“If you pick the right people and give them the opportunity to spread their wings - and put compensation and rewards as a carrier behindit - you almost don’t have to manage them.” — Jack WelcMost of us would have heard the term “compensation” in the context of getting paid for the work that we do. The work can be as part offull time engagement or part time in nature. What is common to them is that the “reward” that we get for expending our energy not tomention the time is that we are compensated for it.From the perspective of the employers, the money that they pay to the employees in return for the work that they do is something thatthey need to plan for in an elaborate and systematic manner. Unless the employer and the employee are in broad agreement (We usethe term broad agreement as in many cases, significant differences in perception about the employee’s worth exist between the twosides), the net result is dissatisfaction from the employee’s perspective and friction in the relationship.It can be said that compensation is the “glue” that binds the employee and the employer together and in theorganized sector, this is further codified in the form of a contract or a mutually binding legal document that spells outexactly how much should be paid to the employee and the components of the compensation package. Since, thisarticle is intended to be an introduction to compensation management, the art and science of arriving at the rightcompensation makes all the difference between a satisfied employee and a disgruntled employee.Though Maslow’s Need Hierarchy Theory talks about compensation being at the middle to lower rung of the pyramidand the other factors like job satisfaction and fulfilment being at the top, for a majority of employees, getting the rightcompensation is by itself a motivating factor. Hence, employers need to quantify the employee’s contribution in aproper manner if they are to get the best out of the employee. The provision of monetary value in exchange for workperformed forms the basis of compensation and how this is managed using processes, procedures and systems formthe basis of compensation management.As the module progresses, readers would be introduced to other aspects of compensation management like thecomponents of compensation management, types of compensation, inclusion of variable pay, the use of EmployeeStock Options etc. The aspect of how skewed compensation management leads to higher attrition is discussed aswell. This aspect is important as studies have shown that a majority of the employees who quit companies giveinadequate or skewed compensation as the reason for their exit. Hence, compensation management is somethingthat companies must take seriously if they are to achieve a competitive advantage in the market for talent.Considering that the current trend in many sectors (particularly the knowledge intensive sectors like IT and Services)is to treat the employees as “creators and drivers of value” rather than one more factor of production, companiesaround the world are paying close attention to how much they pay, the kind of components that this pay includes andwhether they are offering competitive compensation to attract the best talent. In concluding this article, it is pertinentto take a look at what Jack Welch had to say in this regard: As the quote (mentioned at the beginning of this article)says, if the right compensation along with the right kind of opportunities are made available to people by the firms inwhich they work, then work becomes a pleasure and the manager’s task made simpler leading to all round benefitsfor the employee as well as the employer.The previous article introduced the topic of compensation management and how the “right” kind of compensation goes a long way inmaking employees motivated and happier.Hertzberg’s Hygiene theory refers to how certain factors are necessary to maintain “Hygiene” or ensure that the employees are notdissatisfied. These factors alone do not contribute to “quantum” jumps in employee satisfaction. Rather, the absence of these factors makes employees dissatisfied. The point here is that if a fair and just compensation is provided, the employee has the “baseline” requirements met which ensures that he or she is now in a position to go for higher things like job satisfaction and fulfilment. However, if compensation is found to be lacking, the employee might very well be unhappy and dissatisfied with the company leading to attrition and other such negative outcomes. Hence, having the right compensation is the first step in getting the best of employees.If we take a look at the components of a compensation system, we find that employers decide on what is the rightcompensation after taking into account the following points.
