Compensation a to z


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Compensation a to z

  1. 1. A to Z Compensation Compensation - "If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behind it - you almost don't have to manage them." -Jack Welch Compensation (meaning) - Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. Compensation may achieve several purposes assisting in recruitment, job performance, and job satisfaction. How is compensation used? Compensation is a tool used by management for a variety of purposes to further the existence of the company. Compensation may be adjusted according the business needs, goals, and available resources. 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. • Modify (through negotiations) practices of unions. Recruitment and retention of qualified employees is a common goal shared by many employers. To some extent, the availability and cost of qualified applicants for open positions is determined by market factors beyond the control of the employer. While an employer may set compensation levels for new hires and advertise those salary ranges, it does so in the context of other employers seeking to hire from the same applicant pool. Morale and job satisfaction are affected by compensation. Often there is a balance (equity) that must be reached between the monetary values, the employer is willing to pay and the sentiments of worth felt be the employee. In an attempt to save money, employers may opt to freeze salaries or salary levels at the expense of satisfaction and morale. Conversely, an employer wishing to reduce employee turnover may seek to increase salaries and salary levels. Compensation may also be used as a reward for exceptional job performance. Examples of such plans include: bonuses, commissions, stock, and profit sharing, gain sharing. What are the components of a compensation system? Compensation will be perceived by
  2. 2. employees as fair if based on systematic components. Various compensation systems have developed to determine the value of positions. These systems utilize many similar components including job descriptions, salary ranges/structures, and written procedures. The components of a compensation system include: Job Descriptions A critical component of both compensation and selection systems, job descriptions define in writing the responsibilities, requirements, functions, duties, location, environment, conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or for entire job families. Job Analysis The process of analyzing jobs from which job descriptions are developed. Job analysis techniques include the use of interviews, questionnaires, and observation. Job Evaluation A system for comparing jobs for the purpose of determining appropriate compensation levels for individual jobs or job elements. There are four main techniques: Ranking, Classification, Factor Comparison, and Point Method. Pay Structures Useful for standardizing compensation practices. Most pay structures include several grades with each grade containing a minimum salary/wage and either step increments or grade range. Step increments are common with union positions where the pay for each job is predetermined through collective bargaining. Salary Surveys Collections of salary and market data. May include average salaries, inflation indicators, cost of living indicators, salary budget averages. Companies may purchase results of surveys conducted by survey vendors or may conduct their own salary surveys. When purchasing the results of salary surveys conducted by other vendors, note that surveys may be conducted within a specific industry or across industries as well as within one geographical region or across different geographical regions. Know which industry or geographic location the salary results pertain to before comparing the results to your company. Policies and Regulations o What are the different types of compensation? • Different types of compensation include: o Basic pay o Commissions o Over-time Pay o Bonus, Profit-sharing & Merit Pay o Stock Options o Travel / Meal / Housing Allowance o Benefits Including – Dental, Insurance, Medical, Vacation, Leaves, Retirement, Taxes, etc Compensation Tips: Everything is Negotiable - It's all negotiable. Every new job -- every performance review, in fact -- is an opportunity to negotiate base salary, various kinds of •
  3. 3. bonuses, benefits, stock options, and other incentives that add to job satisfaction and provide financial security. Taking control of your job search and conducting a smart search that takes into account more than just financial considerations can also lead to that elusive condition called happiness. Are you prepared to negotiate for happiness? The negotiation process is an opportunity to define, communicate, and achieve what you want. But to get the right job that pays what you deserve, you'll need to do your homework. The first step in the negotiation clinic is to understand the negotiation basics. Negotiation requires gathering information, planning your approach, considering different alternatives and viewpoints, communicating clearly and specifically, and making decisions to reach your goal. “The author Maryanne L. Wegerbauer” In her book, describes how each party in a negotiation can fulfill specific needs and wants of the other party, a concept called "relative power." According to Wegerbauer, understanding your strengths and resources; being able to respond to the needs of the other party; and knowing your competition enable you to assess your bargaining position more accurately. Learn the power factors - What is your power over the other side of the table? Relative power, Wegerbauer says, is a function of the following. Business climate factors • Overall state of the economy and the industry in which you compete • Overall unemployment rate and the general employment picture • Demand for industry- and profession-specific knowledge and skills Company factors • Profitability • Position in the business cycle (startup, growing, stable, turnaround) Hiring manager factors • Urgency of the company's need to fill the position • Decision-making authority • Staffing budget Applicant factors • Other opportunities • Technical expertise, unique knowledge/skill set • Resources (financial depth, networks, etc.) • Level of competition/availability of other candidates • Career risk Plan and communicate - A negotiation is composed of two major steps: planning (research and strategy) and communication (information exchange and agreement. In the planning step, get as much information as you can up front and, using both the company's written and unwritten
