Compensation Management

Meaning and Important Concepts

If you pick the right people and give them the opportunity to spread their wings - and put
compensation and rewards as a carrier behind it - you almost dont have to manage them.
Jack Welch
Most of us would have heard the term compensation in the context of getting paid for the work
that we do. The work can be as part of full time engagement or part time in nature. What is common
to them is that the reward that we get for expending our energy not to mention the time is that
we are compensated for it.
From the perspective of the employers, the money that they pay to the employees in return for the
work that they do is something that they need to plan for in an elaborate and systematic manner.
Unless the employer and the employee are in broad agreement (We use the term broad agreement
as in many cases, significant differences in perception about the employees worth exist between
the two sides), the net result is dissatisfaction from the employees perspective and friction in the
relationship.
It can be said that compensation is the glue that binds the employee and the employer
together and in the organized sector, this is further codified in the form of a contract or a mutually
binding legal document that spells out exactly how much should be paid to the employee and the
components of the compensation package. Since, this article is intended to be an introduction to
compensation management, the art and science of arriving at the right compensation makes all the
difference between a satisfied employee and a disgruntled employee.
Though Maslows Need Hierarchy Theory talks about compensation being at the middle to lower
rung of the pyramid and the other factors like job satisfaction and fulfilment being at the top, for a
majority of employees, getting the right compensation is by itself a motivating factor. Hence,
employers need to quantify the employees contribution in a proper manner if they are to get the
best out of the employee. The provision of monetary value in exchange for work performed forms
the basis of compensation and how this is managed using processes, procedures and systems form
the basis of compensation management.
As the module progresses, readers would be introduced to other aspects of compensation
management like the components of compensation management, types of compensation, inclusion
of variable pay, the use of Employee Stock Options etc. The aspect of how skewed compensation
management leads to higher attrition is discussed as well. This aspect is important as studies have
shown that a majority of the employees who quit companies give inadequate or skewed
compensation as the reason for their exit. Hence, compensation management is something that
companies must take seriously if they are to achieve a competitive advantage in the market
for talent.

Considering that the current trend in many sectors (particularly the knowledge intensive sectors
like IT and Services) is to treat the employees as creators and drivers of value rather than one
more factor of production, companies around the world are paying close attention to how much
they pay, the kind of components that this pay includes and whether they are offering competitive
compensation to attract the best talent. In concluding this article, it is pertinent to take a look at
what Jack Welch had to say in this regard: As the quote (mentioned at the beginning of this article)
says, if the right compensation along with the right kind of opportunities are made available to
people by the firms in which they work, then work becomes a pleasure and the managers task
made simpler leading to all round benefits for the employee as well as the employer.

Components of Compensation - Part I

The previous article introduced the topic of compensation management and how the right kind
of compensation goes a long way in making employees motivated and happier.
Hertzbergs Hygiene theory refers to how certain factors are necessary to maintain Hygiene or
ensure that the employees are not dissatisfied.

These factors alone do not contribute to quantum jumps in employee satisfaction. Rather, the
absence of these factors makes employees dissatisfied.
The point here is that if a fair and just compensation is provided, the employee has the baseline
requirements met which ensures that he or she is now in a position to go for higher things like job
satisfaction and fulfilment.
However, if compensation is found to be lacking, the employee might very well be unhappy and
dissatisfied with the company leading to attrition and other such negative outcomes.
Hence, having the right compensation is the first step in getting the best of employees.

If we take a look at the components of a compensation system, we find that employers decide on
what is the right compensation after taking into account the following points.
1. The Job Description of the employee that specifies how much should be paid and the parts of the
compensation package.
a. The Job Description is further made up of responsibilities, functions, duties, location of
the job and the other factors like environment etc.
b. These elements of the job description are taken individually to arrive at the basic
compensation along with the other components like benefits, variable pay and bonus.
It needs to be remembered that the HRA or the House Rental Allowance is
determined by a mix of factors that includes the location of the employee and
governmental policies along with the grade of the employee.
Hence, it is common to find a minimum level of HRA that is common to all the
employees and which increases in proportion to the factors mentioned above.
2. The Job Evaluation that is a system for arriving at the net worth of employees based on
comparison with appropriate compensation levels for comparable jobs across the industry as well
as within the company.
a. Factors like Experience, Qualifications, Expertise and Need of the company determine
how much the employer is willing to pay for the employee.

