Grade and pay structure explained for compensation management

Grade and Pay structure
Compensation Management

Prepared By
Kindly restrict the use of slides for personal purpose.
Please seek permission to reproduce the same in public forms and presentations.
Manu Melwin Joy
Assistant Professor
Ilahia School of Management Studies
Kerala, India.
Phone – 9744551114
Mail – manu_melwinjoy@yahoo.com

• Grade and pay structures
provide a logically
designed framework
within which an
organization’s pay
policies can be
implemented.

• They enable the organization to
determine where jobs should be
placed in a hierarchy, define pay
levels and the scope for pay
progression and provide basis upon
which relativities can be managed,
equal pay achieved and the
processes of monitoring and
controlling the implementation of
pay practices take place.

• A grade and pay structure
can also serve as a medium
through which the
organization communicates
the career and pay
opportunities available to
employees.

Grade structure

Grade structure
• A grade structure consists
of a sequence or hierarchy
of grades, bands or levels
into which groups of jobs
that are broadly
comparable in size are
placed.

Grade structure
• There may be a single
structure, which is
defined by the number
of grades or bands it
contains.

Grade structure
• Alternatively the structure
may be divided into a
number of career or job
families consisting of
groups of jobs where the
essential nature and
purpose of the work are
similar but the work is
carried out at different
levels.

Types of Grade structure
• Narrow-graded structures,
which consist of a
sequence of narrow grades
(generally 10 or more).
They are sometimes called
multi-graded structures.

• Broad-graded structures,
which have fewer grades
(generally six to nine)

• Broad-banded structures,
which consist of a limited
number of grades or bands
(often four to five).
Structures with six or
seven grades are often
described as broad-
banded even when their
characteristics are typical
of broad grades.

• Career family structures, which
consist of a number of families
(groups of jobs with similar
characteristics) each divided
typically into six to eight levels.
The levels are described in terms
of key responsibilities and
knowledge, skill and competence
requirements and therefore
define career progression routes
within and between career
families. There is a common
grade and pay structure across all
the career families

• Job family structures, which
are similar to career families
except that pay levels in
each family may differ to
reflect market rate
considerations (this is
sometimes referred to as
market grouping). The
structure is therefore more
concerned with market rate
relativities than mapping
careers.

• Combined structures, in
which broad bands are
superimposed on career/job
families or broad bands are
divided into families.

• Pay spines, consisting of a
series of incremental 'pay
points' extending from the
lowest- to the highest-paid
jobs covered by the
structure.

Pay structure

Pay structure
• A grade structure
becomes a pay structure
when pay ranges,
brackets or scales are
attached to each grade,
band or level.

Pay structure
• Pay structures are defined
by the number of grades
they contain and especially
in narrow or broad graded
structures, the span or
width of the pay ranges
attached to each grade.

Pay structure
• Span is the scope the grade
provides for pay progression
and is usually measured as
the difference between the
lowest point in the range
and the highest point in the
range as a percentage of the
lowest point. Thus a range of
20,000 to 30,000 would have
a span of 50 per cent.

Pay structure
• Pay structure define the
different levels of pay for
jobs or groups of jobs by
reference to their relative
internal value as determined
by job evaluation, to
external relativities as
established by market rate
surveys and to negotiated
rates for jobs.

Incidence of grade and Pay structure

Narrow Graded structure

• A conventional narrow
graded pay structure
consists of a sequence of job
grades into which jobs of
broadly equivalent value are
slotted. A pay range is
attached to each grade.

• Jobs are allocated to grades
on the basis of an
assessment of their relative
internal value. Grades may
be defined in terms of a
points bracket, if a point
factor job evaluation scheme
is used.

• Alternatively, they may be
defined verbally if a job
classification system is used
or by reference to the
benchmark jobs slotted into
the grade.

• A pay range is attached to
each grade. It indicates the
minimum and maximum
rates payable for any job in
the grade and the scope for
the pay of job holders to
progress while they are in
that grade.

