Unit 7
Compensation and benefits
 Compensation, job evaluation, concept, process and significance,
components of employee remuneration, base and supplementary,
Pay for performance and Financial Incentives, Maintenance,
Overview of employee welfare, health and safety, social security.
Compensation is typically defined as
“The money received by an employee
from an employer as a salary or wages”.
Reward, on the other hand, is defined as
“A thing given in recognition of service,
effort, or
achievement” we are witnessing a shift to
use of the term “Reward Management”
increasingly.
COMPONENTS OF TOTAL REWARD
STRATEGY
Best rewards management practices
Compensation & Benefits are also known as Total Rewards
Compensation System Components
Benefits
Pay
Source of figure: Fisher, Schoenfeldt, & Shaw (2006), Figure 11.1, p. 485
Extrinsic vs. Intrinsic Compensation
Extrinsic Compensation.
Core Compensation

1)
2)
Salaries (Monthly).
Wages (Hourly, Daily, or Weekly).
Cost-of-Leaving Adjustment (COLAs).

1)
2)
3)
4)
5)
Consumer Price Index (CPI).
Seniority Pay.
Merit Pay.
Incentive Pay.
Person-focused Pay (Pay-for-Knowledge and Skill-Based Pay)
Employee Benefits:
Legally Required Benefits

1)
2)
Discretionary Benefits (not legally obligatory):

1)
2)
3)
4)
9
Social Insurance
Sick leave.
Health Insurance
Life Insurance.
Retirement Plans.
Paid time-off.
Job Satisfaction & Pay Satisfaction
 Pay and job satisfaction are entirely different but they interact and
influence each other. A positive view of one can improve the other.
 Reward Systems should be designed, developed, and implemented
in a way leading to improved employee pay, job, and organizational
satisfaction.
Compensation:
A money value is presented in return of an employee efforts doing certain tasks or jobs for definite or
indefinite time frame . It varies in terms of formation and type presenting based on the nature of job. It
is an obligatory right forced by law.
Benefits:
A certain type of financial or non financial rewards are presented for the purpose of rewarding &
recognition, to the employee in returns of his efforts doing a job. Some benefits are obligatory and
some are not forced by Law.
Salary:
A money value is presented in return of an employee efforts doing certain tasks or jobs, on monthly or annually basis.
Manly are given to white collars.
Wage:
A money value is presented in return of an employee efforts doing certain tasks or jobs, on hourly or daily basis.
Manly are given to Blue collars.
Objectives of Compensation
Administrative
efficiency
Legal
compliance
Acquire
personnel
Retain
employees
Effective
Compensation
Control
costs
Reward
behaviour
Ensure
equity
16-2
INTRODUCTION
Compensation is what employees receive in exchange for their contribution to the organization.
Generally speaking, employees offer their services for three types of rewards

Base pay

Variable pay

Benefits
The most important objective of any pay system is fairness or equity, generally expressed in three
forms. Equity
Equal pay for work of equal value.
 Internal equity: Requires that pay be related to the relative worth of a job so
that similar jobs get similar pay.

External equity: Paying worker what other firms in the labor market pay .The external
equity is established through wage and salary surveys.ex-Hewitt Associates, Kelly .

Individual equity: where equal pay is ensured for equal value of work.
Pay Equity
An employee’s perception that
compensation received is equal to the
value of the work performed.
Equity and Its Impact on Pay Rates
Forms of Compensation
Equity
External
equity
Internal
equity
Individual
equity
Procedural
equity
16-3
Objectives of compensation planning

Attract talent

Retain talent

Ensure equity
 Reward appropriately(loyalty, commitment, experience, risk raking and other
behaviours)

Control costs

Comply with legal rules

Ease of operation
Compensation Administration
desired
16-5
Components of Pay Structure
The two essential components of pay structure are; basic wages and dearness
allowance .the basic wage rate is fixed taking the skill needs of the job, experience
needed, difficulty of work, training required, responsibilities involved and the
hazardous nature of the job. Dearness allowance is paid to employees in order to
compensate them for the occasional or regular rise in the price of essential
commodities.
Important Compensation Related Acts in India


