Compensation Management

Dr. Tanuja Sharma, PhD-FMS (Delhi University)

Associate Professor ,Human Resource Management
Management Development Institute (MDI)
(http://www.mdi.ac.in)
Mehrauli Road, Sukhrali, Gurgaon 122001, INDIA
Fax: +91-124-2341147;Phone: +91-124-4560304
Mobile: 9910841987
Email: tanujasharma@mdi.ac.in


AN EXPERIENTIAL
EXCERCIZE
Philosophy of Compensation
Management
Ever since I was a boy I have wished to
write a discourse on Compensation: for it
seemed to me that life was ahead of
theory and people knew more than was
taught.
Ralph Waldo Emerson
Compensation," The riverside
Essays, Vol.1
Questions???
Compensation ?
Management?
Organization Compensation
Philosophy
What can
we afford?
How are
others being
compensated
?
What was the
prior
compensation?
What is the
minimum he/
she will
accept?
How badly do
we want
him/her?
What are executive
compensation
levels within
member
companies?

Compensation refers to all forms of
financial returns and tangible
services and benefits employees
receive as part of an employment
relationship.
What Is Compensation?
Total Returns for Work
Basic Forms of Compensation
Base Pay
Wages
Salaries
Variable Pay (Short term & Long term)
Pay for Performance
Bonuses
Incentives
Stock Options
Benefits
Medical Insurance
Paid Time Off
Retirement Pensions
Workers Compensation
Non-Pecuniary Rewards (Non-Financial Rewards. E.g. reputation,
power on the job.)
Base Pay
Base Pay The basic compensation an
employee receives in exchange for work
performed.
Wages - time-based (usually hourly)
compensation calculated on the basis of the
amount of time worked.
Salaries - payments consistent from time
period to time period regardless of the actual
amount of time worked.

Variable Pay
Variable Pay - compensation linked to individual,
team and/or organizational performance. Some
examples:
Piece-rate/ hourly-rate - productivity-based
compensation paid for each unit of product produced or
service provided.
Bonuses (short-term tied to performance)
Profit-sharing
Gain-sharing
Commissions
Stock options etc.
Benefits
Benefits - indirect compensation contingent upon
organizational membership. [30-40% of total payroll costs].
Some examples:
Health Insurance
Life Insurance
Vacations and Holidays
Pensions
Sick Leave
Severance Pay
Allowances:Eg. Utilities, Education Allowance, Uniform
Allowance etc.
Awards and Recognition

More examples of Benefits
1. Extra payments for time worked: (Holiday premiums
or Shift premiums)
2. Non-production awards and bonuses: (Anniversary
awards/ Attendance bonus/ Quality bonus/ Safety
awards/ Service bonus/ Suggestion awards)
3. Payments for time not worked: (Family allowances,
Paid Holidays, Paid Sick Leave, Severance Pay)
4. Payments for employee security: (Contributions
toward accident insurance, hospitalization & life
insurance)
5. Payments for employee services: (Canteen service,
Company Housing, Educational assistance, employee
discounts for purchases, voluntary medical examination,
festival gifts)
Components of Compensation Analyzed
Annual Base Salary (ABS):
Monthly Basic Salary (Basic +DA)
Annual Guaranteed Cash (AGC):
Includes all guaranteed components of compensation such as
Conveyance Allowance, Car Allowance, House Rent Allowance,
telephone, Leave Travel Assistance, Medical Allowance, etc

Annual Total Cash (ATC):

Includes Guaranteed Cash and the variable component of the salary
including performance based bonus and incentives

Annual Total Employment Cost (ATEC):
Annual Total Cash plus all benefits and perquisites such as insurance
premium, entertainment reimbursement, club memberships, loan
programs, retirement benefits, etc


Prevailing Environment - Global Scenario
Employers are increasingly taking a view
that long term benefit costs are but one
component of an employees total
remuneration.(retiral -PF, Gratutity-a part
of CTC)
Employers can maximize their return on
total remuneration costs by allowing
individual employees flexibility (within
regulatory & legal provisions) in deciding
how they will receive their money.
Prevailing Environment - Global Scenario
Retirement benefit program is a facility
offered by the employer for Membership.
It makes sense to allow individual
employees to tailor their benefits &
contributions to their personal
circumstances.
Employees have different needs at
different stages-hence need to look at
different cross section of the employees
differently.

