Compensation

Executive compensation
Lecture outline
Define compensation
How is Compensation used ?
Essentials of the compensation system.
Wage theories
Importance of the compensation system
Components of Remuneration
Methods of wage payment systems
Matching organizational pay ranges with Market
rates
Common incentive plans
Trends in compensation
Allowance linked to salary as a
percentage of the basic payment
Compensation policies reviewed annually
Tailor made for experts
Emphasis on variable performance.
ESOPs is not used extensively due to
their comparatively lesser share value
Should confirm with prevailing tax laws.
 Corporate Practices on
compensation
Existence of substantial difference in gross compensation
for mgrs. & their subordinates
Dissimilarity in compensation structure between project &
support functions
Restricted non tax perks in the form of reimbursement
under various heads to certain top level of management
Significant increase in base salary & hence in deferral
benefits.
Shift in incentives from individual to group
Clear and discernible shift happening from Individual to Role
based Compensation
Delivery, Impact & Accountability are becoming key drivers
for compensation
will need to think more aggressively on health and wellness
to drive longer term value
impact of multiple generations on the workforce
Compensation
Itis systematic approach to providing
monetary value to employees in
exchange for work performed

Remuneration is the compensation an

employee receives in return for his or
her contribution to the organisation.
Concepts
Wage
Salary
Earnings
Nominal wage paid in monetary terms.
Real Wage represents purchasing power of money
wage
Wage rate Amount of remuneration for a unit of
time excluding Incentives
Standard wage rate amount of wage fixed for a unit
of time fixed on the basis of job evaluation
standards.
Wage policy in India
1.Minimum wage (Minimum requirements for
the standard working class family )
Statutory minimum wage
2.Fair wage (Productivity of labor, prevailing
rate of wages , level of national income, place
of industry in the economy of the nation ,
employers capacity to pay)
3. Living wage (material as well as social
needs)
Bonus
Salary differentials
Different salaries for the employees doing the same job.

To attract the talent & skilled people

To allow companies to build distinctive competencies
To satisfy the talented employees as they get higher salaries
To encourage staff to develop their skills

They are due to :

Market factors
Strategy
Occupational factors
Socio Economic factors
How is compensation used?
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
Modify ( through negotiations) practices
of unions
Essential of Compensation
system system
Fairness or equity
Attract talent
Retain talent
New and desired behaviour
Comply with legal rules
Ease of operation
 Wage theories
According to economic theory of wages the demand for labour depends
on :

Productivity of labour
Technology
Demand of the product
The price of capital input

The shift in demand for labour again depends on two elements:

1. The industries demand as a whole represent the market demand for

labour

2. An industry is a collection of firm

 Theory of wages
Wages Fund Theory (Wage rate =Amount of fund
allocated Wage / Total no. of workers)
Subsistence Theory David Ricardo
The Surplus Value Theory of Wages Karl Marx
Residual Claimant Theory Francis A. Walker Amount
of wages = Production value ( Rent+ Profits +
interest)
The Bargaining Theory of Wages John Davidson
Behavioural Theories of Wages
The investment theory of wages - H .M .Gitelman
(wages are seen as investment in worker productivity)
Subsistence theory ( iron law of wages)

Labor demand remains constant

Population increases or decreases on
the basis of subsistence wages paid to
the workers
No wage differential
Components of remuneration
1. Wages refers to the hourly rate of pay
Basic wages
Dearness allowance (linked to consumer price index , the time
factor and the point factor)
HRA
Conveyance allowance

2.Incentives : performance based

3.Fringe benefits
Provident fund
Gratuity
Perquisites
4. Non monetary benefits
5. Delighting employees with e rewards
Methods of wage payment
Time wage
Guaranteed time rates
Piece rate system(rate per piece or unit
of output)
Skill based pay
Competency based pay
Executive compensation
Broad banding
Wage Fixation institutions in
India
Collective Bargaining

Wage Boards

Pay commissions
 Determining pay
The wage curve (relationship between
the relative worth of the jobs and their
wage rates can be represented by
means of a graphical representation)

Pay grades

Rate ranges
 Pay Program
Theability of a pay program to
communicate and create value comes
from the level of sustained
communication, focus and
organizational muscle that a company
can bring in to make it work.
Matching organizational pay ranges with
Market rates

Matching the competition policy

Lead Policy ( Structure adjusted for
market level at the end of plan year ,
more than competition)
Lag policy (structure adjusted for
market level at the start of plan year
,providing other benefits of the
employees)
Lead lag policy (middle of the year )
Common incentive plans
Profit sharing

Employee stock option plan

Team based incentives

Uber taxi aggregator
On demand app car service
By Travis Kalanick and Garret camp invested 200000 as seed money
investors Google
Service available in 58 countries and 300 cities worldwide
Pricing model and Experience
Technology- the app technology for consumers and demand calculation
technology at the firm
Business Model - Uberification
Minimize pick up times and maximize utilization
Pay per trip incentive model
Employees technological abilities and innovativeness
Rethink the working of transportation industry
Company measures driver performance through a successful driver
monitoring programme
Labour laws (wages)
Payment of wages Act ,1936
Minimum wages Act,1948
Payment of Bonus Act,1965
Equal remuneration Act,1976
Payment of gratuity Act ,1972