Human Resource is the most vital resource for any organization.

It is responsible for each and every decision taken, each and every work done and each and every result. Employees should be managed properly and motivated by providing best remuneration and compensation as per the industry standards. The lucrative compensation will also serve the need for attracting and retaining the best employees. Compensation is the remuneration received by an employee in return for his/her contribution to the organization. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. Compensation is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness. Components of Compensation System Compensation systems are designed keeping in minds the strategic goals and business objectives. Compensation system is designed on the basis of certain factors after analyzing the job work and responsibilities. Components of a compensation system are as follows:

Forms of Compensation Compensation provided to employees can direct in the form of monetary benefits and/or indirect in the form of non-monetary benefits known as perks, time off, etc. Compensation does not include only salary but it is the sum total of all rewards and allowances provided to the employees in return for their services. If the compensation offered is effectively managed, it contributes to high organizational productivity. Direct Compensation Direct compensation refers to monetary benefits offered and provided to employees in return of the services they provide to the organization. The monetary benefits include basic salary, house rent allowance, conveyance, leave travel allowance, medical reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular interval at a definite time. Basic Salary Salary is the amount received by the employee in lieu of the work done by him/her for a certain period say a day, a week, a month, etc. It is the money an employee receives from his/her employer by rendering his/her services. House Rent Allowance Organizations either provide accommodations to its employees who are from different state or country or they provide house rent allowances to its employees. This is done to provide them social security and motivate them to work. Conveyance Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees to motivate them.

Leave Travel Allowance These allowances are provided to retain the best talent in the organization. The employees are given allowances to visit any place they wish with their families. The allowances are scaled as per the position of employee in the organization. Medical Reimbursement Organizations also look after the health conditions of their employees. The employees are provided with mediclaims for them and their family members. These medi-claims include health-insurances and treatment bills reimbursements. Bonus Bonus is paid to the employees during festive seasons to motivate them and provide them the social security. The bonus amount usually amounts to one months salary of the employee. Special Allowance Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees to provide them social security and motivate them which improve the organizational productivity. Indirect Compensation Indirect compensation refers to non-monetary benefits offered and provided to employees in lieu of the services provided by them to the organization. They include Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel Assistance Limits, Retirement Benefits, Holiday Homes. Leave Policy It is the right of employee to get adequate number of leave while working with the organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc. Overtime Policy Employees should be provided with the adequate allowances and facilities during their overtime, if they happened to do so, such as transport facilities, overtime pay, etc. Hospitalization The employees should be provided allowances to get their regular check-ups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.

Insurance Organizations also provide for accidental insurance and life insurance for employees. This gives them the emotional security and they feel themselves valued in the organization. Leave Travel The employees are provided with leaves and travel allowances to go for holiday with their families. Some organizations arrange for a tour for the employees of the organization. This is usually done to make the employees stress free. Retirement Benefits Organizations provide for pension plans and other benefits for their employees which benefits them after they retire from the organization at the prescribed age. Holiday Homes Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill station and other most wanted holiday spots. The organizations make sure that the employees do not face any kind of difficulties during their stay in the guest house. Flexible Timings Organizations provide for flexible timings to the employees who cannot come to work during normal shifts due to their personal problems and valid reasons. Need of Compensation Management

A good compensation package is important to motivate the employees to increase the organizational productivity. Unless compensation is provided no one will come and work for the organization. Thus, compensation helps in running an organization effectively and accomplishing its goals. Salary is just a part of the compensation system, the employees have other psychological and selfactualization needs to fulfill. Thus, compensation serves the purpose The most competitive compensation will help the organization to attract and sustain the best talent. The compensation package should be as per industry standards.