Under the Workmen's Compensation Act,1923.
Wages for leave period, holiday pay, overtime pay, bonus, attendance bonus and good conduct bonus. Workers'
compensation replaces income that is lost because of a job-related injury or illness. Disability insurance covers
income lost due to injuries and illnesses that are not job related.
Under the Payment ofWages Act, 1936
Retrenchment compensation, payment in lieu of notice , gratuity payable on discharge
Compensation Administration
Base Pay Structure (Fixed component)






18
Salaries and wages are the periodic assured payments
made to the employees. Salaries are generally paid to the
permanent employees on the monthly basis, whereas
wages are paid to temporary or contractual workers on the
daily basis. Base Pay is the fixed component and generally
consists of the following:
Basic Component
HRA (House Rent Allowance)
DA (Dearness Allowance)
Leave Travel Allowance
Mobile Expenses
Medical Allowance/Reimbursements, etc.
Variable Pay Programs
Variable Pay Plans for Sales
Variable pay plans for sales represents a pay-mix
that may be a 70-30 or 60-40 or 50-50 plan. Here the
30, 40 or 50 represents the variable portion of the
pay and is linked to the targets.
Variable Pay Plans for Non-Sales
The variable pay is based on jobs and levels of job.
may be broken under employee performance based
on quality of work,absense of complaints etc
19
Bonus
The bonus can be paid in different ways. It can be fixed
percentage on the basic wage paid annually or in
proportion to the profitability. The Government also
prescribes a minimum statutory bonus for all employees
and workers.
Commissions
Commission to Managers and employees may be based
on the sales revenue or profits of the company. It is
always a fixed percentage on the target achieved. For
taxation purposes, commission is again a taxable
component of compensation.
20
Mixed Plans
Incentives
Incentive is clearly defined, target-related and upfront.
Piece rate wages are prevalent in the manufacturing
wages.
Sign on Bonuses
The latest trend in the compensation planning is the lump
sum bonus for the incoming employee. A person, who
accepts the offer, is paid a lump sum as a bonus.
Profit Sharing Payments
Profit sharing is again a novel concept nowadays. This
can be paid through payment of cash or through ESOPS.
21
Benefits
Types of Benefits
i. Paid time off (also referred to as PTO)
It is earned by employees while they work. They
may be a) holidays (governed by the law), b) Leaves
(governed by the shop and establishment act) like
Casual Leaves, Sick Leaves, Earn or privilege
leaves, etc.
ii. Insurance Programs
The insurance programs may include health
insurance, life insurance, personal accident
insurance,
disability
insurance,
family-health
insurance, etc.
22
iii. Fringe Benefits
Fringe benefits include a variety of non-cash payments
that are used to attract and retain
talented
employees and may include educational assistance,
flexible medical benefits, child-care benefits, and nonproduction bonuses (bonuses not tied to performance).
iv. Social Security
Social security benefits are aimed at protecting
employees against all types of social risks that may
cause undue hardships to them in fulfilling their basic
needs. ex: Old-age Insurance Benefits, Housing Benefits.
23
Rewards & Recognition
Recognition is non-monetary reinforcement for good performance. It has a psychological benefit to the
employee.
Rewards are monetary reinforcement for individual or company target accomplishment for the current
quarter or year.
Awards are tokens of appreciation, which are given to individuals for their personal achievements. It
can be called as symbol of recognition to an individual for their personal achievements.
Tailor-made Rewards
•
•
•
•
•
•
Junior employees need more than compensation to stay on as they have lower liabilities and huge opportunities. IPhones, gadgets,
fashion accessories or online vouchers are a big hit.
For a senior executive at Hay Group in India, a client transferred the title of a company-owned house to him.
At Coca Cola India, A tam that conceptualized a program was sent to Russia and Turkey.
PepsiCo has a deferred bonus payout scheme to pep up employees.
At HCL technologies, the company presented Mercedez cars to its top performers at the CEO level.
At Jabong, employees can give “you make a difference” cards to their peers, subordinates or leaders.
Source: http://articles.economictimes.indiatimes.com/2014-10-04/news/54626628_1_pepsico-india-rewards-job-market