1. The Job Description of the employee that specifies how much should be paid and the parts of the compensation package. a. The Job Description is further made up of responsibilities, functions, duties, location of the job and the other factors like environment etc. b. These elements of the job description are taken individually to arrive at the basic compensation along with the other components like benefits, variable pay and bonus. It needs to be remembered that the HRA or the House Rental Allowance is determined by a mix of factors that includes the location of the employee and governmental policies along with the grade of the employee. Hence, it is common to find a minimum level of HRA that is common to all the employees and which increases in proportion to the factors mentioned above. 2. The Job Evaluation that is a system for arriving at the net worth of employees based on comparison with appropriate compensation levels for comparable jobs across the industry as well as within the company. a. Factors like Experience, Qualifications, Expertise and Need of the company determine how much the employer is willing to pay for the employee. 3. It is often the case that employers compare the jobs across the industry and arrive at a particular compensation after taking into account the specific needs of their firm and in this respect salary surveys and research results done by market research firms as to how much different companies in the same industry are paying for similar roles.The components of compensation that have been discussed above are the base requirements for any HR Managerwho is in charge of fixing the compensation for potential employees.There are other variables as well that would be discussed in subsequent articles. This article has introduced severalconcepts around the topic of components of compensation and these concepts are crucial for HR professionals aswell as those aspiring management professionals who want to make a career in the corporate world.Before concluding this article, it needs to be remembered that exit interviews have shown that over 70% ofemployees who quit their jobs do so because they are dissatisfied with the compensation that they are getting.Hence, all HR professionals and managers must take this aspect into account when they determine thecompensation to be paid to employees.In the previous article (Part I) we looked at some of the components of compensation that are paid out to employees and the way inwhich these components are fixed by HR managers and companies. In this article (Part II), we shall look at some components ofcompensation like Basic and Variable Pay (including the sub-components of variable pay) and discuss how these are fixed by the firmswhen they sign off on the compensation packages to their employees.To take the first component that is common to all packages at all levels (hence the term basic - however, it is not the same for all levels). Basic pay is the base on which the compensation package rests. This is the equivalent of the base of the pyramid and the other components are usually fixed as a percentage of the basic pay. It is common to find components like HRA (House Rental Allowance) and Additional Pay as a certain percentage (say 20% or 30%) of the Basic. There are many companies that have introduced the concept of Variable Pay where this particular component of the compensation is not fixed, but is a percentage of the Basic that is paid out according to the performance of the company, group and the individual. Hence, the term performance linked pay is also used for variable pay. If we take the three sub-components of the Variable Pay - a. The company performance linked pay is as the term implies paid out as a percentage of the Basic that is tied to the performance of the company as a whole. So, if a company performs exceedingly well in the given quarter, then the employee might get a large percentage (say 100% or 150%) of the base of the component. If a company does do not well or does only moderately better, then the employee might get a lower percentage of the base (say 50% or 75%). b. The group performance linked pay is paid out in a similar manner but the point of reference in this case is the performance of the group or the division in which the employee works.
c. Finally, the most important sub-component is the Individual Performance Linked Pay that is paid out according to the performance of the employee and hence is entirely tied to the way in which the employee performs as determined by the rating that he or she gets at the end of the performance cycle.The rationale for these components is that an employee would be better motivated to perform individually, contributeto the group to which he or she belongs and finally, perform well keeping in view the overall growth of the company.Hence, these sub components of compensation have been designed to spur the employee to excel not only in anindividual capacity but as a team member and finally, a responsible employee of the company. The idea here is todiscourage silo based performance and instead concentrate on all round performance.In the articles to follow, we shall look at how employees can negotiate their compensation by following some tips thatwe shall provide.In the previous sections, we looked at the components of the compensation and how each is used to assess the relative importance ofan employee as far as remuneration is concerned. In this article, we look at some of the factors that determine how much compensationis to be paid out to the employee by looking at the issue from the perspective of the employer. The subsequent article would take a lookat how the employee can influence the compensation setting process with negotiation and bargaining.From the perspective of the employer, the factors that affect compensation are: The Overall Macroeconomic situation where in the state of the economy of the country in which the firm is situated plays a major role in determining the compensation to be paid. For instance, if an economy is booming or is in a high growth trajectory, chances are that the employers would pay the employees more and conversely, if the economy is in a downward trajectory, chances are that the employers would pay the employees less. We often hear about how because of the recession, salary hikes have been deferred or cut down. This is a direct result of the linkage between firm performance and the performance of the economy. The Demand for a particular skill weighs heavily on the way in which the