Master of Business Administration- MBA Semester 4 MU0015 Compensation Benefits (Book ID: B1336) Note: Assignment (60 marks)

) must be written within 6-8 pages. Answer all questions. Kindly note that answers for 10 marks questions should not exceed 400 words. Q.1 Discuss the elements of compensation package.

Ans. The primary elements of a compensation package are: Base pay: Base pay is the fixed rate of compensation that an employee receives for performing the standard duties and assignment of a job. Employers need to ensure that base-pay programs are designed to reveal market practices within their identified competitor group. To achieve this, organizations must first identify their competitive market. This can be achieved by considering different factors, including the nature of the industry, geographic location, total employment and annual revenue. Next, they need to conduct an assessment of market pay practices for similar jobs within the recognised competitor group. This assessment should involve the duties, skills, and impact levels of each job evaluated that is, each job of similar size and scope. Variable pay: Performance-based variable pay continues to achieve momentum as a more successful way to identify and reward employee performance. Also known as payper-performance, variable pay is popular in todays corporate world. By including a percentage of variable pay in the compensation plan, organizations ensure that two people with different efficiency levels do not get the same benefits. By doing this, the company rewards productivity and hard work and motivates the under-performers to work hard. Once limited to senior management levels, these incentive or bonus plans are being redesigned to reward the achievement of specific company or employee performance objectives. In a variable pay plan, the size of the award varies among employees and from one performance period to another, based on levels of achievement measured, as well as against pre established company and employee performance targets. Amounts are usually calculated as a percentage of base pay depending on job category and position. Rewards are normally paid in cash on an annual, semi annual or quarterly

basis depending on the plan design. Plan designs range from sales-commission types to individual incentive or bonus plans to team awards. Skill and competency-based pay: Skill-based pay offers employees extra compensation when they have new skills specially recognized by the company as essential to achieve a competitive advantage. Skill-based pay can be particularly useful for employees who like their current jobs but are looking for new challenges. Competency-based pay is more widespread than skill-based pay because the criteria cover not only measurable skills but also knowledge, performance behaviors and personal attributes. Long-term incentive compensation: Long-term incentive compensation vehicles, such as stock-option plans and other deferred-compensation plans, which are not usually used to reward performance, are achieving desirability among employees. These long term incentive compensation plans appreciate employees based on company performance over a long term that is typically three to five years. Stock-option plans are a common form of long-term compensation at public organizations. In most private companies, incentives that reflect stock plans are used for key employees. Q2. Describe the importance of employee satisfaction. Explain the link between employee satisfaction and compensation. Ans. Employee satisfaction is the individual employees general thoughts towards the job. Employee satisfaction is also an employees cognitive and affective evaluation of their job. The employees satisfaction with rewards is, in part, related to what is expected and how much is received. Feelings of satisfaction or dissatisfaction occur when employees compare their input like job skills, education, effort and performance with output that is the mix of extrinsic and intrinsic rewards they receive. Employee satisfaction is also affected by comparisons with other employee in the same types of jobs and the same types of organisations. As a result, employees compare their own input or output ratio with that of other employees. While comparing themselves to others, most of the employees highlight only their strong points, such as certain skills or a recent incident of effective performance. Employees also give their own performance a higher rating than the one they receive from their supervisors. The problem of unrealistic