3. It is often the case that employers compare the jobs across the industry and arrive at a particular
compensation after taking into account the specific needs of their firm and in this respect salary
surveys and research results done by market research firms as to how much different companies
in the same industry are paying for similar roles.

The components of compensation that have been discussed above are the base requirements for
any HR Manager who is in charge of fixing the compensation for potential employees.
There are other variables as well that would be discussed in subsequent articles. This article has
introduced several concepts around the topic of components of compensation and these concepts
are crucial for HR professionals as well as those aspiring management professionals who want to
make a career in the corporate world.
Before concluding this article, it needs to be remembered that exit interviews have shown that over
70% of employees who quit their jobs do so because they are dissatisfied with the compensation
that they are getting. Hence, all HR professionals and managers must take this aspect into account
when they determine the compensation to be paid to employees.

Components of Compensation - Part II

In the previous article (Part I) we looked at some of the components of compensation that are paid
out to employees and the way in which these components are fixed by HR managers and
companies. In this article (Part II), we shall look at some components of compensation like Basic
and Variable Pay (including the sub-components of variable pay) and discuss how these are fixed
by the firms when they sign off on the compensation packages to their employees.
To take the first component that is common to all packages at all levels (hence the term basic however, it is not the same for all levels).

Basic pay is the base on which the compensation package rests. This is the equivalent
of the base of the pyramid and the other components are usually fixed as a percentage of
the basic pay. It is common to find components like HRA (House Rental Allowance) and
Additional Pay as a certain percentage (say 20% or 30%) of the Basic.
There are many companies that have introduced the concept of Variable Pay where
this particular component of the compensation is not fixed, but is a percentage of the Basic
that is paid out according to the performance of the company, group and the individual.
Hence, the term performance linked pay is also used for variable pay.
If we take the three sub-components of the Variable Pay a. The company performance linked pay is as the term implies paid out as a
percentage of the Basic that is tied to the performance of the company as a whole.
So, if a company performs exceedingly well in the given quarter, then the employee
might get a large percentage (say 100% or 150%) of the base of the component. If

a company does do not well or does only moderately better, then the employee
might get a lower percentage of the base (say 50% or 75%).
b. The group performance linked pay is paid out in a similar manner but the point
of reference in this case is the performance of the group or the division in which
the employee works.
c. Finally, the most important sub-component is the Individual Performance Linked
Pay that is paid out according to the performance of the employee and hence is
entirely tied to the way in which the employee performs as determined by the rating
that he or she gets at the end of the performance cycle.
The rationale for these components is that an employee would be better motivated to perform
individually, contribute to the group to which he or she belongs and finally, perform well keeping
in view the overall growth of the company. Hence, these sub components of compensation have
been designed to spur the employee to excel not only in an individual capacity but as a team
member and finally, a responsible employee of the company. The idea here is to discourage silo
based performance and instead concentrate on all round performance.
In the articles to follow, we shall look at how employees can negotiate their compensation by
following some tips that we shall provide.

Negotiation in Compensation Management

It is impossible to talk about compensation management without referring to the process of
negotiation and bargaining that is an integral part of compensation management. As anybody who
has worked in the formal or even the informal sector knows, the process of negotiating ones salary
and perks is fundamental to the process of hiring and selection. In this article, we look at some of
the strategies employed by professionals world over when they negotiate with their prospective
employers regarding their compensation.
Have a Plan in Place
The first element of negotiation is to plan for the process by deciding on how much more you want
and how much you think the employer is willing to give. The fine art of knowing how much you
should ask for and at what point should you strike the deal is something that experienced
professionals know and rookies should learn. Without having a clear idea of the target level of
compensation that you are aiming for, the negotiation process would turn out to be an exercise in
futility.
Communicate Your Needs
Once you have arrived at a figure that you think you deserve, the next step is to communicate the
same to the prospective employer without delay. The important point to note here is that the way
in which you articulate your needs is as important as the need to drive a bargain. For instance,
without expressing yourself clearly to the HR manager of the prospective employer, there is little
chance that he or she would understand your needs and respond appropriately. Hence, once you