(Economic Times-4th October, 2014. “Firms like PepsiCo, Coca Cola, others institute rewards and recognition programmes to
retain talent”)
Corporate Policies, Competitive Strategy,
and Compensation
 Aligned Reward Strategy
 The employer’s basic task:
 To create a bundle of rewards—a total reward package—that specifically
elicits the employee behaviors that the firm needs to support and achieve its
competitive strategy.
 The HR or compensation manager along with top management
creates pay policies that are consistent with the firm’s strategic
aims.
Compensation Policy Issues
• Pay for performance
• Pay for seniority
• The pay cycle
• Salary increases and promotions
• Overtime and shift pay
• Probationary pay
• Paid and unpaid leaves
• Paid holidays
• Salary compression
• Geographic costs of living differences
Compensation Policy Issues
•
Whether to emphasize seniority or performance is a compensation policy issue.
•
seniority-based pay may be of advantage to the extent that employees seek seniority as an objective standard yet a
disadvantage is that top performers may get the same raises as poor ones.
•
Salary Compression is a salary inequity problem generally caused by inflation resulting in longer-term employees in a position
earning less than workers entering the firm today.
•
Prices go up faster than company's salaries and firms need a policy to handle it, One policy is to install a more aggressive merit
pay program, Others authorize supervisors to recommend equity adjustments for selected employees who are both highly valued
and victims of pay compression..
•
Geography : cost of living differences between cities can be considerable; employers handle cost of living differences to give the
transferred person a nonrecurring payment, others pay a differential ongoing cost in addition to one time allocation, while others
simply raise the employee's base salary.
•
Compensating Expatriates employees: multinational companies compensate expatriate employees those who are sent overseas
using two basic international compensation policies; home-based and host-based plans.
Compensation Related Acts in India
Minimum Wages Act, 1948
Payment of Wages Act, 1936
Equal Remuneration Act, 1976
Companies Act, 1956
Payment of Bonus Act
Payment of Gratuity Act
Employee Stock Scheme (ESOS)
Employee Stock Purchase (ESPS)
Pricing the Jobs
Pricing the jobs simply means determining the
compensation for a particular job. Job evaluation is
the process by which the relative worth of various jobs
in an organization is determined.
Job Evaluation
Job evaluation is a process of determining the relative
worth of various jobs in an organization.
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).
2
Determine the worth of each job in your organization
through job evaluation (to ensure internal equity).
3
Group similar jobs into pay grades.
4
Price each pay grade
5
Fine-tune pay rates.
Step 1.The Salary Survey
Step 1. The Wage Survey:
Uses for Salary Surveys
To price
benchmark jobs
To market-price
wages for jobs
To make decisions
about benefits
Step 2: Job Evaluation
Identifying Compensable Factors
Skills
Effort
Responsibility
Working
conditions
Compensable Factors
Factors in a particular jobs which should be
compensated for they directly or indirectly contribute
in successful completion of that particular job are
called compensable factors.
Establishing Pay Rates (continued)
Preparing for the Job Evaluation
1
Identifying the need for the job evaluation
2
Getting the cooperation of employees
3
Choosing an evaluation committee
4
Performing the actual evaluation
Job Evaluation Methods
Methods for
Evaluating Jobs
Ranking
Job
Classification
Point
Method
Non Quantitative Techniques –Ranking, Job Classification Method
Quantitative Techniques –Point Method,Factor Comparison
Factor
Comparison
Step 3: Grouping Jobs
Point Method
Grouping
Similar Jobs
into Pay
Grades
Ranking Method
Classification Methods
Job Evaluation Methods:
1. Ranking
Perhaps the simplest method of job evaluation is the
ranking method. According to this method, jobs are
arranged from highest to lowest, in order of their value or
merit to the organization. Jobs can also be arranged
according to the relative difficulty in performing them.
The job at the top of the list has the highest value and
the job at the bottom of the list will have the lowest value.
2.Job Classification Method
 According to this method, a predetermined number of job groups or
job classes are established and jobs are assigned to these
classifications. This method places groups of jobs into job classes or