Strategic Compensation Strategic compensation is determining and providing the compensation packages to the employees that are aligned with the business goals and objectives. In todays competitive scenario organizations have to take special measures regarding compensation of the employees so that the organizations retain the valuable employees. The compensation systems have changed from traditional ones to strategic compensation systems. The Factors External

influencing

compensation management are broken into two categories: Internal and

factorsinfluencingemployeeremuneration-090615045010-phpapp01.pptx Internal Corporate philosophy Corporate mission Business strategy Human resources philosophy and strategy Total rewards philosophy and strategy Corporate culture Shareholder expectations Corporate structure Costs/resource availability External Community culture Competition Economics Industry characteristics Labor market Legal/regulatory Technology Globalization

Employee Compensation Policy

Writing an Employee Compensation Policy

For legal protection and good business sense, every company should have an up-to-date employee compensation policy. What is the status on yours? An organization should not wait for dire circumstances, such as a pay inequity lawsuit, to write down or update their employee compensation policy. All organization leaders should create a written policy document or refresh their existing one for legal protection, and as a guideline or framework for the companys compensation program.

Below is a list of helpful tips and tools for creating an effective employee compensation policy that is specific to your organization.

What is the compensation policy?

The compensation policy describes the details of the compensation components in the organization, how they are used and the conditions for the employees as the compensation component can be applied in their specific situation. Each organization uses many compensation components and they have to be described. The compensation policy provides the basic explanation of the compensation component, how it is calculated, who is eligible for the usage and the approval procedure. The compensation policy belongs to most read and discussed internal policies of the organization as it drives the salaries of the individual employees. Each employee is interested in the structure of the salary and the potential total cash achievable in the organization. The compensation policy is the main tool to find out the details about the compensation components and the way, how to achieve the highest total cash. The compensation policy drives the effort and performance of employees as the employees will find the smart and easiest way how to achieve the highest possible income with the smallest possible individual performance. The compensation policy has to be set the smart way as it avoids the potential work-around and abuse.

What is important in the compensation policy?

The compensation policy has to be transparent and it has to provide just the only way of the interpretation. It is extremely important, the employees and managers are not unsure about the compensation component and they understand clearly, what conditions are applied for the approval of the specific compensation component. The transparent compensation policy supports the high performance corporate culture organization as the employees understand, what behavior and performance levels are expected to be eligible for the specific compensation component and it drives the behavior and performance specifically the right way for the organization. The policy has to cover all the compensation components, which are used in the organization and affects large populations. The exceptional managerial component tools can be referenced from the general compensation policy, but they should not stay hidden. The employees cannot trust the compensation policy, which does not mention all the compensation components.
Components of Compensation

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. 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 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%). 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. 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.

Research and Prep for the Compensation Policy Define Your Compensation Philosophy

First, each organization should develop a compensation philosophy. Information on how to do so is covered in detail in a separate blog post but, in brief, your compensation philosophy states how the organizations guiding principles influence the employee compensation plan. After you develop your philosophy, you can move on to creating your employee compensation policy. The following are some key points on how to prepare for writing your policy:

Determine your place in the market. Know where your organizations compensation sits relative to the market where you compete for your talent. This may include factors like your industry, geography or size of organization, to name a few. Our post on how to set salary ranges can help with that process. Select the types of compensation. Beyond base salary, what other forms of compensation does your company offer, when and why? These can include bonuses, such as individual commission and incentives, team incentives, company-wide incentives, benefits, fringe benefits, stock/ownership and others. Review each type and determine if one or a combination of these options work for your organization and who in the organization will be eligible for each type of compensation. Review your process. Think about the process youll use for balancing internal pay equity against market competitiveness. This will include some research about using a straight market-pricing philosophy versus a job evaluation tool to put similar jobs within pay grades. There are advantages and disadvantages to each approach.