self-ratings exists to some extent as managers in most organisations do not communicate a candid evaluation of their subordinates performances to them. The biggest problem however, is the failure by supervisors to communicate a candid appraisal of performance, which makes it difficult for employees to develop a realistic view of their own performance. This increases the possibility of dissatisfaction with the pay that the employees are receiving. Employee satisfaction is very important for organisations, as it: Enhances employee retention. Increases productivity. Increases customer satisfaction. Reduces turnover, recruiting, and training costs. Enhances customer satisfaction and loyalty. Improves teamwork. Improves the quality of products and or services due to more competent, energised employees. Employee satisfaction is very important for employees as They will care about the quality of their work. They will create and deliver superior value to the customer. They are more committed to the organisation. Their work is more productive. Linking Employee Satisfaction to Compensation Linking employee satisfaction to compensation is being practised since long time in most of the organisations. Compensation designs based on this link usually measure performance from a relatively objective side, such as sales or revenues, stock price, productivity gains and so on. The example of this effort in recent times is embedded in labour contracts recently negotiated at United Airlines (UAL). The unions were able to push for a major new approach in part because they own 65 percent of UAL s stock. Under the terms of agreement more than half of the bonus pay received by the top 625 UAL managers was determined by criteria like time performance and employee satisfaction. While time performance is clearly an objective measure of performance, employee satisfaction is less objective and more unusual. In fact, only a small handful of other firms use satisfaction to determine executive pay. Employee satisfaction has to be measured and evaluated before a new compensation plan can be implemented. Usually, an outside survey firm is hired to perform the annual

survey for employees. The results of this survey is shared through out the company. Thus, the top management will get to know how employees feel about the compensation. Employee satisfaction towards compensation is the most important discourse for any company, because it is directly related to the performance that can be achieved by employees. The more an employee is satisfied and happy with their compensation, the better they perform. In turn, this will influence the company performance too. Thus companies should strive to bring in a fair compensation plan so as to increase employee satisfaction. Employee satisfaction with respect to compensation and rewards depends on the level of intrinsic and extrinsic results and how the employee views those results. These results have different values for different employees. For most of the employees, a responsible and challenging job may have neutral or even negative value depending on their education and previous experience by work providing intrinsic results. These employees might have a higher value for monetary rewards, whereas for a few others, a responsible and challenging position or the learning involved in the job may have very high positive values. Q3. What is pay structure? Explain why it is necessary to develop a proper pay structure. Mention the factors to be determined and steps for developing pay structures. Ans. Meaning of pay Structure: Pay structure is the grouping of pay grades or pay bands. There can be more than one pay structure in a compensation plan. For instance, there may be one pay structure for service and maintenance positions, one for sales positions and one for managerial positions. Or, the organisation may have just one structure for all positions. The following shows the necessity for developing a proper pay structure : Pay structure helps in analysing the employees role, value and status in the organisation. It also helps in the assessment of incentives. An organisation's pay structure is a visible demonstration of its compensation philosophy and plan. Pay structure is a tool, which is developed logically and communicated effectively to make the employees more motivated towards the job. The following three factors have to be determined while developing a pay structure:

The proper data for establishing the relative value of a particular job to the organization. The proper pay range for a job with the defined value to the organisation. The value of each job position within the specified pay range.

Once the above factors are determined, pay structures can be developed through the following steps: 1. Group the jobs with those that have a similar value in the organisation. 2. Measure these groups to find out the number of pay ranges needed to group the jobs on the basis of their value to the organisation. 3. Create a salary range that has a minimum point, a mid-point and a maximum point for amounts allotted within the range and determine the pay for each job grouping. An organisations compensation philosophy and pay strategy determines the approach that should be taken to allocate pay across job ranges. Factors to be considered are: Number of years of experience. Number of reporting staff members. Performance evaluation results. Hazardous working conditions. Undesirable shifts. Education and degrees. Professional certifications. Management opinions. A successfully developed pay structure identifies career development in addition to promotion. It demonstrates and pays for the business results on which an organisation places value. An effective pay structure is worth the time and attention. It pays to get it right.

Q.4 Explain the components of wages. Explain employee participation in wage fixation. Ans. Components of wages are as follows:

