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This document discusses compensation management and provides details on various compensation components and philosophies. It begins with definitions of compensation and the basic forms: [1] base pay including wages and salaries, [2] variable pay such as bonuses and incentives, and [3] benefits including health insurance and retirement. The document then examines compensation objectives like efficiency, fairness and competitiveness. It outlines two prevailing philosophies of compensation that are either entitlement-oriented or performance-oriented. The document concludes with assignments for students to analyze compensation packages of different companies and executives.
This document discusses compensation management and provides details on various compensation components and philosophies. It begins with definitions of compensation and the basic forms: [1] base pay including wages and salaries, [2] variable pay such as bonuses and incentives, and [3] benefits including health insurance and retirement. The document then examines compensation objectives like efficiency, fairness and competitiveness. It outlines two prevailing philosophies of compensation that are either entitlement-oriented or performance-oriented. The document concludes with assignments for students to analyze compensation packages of different companies and executives.
This document discusses compensation management and provides details on various compensation components and philosophies. It begins with definitions of compensation and the basic forms: [1] base pay including wages and salaries, [2] variable pay such as bonuses and incentives, and [3] benefits including health insurance and retirement. The document then examines compensation objectives like efficiency, fairness and competitiveness. It outlines two prevailing philosophies of compensation that are either entitlement-oriented or performance-oriented. The document concludes with assignments for students to analyze compensation packages of different companies and executives.
Associate Professor ,Human Resource Management Management Development Institute (MDI) (http://www.mdi.ac.in) Mehrauli Road, Sukhrali, Gurgaon 122001, INDIA Fax: +91-124-2341147;Phone: +91-124-4560304 Mobile: 9910841987 Email: tanujasharma@mdi.ac.in
AN EXPERIENTIAL EXCERCIZE Philosophy of Compensation Management Ever since I was a boy I have wished to write a discourse on Compensation: for it seemed to me that life was ahead of theory and people knew more than was taught. Ralph Waldo Emerson Compensation," The riverside Essays, Vol.1 Questions??? Compensation ? Management? Organization Compensation Philosophy What can we afford? How are others being compensated ? What was the prior compensation? What is the minimum he/ she will accept? How badly do we want him/her? What are executive compensation levels within member companies?
Compensation refers to all forms of financial returns and tangible services and benefits employees receive as part of an employment relationship. What Is Compensation? Total Returns for Work Basic Forms of Compensation Base Pay Wages Salaries Variable Pay (Short term & Long term) Pay for Performance Bonuses Incentives Stock Options Benefits Medical Insurance Paid Time Off Retirement Pensions Workers Compensation Non-Pecuniary Rewards (Non-Financial Rewards. E.g. reputation, power on the job.) Base Pay Base Pay The basic compensation an employee receives in exchange for work performed. Wages - time-based (usually hourly) compensation calculated on the basis of the amount of time worked. Salaries - payments consistent from time period to time period regardless of the actual amount of time worked.