What Do Employers Want?
Employers prefer to have control of cost.
Employers would like to provide
infrastructure so that employee needs can
be fulfilled.
Employers like pension plans to be a tool
of retention and reward.
What Do Employees Want?
Relational Returns from Work
Recognition
& Status
Employment
Security
Challenging
Work
Learning
Opportunities
Direct Pay Forms
Cash Compensation:
Base
Cash Compensation:
Merit Pay / Cost-of-
Living Adjustments
Cash Compensation:
Incentives
Long-Term Incentives
Indirect Pay Forms
Benefits: Income
Protection
Benefits: Work/Life
Focus
Benefits:
Allowances
Forms of Pay
Two Prevailing Philosophies of
Compensation (Right Vs Duty)
Entitlement Orientation
all employees
automatically receive
raises every cycle.
Seniority basis
Cost of living allowances
(COLAs)/DA
Across the board raises
are due employees
regardless of performance
or competitive pressure.

Performance Orientation -
pay is based on
performance differences
among employees.
Merit basis
Bonuses tied to
performance.
Gaining ground against
entitlement oriented
systems.
Market adjustments

POLICIES TECHNIQUES OBJECTIVES
EFFICIENCY
Performance
Quality
Customers
Stockholders
Costs
FAIRNESS

COMPLIANCE
COMPETITIVENESS
Market Surveys Policy PAY
definitions lines STRUCTURE
CONTRIBUTORS
Seniority Performance Merit INCENTIVE
based based guidelines PROGRAMS
MANAGEMENT Costs Communication Change EVALUATION
THE PAY MODEL
ALIGNMENT
Work Descriptions Evaluation/
analysis certification
INTERNAL
STRUCTURE
Compensation Objectives
Efficiency
Fairness
Compliance
Best Fit vs. Best Practices
Best Fit
If design of pay system
Reflects companys
strategy and values
Is responsive to
employees needs and
Is globally competitive
Company is more likely to
achieve competitive
advantage
Best Practices
Assumptions
A set of best-pay practices
exists
Practices can be applied
universally across all
situations
The Key to World Class Executive Compensation
ProgramExercise Good Judgment The 4 Ps
Process
Principles
Performance
Pay
Right Data
Right Job
flexibility
Internal
Performance
External
Performance
Benchmark
Performance
Annual
Calendar
Demarcation
of roles
Accountability
Responsibility
Consistency
Measurability
Assignment-1
(submission-Next week)

1.Individual work (Tuesday, Jan 7th-In class presentation;
students with work ex. Only : Company based groups to share
their salary slips showing different components/percentage of
components/ frequency?-monthly/annual/long term etc.
2. CASE ON NEGOTIATION

CONT:-PROJECT REPORT FOR TERM III


Part report for comp mgt.
Group based work: (soft & hard copy submission)
I. Interview any 5 Executives from different companies and find out the CTC
components and how they are paid. Analyze sector wise data.
also if possible-find salary data (components and % only) for three
different levels (top/middel/ lower) of managers in a company. Analyze the
same.
I. Study of annual reports to understand compensation-select a sector of
your interest or compare cross sectors (banking, IT, manufacturing etc).
CEO & Directors remuneration (rem. Policy of top-mgt members)-note
down the components (eg. Salary, commission etc.) and the contents as
disclosed in the annual report.
FOR A COMPANY-Study the annual report And explore the following
relationship;
-revenue & employee/HR cost for a year. compare across past 3-5 years
-CEO/directors salary and PBT over 3-5 years in a company. Does
recession have any impact on the same?