Compensation, Employee Payroll & Incentive Management

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Compensation & Employee Payroll What is Compensation & Employee Payroll?

Compensation

is an integral part of human resource management which helps in motivating the employees and improving organizational effectiveness.

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Compensation Management
Compensation

systems are designed keeping in minds the strategic goals and business objectives. Compensation systems are designed on the basis of certain factors after analyzing the job work and responsibilities

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Compensation Philosophy

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Compensation Goals
Attracting

good employees Retaining good employees Motivating employees Complying with the law Having a cost effective compensation system
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Compensation Policy Issues

Pay for performance Pay for seniority

The pay cycle

Salary increases and promotions Overtime and shift pay

Incentives & Benefits

Deferred payments Paid and unpaid leaves / Paid holidays

Salary compression
Geographic costs of living differences
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Equity and Its Impact on Pay Rates

Forms of Equity

External Equity

Internal Equity

Individual Equity

Procedural Equity

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Addressing Equity Issues

Salary Surveys

Methods to Address Equity Issues

Job Analysis and Job Evaluation

Performance Appraisal and Incentive Pay

Communications, Grievance Mechanisms, and Employees Participation

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Establishing Pay Rates

Steps in Establishing Pay Rates
1

Conduct a salary survey of what other employers are paying for comparable jobs (to help ensure external equity). Determine the worth of each job in your organization through job evaluation (to ensure internal equity).

3 4 5

Group similar jobs into pay grades. Price each pay grade by using wage curves.
Fine-tune pay rates.

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Compensation and the Three Equities

External
Attracting good employees Retaining good employees Motivating employees

Equity

Internal

Equity

Individual

or Employee Equity

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External Equity
Attracting

good employees Labor Market Model Market Surveys Pay strategy/policies

Where do you position yourself vis--vis the market

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Internal Equity
Retaining
Ranking

good employees Job Evaluation Techniques

Jobs are compared to each other based on their overall worth to the company. The worth of a job is usually measured by judgments of skill, effort, responsibility, and working conditions. The advantage of the ranking method is that it is simple. The disadvantages, similar to the ranking method of performance appraisal, are that the intervals between the ranks are assumed to be equal, the judgments are global, and as the number of jobs for evaluation increases it becomes increasingly difficult. Also, the evaluators must have knowledge of all jobs.
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 Classification method
Grade Grade Grade Grade Grade Grade Grade 1 2 3 4 5 6 7

Jobs are classified into a grade/category structure. Each tier of the structure has a description and associated job titles. For example, the Westinghouse system had:
Unskilled ex. File clerk Skilled ex. Typist, lathe operator Interpretive ex. Chief clerk Creative ex. Engineers, sales reps Executive ex. Department heads Administrative ex. Chief engineer, Director of R&D Policy ex. Vice-president of Marketing

Each job is assigned to the grade/category providing the closest match to the job. Standards are developed mainly along occupational lines. The standards help identify and describe key characteristics of occupations that are important for distinguishing different levels of work. Pay ranges are then assigned to grades. The advantages of this method are that it is simple and has been in use for many years. Its disadvantages include the fact that classification judgments are subjective, and the standard used for comparison may have built-in biases. Also, some jobs may fit into more than one grade/category or their descriptions are so broad that they do not relate to specific jobs.
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 Factor Comparison
Select benchmark jobs. Sets of compensable factors are identified as determining the worth of jobs. The number of factors is usually four or five and typically relate to skill, responsibility, effort and working conditions. Jobs are then ranked on each factor. Wages are then allocated to the factors. The organizations other jobs are then compared to the benchmark jobs and rates of pay for each of the other jobs. Factor comparison has the advantage that the value of the job is expressed in monetary terms, and the method is applicable to a wide range of jobs. The methods disadvantages are that the pay points for each factor is based on subjective judgments.

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 Point Method
The point method is an extension of the factor comparison method. Usually between eight and fourteen compensable factors (typically related to skill, effort, responsibility, and working conditions) are identified as determining the worth of jobs. Factors are divided into degrees Points are assigned the degrees Benchmark jobs are compared to market rates

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Establishing Pay Rates

Point Method Group Similar Jobs into Pay Grades

Ranking Method

Classification Methods

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Establishing Pay Rates

Price

Each Pay GradeWage

Curve
Shows the pay rates paid for jobs in each pay grade, relative to the points or rankings assigned to each job or grade by the job evaluation.
Shows the relationships between the value of the job as determined by one of the job evaluation methods and the current average pay rates for your grades.