• Narrow graded pay
structures are based on the
belief that individuals should
progress through ranges by
reference to their
performance, skill,
competence or time in the
job.

• The advantages of narrow
graded structures are that
they clearly indicate pay
relativities, provide a
framework for managing
relativities and for ensuring
that jobs of equal value are
paid equally, allow better
control over the fixing of
rates of pay and pay
progression and are easy to
explain to employees.

A Narrow Multi Graded structure

Broad Banding

Broad banding
• Broad banding is a job
grading structure that falls
between using spot salaries
vs. many job grades to
determine what to pay
particular positions and
incumbents within those
positions.

Broad banding
• While broadbanding gives
the organization using it
some broad job
classifications, it does not
have as many distinct job
grades as traditional salary
structures do

Broad banding
• Thus, broadbanding reduces
the emphasis on ‘status’ or
hierarchy and places more of
an emphasis on lateral job
movement within the
company.

Broad banding
• In a broadbanding structure
an employee can be more
easily rewarded for lateral
movement or skills
development, whereas in
traditional multiple grade
salary structures pay
progression happens
primarily via job promotion.
In this way, broadbanding is
a more flexible pay system.

Broad banding
• This flexibility, however, can
lead to internal pay relativity
problems as there isn’t as
much control over salary
progression as there would
be within a traditional multi-
level grading structure.

Broad banding
• For a suitable organization in
the right cultural setting,
broadbanding can do the
following:
– Reward performance more
efficiently – as the pay ranges
are wide, the company has
the flexibility to reward a star
performer, even when they
aren’t getting promoted.

Broad banding
following:
– Take the emphasis off of job
evaluation – because the
number of levels have been
reduced, job evaluation can
be streamlined as there aren’t
as many distinct grades that
need to be considered when
slotting a job into the
structure.

Broad banding
following:
– Manage a flexible/mobile
workforce – for companies that
have staffing needs that change
frequently or are difficult to predict,
or work within a business
environment that is in flux,
broadbanding offers a program that
is easier to maintain than a
traditional system with many
distinct levels.

Broad banding
• One concern noted by
companies that have
implemented broadbanding
is that compensation costs
may go up. This is due to the
wider than normal band
taking away that more
gradated top end control on
salary levels.

Broad banding
• This can be effectively
managed through the use of
market data, in order to help
managers to validate their
pay decisions for a particular
employee to the external
market before proceeding to
give higher than normal pay
increases.

Broad banding
• Broadbanding, like other
grading systems, relies on
the buy-in of all key
stakeholders including the
business managers, HR
managers, and employees.

Broad banding
• Tailored communication to
each of these groups will go
a long way towards ensuring
the successful
implementation of a
broadbanding program.

Career/Job Families

Career/Job Families
• Career families consists of
jobs in a function or
occupation such as
marketing, operations,
finance or HR that are
related through the activities
carried out and the basic
knowledge and skill required
but in which the levels of
responsibility, knowledge,
skill or competency needed
differ.

Career/Job Families
• In a career family structure,
the different career families
are identified and the
successive levels in each
family are defined by
reference to the key
activities carried out and the
knowledge and skills or
competencies required to
perform them effectively.

Career/Job Families
• They define career paths –
what people have to know
and be able to do to advance
their career with a family
and to develop career
opportunities in other
families.

Career/Job Families
• Typically, career families
have between six and
eight levels as in broad
graded structure. Some
families may have more
levels than others.

Career/Job Families
• In effect, a career
structure is a single
graded structure in
which each grade has
been divided into
families.

Career/Job Families
• The difference between
a conventional graded
structure and a career
family structure is that in
the former, the grade
definitions are all the
same.

Career/Job Families
• In a career family structure,
although the levels may be
defined generally for all
families, separate definitions
expressed as competency
requirements exists for
levels in each of the career
families.

Career/Job Families
• Career family structure
provide the foundation for
personal development
planning by defining the KSA
required at higher levels or
in different functions and
describing what needs to be
learnt through experience,
education or training.