employer fixes the compensation for the employee. For instance, premium skills like Consulting and Accountancy are paid more as are the Technology Professionals who might be experts in their chosen field. As discussed in earlier articles, it is the expertise and the relative scarcity of such experts that determines how much the employer is willing to pay. The Position of the company in the Business Cycle often determines how much the company is willing to offer to the employee. For instance, if a company is a start-up, chances are that the company would pay more because of the need to get the best possible talent into the company. Further, many start-ups give their employees ESOP’s or Employee Stock Option Plans wherein the employees can redeem their stocks after the lock-in period. Finally, the urgency of the firm in filling up the position plays an important role in determining how much the employer is willing to pay the employee and in many cases, if the time to get on board the employee is less, staffing managers along with the line manager in charge of hiring the employee might decide to pay more because they want the employee to come on board as quickly as possible.These are some of the factors that determine the compensation to be paid to the employee from the perspective ofthe employer. This is not an exhaustive list but an indicative one and as the module progresses, we shall be revisitingsome of these factors along with adding additional information. The next article would talk about how employees cannegotiate with the employer for better compensation and perks.In the previous article, we looked at some of the factors that help the employers determine the level of compensation to be given toemployees. In this article, we look at the factors that affect compensation from the perspective of the employee. What this means is thatthe employee should not be constrained by the amount of compensation that the employer provides him or her and can and shouldnegotiate with the prospective employer until he or she is satisfied with the outcome.Of course, there are several kinds of negotiation with the employer. For instance, the employee can negotiate at the time of the hiringprocess or can negotiate at the time of the appraisal cycle. In this article, we consider the strategies available to the employee at thetime of the hiring process.There are several parts to the employee’s strategy to negotiate with the employer. Some of them are: Plan and Communicate: The most important part of the employee’s strategy must be to research the compensation trends in the market and then negotiate with the employer based on how much the other companies are willing to pay for a similar role combined with the fact that the company hiring him or her
pays for the same role. Hence, it is advisable for the employee to keep in touch with compensation trends in the marketplace and also talk to other employees before he or she decides to communicate his or her expectations to the prospective employer. Timing makes the difference: In any negotiation process, time is the key element and hence timing the negotiation process is important. The best possible option for the employee would be to wait for the company to make an offer and then pitch in his or her expectations about the compensation. There is something called overkill which must be avoided and the employee must avoid going overboard. At the same time, the employee must also ensure that he or she does not start the negotiation process early on in order not to lose out on the offer. Hence the timing of the pitch makes all the difference. Consider the Alternatives: When you are deciding about prospective offers, ensure that you make the pitch for your expected compensation level after taking into account all the alternatives and not simply rush into something that does not value your experience and expertise adequately. At the same time, do not harangue the prospective employers though you might have several alternatives available to you. The point to be noted is that different companies react to compensation negotiations in different ways and hence you must play the field according to these points.Many a time, prospective employees lost out on compensation either because they asked too high or asked too late.At the same time, they should also remember not to coerce the employers. The best possible strategy is whereyou are confident about yourself and your worth as measured by the employer must reflect your own senseof self worth. When there is a meeting point between these, then you can rest assured that you have arrived at theideal compensation for yourself.It is impossible to talk about compensation management without referring to the process of negotiation and bargaining that is an integralpart of compensation management. As anybody who has worked in the formal or even the informal sector knows, the process ofnegotiating one’s salary and perks is fundamental to the process of hiring and selection. In this article, we look at some of the strategiesemployed by professionals’ world over when they negotiate with their prospective employers regarding their compensation.Have a Plan in PlaceThe first element of negotiation is to plan for the process by deciding on how much more you want and how much you think the employeis willing to give. The fine art of knowing how much you should ask for and at what point should you strike the deal is something thatexperienced professionals know and rookies should learn. Without having a clear idea of the target level of compensation that you areaiming for, the negotiation process would turn out to be an exercise in futility.Communicate Your NeedsOnce you have arrived at a figure that you think you deserve, the next step is to communicate the same to theprospective employer without delay. The important point to note here is that the way in which you articulate yourneeds is as important as the need to drive a bargain. For instance, without expressing yourself clearly to the HRmanager of the prospective employer, there is little chance that he or she would understand your needs and respondappropriately. Hence, once you have sorted out the target compensation that you want, you should also have astrategy to communicate it to the employer.Timing is EverythingYou need to remember that there is something called being too early when you negotiate and too late as well. Hence,the timing of your articulation forms the basis for a successful negotiation. For instance, if you start your