job grades. Separate classes may include office, clerical, managerial,
personnel, etc. Following is a brief description of such a classification
in an office.
 Class I - Executives: Manager, Deputy manager, Office
superintendent, Departmental supervisor, etc.
 Class II - Skilled workers: Under this category may come the
Purchasing assistant, Cashier, Receipts clerk, etc.
 Class III - Semiskilled workers: Under this category may come Steno
typists, Machine-operators, Switchboard operator etc.
 Class IV - Unskilled workers
3.Job Evaluation Methods: Point Method
 A quantitative technique that involves:
 Identifying Compensable Factors for the Benchmark Jobs
 Assigning Point Values to Compensable Factors
 Calculating a total point value for the job by adding up the
corresponding points for each factor.
 Find the maximum number of points assigned to each job.
 This would help in finding the relative worth of a job
Factor Comparison Method
Jobs are ranked according to a series of factors. These
factors comprise of
1. Mental Requirements, 2. Skill Requirements
3. Physical Requirements 4. Responsibilities 5. Working
Conditions.
The jobs under consideration are evaluated using factor-by
factor in relation to the key jobs on job comparison scale.
Pay will be assigned in this method by comparing the weights of the factors
required for each job.
Ranking Key Jobs by Factors1
Mental
Requirements
Physical
Requirements
Skill
Requirements
Responsibility
Working
Conditions
Welder
1
4
1
1
2
Crane operator
3
1
3
4
4
Punch press operator
2
3
2
2
3
Security guard
4
2
4
3
1
11
is high, 4 is low.
Market Pricing/ Benchmarking
Market pricing is the process for determining the external value of
jobs, allowing you to establish wage and salary structures and pay
rates that are market sensitive.
Market pricing or benchmarking is a comprehensive and timeconsuming process. Generally market pricing/Benchmarking is
done through job matching sessions, salarysurveys, done by third
party like Mercer, Hewitt,kelly
The market pricing or benchmarking is done through following
steps –
i. Defining the jobs (Job analysis)
ii.Deciding the job families. Similar jobs in the same family
42
iii.
iv.
v.
vi.
43
Identifying a third party for carrying out the salary
surveys.
Matching the job analysis information with the
standard job descriptions available with the third
party and deciding appropriate scale of each job.
Choosing the benchmark companies. Generally
for each job-family separate set of benchmarking
companies are chosen.
Survey & sharing of information – the third-party
consultant conducting the survey operates on
strict confidentiality and does not disclose any
company-specific information to the clientcompany. Then how is the information shared?
Step 4: Price Each Pay Grade
 The Wage 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.
Competency-Based Pay
 Competencies
 Demonstrable characteristics of a person, including knowledge,
skills, and behaviors, that enable performance
 What is Competency-Based Pay?
 Paying for the employee’s range, depth, and types of skills and
knowledge, rather than for the job title he or she holds
The Pay Gap
 Factors Lowering the Earnings ofWomen:
1. Women’s starting salaries are traditionally lower.
2. Salary increases for women in professional jobs do not reflect their
above-average performance.
3. In white-collar jobs, men change jobs more frequently, enabling
them to be promoted to higher-level jobs over women with more
seniority.
4. In blue-collar jobs, women tend to be placed in departments with
lower-paying jobs.
Types of Employee Incentive Plans
Individual Employee Incentive
and Recognition Programs
Sales Compensation
Programs
Pay-for-Performance
Plans
Team/Group-based
Variable Pay Programs
Organizationwide Incentive
Programs
Executive Incentive
Compensation Programs
Performance-based Pay/ Variable Pay
Performance-based pay is also called as Variable
pay. Variable pay is used to recognize and reward
employee contribution towards company productivity,
profitability, or some other metric deemed important.
Variable pay is awarded in a variety of formats
including profit sharing, bonuses, holiday bonus,
deferred compensation, cash, and goods and
services such as a company-paid trip etc.
17-3
Variable Pay Or Pay For Performance Systems
/Types of performance-based Pays
Here the pay is linked to individual, group or organisational performance. Employees have
to compete and deliver results. Three types of variable pay are commonly used:

