COMPENSATION

Compensation is a systematic approach to providing monetary value to employees

in exchange for work performed. Compensation may be used to:

 recruit and retain qualified employees.

 increase or maintain morale/satisfaction.
 reward and encourage peak performance.
 achieve internal and external equity.
 reduce turnover and encourage company loyalty.

Compensation may also be used as a reward for exceptional job performance.

Examples of such plans include: bonuses, commissions, stock, profit sharing, gain
sharing.

Compensation Plan – Factors Influencing: Internal and External Factors

Compensation level is influenced by a number of factors.
Some factors are internal in nature and others are external. Internal factors are
company-specific that relate to the company’s resources, abilities, policies, etc.
External factors are those that operate outside the organization, i.e., the external
environment that have an effect on the compensation plans.

1. Internal Factors:
i. Financial Ability:
A firm’s liquidity position, returns on investment, financial outlay, etc., indicate the
long-term financial capacity of a firm. A company’s financial strength should be
such that even in uncertain situations, it can adhere to the compensation policies and
pay uniformly to all its employees.
ii. Compensation Policies:
A company’s compensation policies are determined by the number of employees
working, number of permanent employees, number of casual staff, etc. Moreover,
whatever policies the company follow (say, only salary schemes or performance-
based incentive schemes) should have a relationship with the total remuneration
volumes of the company.
iii. Recruitment and Selection Policy:
This influences the number of people that are on the payroll. The compensation
policies should take into account the number of new employees inducted and the
number of employees that are retired or have left.
iv. Job Evaluation:
The worth of the job in terms of contributions in financial terms to an organization
is related to the compensation level. For example, the contribution of a salesperson
in selling a high unit value item such as – a turbine or furnace to the firm is immense
and therefore, the concerned employee needs to be suitably compensated.
v. An Employer’s Designation and Position:
An executive or managerial position definitely deserves higher pay level. Secondly,
a senior in position demands a higher remuneration package than that of the junior
employee.

2. External Factors:
i. Prevailing Compensation Policies in the Industry:
Every industry has a trend to offer compensation to its salespeople and it is safe for
a firm to follow the industry trend. This is especially true for medium and small
companies with limited financial strength. But efficient salespeople, once they prove
their worthiness, can bargain for better salaries or commissions. There is no
difficulty in putting them on premium compensation packages in large companies.
ii. Legal Conditions:
As companies operate within the legal frame of governments, they need to strictly
observe the legal policies and regulations of the governments. The government has
legal stipulations on the minimum wages act or provisions for fringe benefits.
iii. Economic Conditions:
These are important pay level determinants. It is a customary practice in the industry
circuit that with the rise in inflationary conditions, the companies escalate the level
of the dearness allowance so that the employees can cope up with the rising price
level.
iv. Trade Unions:
It often plays a mediating role in the company’s decision to fix up different pay
levels for employees along various positions. This is true in public sectors and large
private sector firms.
STEPS OF DETERMINING COMPENSATION

1. Define the job.

Define the job’s purpose, essential duties and responsibilities, required skills and
knowledge, experience, and educational level. This involves creating a job
description or updating an existing one. When done right, defining a job accurately
requires a comprehensive job analysis.

2. Determine the job’s value to your organization.

Evaluating the job’s worth and value not only in the market, but also to your
organization, is an important step in setting compensation for this reason: a job with
greater internal impact and contribution to your organization’s strategy and business
objectives will be more valuable, and therefore should be paid more, than a job with
less of a direct impact. Knowing the job’s value also helps you determine whether
or not compensation is worth negotiating.

When evaluating a job’s worth, several different methods can be used. Jobs can be
slotted into a class or grade that matches their class description on job skill and
complexity. Also, jobs can be assigned points based on certain factors such as mental
and/or physical effort, supervisory responsibility, and accountability/responsibility.

3. Review where a job fits within a range.

Depending on the value of the job and what it is priced at, the job (if it is a new job)
is then allocated to the pay structure in a given grade. You’ll also want to consider
experience level in the range. Typically, new-hires with no to little experience earn
closer to the minimum, and highly experienced employees earn closer to the
maximum.

4. Consider organizational factors, including budget.

Evaluate what is in your budget and what you paid the last incumbent, if it is not a
new role. You should also consider the factors like cost-of living adjustments,
bonuses, and other increases.