have sorted out the target compensation that you want, you should also have a strategy to
communicate it to the employer.
Timing is Everything
You need to remember that there is something called being too early when you negotiate and too
late as well. Hence, the timing of your articulation forms the basis for a successful negotiation. For
instance, if you start your demands early on in the hiring process, the prospective employer might
stall the process or even put a stop to your hiring. On the other hand, if you put forward your
demands as you are about to join the firm, there is precious little anyone can do about your
demands. Hence, you should have a keen eye for when you should communicate your demands.
The three aspects of having a plan, communicating the need and then timing it in such a way as to
derive maximum advantage are essential to the negotiation process. Of course, there are many
firms that do not entertain any sort of negotiation and there are firms that put up pretense of
negotiation when in reality, they do not budge at all. In these cases, it is better to adopt a wait and
watch policy and make your move once they get into the details of your compensation.
In conclusion, a successful negotiation hinges on the willingness of both the parties to hear
each other and an ability to arrive at a common denominator in a spirit of accommodation.
Hence, do not be overtly rigid and at the same time do not give in to the employer totally.

Compensation and the IT Sector

The IT (Information Technology) sector comprising of software and hardware sectors is a sunrise
sector in many countries. Despite the fact that the sector has been around since the late 1980s, the
sector is considered relatively young and a place for innovation, entrepreneurship and growth. No
wonder many fresh graduates flock to the IT sector after graduation to take up roles that are
challenging and stimulating.
To attract the best talent available, the IT sector designs the compensation packages in ways that
can be termed innovative and path breaking as they bundle the basic compensation components
and perks and benefits in novel and unique ways.
This article looks at some of the ways in which the IT sector provides compensation for its
employees.
Innovative Compensation Packages
A hallmark of the compensation packages in the IT sector is their reliance on non standard
components that are the characteristic of the old economy or the traditional sectors. In
comparison, the so-called new economy companies make it a point to include additional
components like variable pay, performance linked incentives over and above the base pay that they
give out to their employees. With the aura surrounding the IT sector, many employees have come

to take for granted the high pay along with the attractive perks and benefits that these companies
give.
ESOPs
The IT sector pioneered the introduction of ESOPs or Employee Stock Options plans for the
employees as a means of ensuring that employees take more ownership and responsibility for their
work by making them partners in the growth of the company. The rationale for giving stock options
to employees is that once they feel a sense of ownership with the company in which they are
working, their performance levels go up due to increased motivation and satisfaction that such a
practice tends to inculcate in the employees. Given the fact that most IT stocks zoom ahead in
value after the IPO or the Initial Public Offering is announced and retains their valuations well into
the companys existence, IT companies that offer ESOPs are much sought after by many
employees.
Other Perks and Benefits
The IT sector provides additional benefits like transportation, medical allowance and allowances
for furnishing ones house. With an emphasis on all round welfare as opposed to paying the
employees what is the minimum, IT companies ensure that their employees are taken care of well.
Many companies in the IT sector are quite liberal in insuring their employees and their families
under group medical insurance which provides adequate cover to the employees and their families
in case of illness and surgeries as well as accidents and other unanticipated contingencies. Further,
some IT companies go a step further and provide for recreational allowances that ensure their
employees vacation expenses are also taken care of.
Given the innovative ways in which IT companies provide for their employees, it is not surprising
that this sector ranks among the most preferred employers and the companies that make up this
sector is the destination of choice for many a grad fresh out of college.