Writing Your Employee Compensation Policy

Once youve done your research on where your current compensation stands relative to the market versus where you would like it to be, its time to write your compensation policy document. Here are some guidelines on how to write a clean and clear policy:

Watch the details. Be specific, but not so specific that you limit your ability to manage the program. For example, you may want to state that the organization will review market data on a regular interval, rather than state the specific timeframe. This will give the organization the ability to do it more or less frequently than in the past depending on business necessity. Communicate your companys commitment. Your compensation policy should outline the organizations commitment to equitable and fair pay practices and reference your organizations intent to comply with all applicable laws and acts. Gain approval. Generally, it is the board of directors that approves the final policy, but these arent the only people involved in developing your policy. The top executives such as the CEO, COO, and CFO have input to the overall goals and objectives of the compensation program. The human resources professional serves as the expert regarding items to be included in the policy. Your organization may also choose to create a compensation committee consisting of individual stakeholders from different departments including some managers and employees as an internal control measure, as well as an employee engagement strategy. Make it real. Your company policies should be reviewed and approved by the executive team and/or board of directors. Meeting minutes or signatures to prove acceptance of the policy are a good idea.

Administration after the Policy is done

It is important to maintain your compensation program after your compensation policy is written so that it stays equitable, relevant, and timely. Here are answers to common questions regarding this process:

Who will be responsible for the administrative work of reviewing job evaluations and market data? The HR department will most likely maintain the compensation program. But many times, in lieu of an HR department, the administrative staff or accounting department may be in charge of the task. What will be the process and timing for submitting new job evaluations?Generally, this is done as needed, but some organizations require these be submitted within certain timeframes to maximize efficiency.

What will be the process and timing for obtaining and reviewing market data?Most companies analyze market data on an annual basis. However, your organization may need to look at market data more frequently, especially if you are in a high growth mode or if you are in an industry or market where salaries are rising faster than the national average. What will be the process and timing for adjusting positions or employees based on market data? This should tie in closely with the review of the market data. However, some employers would be wise to look for trends rather than respond too quickly to market fluctuations. What will be the process and timing for adjusting employees pay based on performance or longevity? This should be directly tied to the performance evaluation process. Many organizations do the performance and/or longevity increase at a separate interval than market adjustments so the differences between the two types of increases are easier to communicate with employees.

Slide 1: Compensation: Methods and Policies Slide 2: A Compensation system should be: Adequate Equitable Balanced Cost-effective Secure Incentive-providing Acceptable to the employee Slide 3: To the individual employee, the most important compensation decision is how much he or she will earn. Determination of Individual Pay : Determination of Individual Pay Three questions need to be addressed: How should one employee be paid relative to another when they both hold the same job in the organization? Should we pay all employees doing the same work at the same level the same? If not, on what basis should we make the distinction? Pay differentials are based on: : Pay differentials are based on: Individual differences in experience, skills, and performance Expectations that seniority, higher performance (or both) deserve higher pay Reasons for choosing to pay employees at different rates for the same job: (1 of 3) : Reasons for choosing to pay employees at different rates for the same job: (1 of 3) Pay differentials allow firms to recognize that different employees performing the same job make substantially different contributions to meeting organizational goals Differentials allow employers to communicate a changed emphasis on important job roles, skills, knowledge, etc. Reasons for choosing to pay employees at different rates for the same job: (2 of 3) : Reasons for choosing to pay employees at different rates for the same job: (2 of 3) Differentials provide organizations with an important tool for emphasizing norms of enterprise without having employees change jobs (i.e., promotion) Pay differentials allow firms to recognize market changes between jobs in the same grade without requiring a major overhaul of the whole compensation system Reasons for choosing to pay employees at different rates for the same job: (3 of 3) : Reasons for choosing to pay employees at different rates for the same job: (3 of 3) Without differentials, the pay system violates the internal equity norms of most employees, reducing satisfaction with pay, and making attraction and retention of employees more difficult Slide 9: Methods of Payment Flat Rates Payment for Time Worked Variable Pay: Incentive Compensation Payment for Time Worked : Payment for Time Worked General, across-the-board increase for all employees Merit increases paid to some employees based on some indicator of job performance Cost-of-living adjustment (COLA) based on the consumer price index (CPI) Seniority