Also, recognize that pay is only part of the total rewards package. If your
organization offers many other attractive benefits like flexible schedules, engaging
career opportunities, fulfilling work, rewards and recognition programs, and
generous time off and benefits, these can all factor into your pay decisions.
Pay Structure in India
Salaries are paid by organizations to their employees in exchange for the services
rendered by them. The salary paid to employees comprises of a number of different
components, such as basic salary, allowance, perquisites, etc.
Salary structure is the details of the salary being offered, in terms of the breakup of
the different components constituting the compensation. Any change(s) to the salary
structure i.e. among the elements, can have a major impact on what the employee
does, such as the kind of tax exemptions claimed.
Components of Pay Structure

 Basic Salary
Basic salary is the base income of an employee, comprising of 35-50 % of the total
salary. Basic salary is determined based on the designation of the employee and the
industry in which he or she works in. Most of the other components, like allowances,
are based on the basic salary. This amount is fully taxable.

 Allowances
Allowance is an amount payable to employees during the course of their regular job
duty. It can be partially or fully taxable, depending on what type it is. Allowances
provided and the limits on it will differ from company to company, according to
their policies.

 Dearness Allowance - Dearness allowance is a certain percentage of the basic

salary paid to employees, aimed at mitigating the impact of inflation. It is paid
by the government to employees of the public sector and pensioners of the
same.

 House Rent Allowance – A house rent allowance is that component of the

salary which is paid to employees for meeting the cost of renting a home.
Salaried individuals residing in rented homes can claim this exemption and
reduce their tax liability.
 Conveyance Allowance - Conveyance allowance, also known as transport
allowance, is a kind of allowance offered by employers to their employees to
compensate for their travel expense to and from their residence and
workplace.
 Leave Travel Allowance - Leave travel allowance is offered by employers to
their employees to cover the travel expense when he or she is on leave from
 work. The amount paid as leave travel allowance is exempt from tax under
Section 10(5) of Income Tax Act, 1961.
 Medical Allowance - Medical allowance is a fixed allowance paid to the
employees of an organization to meet their medical expenditure.

 Gratuity
Gratuity is a lump sum benefit paid by employers to those employees who are
retiring from the organization. This is only payable to those who have completed 5
or more years with the company. The gratuity amount is paid in gratitude for the
services rendered by the individual during the period of employment.

 Employee Provident Fund

Employee Provident Fund is an employee benefit scheme where investments are
made by both the employer and the employee each month. It is a savings platform
that aids employees to save a portion of their salary each month, from which
withdrawals can be made following a month from the date of cessation of service or
upon retirement.

 Professional Tax
Professional tax is a tax levied on the income earned by salaried employees and
professionals, including chartered accountants, doctors and lawyers, etc. by to the
state government. Different states have varying methods of calculating professional
tax. The maximum amount that is payable in a year is Rs. 2,500.

 Perquisites
Perquisites, also referred to as fringe benefits, are the benefits that some employees
enjoy as a result of their official position. These are generally non-cash benefits
given in addition to the cash salary. Some examples of perquisites include provision
of car for personal use, rent-free accommodation, payment of premium on personal
accident policy, etc.

 ESIC
If a company has 10 or more employees whose gross salary is below Rs. 21,000 per
month, then the employer is required to avail ESIC scheme for such employees.
Wage Differential
A wage differential refers to the difference in wages between people with similar
skills within differing localities or industries. It can also refer to the difference in
wages between employees who have dissimilar skills within the same industry.

1. Nature of Employment

Wage differentials may be on account of acceptance or non-acceptance of

the employment. People may accept a job with low remuneration with attractive
working and living conditions while may not accept high Paid employment with bad
living and working conditions and tiresome Jobs.
2. Profitability of Success

Wage differentials are found with the profitability of success in employment. Where
the probability of success is uncertain, wages will be high while in case of an
employee having risk and failures the wage rate will below.

3. Training and Education

A job with a low level of training and education will have low wage rates Higher
Education and Training required high wages rates. People generally accept the easy
jobs rather than a difficult job despite the low wage rates.

4. Security and Stability of Employment

Secure and stable employment has low wage rates while temporary and seasonal
employees will have High wage rate.

5. Geographical Differences

Wage differentials are on the basis of geographical differences based on Industrial

and occupational differences. In cities, wage rates are high while rural labour is
available at low wage rates.
Profit-sharing
Money, as we all know, is a great motivator, and if an employee is offered a
chance of owning a part of profits, it takes his motivation and contribution to the
next level. Profit-sharing is a process wherein you share the profits with your
key employees and is often described as a form of additional remuneration to
keep the employees engaged and satisfied in the job so that the rate of
employee retention is higher.

Methods

The conventional profit-sharing methods are

 Cash money
 Bonds
 Mutual funds
 Stocks or company shares

The advantages of profit-sharing are as follows-

 A healthy relationship between employer and employee – when an

employer is willing to share profits with his employees, it shows a
willingness on his part to take every employee with himself in this
journey. When the employee becomes invested in the company, there is
a feeling of ownership that encourages a solid bond and leads to lack of
absenteeism and a lower rate of employee turnover.

