Compensation

Group- 9
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Compensation

 Compensation is what employees

receive in exchange for their contribution
to the organization. This includes a
basic salary, any and all bonuses,
shares, options, and any other company
benefit.
Objectives
• Internal Equity -Internal equity deals with the
perceived worth of a job relative to other jobs in the
organization.
• External Equity - External equity deals with the issue
of market rates for jobs.
• Individual Equity - Individual equity deals with how
individuals perceive how they are being paid relative
to other individuals within the organization and
perhaps within the same position.
• Performance Incentives -A significant element of a
base pay program is to encourage higher or increased
levels of employee performance.
 Contd…..

• Maximum Use of Financial Resources - Since an organization does not have

unlimited financial resources, the management needs to be design the base pay
program to maximize the value to the organization with minimum use of these
limited resources.
• Compliance with Laws and Regulations -While not the primary objective of a
pay program, one of the objectives of the management is to see that a pay
program is kept in compliance with various state and central laws and
regulations.
• Administrative Efficiency - Due to the limited financial resources in an
organization, one of the objectives of the management is to be to have a pay
program that is easy to administer, flexible, and cost-effective.
Compensation
Management

• 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
Contd……

• 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.
Types of Compensation
Management

• Direct Compensation

• Indirect Compensation
 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.
Components in Direct
Compensation
 Basic Salary

• The basic salary in INDIA corresponds with what has been recommended by the Fair Wage Committee(1948)
and the15th Indian Labour Conference(1957). The various awards by Wage tribunals, Wage boards, Pay
commission reports and job evaluations also serve as guiding principles in determining ‘BASIC SALARY’.
• While deciding the basic salary, the following criteria may be considered:
• Skill needs of the job
• Experience needed
• Difficulty of work: mental as well as physical
• Training needed
• Responsibilities involved
• Hazardous nature of job
HRA (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
 Components in Direct
Compensation

Conveyance :
• Organizations provide for cab facilities to their
employees. Few organizations also provide vehicles
and petrol allowances to their employees to motivate
them.
 Components in Direct
Compensation

3) 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.
 Components in Direct
Compensation

4) Medical Reimbursement :
• Organizations also look after the health conditions of their
employees.
• The employees are provided with medi-claims for them and
their family members.
• These medi-claims include health-insurances and treatment
bills reimbursements
 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 month’s
salary of the employee.
• This is apart from the salary.
 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
company’s 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.
Components in Indirect
Compensation
 Components in 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.
 Components in 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.
 Components in Indirect
Compensation

3) 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.
 Components in 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.
 Components in 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.
 Components in 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.
 Components in 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 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.
 Components in 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.
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.
Cntd…

• 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.
Components of Monthly Payroll
of an Employee
Annual Payroll Management

What is Annual Payroll?

• Annual payroll consists of leave travel allowances,
incentives, annual bonuses, meal
vouchers/reimbursements, and medical
reimbursements.
Components of Annual
Payroll
Incentive Management

• In today’s 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
Short-term incentives, or
bonuses

• Those additions to base pay provided to employees within the current year.
The “bonus” is used as a salary alternative that gives the executive an
incentive to remain employed through the end of the year, and protects the
employer against a particularly bad year or particularly poor individual
performance by enabling the employer to reduce basic compensation on a
retroactive basis by reducing or eliminating the annual bonus. For example,
an executive making $150,000 may be scheduled to receive a bonus equal to
20% of the executive’s base salary at the end of the year if he is still employed
on the last day of the fiscal year. If that executive quits six months into the
fiscal year, the employer saves $15,000 ([$150,000 x .2] x 6 months/12
months)by structuring part of the executive’s basic compensation as a bonus
rather than as part of his base salary.
Long Term Incentive Pay

• A program established to give benefits to employees to reward them for

improved commitment and performance and as a means of motivation.
An incentive plan is designed to supplement base pay and fringe
benefits. A financial incentive plan may offer stock options or a cash
bonus.
Elements of long term incentive plan

• Cash based (LTIP)

Long Term Cash Incentive Pay is a performance driven award that pays
compensation based on a three to five year performance period and
calculated as a multiple of base salary. Performance can be measured
against an industry peer group of companies and the projected long term
growth of the company, just to name a few. Awards are based on a
multiple of base salary.
 Equity Based

EMPLOYEE STOCK OPTIONS

• The award of stock options represents the most commonly used form of
long term performance incentives. The grant awards are designed to
incentives the executive to perform because he or she has a long term
stake in the future of the company, through eventual stock ownership. A
majority of public companies issue fixed priced stock options (fair market
value determined on the date of the grant).
Benefits of Incentives
 Perquisites, or Perks

 Executive Perquisites are those benefits provided to executives above and

beyond benefits provided to all other employees. Generally, executive
perquisites include office space, parking, cell phones, annual physical, company
car, club memberships, first class air travel, corporate aircraft, employment
contracts, legal and financial services, severance agreements, change in control
agreements, special deferred compensation, SERP and supplement disability
and life insurance.
a) Employment Contracts

• Employment Contracts provide security, through the use of the term contract and
provisions covering performance, termination and compensation. An effective
agreement represents the mutuality of interests between the parties and the
method for achieving those interests. In a seller's market, executives expect to
receive this safety net in the event the employment relationship sours. Without an
agreement, the executive becomes an at-will employee. Offer letters are
generally not binding contractual agreements.
b) Supplemental Executive
Retirement Plans (SERPS)

SERPS are unfunded non-qualified plans that provide

additional retirement compensation and benefits to the top
tier of executives and directors. Many plans provide for
benefits that range from 60% to 80% of the executive's final
average salary. The plans are structured like defined benefit
plans, and they provide a lifetime differential payment
between the targeted overall retirement benefit and the
benefits the executive receives from tax qualified plans and
social security.
c) Change in Control & Severance
Agreements

• Change-in-Control Agreements, also known as

"Golden Parachutes," provide the executive with
protection against the risk of losing their employment if
the company is acquired. These agreements
incentives the executive and create further dedication
to the company during turbulent times, thus protecting
management interests.
d) Executive Life Insurance Plans

• Companies offer executives additional

life insurance coverage as a perquisite,
beyond the company group plan. The
most common reason companies
provide additional life insurance
coverage is to remain competitive in
attracting top talent. The executive
benefits by receiving retirement income
(ownership of the cash value life
insurance policy), wealth building, and
estate tax minimization.
 e) Relocation Packages

• Companies offer relocation programs that provide benefits to alleviate the

financial and emotional stress of moving from one location to another. The
executive generally expects to negotiate enormous benefits through these plans,
in order to minimize financial and tax risks of the transition. Companies desire to
remain competitive and retain top talent.
f) Make Whole or Leave Behind
Payments

• "Make Whole" payments, also known as sign on bonuses

or "Golden Hellos," are non-performance related payments
used to compensate the new executive for loss of
performance related compensation left behind with the
former employer. The size of these generous make whole
payments can be staggering and are dependent on the
executive's level, industry and company.