Variable Pay : Variable Pay Percentage of an employees paycheck is put at risk If business goals are not met, the pay rate will not rise above the lower base salary Annual raises are not guaranteed Helps manage labor costs Does not guarantee equitable treatment of employees Variable Pay: Key Design Factors : Variable Pay: Key Design Factors Types of Variable Pay : Types of Variable Pay Individual Incentives Group Incentives Organization Incentives Individual Variable Pay : Individual Variable Pay Merit incentives Individual incentives piecework production bonuses commissions Merit Pay Problems : Merit Pay Problems Employees fail to make the connection between pay and performance The secrecy of the reward is perceived by other employees as inequity The size of the merit award has little effect on performance Individual Incentives : Individual Incentives Possible only in situations where performance can be specified in terms of output e.g., sales riyals / dollars generated e.g., number of items completed Employees must work independently of each other so that individual incentives can be applied equitably Conditions for Effective Individual Incentive Plans : Conditions for Effective Individual Incentive Plans The task is liked The task is not boring The supervisor reinforces and supports the system The plan is acceptable to employees and managers The incentive is financially sufficient to induce increased output Quality of work is not especially important Most delays in work are under the employees control Reasons to Use Team Incentives : Reasons to Use Team Incentives When it is difficult to measure individual output When cooperation is needed to complete a task or project When management feels this is a more appropriate measure on which to base incentives Organization-wide Incentives : Organization-wide Incentives Usually based on one of two performance concepts: A sharing of profits generated by all employees altogether A sharing of money saved as a result of employees efforts to reduce costs Approaches to Organization-wide Incentives : Approaches to Organization-wide Incentives Suggestion Systems: Essential Elements : Suggestion Systems: Essential Elements Management commitment Clear goals Designated administrator Structured award system Regular publicity Immediate response to each suggestion Gainsharing Plans : Gainsharing Plans Employees earn bonuses tied to unit-wide performance as measured by a predetermined, gainsharing formula Commonly used gainsharing plans: Lincoln Electric Plan Scanlon Plan Rucker Plan ImproShare Key Elements in Designing a Gainsharing Plan : Key Elements in Designing a Gainsharing Plan Strength of reinforcement Productivity standards Sharing the gains Scope of the formula Perceived fairness of the formula Production variability Newer Approaches to Gainsharing :

Newer Approaches to Gainsharing Business Plan Gainsharing Winsharing Spot Gainsharing Typical Profit Sharing Plans : Typical Profit Sharing Plans Cash or current distribution plans provide full payment to participants soon after profits have been determined Deferred plans credit a portion of current profits to employees accounts with cash payments made at the time of retirement, disability, severance, or death A combination of both incorporates aspects of current and deferred options Ownership : Ownership Employee stock ownership plan (ESOP) employees receive stock in the company ESOPs are tax qualified i.e., in return for meeting certain rules designed to protect the interests of plan participants, ESOP sponsors receive various tax benefits ESOPs are defined contribution plans the employers makes yearly contributions that accumulate to produce a benefit that is not defined in advance People-Based Pay : People-Based Pay Executive Pay : Executive Pay More likely to be based on comparative performance: Compensation committees link CEOs pay to returns to shareholders Variable performance-based pay is emphasized over guarantees CEOs are encouraged to invest in company stock Performance yardsticks are linked to actual key productivity indices, to the competition, or to both CEOs are held responsible for the cost of capital Issues in Compensation Administration : Issues in Compensation Administration Pay Secrecy or Openness Pay Security Pay Compression Pay Security Plans : Pay Security Plans Solutions to the Problem of Pay Compression (1 of 2) : Solutions to the Problem of Pay Compression (1 of 2) Reexamining how many entry-level people are needed Reassessing recruitment itself Focusing on the job evaluation process, emphasizing performance instead of salary-grade assignment Basing all salaries on longevity Solutions to the Problem of Pay Compression (2 of 2) : Solutions to the Problem of Pay Compression (2 of 2) Giving first-line supervisors and other managers the authority to recommend equity adjustments for incumbents who have been unfairly victimized by pay compression Limiting the hiring of new employees seeking excessive salaries Summary : Summary There is a growing realization that traditional pay systems do not effectively link pay to performance The trend is toward a total compensation approach made up of base pay, variable pay, and benefits Flexibility is an essential ingredient in any compensation plan and can be built using a variable pay approach