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Plotting a Wage Curve

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Establishing Pay Rates

Fine-Tune

Pay Rates

Developing pay ranges

Flexibility in meeting external job market rates. Easier for employees to move into higher pay grades. Allows for rewarding performance differences and seniority.

Correcting out-of-line rates

Raising underpaid jobs to the minimum of the rate range for their pay grade. Freezing rates or cutting pay rates for overpaid (red circle) jobs to maximum in the pay range for their pay grade.
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Wage Structure

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Compensation Management

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Compensation Management
Compensation

provided to employees can be 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.
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Types of Compensation Management

Direct Compensation Indirect Compensation

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Direct Compensation

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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.
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Components Of Direct Compensation

Basic

Salary HRA (House Rent Allowance) CA (Conveyance Allowance) LTA (Leave Travel Allowance) Medical Reimbursement Bonus (Salary Bonus) SA (Special Allowance) Other Allowances
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Components of Direct Compensation 1) HRA (House Rent Allowance): Organizations either provide accommodations to its employees who are from different location or country or they provide house rent allowances to its employees

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Components of Direct Compensation

2) Conveyance : Organizations provide for cab facilities to their employees. Few organizations also provide vehicles and petrol allowances to their employees IT Act allows a Conveyance Allowance of upto Rs.800/- p.m. as non-taxable allowance.
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Components of Direct Compensation

3) Leave Travel Allowance: The employees are given allowances to visit any place they wish with their families. The IT Act allows 2 trips in a block of 4 years as tax free, once to the home town and once anywhere else in the country The allowances are scaled as per the position of employee in the organization.
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Components of Direct Compensation

4) Medical Reimbursement : Organizations also look after the health conditions of their employees. The employees are provided with mediclaim insurance for them and their family members. IT Act allows upto a reimbursement of Rs. 15,000/- p.a. as non-taxable
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Components in Direct Compensation

5) 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. This is apart from the salary.
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Components in Direct Compensation

6) Special Allowance : Special allowance such as overtime, mobile allowances, meals, commissions, travel expenses, reduced interest loans; insurance, club memberships, etc are provided to employees for motivation and companys Productivity.
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Indirect Compensation

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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.

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Components of Indirect Compensation

Leave

Policy Overtime Policy Hospitalization Insurance Leave Travel Retirement Benefits Holiday Homes Flexible Timings
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Components of Indirect Compensation

1) Leave Policy: It is the right of employee to get adequate number of leave while working with the organization. The Leave Policy differs in every organization. The organizations provide for paid leaves such as, casual leaves, medical leaves (sick leave), and maternity leaves, statutory pay, etc.
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Components of Indirect Compensation 2) 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.
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Components of Indirect Compensation

3) Hospitalization : The employees should be provided allowances to get their regular checkups, say at an interval of one year. Even their dependents should be eligible for the medi-claims that provide them emotional and social security.
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Components of Indirect Compensation

4) 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.
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Components of Indirect Compensation

5) 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.
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Components of Indirect Compensation

6) 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.

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Components of Indirect Compensation

7) Holiday Homes : Organizations provide for holiday homes and guest house for their employees at different locations. These holiday homes are usually located in hill stations 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.
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Components of Indirect Compensation

8) 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.

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Payroll Management

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Payroll Management
Payroll

refers to the administration of employees' salaries, wages, bonuses, net pay, and deductions. It consist of the employee ID, employee name, date of joining, daily attendance record, basic salary, allowances, overtime pay, bonus, commissions, incentives, pay for holidays, vacations and sickness, value of meals and lodging etc. There are some deductions such as PF, taxes, loan installments or advances taken by employee.
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Components of Monthly Payroll of an Employee

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Payroll Management
Deductions

such as tax and loan/advances taken by the employee from organizations are deducted only where applicable. Dearness Allowance and House rent allowance is provided at a fixed rate stated by the employment law. Provident fund is deducted from the gross salary of employee on the monthly basis as per the employment law, which is provided later to the employee. Organizations also contribute the same amount to the provident fund of the employee.
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Annual Payroll Management