Attrition and Compensation Management

Many studies have found that there is a direct causal linkage between the levels of compensation
that a firm pays and the rate of attrition that it has. Attrition can be voluntary and involuntary,
where the former is the employee quitting the company out of his or her own volition and the latter
is the company asking the employee to quit for a number of reasons ranging from non-performance
to violation of rules and regulations. In this article, we consider the voluntary attrition and the
linkage between inadequate compensation and attrition.
Low compensation and Attrition
The exit interviews conducted by the HR professionals to ascertain the reasons behind an
employees exit usually reveal that low compensation is a major factor behind the employees
decision to quit the company. Research into the phenomenon of attrition has found that many
employees (particularly at the entry and the middle management levels) leave companies because

they have been offered better compensation at another company. On the other hand, the senior
management personnel quit to take up challenging roles that pay well as well as provide self
actualizing drives to them.
Hence, it can be construed that compensation is a major factor behind an employees desire to
quit a particular company and join another company.
Compensation as a Hygiene Factor
Hertzbergs theory of motivation lists hygiene factors as those conditions when absent cause an
employee to be dissatisfied. The point about this theory is that factors like adequate compensation,
a congenial working environment and additional benefits are necessary to motivate the employee
and they ought to be present to keep the employee happy. The absence of such factors makes the
employee lose focus and drive and hence the lack of hygiene makes it difficult for the employee
to continue.
How to Manage Compensation Expectations
The appraisal time or the time of the year when employees are graded on their performance is
usually the time when employees put forth their aspirations and expectations regarding the
compensation and other aspects of their job. Hence, the line managers and the HR managers must
make it a point to manage the expectations of the employees during this period. The attrition is
usually the highest when employees are handed their raise letters that specify how much their
compensation is increased. This is because the employees might expect more than what they have
been awarded which leads to dissatisfaction.
Though compensation in recent years has ceased to be the be all of employee satisfaction with
the nature of work and the responsibilities that an employee has becoming more important in
determining job satisfaction, it still is one of the most important factors behind an employees
decision to quit a company. Hence, it is incumbent upon HR professionals and the senior
management that they devise compensation plans keeping in mind the various factors that drive
an employees psyche. Only when an employee is satisfied with his or her condition in a company
can they perform at the desired levels.

Executive Compensation
When one writes about executive compensation, the thought of jet setting CEOs who enjoy
luxurious lifestyles and live in gardened villas at the companys expense comes to mind.
While the stereotypical image of a CEO enjoying such extravagance is indeed true to a
certain extent, there is more to the topic of executive compensation. For instance, the practice
in recent years has been to offer generous packages to executives that include stock options,
benefits and variable pay over and above the basic components.

The point to note is that executive compensation is as removed from the compensation packages
offered to middle and lower tier employees as they are in the hierarchy of companies. The reason
for this has been the trend of CEOs and executives being vested with more responsibilities as well
as an emphasis on holding them responsible for top line and bottom line growth.
Gap between CEO and Worker Pay
Among the many causes attributed to the ongoing global financial crisis was the one about flawed
incentives and high compensation packages to the executives which resulted in skewed priorities
for the executives who were bent on registering profits at any expense and in the process throwing
caution to the winds. It was also pointed out that the gap between the compensation of the CEOs
and the lower most employee was in the ratio of 300: 1 for companies like GE (General
Electric) and GM (General Motors) where the CEOs of these companies raked in Millions
of Dollars of compensation when compared to the workers who were barely making five digit
salaries. This has spurred a debate over the efficacy of paying executives so much when the end
result is not commensurate with the pay.
Perks and Benefits
While salary is one part of executive pay, the associated perquisites and benefits that executives
are granted by the board of directors is another important aspect. Things like paid vacations,
childrens education, preferred neighborhood housing and access to the best clubs and other
benefits make the job of executives an aspirational one for many business graduates. Further, the
humungous bonuses offered to the executives (in the range of 100% to 300%) makes one wonder
whether the stratospheric levels of executive pay is something that needs a rethink by the collective
conscience of the corporate world.
The point that this article is making is that while executive compensation needs to be
commensurate with the level of experience, the ability to articulate vision and imbue the
organization with a sense of mission and at the same time the capability to take risks, there needs
to be a line drawn somewhere which caps the compensation and packages offered to executives at
levels that are more earthly. While the intention is certainly not to begrudge the compensation
being offered to executives, the incentive system must be more tied in to current market realities
as is the case with compensation at other levels. Hence, the lessons learned from the recent
financial crisis about asymmetric risk and reward systems must not be forgotten in a hurry.