  4. 4. signals; map your skills against what the company values. Give it time - Timing is also important. Remember that the best time to negotiate is after a serious job offer has been made and before you have accepted it. Once you are clear about the initial offer, you can express interest and even enthusiasm, but ask for more time to consider the job offer. Wegerbauer suggests that this request is made "in light of the importance of the decision." Sometimes you can split up the negotiating session into two meetings: one to firm up the job design and responsibilities and the second to go over compensation and benefits. The key message here is not to make an impulsive decision. If they really want you, there's time. Consider the alternatives You should be prepared with a rationale for everything to strengthen your position. Counteroffers are an expected part of many negotiations, so be sure to remain flexible. Keep in mind that different companies can give negotiations more or less latitude. Smaller companies may be more flexible than large, bureaucratic companies. Unionized companies usually have very little room for individual negotiations. Negotiate for a win-win - Remember that the negotiation is not about strong-arm tactics or win/lose. It is a two-way process where you and your prospective employer are each trying to get something you need. In a negotiation, you're both designing the terms of a transaction so that each of you will receive the maximum benefit from the final agreement. Compensation trends in India -India’s transition to a market driven economy began in 1991 with the introduction of liberalization (pro-market economic reforms). Prior to 1991, the Government was (and still is) the biggest employer and job creator, accounting for over 85% of post-matriculation (High School) jobs. Pay was largely determined by high-level agreements between employee unions and the Government and was largely guaranteed in nature. A similar situation was prevalent in the private sector, where Government pay scales were often used as a benchmark in fixing and revising pay. Compensation packages were low on cash and high on fringe benefits such as accommodation, cars, and subsidized loans. Variable pay was largely restricted to top and senior management in few private sector enterprises. Grading systems were largely industry-wide and salary progression was purely determined by length of service. Current trends - Productivity gains (4% in 2003-04), fast growth in real wages (40% over the last 5 years), a booming but extremely competitive economy (GDP growth of 6%), simplification of tax rules and emergence of knowledge-based industries such as Information Technology & Outsourcing Services, Healthcare etc are key factors that have influenced compensation in India post liberalization. Compensation is now characterized by a Total Cost of Employment approach, a rapid movement to flexible benefits, and increasing levels of variable pay (variable pay now forms about 7% - 35% of fixed pay). Grade structures have become organization specific and salary progression is driven by market forces and individual performance. Average salary
  5. 5. increases over 2003-04 ranged from 5% - 20%. The average increase was 11%. While most organizations benchmark compensation nationally within a select group of competitors, a few organizations are beginning to benchmark themselves internationally at senior management levels. India has the fastest compensation increase rate in the Asian region at 11.7% and it also has the highest labour turnover in the region. Different compensation plans - how do they affect your financial results - With the introduction of FRS 102 Share-based Payment, companies are required to recognize the expenses of employee equity compensation schemes with effect from 1 January 2005. This article highlights the major implications to the financial results of the three most common equity compensation schemes, namely share option scheme, performance shares scheme, and Share Appreciation Rights (SAR, also known as phantom share scheme). Key Characteristics - The key characteristics of each scheme are as follows: Share option scheme • The company grants employees the right to subscribe for new shares in the company at a fixed price. • Employees are required to pay the company the exercise price in consideration for the shares. • Employees can generally only exercise the right after remaining in service with the company for a period of time and/or after meeting certain performance targets. • The right would generally expire after a period of 5 to 10 years from the date of the grant. Performance share scheme • The company grants employees shares in the company. • Employees will generally receive the shares, at no cost, after remaining in service with the company for a period of time and/or after meeting certain performance targets. Share Appreciation Rights • Similar to the share option scheme except that: Upon exercise of the option, the employees do not pay the exercise price to the company nor receive the shares; instead, they are paid the difference between the exercise price and the market price of the shares in cash. While all three schemes require the use of fair values of the share options or shares for the recognition of the compensation expense over the vesting period, the impact on the company’s financial position and financial results is different. Impact on net assets - The three schemes have a different effect on the net asset values of companies. Under FRS 102, share option scheme and performance share scheme are considered “equity-settled”. This means that in recognizing an expense for the compensation costs, a corresponding increase in shareholders’ equity is recognized. Hence, the net asset position of the company is unchanged. In contrast, obligations under SAR schemes are considered liabilities of