Individual incentives: they link individual effort to pay

Group incentives: they link pay to the overall performance of the
entire group
 Organisation-wide incentives: here employees are rewarded on the
the success of the organisation over a specified time period.
Compensation Administration
basis of
17-18
Organization Wide Incentive Plans
These plans reward employees on the basis of the success of the organization over a specified time
period.

Profit sharing: Here the organization agrees to pay a particular portion
(given in cash or in the form of shares) to eligible
employees.
of net profits

Gain sharing: It is based on a mathematical formula that compares a
baseline
of
performance with actual productivity during a given period. When productivity exceeds the
base line an agreed upon savings is
shared with employees.

Employee stock ownership plan: It provides a mechanism through
which certain
eligible employees (based on length of service, contribution to the department etc) may
purchase the stock of the company at a reduced rate.
Individual vs. Team-based Incentives
Individual
Team-based
• Team results
• Piecework
• Production incentives
• Production bonuses
• Profit-sharing
• Commissions
• Stock ownership (ESOP)
• Executive incentives
• Cost reduction plans
Individual Incentives
Individual incentives are lump sum payments like
sales commission, worker incentives etc. based on
standard piece-rate system or standard hour system.
Individual incentive plans include Piece-work Plans,
Management incentive plans, etc.
Piecework Plans: Incentive Piecework is a type of
incentive program whereby the employee is paid
based on each unit of output.
Management Incentive Plan: The Management
Incentive Plan generally applies
to
the
senior
executives with a significant level of responsibility
within the organization. The Incentive Plan contains
both an annual and a long term incentive element.
Executive Compensation
Executive compensation covers employees that include presidents of company, chief executive officers
(CEOs), chief financial officers (CFOs), vice presidents, occasionally directors of the company, and
other upper-level managers. It is usually the members of the “C-Suite.” (A widely-used slang term used to
collectively refer to a corporation's most important senior executives. C-Suite gets its name because top senior
executives' titles tend to start with the letter C, for chief, as in chief executive officer, chief operating officer and chief
information officer.)
What Are the Components of Executive Compensation?
 Base salary
 Incentive pay, with a short-term focus, usually in the form of a bonus
 Incentive pay, with a long-term focus, usually in some combination of stock awards, option
awards, non-equity incentive plan compensation
 Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan
(SERP)
 Extra benefits and perquisites, such as cars and club memberships
 Deferred compensation earnings
Apple CEO Tim Cook's salary doubled in 2014

Apple CEO Tim Cook got a fat cash bonus that brought his total compensation to $9.2 million in 2013. That's more than
double what he received in the previous year (2013), as the company enjoyed a upsurge in sales and profit fueled by the
popularity
of
its
new,
over-sized
iPhone
6
models.
Cook's pay for fiscal 2014 included $1.7 million in salary and $6.7 million in incentive pay that was awarded by Apple's
board after he beat the performance goals that directors had set for him, according to a regulatory filing. He also
received $774,176 in other compensation, including a 401k contribution, company-paid insurance premiums and
security expenses.
Facebook reveals salaries of top execs, including Mark Zuckerberg's

In Feb, 2012, Facebook Inc. said in a filing with the Securities and Exchange Commission that it will pay Zuckerberg,
27, a base salary of $500,000 per year. Zuckerberg's 45 per cent target bonus will be based on his performance.

Chief Operating Officer Sheryl Sandberg received a base salary of $300,000. Her target bonus is also 45 per cent.
Compensation Trends
• Broad banding
– Broad banding is defined as a strategy for salary structures that consolidate a large
number of pay grades into an extremely wide salary bands called "broad bands.“
– Broad banding evolved because organizations want to flatten their hierarchies and
move decision-making closer to the point where necessity and knowledge exist in
organizations.
Pros
In flattened organizations, fewer promotional opportunities exist so the broad banding
structure allows more latitude for pay increases and career growth without promotion.
For example, organizations that had eight levels of management could eliminate four
levels, widen the salary ranges of the remaining four levels, and simply slot each manager
into one of those ranges.
Cons
Lack of permanence in job responsibilities can be unsettling to new employees.
Expatriate compensation
 Three types of premiums to expatriates:
 foreign-service premium
 hardship premium and
 cost-of-living adjustment (COLA).
New Approaches to Pay
 Skill- or knowledge-based pay
 Based on the employee’s skills or knowledge
 Variable pay
 Performance-linked approach
 Broadbanding
 Consolidation of pay grades
 Tailor-made perks
 Employees choose
 International pay
 Need to develop polices to meet global needs