demandsearly on in the hiring process, the prospective employer might stall the process or even put a stop to your hiring. Onthe other hand, if you put forward your demands as you are about to join the firm, there is precious little anyone cando about your demands. Hence, you should have a keen eye for when you should communicate your demands.The three aspects of having a plan, communicating the need and then timing it in such a way as to derive maximumadvantage are essential to the negotiation process. Of course, there are many firms that do not entertain any sort ofnegotiation and there are firms that put up pretence of negotiation when in reality, they do not budge at all. In thesecases, it is better to adopt a wait and watch policy and make your move once they get into the details of yourcompensation.In conclusion, a successful negotiation hinges on the willingness of both the parties to hear each other and anability to arrive at a common denominator in a spirit of accommodation. Hence, do not be overtly rigid and atthe same time do not give in to the employer totally.The IT (Information Technology) sector comprising of software and hardware sectors is a sunrise sector in many countries. Despite the
fact that the sector has been around since the late 1980’s, the sector is considered relatively young and a place for innovation,entrepreneurship and growth. No wonder many fresh graduates flock to the IT sector after graduation to take up roles that arechallenging and stimulating.To attract the best talent available, the IT sector designs the compensation packages in ways that can be termed innovative and pathbreaking as they bundle the basic compensation components and perks and benefits in novel and unique ways.This article looks at some of the ways in which the IT sector provides compensation for its employees.Innovative Compensation PackagesA hallmark of the compensation packages in the IT sector is their reliance on non standard components thatare the characteristic of the old economy or the traditional sectors. In comparison, the so-called “new economy”companies make it a point to include additional components like variable pay, performance linked incentives over andabove the base pay that they give out to their employees. With the aura surrounding the IT sector, many employeeshave come to take for granted the high pay along with the attractive perks and benefits that these companies give.ESOP’sThe IT sector pioneered the introduction of ESOP’s or Employee Stock Options plans for the employees as ameans of ensuring that employees take more ownership and responsibility for their work by making them partners inthe growth of the company. The rationale for giving stock options to employees is that once they feel a sense ofownership with the company in which they are working, their performance levels go up due to increased motivationand satisfaction that such a practice tends to inculcate in the employees. Given the fact that most IT stocks zoomahead in value after the IPO or the Initial Public Offering is announced and retains their valuations well into thecompany’s existence, IT companies that offer ESOP’s are much sought after by many employees.Other Perks and BenefitsThe IT sector provides additional benefits like transportation, medical allowance and allowances for furnishing one’shouse. With an emphasis on all round welfare as opposed to paying the employees what is the minimum, ITcompanies ensure that their employees are taken care of well. Many companies in the IT sector are quite liberal ininsuring their employees and their families under group medical insurance which provides adequate cover to theemployees and their families in case of illness and surgeries as well as accidents and other unanticipatedcontingencies. Further, some IT companies go a step further and provide for recreational allowances that ensure theiremployees’ vacation expenses are also taken care of.Given the innovative ways in which IT companies provide for their employees, it is not surprising that this sector ranksamong the most preferred employers and the companies that make up this sector is the destination of choice formany a grad fresh out of college.Many studies have found that there is a direct causal linkage between the levels of compensation that a firm pays and the rate ofattrition that it has. Attrition can be voluntary and involuntary, where the former is the employee quitting the company out of his or herown volition and the latter is the company asking the employee to quit for a number of reasons ranging from non-performance toviolation of rules and regulations. In this article, we consider the voluntary attrition and the linkage between inadequate compensationand attrition.Low compensation and AttritionThe exit interviews conducted by the HR professionals to ascertain the reasons behind an employee’s exit usually reveal that lowcompensation is a major factor behind the employee’s decision to quit the company. Research into the phenomenon of attrition hasfound that many employees (particularly at the entry and the middle management levels) leave companies because they have beenoffered better compensation at another company. On the other hand, the senior management personnel quit to take up challenging rolesthat pay well as well as provide self actualizing drives to them.Hence, it can be construed that compensation is a major factor behind an employee’s desire to quit a particularcompany and join another company.Compensation as a Hygiene FactorHertzberg’s theory of motivation lists hygiene factors as those conditions when absent cause an employee to bedissatisfied. The point about this theory is that factors like adequate compensation, a congenial working environmentand additional benefits are necessary to motivate the employee and they ought to be present to keep the employee
