compensation

OUR

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

ImageBuilding

EnsureEquity

Legal
Compliance

Institutional
effectiveness
Effective
Compensation

Attracttalent

Motivate&
RetainStaff

Administratively
Efficient

RewardValued
Behavior

Employee
Management

Piece rated
Skill based
Time based

Characteristics of Effective
Compensation Plan
Effective compensation plans build an
allowance for company profit at the high end
of the range of profitability appropriate to the
market stage
Effective 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

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, gross salary and net

salary
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 deductions
Ctc= gross salary + benefits
Gross salary = ctc benefits
Net salary = gross salary deductions

Factors affecting CTC

Industry norms or company specific policies
Types of organization
Salary band and average age of employees
Location of work

Components
Monthly component
Quarterly component
One time and annual component
Advance component
Deferred component
Attendance linked component
Seniority linked component
Performance linked component
Statutory component

Monthly component
Basic salary
Dearness allowance (% of basic salary)

system of payment:
linked with price index- flat rate and graduated rate
Not linked with price index

Paid 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

a)
b)
c)
d)

Conveyance allowance
Food coupons
Housing or HRA
Special allowance
allowance to meet expense incurred while performing
duties:
Daily allowance
Helper allowance
Academic allowance
Uniform allowance

a.
b.
c.

d.

Allowance to meet personal expenses

Children education allowance
Hostel allowance
Special compensatory allowance eg: working in himachal
Pradesh or tribal area etc
Allowance to transport handicapped employees

QUATERLY COMPONENTS
PERQUISITES
BONUS
INCENTIVES

ANNUAL AND ONE TIME

COMPONENT
LEAVE TRAVEL CONCESSION
MEDICAL ALLOWANCE
GIFT VOUCHERS

ADVANCE COMPONENTS
THESE ARE THE MONEY GIVEN
TO THE EMPLOYEES TO MEET CERTAIN
PERSONAL EXPENSES MOSTLY AS A LOAN

Deferred components
Seasonal allowance
Separation allowance

Attendance linked
components
These components are linked
with the attendance of the employees

Seniority linked
components
IMORTANCE

Cooperation between workers

Politics by supervisors will not work
Easy to measure
Less scope for favouritism
Simple to understand
Sense of security
Helps reward loyal workers
Less scope for conflicts
Reduces labour turnover

Limitations
Performance is not rewarded
Competent employees will not prefer this
system
Fails to differentiate between efficient and
inefficient workers
No self motivation to excel
A hurdle in attracting capable persons

Performance linked components

Bonus
Incentives

Importance

Helps in achieving organizational goals

Help in deciding performance levels
positive influence of employees

limitations
Motivation cannot be guaranteed
Dependency on performance management
Proper training of managers
Disputes of performance measurement

Statutory components
Provident fund
Gratuity
pension

Advantages of CTC
CONTROL OVER REMUNERATION COST
CAN CONTROL LABOUR COST MORE
EFFICIENTLY
INTERNAL EQUITY
EMPLOYEE SOCIAL SECURITY IS SEEN

Terminology
Compensation
Benefit
Salary
Pay
Basic pay
Wage
Allowance
Incentive
commission

Reward
Recognition
Perquisite

benefit which one enjoys or is entitled to on account of one's

job or position

Fringe benefit
an extra benefit supplementing an employee's money wage
or salary, for example a company car, private health care, etc.
Subsistence allowance
Reimbursement
Consolidated pay
Stipend
Service charge
Pay 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.
Bonus
Joining bonus
Retention bonus
Relocation pay
Increment
Stagnation increment
IS IT INCREMENT GIVEN TO EMPLOYEES WHO COULD
NOT BE PROMOTED AND HENCE BEING COMPENSATED

MANAGEMEN
T

COSTS
COMMUNICATION
COSTS COMMUNICATION
CHANGE
CHANGE

Strategy
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 advantage
The greater the alignment, or fit, between
the organizational strategy and the
compensation system, the more effective
the organization

233

Strategic Perspectives
Toward Total Compensation

Support business strategy

Allign compensation system to strategy

Strategic Perspectives
Toward Total Compensation
(1 of 2)

Google

Medtronic

Objectives

Emphasis on
innovation
Commitment to cost
containment
Recognize
contributions
Attract and reward
the best

Focus on customers
Fully present at work and in
personal lives
Recognize personal
accomplishment and share
success
Attract and engage top
talent
Control costs

Internal
Alignment

Minimize hierarchy
Everyone wears
several hats
Emphasize
collaboration

Reflect job responsibilities

Support promotional growth
opportunities
Foster team culture
238

Strategic Perspectives
Toward Total Compensation
(2 of 2)
Google

Medtronic

Externally
Competitive

Explore novel ideas in

benefits and compensation
Generous, unique benefits

Market value of jobs

establishes overall pay
parameters
Choices in benefits

Employee
Contributions

Recognize individual
contributions
Unrivaled stock programs

Incentives directly tied to

business goals
Opportunity to earn abovemarket pay
Recognition of individual and
team performance

Management

Love employees, ant to

know it
Technology support

Clearly understood; open

Technology support
Employee choice
2-4

Which pay decisions are

startegic
Objectives
Internal Alignment
External
Competitiveness
Employee Contributions
Management

240

Example: The Strategic

Compensation Decisions Facing
Starbucks

Objectives: 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 Approach
De-emphasize differences.
Use equity based pay structures, cross-train
employees to handle many jobs, and call
employees partners.

Example: The Strategic

Compensation Decisions Facing
Starbucks (cont.)

Competitiveness: How should total

compensation be positioned against our
competitors? What forms of compensation
should we use?
Starbucks Approach
Pay 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.)

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 Approach
Emphasize team performance and shareholder
returns.
For new managers in Beijing and Prague, provide
training opportunities in the U.S.

Key Steps to Formulate a

Compensation Strategy
1. Assess Total Compensation Implications
Competitive Dynamics
Core Culture / Values
Social and Political Context
Employee / Union Needs
Other HR Systems

4. Reassess the Fit

Realign as Conditions Change
Realign as Strategy Changes

2. Map a Total Compensation Strategy

Objectives
Alignment
Competitiveness

Contributions
Management

3. Implement Strategy
Design System to Translate Strategy
into Action
Choose Techniques to Fit Strategy
245

Best Fit versus Best

Practices
Best 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 strategy

Emerging evidence suggests that a focus

on What practices pay off best under what
conditions? will be most effective

246

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