics of Effective Compensation Plan Effective compensation plans do not hurt or take advantage of either the company or salesperson. Effective compensation plans value efforts according to their contribution, not just their difficulty.Effective compensation plans distinguish between performing tasks and achieving results. Effective compensation plans avoid competition between salespeople. Effective compensation plans allow salespeople to plan, whereby reducing stress.Effective compensation plans constantly address changing company goals and market conditions.

CTC CTC is the amount that an employer will spend on an employee in an particular year. Gross salary is the total salary he gets before deductions Net salary is the total salary he gets after deductionsCtc= gross salary + benefitsGross salary = ctc benefitsNet salary = gross salary deductions Ctc, gross salary and net salaryIndustry norms or company specific policiesTypes of organization Salary band and average age of employeesLocation of work Factors affecting CTCMonthly componentQuarterly componentOne time and annual component Advance component Deferred component Attendance linked component Seniority linked component Performance linked componentStatutory component Components

Basic salaryDearness allowance (% of basic salary) system of payment: linked with price index- flat rate and graduated rate Not linked with price indexPaid leaves and holidays off the job paid leave- holidays and vacation, other paid leaves( eg:maternity leave) on the job paid leave- eg rest periods between work hour

Monthly componentConveyance allowanceFood coupons Housing or HRASpecial allowance allowance to meet expense incurred while performing duties:Daily allowanceHelper allowanceAcademic allowanceUniform allowance Allowance to meet personal expensesChildren education allowanceHostel allowanceSpecial compensatory allowance eg: working in himachal Pradesh or tribal area etcAllowance to transport handicapped employees

PERQUISITESBONUSINCENTIVESQUATERLY COMPONENTS LEAVE TRAVEL CONCESSIONMEDICAL ALLOWANCEGIFT VOUCHERS ANNUAL AND ONE TIME COMPONENT THESE ARE THE MONEY GIVEN TO THE EMPLOYEES TO MEET CERTAIN PERSONAL EXPENSES MOSTLY AS A LOANADVANCE COMPONENTS Seasonal allowanceSeparation allowance Deferred components These components are linked with the attendance of the employees Attendance linked componentsIMORTANCECooperation between workers Politics by supervisors will not workEasy to measureLess scope for favouritismSimple to understandSense of securityHelps reward loyal workersLess scope for conflictsReduces labour turnover Seniority linked components Performance is not rewardedCompetent employees will not prefer this systemFails to differentiate between efficient and inefficient workersNo self motivation to excel A hurdle in attracting capable persons

LimitationsBonusIncentives

ImportanceHelps in achieving organizational goalsHelp in deciding performance levels positive influence of employees

Performance linked components Motivation cannot be guaranteedDependency on performance managementProper training of managersDisputes of performance measurement

limitationsProvident fund Gratuity pensionStatutory components CONTROL OVER REMUNERATION COSTCAN CONTROL LABOUR COST MORE EFFICIENTLYINTERNAL EQUITY EMPLOYEE SOCIAL SECURITY IS SEEN

Advantages of CTCCompensationBenefitSalaryPayBasic payWageAllowanceIncentivecommissionTerminology RewardRecognitionPerquisite benefit which one enjoys or is entitled to on account of one's job or positionFringe benefit an extra benefit supplementing an employee's money wage or salary, for example a company car, private health care, etc.Subsistence allowanceReimbursementConsolidated payStipendService chargePay scales Severance pay an amount paid to an employee on the early termination of a contract.Terminal benefit are final entitlements of an employee upon termination of an employment contract.BonusJoining bonusRetention bonusRelocation payIncrementStagnation increment IS IT INCREMENT GIVEN TO EMPLOYEES WHO COULD NOT BE PROMOTED AND HENCE BEING COMPENSATED

MANAGEMENTCOSTS COMMUNICATION CHANGE A fundamental business decision that an organization has made in order to achieve its strategic objectives e.g., what business to be in, how to gain competitive advantageThe greater the alignment, or fit, between the organizational strategy and the compensation system, the more effective the organization2-33StrategyStrategic Perspectives Toward Total CompensationSupport business strategy Allign compensation system to strategy

2-38Strategic Perspectives Toward Total Compensation (1 of 2)GoogleMedtronicObjectivesEmphasis on innovation Commitment to cost containmentRecognize contributionsAttract and reward the bestFocus on customersFully present at work and in personal livesRecognize personal accomplishment and share successAttract and engage top talentControl costsInternal AlignmentMinimize hierarchyEveryone wears several hatsEmphasize collaborationReflect job responsibilitiesSupport promotional growth opportunitiesFoster team cultureSee Exhibit 2.1, text pages 26-27Strategic Perspectives Toward Total Compensation (2 of 2)GoogleMedtronicExternally CompetitiveExplore novel ideas in benefits and compensationGenerous, unique benefitsMarket value of jobs establishes overall pay parametersChoices in benefitsEmployee ContributionsRecognize individual contributionsUnrivaled stock programsIncentives directly tied to business goalsOpportunity to earn above-market payRecognition of individual and team performanceManagementLove employees, ant to know itTechnology supportClearly understood; openTechnology supportEmployee choice2-4See Exhibit 2.1, text pages 26-27Which pay decisions are startegic Objectives Internal Alignment External Competitiveness Employee Contributions Management2-40Example: The Strategic Compensation Decisions Facing StarbucksObjectives: How should compensation support business strategy and be adaptive to the cultural and regulatory environment?Starbucks Objectives Grow by making employees feel valued.Recognize that every dollar earned passes through employees hands.Use pay, benefits, and opportunities for personal development to help gain employee loyalty and become difficult to imitate.Example: The Strategic Compensation Decisions Facing Starbucks (cont.)Alignment: How differently should the various types and levels of skills be paid within the organization?Starbucks ApproachDe-emphasize differences.Use equity based pay structures, cross-train employees to handle many jobs, and call employees partners.Competitiveness: How should total compensation be positioned against our competitors? What forms of compensation should we use?Starbucks ApproachPay just slightly above other fast-food employers.Provide health insurance and stock options for all employees (including part-timers).Give everyone a free pound of coffee every week.Example: The Strategic Compensation Decisions Facing Starbucks (cont.)Example: The Strategic Compensation Decisions Facing Starbucks (cont.)Contributions: Should pay increases be based on individual and/or team performance, on experience and/or continuous learning, on improved skills, on changes in cost of living, on personal needs, and/or on each business units performance?Starbucks ApproachEmphasize team performance and shareholder returns.For new managers in Beijing and Prague, provide training opportunities in the U.S.2-451. Assess Total Compensation Implications Competitive Dynamics Core Culture / Values Social and Political Context Employee / Union Needs Other HR Systems2. Map a Total Compensation Strategy Objectives Contributions Alignment Management Competitiveness

3. Implement Strategy Design System to Translate Strategy into Action Choose Techniques to Fit Strategy

4. Reassess the Fit Realign as Conditions Change Realign as Strategy Changes

Key Steps to Formulate a Compensation StrategyBest fit approach suggests that aligning compensation decisions with strategy will be most effective Best practices approach suggests that a set of practices exist that work with almost any strategyEmerging evidence suggests that a focus on What practices pay off best under what conditions? will be most effective

2-46Best Fit versus Best PracticesBest Fit vs. Best PracticesBest FitIf design of pay systemReflects companys strategy and valuesIs responsive to employees needs andIs globally competitiveCompany is more likely to achieve competitive advantageBest PracticesAssumptionsA set of best-pay practices existsPractices can be applied universally across all situations