Compensation
Globalization

Management

and

This module has covered topics related to compensation management and discussed the topic from
a variety of perspectives. To close the compensation management module, here are some thoughts
on where the corporate world is headed worldwide in the context of the ongoing global economic
crisis and how the corporates are addressing the needs of their employees.

Further, globalization has created a global village where people in different parts of the
world are able to not only participate in global supply chains but also partake of the wonders
of cultural exchange and assimilation. This has created aspirational values among large sections
of people in the developing countries who now demand better compensation at par with their
counterparts in the advanced economies of the West.
Hence, corporates need to be aware of the complexities of the issue of how much compensation
and in what form that is to be paid to the employees taking into account all the factors.
Given the fact that most companies in the West outsource to countries like China and India because
of the cost advantage where lower wages in these countries provide cost savings, the reckoning of
higher wage demands and wage parity that occurs because of economic factors might obviate the
advantage enjoyed by these countries as far as the outsourcing phenomenon is concerned.
In this context, it is worth noting that corporates world over are feeling the pinch of the ongoing
global economic crisis and this has led to depressed wages as well as lower hikes for the employees
in the last two years. Hence, the added challenge of keeping the workforce happy in these gloomy
times is something that HR managers must take into account as well.
The globalized workforce that participates in the global supply chain creates its own set of
challenges with many expatriates being paid hardship allowances to entice them to work
abroad in developing countries. Further, the native workforce in these transnational corporations
earn higher wages than those of the average workers in their countries leading to ethnic tensions
and demand for inclusion of the less qualified workers. All these factors need to be addressed by
the managers of corporations when they decide on the compensation.
Finally, the very real phenomenon of attrition because of poor compensation continues to haunt
the corporates and the challenge of retaining quality workers while retrenching poor performers
remains a key imperative for companies. Hence, compensation management has aspects other than
those that were discussed so far in this module and this article is meant to highlight some of them.
It is hoped that the world economy recovers quickly and the boom years where workers and
corporates were happy working together come back to the advantage of everybody.

Corporate Strategies to beat the Downturn:

Cutting Slack and Layoffs
The Difference between Top Line Growth and Bottom Line Profitability
Corporates need growth to sustain their activities and increase their profits. What is known in
financial jargon as Top Line Growth is the increase in revenues that happens because of growth
that the corporate actualizes during a given year. In contrast, what is known as Bottom Line Growth
is the net result of revenues minus costs of doing business and taxes paid apart from other items in
the income statement that result from an outflow of funds. In other words, a corporate is profitable
when its bottom line is positive meaning that the difference between revenues or the inflows and

the expenditure or the outflows is positive. This is the cardinal rule under which any corporate
functions and usually, most corporates increase their bottom line through increased revenues and
cutting costs that result in more top line growth (increased revenues) and better bottom line
growth(as a result of increased top line and decreased expenditure).
During recessionary times (like the one that is now underway in the world, corporates find it
difficult to grow their top lines because of sluggish demand, consumer purchases and spending
decreasing because of lesser disposable incomes, and an overall bearish sentiment that results in
lesser revenues. In this scenario, corporates usually focus on cutting costs as a means to sustain
their bottom line growth. Remember that the bottom line can grow even in the absence of more
profits by cutting costs and rationalizing expenditures which reflect in the income statement as
decreased expenses and hence, additions to the bottom line.
Strategies to beat the Downturn
This brings us to the strategies that corporates pursue during recessionary times to increase their
bottom lines. These strategies usually entail cutting costs wherever and however possible. As
salaries and benefits given to employees are a major source of expenditure to corporates, layoffs
are the typical reactions to recessions. Apart from layoffs, the other strategy that the corporates
pursue is through rationalizing the costs, which means that no salary hikes, no bonuses, and a
trimming of employee benefits. These are typical reactions to a no growth or a slow growth
external environment. Further, many corporates cut down on costs by focusing their energies on
critical and performing operations and activities. This usually results in shuttering of loss making
business units and phasing out of activities where the costs are high and the revenues are less.
Moreover, corporates also resort to increasing profitability that can actualize by increased
profitability, greater returns on existing processes through efficiency, and a focus on getting more
bang for the buck, which means that corporates employ strategies that are intended to extract more
revenues from the operations and reduce costs from the same.
Innovation, Automation, and Increased Productivity
Increased productivity is usually actualized through innovation, automation, and increased
demands on employees to spend their time productively. Among the three methods listed
previously, the performing corporates usually resort to innovation as a strategy to beat the
downturn. Next are those who automate their processes to a greater degree and layoff the redundant
employees. Third are those who make more demands on their employees by asking them to work
more hours, spend lesser time in breaks from work, and generally asking them to be more
productive. It needs to be mentioned that among these strategies, the best companies usually
combine elements from all the three to actualize more profitability.
Cutting Slack and Trimming Flab is the Answer to fitness for individuals and Corporates Alike
We have discussed how corporates react to decreased revenues by cutting costs. The key aspect
about these strategies is that they all focus on cutting slack or trimming the costs. An example
would be an overweight person who has to be fit if he or she has to remain in contention for work
and healthy living. This means that this individual has to cut the extra fat and generally lead a