Variable Pay Variable Pay - compensation linked to individual, team and/or organizational performance. Some examples: Piece-rate/ hourly-rate - productivity-based compensation paid for each unit of product produced or service provided. Bonuses (short-term tied to performance) Profit-sharing Gain-sharing Commissions Stock options etc. Benefits Benefits - indirect compensation contingent upon organizational membership. [30-40% of total payroll costs]. Some examples: Health Insurance Life Insurance Vacations and Holidays Pensions Sick Leave Severance Pay Allowances:Eg. Utilities, Education Allowance, Uniform Allowance etc. Awards and Recognition
More examples of Benefits 1. Extra payments for time worked: (Holiday premiums or Shift premiums) 2. Non-production awards and bonuses: (Anniversary awards/ Attendance bonus/ Quality bonus/ Safety awards/ Service bonus/ Suggestion awards) 3. Payments for time not worked: (Family allowances, Paid Holidays, Paid Sick Leave, Severance Pay) 4. Payments for employee security: (Contributions toward accident insurance, hospitalization & life insurance) 5. Payments for employee services: (Canteen service, Company Housing, Educational assistance, employee discounts for purchases, voluntary medical examination, festival gifts) Components of Compensation Analyzed Annual Base Salary (ABS): Monthly Basic Salary (Basic +DA) Annual Guaranteed Cash (AGC): Includes all guaranteed components of compensation such as Conveyance Allowance, Car Allowance, House Rent Allowance, telephone, Leave Travel Assistance, Medical Allowance, etc
Annual Total Cash (ATC):
Includes Guaranteed Cash and the variable component of the salary including performance based bonus and incentives
Annual Total Employment Cost (ATEC): Annual Total Cash plus all benefits and perquisites such as insurance premium, entertainment reimbursement, club memberships, loan programs, retirement benefits, etc
Prevailing Environment - Global Scenario Employers are increasingly taking a view that long term benefit costs are but one component of an employees total remuneration.(retiral -PF, Gratutity-a part of CTC) Employers can maximize their return on total remuneration costs by allowing individual employees flexibility (within regulatory & legal provisions) in deciding how they will receive their money. Prevailing Environment - Global Scenario Retirement benefit program is a facility offered by the employer for Membership. It makes sense to allow individual employees to tailor their benefits & contributions to their personal circumstances. Employees have different needs at different stages-hence need to look at different cross section of the employees differently.
What Do Employers Want? Employers prefer to have control of cost. Employers would like to provide infrastructure so that employee needs can be fulfilled. Employers like pension plans to be a tool of retention and reward. What Do Employees Want? Relational Returns from Work Recognition & Status Employment Security Challenging Work Learning Opportunities Direct Pay Forms Cash Compensation: Base Cash Compensation: Merit Pay / Cost-of- Living Adjustments Cash Compensation: Incentives Long-Term Incentives Indirect Pay Forms Benefits: Income Protection Benefits: Work/Life Focus Benefits: Allowances Forms of Pay Two Prevailing Philosophies of Compensation (Right Vs Duty) Entitlement Orientation all employees automatically receive raises every cycle. Seniority basis Cost of living allowances (COLAs)/DA Across the board raises are due employees regardless of performance or competitive pressure.
Performance Orientation - pay is based on performance differences among employees. Merit basis Bonuses tied to performance. Gaining ground against entitlement oriented systems. Market adjustments
COMPLIANCE COMPETITIVENESS Market Surveys Policy PAY definitions lines STRUCTURE CONTRIBUTORS Seniority Performance Merit INCENTIVE based based guidelines PROGRAMS MANAGEMENT Costs Communication Change EVALUATION THE PAY MODEL ALIGNMENT Work Descriptions Evaluation/ analysis certification INTERNAL STRUCTURE Compensation Objectives Efficiency Fairness Compliance 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 The Key to World Class Executive Compensation ProgramExercise Good Judgment The 4 Ps Process Principles Performance Pay Right Data Right Job flexibility Internal Performance External Performance Benchmark Performance Annual Calendar Demarcation of roles Accountability Responsibility Consistency Measurability Assignment-1 (submission-Next week)
1.Individual work (Tuesday, Jan 7th-In class presentation; students with work ex. Only : Company based groups to share their salary slips showing different components/percentage of components/ frequency?-monthly/annual/long term etc. 2. CASE ON NEGOTIATION
CONT:-PROJECT REPORT FOR TERM III
Part report for comp mgt. Group based work: (soft & hard copy submission) I. Interview any 5 Executives from different companies and find out the CTC components and how they are paid. Analyze sector wise data. also if possible-find salary data (components and % only) for three different levels (top/middel/ lower) of managers in a company. Analyze the same. I. Study of annual reports to understand compensation-select a sector of your interest or compare cross sectors (banking, IT, manufacturing etc). CEO & Directors remuneration (rem. Policy of top-mgt members)-note down the components (eg. Salary, commission etc.) and the contents as disclosed in the annual report. FOR A COMPANY-Study the annual report And explore the following relationship; -revenue & employee/HR cost for a year. compare across past 3-5 years -CEO/directors salary and PBT over 3-5 years in a company. Does recession have any impact on the same?