What is Annual Payroll? Annual payroll consists of leave travel allowances, incentives, annual bonuses, meal vouchers/ reimbursements, and medical reimbursements.
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Components of Annual Payroll

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Incentive Management

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Incentive Management
In

todays strategic compensation systems, incentives forms an integral part of the performance based compensation packages. It is a challenge for organizations to formulate strategies to maintain the internal equity and external equity and provide the most competitive compensation packages to attract and retain the talented workforce

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Incentive Management
For

the purpose effective incentives programs are undertaken. Employees are involved in the process so as to deliver un-biased packages to all the employees. The compensation strategies should be effective. All the employees should be aware of the organizational goals and objectives.
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Benefits of Incentives

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Benefits of Incentives
Deserving

employees should receive significant rewards . Incentives accounts for employees high productivity. Today youngsters believe in performance based pay, thus incentives will help to motivate them to produce more. In the hospitality and retail industry it is the incentive that accounts for the overall package of the employee.
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Variable Pay Plans

Free Powerpoint Templates HRM

Need for variable pay

Encourage

certain behavior Differentiate best and the rest Reward achievement Hedge financial risk

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Target Audience
Individual
Target to strive for Sense of fulfillment Sense of differentiation Healthy competition Sharing success Super ordinate goals

Team

Entire

Company
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Types
Long

Shared ownership Wealth creation Risk sharing Promoting a certain behavior/ pattern

Term

Sales

Short

Term

Target Realization Direct Contribution to Top & Bottom lines

Alignment to goals Track and Measure performance

Non

Sales

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Framework Design
Life

cycle & culture of the company Operating Industry Product/Service/Solution stage Operating Geographies Incentive ROI
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Industry Trend

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Sales Incentive Plans

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Guiding Principles
KISS

(but realistic) Communicate clearly Align with strategy & job role Integrate with the total rewards package Reward for results, not activities Link to quantifiable measures
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Understanding Linkages
Business strategy Selling roles

Inputs
Performance measures and weights Incentive form Pay mix Payout frequency

Process
Payout mechanics

Output

TARGET TOTAL COMPENSATION

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Sales Roles by salesmen

Hunter

New business acquisition Cold calling or prospecting Little post-sale effort

Retain and grow accounts Identifying and addressing customer needs Significant post-sale effort

Farmer

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Selling roles by customers

Transactional

Consultative

Product or services have known value to customers Sales cycle is short Price is a key component of the purchase decision Customers want an efficient buying process Sales focus on generating maximum revenue at minimum cost

Customers need help making the purchase decision The sales cycle is moderate to long Value is a key component of the purchase decision Customers want a solution Sales focus on creating longterm, profitable customer relationships

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2D Framework
Transactional Hunter Consultative

Traditional Small Game Hunter closing many small deals

Big Game Hunter

closing fewer, larger deals

Service reps who tend the crop to keep from losing customers Farmer
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Relationship managers who grow the business with long-term customers

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Contd
Transactional Hunter
Mastery of sales process execution Minimal to modest sales experience

Consultative
Mastery of sales process execution Deep technical knowledge Significant hunter model selling experience

Excellent problem-solving skills Able to use technology to facilitate the process Minimal experience required

Excellent relationshipbuilding skills Deep customer/industry knowledge Functional management experience Deep industry experience (may have been a customer)

Farmer

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Typical examples
Transactional Hunter Consultative

Insurance Agent

Major Account Development

Service Rep

Key Account Manager

Farmer

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Life cycle position

Sales Volume

Introduction

Growth

Maturity

Hunter role is more common

Farmer role is more common

Time

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Elements-Sales Incentive
Commission Bonus

Incentive form

Pay levels

$
2011
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Fixed % versus variable

Mix

Payout frequency

Payout

Mechanics
// 0% 80% 100% 120% 140%

Performance measures: definition

Revenue Volume Profit Market share Growth Baseline

Performance

Performance measures: relative importance

% Weight

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Communication
From

CXO desk Clarity on outcomes Consistent communication Reiterate at regular intervals

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Measurement Parameters
Gross

Margins Incremental Margins Sales Product Mix Distribution effectiveness CSAT DSO ROI
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