healthier life by cutting down on excess consumption. Similarly, the bottom line for corporates to
better their bottom lines is through trimming the flab and increasing the fitness of the organization.

Development of Compensation System

Compensation system involves the total rewards that are given to the employees for the labour and
services they provide to the organization. Compensation includes direct monetary benefits as well
as indirect monetary benefits.
Wages and salaries form the direct financial benefits that an employee receives from his or her
company. Besides, wages and salaries, bonuses and commissions also form a part of the direct
monetary benefits. The indirect monetary benefits include paid absences and other leave benefits,
retirement plans, employee insurance schemes, health plans, education benefits and other such
benefits.
A well-defined and balanced compensation system gives the organization an advantage of
maintaining internal as well as external equity. It is a powerful tool for attracting employees,
motivating them to work in achieving the strategic organizational goals, and retaining them in the
long run. An HR Consulting Firm can provide an in depth analysis and detailed report on the
setting up of a balanced compensation system for the company.
An organization need to have a clear compensation philosophy which is in line with the
strategic goals, objectives and culture of the organization. Based on the compensation
philosophy of the company, the various components of compensation are designed and chalked
down in detail.
The development of compensation philosophy includes the study of various aspects viz:

Impact of compensation strategy in promoting organizational success

Organizations stand in considering the compensation provided as a tool in attracting
and/or retaining employees
Does the organization intend to lead/lag/match the compensation market for the given
geographic area and in the concerned industrial sector?
How does the organization aims at maintaining internal and/or external equity?
How is the employees performance linked in relation to wage or salary increases?
Following the legal formalities, rules and regulations of the land

Compensation detailing comprises of identifying positions and setting up of wage or salary

specifications against each of the position. Also, incentive packages and bonuses, if any, are clearly
defined for each of the position while describing the compensation related details.
Compensation detailing may involve execution of following activities depending upon the
requirements of the organization:

Designing pay scale

Defining bonus and incentive plans

Performing salary surveys
Examining the requirement for wage/salary changes or increase
Defining guidelines for change/increase in wage/salary
Elaborate preparation of compensation policy and compensation strategy

A compensation study carried out in an organization generally involves following important

elements:

Analyzing the current situation and requirements of the organization

Conducting salary/wage surveys and interviews within the organization
Studying the various positions or jobs as existing in the organization
Restructuring and redefining the positions, according to needs
Defining the internal worth of the different positions in the organization
Ranking the various positions and jobs in the company
Evaluating the existing base compensation plan of the organization
Identifying and evaluating the market pay structures
Revising the base compensation plan in the organization
Matching the changed compensation package with the current fiscal resources of the
organization
Comprehending the impact of pay revisions
Laying down the guidelines for revised pay administration
Preparing an elaborate report on the compensation studies to be submitted to the top
management

Depending upon the requirements of the company, the HR Consulting Firm may take up the
necessary aspects required to be considered for development and/or improvement of the
compensation system in the organization, thereby, strengthening the compensation system of the
company by making it more equitable and attractive.