Basic Wage: It can be defined as payment for labour or services to an employee, especially payment on an hourly, daily, or weekly basis. The wages of an employee are fixed depending on the following: A basic rate of wages in addition to special allowance (that is cost of living allowance). A basic rate of wages which may include either cost of living allowance or cash value of concessions for supplies of essential products. A rate that includes basic rate, cost of living allowance and cash value of concessions. Dearness allowance: The dearness allowance is a part of the total compensation employees receive for having performed their job. It is a part of the original salary. The percentage is re-evaluated and may be changed every six months. Compensation Benefits Bonus: It is an extra pay given to employees in appreciation to their performance. The advantage of bonus is that in case of low paid workers, such sharing increases their earnings and therefore, helps in bridging the gap between the actual wage and the needbased wage. Fringe benefits: The term fringe benefit refers to the extra benefits provided to employees, apart from the compensation paid in the form of wages or salary. Employee participation in wage fixation : It is essential to involve employees in many phases of a reward system. For example, a wide variety of employees should serve on job evaluation Compensation Benefits committees. If a point plan is adopted, we can involve employees in identifying the compensable factors to be used and prioritising these factors. Employees are also likely to have good insight into which competitor firms should be included in a wage survey. Employee involvement can be done using different methods. At the least, a survey can be done to understand their preferences. Groups of employees can help in combining these preferences into a system. Q5. Describe Cost-to-Company and list its components.

Ans. Cost to Company :

Cost to Company (CTC) is the amount that you cost your company. That is, it is the amount that the company directly or indirectly spends on you because of employing you. Components of CTC : The following are the components of CTC: Basic. Dearness Allowance (DA). House Rent Allowance (HRA). Medical allowance. Conveyance allowance. Special Allowance. Vehicle Allowance. Incentives or bonuses. Leave Travel Allowance or Concession (LTA / LTC). Telephone / Mobile Phone Allowance.

CTC includes the salary directly paid to the employees, the benefits directly attributable to the employees such as companys contribution to the provident fund, pension funds, medical insurance premium, life insurance premium, cost of loans offered to the employees, telephone expenses for mobile phone connections and land-line connections, benefits offered for visiting the home country or hometown and so on. It is important to note that even a lower CTC might mean a higher take home pay than an offer with higher CTC, if the other components are arranged differently. Similarly, you must not infer that with increase in salary or position, your pay as percentage of salary will increase/decrease. You have to assess each offer separately. Most companies usually talk in terms of CTC as the figures look more impressive. However, they are often misleading. You should carefully look at their offer and calculate yourself how much your take home pay will be. After all, all deductions are based on fixed percentages and you can easily arrive at the right figure. Even the company will guide you on this. Sometimes, even a lower take home pay may be beneficial if the other payments are made against vouchers/bills (for example, telephones, cars, refreshment, and so on). This will ultimately lower your tax liability. Hence you should look at both CTC as well as take home pay while negotiating. You also have to look at certain other criteria like work timings, number of holidays, employee centric schemes for further education, and so on.

These factors must not be ignored even though you cannot put a money value to these factors. Q6. What is meant by strategy? Write a brief note on Strategic compensation planning. Ans. Strategy : A strategy is an elaborate and systematic plan of action. A business strategy is a set of decisions concerning policies and practices associated with an organisations system. It is the choice and scope of an organisation over the long term, which achieves advantage for the organisation through its composition of resources within a challenging environment. Organisations need to formulate their strategies in each functional area, so that it can meet the needs of market and can fulfill the stakeholder expectations. Strategic compensation planning : Strategic compensation planning helps organizations to focus on their strategic objectives and develop a comprehensive plan, considering base Compensation Benefits pay, shortand long-term incentives, benefits and growth opportunities. This kind of planning helps ensure that the compensation system will support the organizations long- and short-term objectives. The ultimate objective of this process is to ensure that the compensation system attracts and retains good performers and motivates them to do those things that support the business plan. In simple words, a strategic compensation plan is the one that enhances employee motivation and growth and at the same time aligning their efforts towards the culture, philosophy and objectives of the organization. Apart from this, environmental, organizational, institutional, and technological factors are high influencers of strategy. An organization should also take all these factors into account in order to sustain growth and profitability. A strategic compensation plan should take care of all the important aspects like costeffectiveness, legal compliance, internal and external equity and pay linked to performance. The alignment of performance, pay and rewards is done to support corporate transmission. This involves four strategic elements in a closed loop, they are: Transformation of business into HR interventions. Designing and delivering them with key objectives. Ensuring the change process. Analyzing and evaluating the outcome (results).