  6. 6. the company, as there would be a cash settlement when the right is exercised. The recognition of the compensation cost under SAR results in a decrease in the net asset of the company. Impact On Earnings Volatility (1) Revaluation of share options/shares during life of grant - With share option and performance share grants, fluctuations in the values of the share options and shares during the life of the grant do not affect the results of the company. This is because the measurement of the share option or share is determined at the date of the grant and is not subsequently revalued. In contrast, for SAR, the company is required to revalue the SAR at every reporting date until the right is settled or expires. This is because the company has to measure its liability (cash payment to employees) at the expected settlement amount. Hence, SAR schemes create more volatility to the financial results. In addition, more resources are also required to perform the revaluation at every reporting date. SAR will continue to impact earnings even after the vesting period because the liability is remeasured until the exercise date. (2) Treatment of unvested rights - The compensation cost is a function of number of options or shares that are expected to vest by the vesting date and the fair value of the option or share. In estimating the number of options or shares expected to vest, only non-market based conditions, which are not based on the market performance of the shares, are considered. These non-market based conditions include the continuance of service over a period of time, and the meeting of a certain revenue target. If no employees meet the non-market based vesting condition by the vesting date, the company does not incur any expense. No performance shares would be issued for performance share schemes and no share options or SAR would vest. If share options or SAR are vested by vesting date, the financial impact of the two schemes is different. For share option schemes, if the share options are not subsequently exercised by the employees (for instance, because the options are out of the money), the company is not allowed to reverse the expenses already charged to the income statement. For SAR schemes, the liabilities are stated at the expected cash settlement. If the SAR is not subsequently exercised, the company is allowed to reverse the expenses previously charged to the income statement. Impact on Tax - Regardless of the above changes, charges to an entity’s income statement relating to share option or performance share schemes, in form of capital or notional cost (such as cost of options granted), are not tax-deductible. Compensation charges that represent actual outgoings (cash outflow or actual liability) to the company may be deductible such as the buying back of its own shares, i.e. treasury shares, to satisfy the obligation to the employees. In addition, such share-based compensation costs must be directly related to the employee’s employment compensation benefits in Singapore to be tax-deductible. The compensation costs to
  7. 7. the entity should match the services rendered by the employee to the same entity. Certain steps must be taken to support the claim for a deduction. Impact on Earnings Per Share Share option and performance share grants have a dilutive effect on EPS, as shares will be issued. For SAR schemes, shares are not issued; hence there is no dilutive effect on EPS. Moving forward - Prior to the implementation of FRS 102, the design of the share compensation plan is often dependent on non-financial factors as the company is not required to recognize an expense on the equity instrument granted. However, with the implementation of FRS 102, it is critical for companies to consider and analyse the financial impact, arising from the design and structure of the scheme, at an early stage. Rewards and Benefits at IBM - Whether you're joining IBM as a fresh graduate or a seasoned professional, we believe that everyone who works here should feel valued and appreciated. That is why we offer a Total Compensation package that includes both Cash Compensation and Benefits. Cash compensation - We want to ensure that IBM continues to attract, retain and motivate highperforming people. As such, we offer a cash compensation structure that will recognise your specific skills and business expertise. After all, they allow us to deliver best-of-class solutions for our clients. Our compensation structure takes different forms to reflect individual performance levels. It includes Base Pay, Fixed Bonuses, Allowances, or Other Payments relevant to the local market. Performance Bonus and Sales Incentives may also be included in your total cash compensation, and are used to ensure you are paid competitively within the market. Performance bonus - Another principle we follow to attract, motivate and retain the most talented employees is to offer a Performance bonus. If you are a regular employee, you will have some portion of your annual compensation tied directly to business results. This is to ensure you receive the appropriate recognition and rewards. Global recognition program - This is the pinnacle of sales excellence within IBM! We want you to know that we value your contributions and appreciate your leadership. Our Global Recognition Program is designed to bring out your best, and encourage you to inspire and motivate others. Employee stock purchase plan - Since 1958, IBM has offered stock purchase plans because we believe in the value of employee ownership. All regular employees, including IBMers who are regular part-timers, are eligible to participate in the plan if they choose. Let's grow the company together! Note: Governmental regulations may prohibit offering the plan or may dictate different plan provisions in certain countries.