happy. The absence of such factors makes the employee lose focus and drive and hence the lack of “hygiene” makesit difficult for the employee to continue.How to Manage Compensation ExpectationsThe appraisal time or the time of the year when employees are graded on their performance is usually the time whenemployees put forth their aspirations and expectations regarding the compensation and other aspects of their job.Hence, the line managers and the HR managers must make it a point to “manage” the expectations of the employeesduring this period. The attrition is usually the highest when employees are handed their raise letters that specify howmuch their compensation is increased. This is because the employees might expect more than what they have beenawarded which leads to dissatisfaction.Though compensation in recent years has ceased to be the “be all” of employee satisfaction with the nature of workand the responsibilities that an employee has becoming more important in determining job satisfaction, it still is one ofthe most important factors behind an employee’s decision to quit a company. Hence, it is incumbent upon HRprofessionals and the senior management that they devise compensation plans keeping in mind the various factorsthat drive an employee’s psyche. Only when an employee is satisfied with his or her condition in a company can theyperform at the desired levels.When one writes about executive compensation, the thought of jet setting CEO’s who enjoy luxurious lifestyles and live in gardenedvillas at the company’s expense comes to mind.While the stereotypical image of a CEO enjoying such extravagance is indeed true to a certain extent, there is more to thetopic of executive compensation. For instance, the practice in recent years has been to offer generous packages to executives thatinclude stock options, benefits and variable pay over and above the basic components.The point to note is that executive compensation is as removed from the compensation packages offered to middle and lower tieremployees as they are in the hierarchy of companies. The reason for this has been the trend of CEO’s and executives being vested withmore responsibilities as well as an emphasis on holding them responsible for top line and bottom line growth.Gap between CEO and Worker PayAmong the many causes attributed to the ongoing global financial crisis was the one about flawed incentives and highcompensation packages to the executives which resulted in skewed priorities for the executives who were bent onregistering profits at any expense and in the process throwing caution to the winds. It was also pointed out thatthe gap between the compensation of the CEO’s and the lower most employee was in the ratio of 300: 1 forcompanies like GE (General Electric) and GM (General Motors) where the CEO’s of these companies raked inMillions of Dollars of compensation when compared to the workers who were barely making five digitsalaries. This has spurred a debate over the efficacy of paying executives so much when the end result is notcommensurate with the pay.Perks and BenefitsWhile salary is one part of executive pay, the associated perquisites and benefits that executives are granted by theboard of directors is another important aspect. Things like paid vacations, children’s education, preferredneighborhood housing and access to the best clubs and other benefits make the job of executives an aspirational onefor many business graduates. Further, the humungous bonuses offered to the executives (in the range of 100% to300%) makes one wonder whether the stratospheric levels of executive pay is something that needs a rethink by thecollective conscience of the corporate world.The point that this article is making is that while executive compensation needs to be commensurate with the level ofexperience, the ability to articulate vision and imbue the organization with a sense of mission and at the same timethe capability to take risks, there needs to be a line drawn somewhere which caps the compensation and packagesoffered to executives at levels that are more earthly. While the intention is certainly not to begrudge the compensationbeing offered to executives, the incentive system must be more tied in to current market realities as is the case withcompensation at other levels. Hence, the lessons learned from the recent financial crisis about asymmetric risk andreward systems must not be forgotten in a hurry.This module has covered topics related to compensation management and discussed the topic from a variety of perspectives. To closethe compensation management module, here are some thoughts on where the corporate world is headed worldwide in the context of theongoing global economic crisis and how the corporates are addressing the needs of their employees.
Further, globalization has created a “global village” where people in different parts of the world are able to not only participatein global supply chains but also partake of the wonders of cultural exchange and assimilation. This has created aspirationalvalues among large sections of people in the developing countries who now demand better compensation at par with their counterpartsin the advanced economies of the West.Hence, corporates need to be aware of the complexities of the issue of how much compensation and in what form that is to be paid to themployees taking into account all the factors.Given the fact that most companies in the West outsource to countries like China and India because of the costadvantage where lower wages in these countries provide cost savings, the reckoning of higher wage demands andwage parity that occurs because of economic factors might obviate the advantage enjoyed by these countries as faras the outsourcing phenomenon is concerned.In this context, it is worth noting that corporates world over are feeling the pinch of the ongoing global economic crisisand this has led to depressed wages as well as lower hikes for the employees in the last two years. Hence, the addedchallenge of keeping the workforce happy in these gloomy times is something that HR managers must take intoaccount as well.The globalized workforce that participates in the global supply chain creates its own set of challenges withmany expatriates being paid “hardship allowances” to entice them to work abroad in developing countries.Further, the native workforce in these transnational corporations earn higher wages than those of the averageworkers in their countries leading to ethnic tensions and demand for inclusion of the less qualified workers. All thesefactors need to be addressed by the managers of corporations when they decide on the compensation.Finally, the very real phenomenon of attrition because of poor compensation continues to haunt the corporates andthe challenge of retaining quality workers while retrenching poor performers remains a key imperative for companies.Hence, compensation management has aspects other than those that were discussed so far in this module and thisarticle is meant to highlight some of them. It is hoped that the world economy recovers quickly and the boom yearswhere workers and corporates were happy working together come back to the advantage of everybody.