Format of a Payslip: All You Need to Know

Introduction
All of us work for monetary and non-monetary benefits and there is no denying the fact that the
former is more important for many (if not all) than the latter. Therefore, employees in organizations
need to understand the components of the Payslip as this determines how much they are earning
(gross and net) as well as a peep into the various sub-headings in which their salary and other
benefits/perks are divided. For those starting their careers and those aspiring to a career in the
corporate world (and even the government and public sector), it is very important that they know
how much each component adds up to and how much tax they have to pay. This article is intended
to walk you through the format of a Payslip and the format that is explained here is a generic one
and can vary from organization to organization. However, care has been taken to ensure that a
proper representation of the components is provided and it can be said that the format listed here
is followed by many reputed organizations like IBM, Fidelity, and Microsoft.

Basic
As the name implies, this is the base component or the basic that employees are entitled to and this
component is used to calculate the other benefits as a percentage of the basic. For instance, it is
common to calculate the PF (Provident Fund) deduction based on the basic in Asian countries and
this component of the Payslip in the West is similar except that the social security component is
known as 401(k) in the United States.
Variable Pay/Bonuses
In recent years, many Asian companies have introduced the component of variable pay, which
indicates the extent to which individual; team, group, and organizational performance are reflected
in the amount of money paid to the employees. For instance, if you have achieved the highest
rating possible, then your individual variable pay would reflect your superlative performance.
Similarly, if your team/group/division has done well, then you are entitled to monetary benefits
that are a percentage of the total amount at the disposal of these entities. Next, if your organization
has done well, then there are chances that you might be rewarded for your contribution to its
success in the same way in which you have been rewarded for your team/group/divisions
performance.
HRA
HRA or House Rental Allowance is calculated on the basis of the category of the city in which
your organization is located. For instance, Metropolises have a higher payout for HRA when
compared to Tier II and Tier III cities and towns. It is important to note that HRA is both a statutory
requirement meaning that it is mandatory according to the labor laws and it is dependent on your
role and rank in the hierarchy of the organization. To explain this further, a basic amount of HRA
is mandated by the government, this is compulsory, and organizations can top it up according to
how they perceive your value to the organization.
Conveyance
This component reflects the amount of money that your company pays out for your conveyance.
Though there are some governmental undertakings, which pay more if you have a car and
compensate the others who do not have a car by providing for a car loan if possible, the private
sector in general pays the conveyance allowance according to the employees place in the hierarchy
and his or her role in the organization.
Medical Reimbursement
In recent years, many organizations have converted this component from reimbursement based on
actual money spent on receipt of bills to a fixed component, which is again dependent on the
parameters laid down and explained previously. Further, there are many organizations that have
done away with this component and instead, they have insured their employees under group
medical insurance for them and their families (immediate dependants) subject to certain limits,
which are again based on the seniority and value of the employee.

EPF/VPF Contribution
As mentioned in the section related to Basic, the EPF (Employee Provident Fund) contribution is
a two-tiered component wherein the employees contribution is calculated as a certain percentage
of the basic, which is mandated by the government. The amount thus deducted would be matched
by the organization, which means that the employee can expect the double of what is deducted
from his or her salary to be put away in social security. However, many multinationals also deduct
a few percentage points more than the mandated figure and also contribute a matching amount. As
for VPF (Voluntary Provident Fund) component, as the name implies, it is purely voluntary on
part of the employee to set aside a portion of their monthly salary and which the organization also
contributes though not the exact amount like EPF and subject to governmental regulations.
Income Tax / Professional Taxes
For many employees, this is the component that does not sound like music as compared to the
other components as this salary head indicates the amount that the employee has to pay to the
government as Income and other taxes. After TDS or Tax Deduction at Source was introduced,
organizations have been calculating the gross Income tax based on the salary of the employee and
then apportioning it over the twelve months so that there is a monthly component, which the
employee has to pay.
Arrears and other Deductions
This head usually encompasses some arrears that the organization owes to the employee carried
over from previous months and similarly, any deductions that have been not done earlier. This
component is usually not part of the Payslip each month unless there are arrears and deductions
pending.
Miscellaneous
This is an umbrella component, which indicates any other deductions/payouts that the employee
pays or receives, and usually this head indicates reimbursement for official lunches and other
perks.