  8. 8. Healthcare, well-being and personal benefits - We offer a range of personal benefits such as medical schemes, dental schemes, health screening, wellness programmes, retirements and insurance programmes. You may even be able to include your spouse/partner and dependants under your coverage for greater peace of mind. We try to be as flexible as possible, so you choose what is appropriate for your personal needs. Flexibility and work-life balance Quite simply, you are IBM's key to business success. We are committed to creating a workplace culture and environment in which you can balance your career with your personal priorities. We offer a number of programmes, ranging from staggered work hours to working from home to part time regular work, which give you the opportunity to achieve a better work/life balance. Additional programmes You will find that many of the benefits at IBM are designed to make life a little easier and a lot more fun! IBM offers employees various discounts for goods and services - IBM Personal Computer Purchase, Housing Assistance Purchase Plan, Car Purchase Assistance Plan, Child Care Services, Mobile Phone Plans, Fitness Centres, and Educational courses. You are also automatically eligible to join our many recreational, social and cultural clubs, and events. Best of all, they're not just for you, but for your entire family as well. Staggered working hours If you would prefer to work from home or start later in the day, you can at IBM. We give you the flexibility to manage your work hours, so you can meet the needs of your personal life. COMPENSATION & BENEFIT PRACTICES, PROGRAMS, AND POLICIES. Employee Benefits: Benefit Plan Costs Health Care Plans (PPO, POS, HMO, HSA) Dental Care Plans Retirement Plans Flexible Benefit Plans Disability Benefit Plans Group Life & AD&D Insurance Plans Benefits for Part-Time Employees Domestic Partner Benefits Employee Policies and Programs: Paid-Time Off (PTO) Alternative Work Schedules (including Telecommuting) Recruiting and Hiring Hiring Bonuses Referral Bonuses Retention Bonuses
  9. 9. Severance Practices Workplace Environment Career Planning & Professional Development Military Leave Policy Benefit Plan Costs • Benefit Costs as Percent of Payroll o Medical, Dental, Vision, Disability, Life, AD&D Plans o Retirement Plans • Benefits Costs as a Monthly Amount Per Employee o Medical, Dental, Vision, Disability, Life, AD&D Plans o Retirement Plans Health Care Plans (PPO, HMO, POS) • Monthly Premiums o Premium Cost o Percent of Premiums Paid by Company • Deductibles o Percent of Plans with Deductibles o Annual Deductible Amounts • Coinsurance o Percent of Expense Covered by Plan • Out-of-Pocket Maximums (OOP) o Percent of Plans with OOP Maximums o Annual OOP Amounts • Lifetime Reimbursement Limits o Percent of Plans with Lifetime Limits • Office Visit and Prescription Co-Payments • Domestic Partner Medical Benefits HSA Qualified Health Plans • Impact on Other Healthcare Options • Monthly Premium Costs • Percent of Premiums Paid by Company • Annual Deductibles • Out-of-Pocket Maximums (OOP) • Lifetime Reimbursement Limits • Prescription Expense Coverage • Company Contributions Dental Care Plans • Types of Dental Plans Offered • Timing of Employee Eligibility to Enroll • Expenses Covered • Costs of Monthly Premiums
  10. 10. • Percent of Monthly Premium Paid by Company • Deductibles and Co-Insurance • Out-of-Pocket (OOP) Maximums • Orthodontic Expense Coverage • Orthodontic Reimbursement Limits Retirement Plans • Types of Retirement Plans Available to Employees o Defined Benefit Plan o 401(k) o Simple-IRA o Profit Sharing Plan o ESOP o SEP-IRA o Salary Reduction SEP • Eligibility Requirements • When do Employee Contributions Fully Vest • Retirement Plan Costs o as a Percentage of Payroll o per Employee • 401(k) Matching Policy Flexible Benefit Plans • Premium Conversion/Premium Only Plan (POP) • Unreimbursed Medical Expenses (UME) • Dependent Child Care Expenses (DCC) • Dependent Adult Care Expenses (DAC) • Adoption Assistance Expenses (AAE) • Cafeteria Plan • Transportation Benefit Plan Disability Benefit Plans (Short- and Long-Term) • Who Pays the Premium • Eligibility for Disability Benefits • Waiting Periods • Duration of Plans • Setting Amount of Disability Benefits • Disability Payouts Group Life & AD&D Insurance Plans • Group Life Plans o Benefit Amounts o Cost Coverage o Supplemental Life Insurance • Accidental Death & Dismemberment (AD&D) Insurance