 Additional income for employees – The employees become involved

in the business entity 100% because they realize that the revenues earned
will be eventually also distributed amongst the workforce.

 Increase in productivity – The employees realize that until and unless

they increase their efficiency levels, the productivity will not rise and
this will have a direct impact on the profit of the business. This is why
employees will try to accomplish their tasks more effectively.
  Less supervision – As the workforce is in itself interested in the growth
and development of an organization, they do not need as much
supervision as their counterparts in other companies.

 Reduced employee turnover- The profit-sharing allocation plan is

loosely based on the length of the service of an employee in an
organization. To be eligible for this scheme, an employee has to work
for a minimum period that is specific and is for a long duration. This is
why companies that have a policy of profit-sharing have reduced
employee turnover and increased employee retention rates.

Gainsharing
Gainsharing is a system of management used by a business to increase profitability
by motivating employees to improve their performance
through involvement and participation. As their performance
improves, employees share financially in the gain (improvement). Gainsharing’s
goal is to improve performance and eliminate waste (time, energy, and materials) by
motivating employees to work smarter as a team rather than just working harder.
Gainsharing should not be confused with profit sharing. There are many differences
between Gainsharing and profit sharing.

Gainsharing Vs Profit Sharing

In a profit-sharing program, employees receive bonuses tied directly to the
company's overall profitability. The more money the company makes, the bigger
the bonuses. Employees in a gainsharing program earn bonuses, too, but those
bonuses require specific improvements in performance, such as increased
productivity, higher sales or reduced expenses. Both types of programs aim to give
employees a stake in the success of the company, but with gainsharing, bonuses
are more closely tied to the performance of specific employees or groups of
employees.
Advantages of Gain Sharing

 Rewards only performance improvement

 Aligns employees to organization goals
 Fosters a culture of continuous improvement
 Enhances employee focus and awareness
 Increases the feeling of ownership and accountability
 Enhances the level of involvement, teamwork and cooperation

Employee Stock Option Plan

What is ESOP?
Employee Stock option plan or Employee Stock Ownership Plan (ESOP) is an
employee benefit scheme that enables employees to own shares in the company.
These shares are purchased by employees at price below market price, or in other
words, a discounted price.
The purpose of providing ESOP is to make the employee more committed towards
the company. In other words, ESOP motivates the employee to be committed
towards the company for a long term and also take ownership of the company.
If the employees are provided with a sense of ownership of the company by making
them shareholders of the company, this will result in the employees focusing more
on performing better for the company.

Benefits of ESOP
1. It acts as a source of motivation for employees who will be benefiting when the
prices of the company shares rise in the market.
2. It helps to retain employees in the organisation
3. Employees are benefited for the hard work they perform in trying times.
4. It helps in preventing a significant amount of cash outflow from the company.
What is an incentive?
An employee incentive is a reward that an employer gives to employees for results
achieved by the company as a whole. It is usually monetary compensation and can
be in addition to salary or wages. An employee incentive can be in the form of a
gift, free products, paid time off, or additional shares of stock.
SOCIAL SECURITY

India’s social security system is composed of a number of schemes and programs

spread throughout a variety of laws and regulations. However, that the government-
controlled social security system in India applies to only a small portion of the
population.

Generally, India’s social security schemes cover the following types of social
insurances:

 Pension;
 Health Insurance and Medical Benefit;
 Disability Benefit;
 Maternity Benefit; and
 Gratuity.

Retirement and pension benefits

Retirement and pension benefits are given to a retired government official to make
sure that they have a constant income and a secured life. The pension provisions are
in place to ensure that the retired government officials are well off and can be
financially independent and can lead their retired lives with no financial challenges.

What is job evaluation? A definition

The essence of compensation administration is job evaluation. Organizations
consist of many jobs, and all jobs are important, but all are not equally
important. The relative importance of jobs is not the same.

Few jobs are more important than others in terms of relative worth. The
objective of job evaluation is to price the job rather than the man.
It is the systematic process of determining the relative value of different jobs in an
organization. The goal of job evaluation is to compare jobs with each other in order

to create a pay structure that is fair, equitable, and consistent for everyone. This
ensures that everyone is paid their worth and that different jobs have different entry

and performance requirements.

 Edwin B. Flippo defines. “Job Evaluation is a systematic and orderly process

of determining the worth of a job in relation to other jobs.”
 In the words of Maurice B. Cumming, “Job Evaluation is a technique of
assessing the worth of a job in comparison with all other jobs throughout an
organisation”.