  11. 11. o Benefit Amounts Benefits for Part-Time Employees • Benefits Available • Work Requirements for Eligibility • Covering the Costs Domestic Partner Benefits • Domestic Partner Healthcare Benefits: Coverage • Eligibility Requirements Employee Policies and Programs covered: Paid-Time Off Policies • Number of Days Paid Time Off Provided by Type of Day: o Holidays o Floating Holidays o Sick Days o Vacation Days o Personal Days o Annual Leave Pool o Other Paid Time Off • Number of Days Paid Time Off Provided by Type of Model: o Traditional Model with Specified Sick Leave o Traditional Model without Specified Sick Leave o Annual Leave Model • Treatment of Unused Paid-Time Off: o Unused Vacation Days o Unused Sick Days o Unused Annual Leave Days o Time Limits on the Use of Carried-Over Paid Time Off o Accrual of Paid Time Off o Upon Termination Alternative Work Schedules • Types of Alternative Work Schedules Offered: o Telecommuting o Flexible Work Hours o Compressed Work Weeks o Job Sharing o Part-time Professional Employment • Eligibility • Productivity of Employees in Alternative Work Schedules • Methods Used to Monitor Productivity • Tools/Assistance Provided to Telecommuting Employees • Requirements for Telecommuting Employees
  12. 12. Recruiting and Hiring • Recruiting Budgets • Recruiting Sources • Job Posting Websites • Recruiting Tools • Interviewing Applicants • Pre-Employment Testing • Pre-Employment Screening Referral Bonuses • Referral Bonus Eligibility by Employee Type and Level • Referral Bonuses Awarded by Type of New Hire • Referral Bonus Payments by Type of Hire • Amount of Referral Bonus • Timing of Referral Bonus Payouts Hiring Bonuses • Hiring Bonus Eligibility by Employee Type and Level • Calculating Hiring Bonuses • Hiring Bonus Amounts by Employee Type and Level • Timing of Hiring Bonus Payouts • Hiring Bonus Forfeiture and Repayment Policies Retention Bonuses • Retention Bonus Eligibility by Employee Type and Level • Calculating Retention Bonuses • Retention Bonus Amounts by Employee Type and Level • Payment of Retention Bonuses Severance Practices • Severance Practices by Company Size • Calculation of Severance • Severance Pay Amounts • Placement Services Offered • Release Agreements • Trends in Severance Amounts Workplace Environment • Dress Codes • Work Space Allocation • Company Sponsored Events and Activities Career Planning and Professional Development Programs • Career Planning Programs o Conference Attendance o Professional Memberships
  13. 13. o Tuition Reimbursement o Trade Journal Subscriptions o Technical Career Ladders o Job Rotation / Cross Training o Management Succession Planning o Formal Mentoring • Tuition Reimbursement o Course Requirements to Receive Tuition Reimbursement o Conditions of Tuition Reimbursement • Professional Development Programs o Management or Supervisory Skills o Leadership Development o Project Management o Interpersonal Communication o Team Building o Conflict Management • Training Budgets Military Leave Policy • Military Leave Policy Key Compensation Components Compensation has become a far more complicated issue than just deciding how much to pay your employees. In addition to salary, employers must consider many other components — 401(k) plans, stock options, bonuses and vacation — that have become part of compensation packages today. Employees also have greater expectations of what should be included in their compensation packages, and they may demand specific benefits that can be costly for small businesses. Costly or not, building a fair and attractive compensation packages is critical for attracting and retaining employees. When setting up your compensation package, consider the following components: Salary and wages. This is usually the single largest component of a compensation package and, not surprisingly, the most common point of comparison used by employees and potential employees. Salary should be tied to a person's skills and experience. Subsequent increases need to be based on an employee's performance, value and contribution to an organization. Check salary surveys and want ads, and scout out competitors to see if they are underpaying or overpaying their staff. Paying too much is an unnecessary drain on your resources, but paying too little will make it difficult to find and keep the best people. Bonuses. Employee bonuses, which are usually paid in a single lump at the end of the year, are one way of providing performance incentives. Profit-sharing plans are a more formal way of doing this, but they're not as effective for rewarding individual performance and compensating employees for meeting their goals. Long-term incentives. Stock options or stock grants not only provide long-term incentives to
  14. 14. employees, but they can also help retain valuable team members through your organization's crucial start-up phase. Health insurance. Employer-sponsored health insurance is fairly standard among medium-size companies. And it's a benefit that has great value to employees. An employer-sponsored plan saves employees money and gives them peace of mind in knowing that they won't be denied coverage, even if they have existing health problems. If you think you can't afford it, think again. Providing insurance to your employees sends the message that you care about their health and the health of their families. To minimize costs, consider having employees pick up part of the tab. Employees who have coverage through a spouse may want to opt out of a plan, particularly if there's a cost associated with it. Life and/or disability insurance. This is also a benefit that usually costs less when it's purchased by an employer rather than an individual. Retirement plans. 401(k) plans have become popular because they are relatively easy to administer and are less expensive than traditional pension plans. Many employees like these plans because they maintain some control over the amount of their contribution and how the money is invested. Most small companies try to put some kind of savings or 401(k) plan in place, even if they don't contribute money to them. Time off and flexible schedules. This includes holidays, vacations, sick days and personal days. An employer unable to offer competitive salaries may close part of the gap by offering more time off or flexible work hours. Some employers make no distinction between sick, vacation and personal days and allow employees a set number of days off each year to be used at their discretion. This prevents employees from abusing sick days and keeps employees from feeling that they need to lie when a child is ill or a personal emergency arises. Miscellaneous compensation. Other forms of compensation to consider include employee assistance programs, which can provide everything from psychological counseling to legal assistance; discounts on company products; use of a company cars; and any other incentives that motivate employees and give your company a competitive advantage. Compensation package of a top executive The total compensation package of a top executive will generally have some Combination of the following components: base salary, short-term bonus based on Performance over the past twelve months, long-term bonus based on performance over the past 3-5 years, stock options (qualified and/or non-qualified), restricted stock, stock purchase and profit sharing. Everything in addition to base salary is not typical of what the average worker receives, and each item should be examined in dividable. On op of the above there will also be a pension, all the usual insurance (health, dental, disability, life) and special fringe benefits ranging from tax preparation to country club membership. Any practicing economist who has ever dealt with the compensation package of a highly paid executive will have an understanding of the complexities involved in valuation, compared to a normal wage earner.