Career/Job Families
• Level definitions in a family
can be more accurate that in
a conventional structure
because they concentrate on
roles within the family with
common characteristics.

Career/Job Families
• A considerable amount of
work is required to produce
clear analytical level
definitions that are properly
graded and provide good
career guidelines.

Combined Career/Job Family and Broad Branded Structures

Combined Career/Job Family and
Broad Branded Structures
• It is possible to combine
career or job family
structures with broad –
branded structures.

• This can be done by
superimposing a broad
banded structure on
career / job families.

• In effect, this means that
in each job or career
family, the levels are
restricted to four or five
rather than the more
typical seven or eight.

Broad band divided into career families

Pay spine

Pay spine
• A scale showing the rates
of pay for employees
working at each level of
an organization.

Pay spine
• It also shows the
increases in pay an
employee gets when
they spend a certain
length of time at a
particular level.

Pay spine
• Pay spines consist of
hierarchy of pay or spinal
column points between
which there are pay
increments and to which
are attached grades.

Pay spine
• This consists of a series
of incremental pay
points ranging from
lowest to highest.
Increments usually
happens between 2.5 to
3 %.

Performance Linked Compensation

• Performance-related pay
or pay for performance is
a salary paid relating to
how well one works. Car
salesmen or production
line workers, for
example, may be paid in
this way, or through
commission.

• Pay-for-Performance ("PFP")
systems tie compensation directly
to specific business goals and
management objectives. To do
this, companies must deliver
competitive pay for competitive
levels of performance, pay above
market for exceptional
performance, and reduced pay
for poor performance. To achieve
this, companies must match
measurable and controllable
performance targets to company
objectives.

• Many employers use this
standards-based system for
evaluating employees and for
setting salaries. Standards-based
methods have been in de facto
use for centuries among
commission-based sales staff:
they receive more pay for selling
more, and low performers do not
earn enough to make keeping the
job worthwhile even if they
manage to keep the job.

Incentives

Incentives
• Incentives can be
defined as monetary or
non-monetary reward
offered to the employees
for contributing more
efficiency.

Incentives
• Incentive can be extra
payment or something
more than the regular
salary or wage.

Incentives
• Incentive acts as a very
good stimulator or
motivator because it
encourages the
employees to improve
their efficiency level and
reach the target.

Incentives
• The two common types
of incentives are:
– Monetary or Financial
Incentives.
– Non-Monetary/Non-
Financial Incentives.

Monetary or Financial Incentives

• The reward or incentive
which can be calculated
in terms of money is
known as monetary
incentive.

• These incentives are
offered to employees
who have more
physiological, social and
security need active in
them.

• Pay and allowances.
– Regular increments in salary
every year and grant of
allowance act as good
motivators. In some
organizations pay hikes and
allowances are directly linked
with the performance of the
employee. To get increment
and allowance employees
perform to their best ability.

• Profits sharing.
– The organization offer share in the
profits to the employees as a
common incentive for encouraging
the employees for working
efficiently. Under profits sharing
schemes generally the companies fix
a percentage of profits, and if the
profits exceed that percentage then
the surplus profits is distributed
among the employees. It
encourages the employees to work
efficiently to increase the profits of
the company so that they can get
share in the profits.

• Co-partnership/stock option.
– Sharing the profit does not give
ownership right to the
employees. Many companies
offer share in management or
participation in management
along with share in profit to its
employees as an incentive to get
efficient working form the
employees. The co-partnership is
offered by issue of shares on
exceeding a fixed target.

• Bonus.
– Bonus is a onetime extra reward
offered to the employee for sharing
high performance. Generally when
the employees reach their target or
exceed the target then they are paid
extra amount called bonus. Bonus is
also given in the form of free trips to
foreign countries, paid vacations or
gold etc. some companies have the
scheme of offering bonus during the
festival times.

• Commission.
– Commission is the common
incentive offered to
employees working under
sales department. Generally
the sales personal get the
basic salary and also with this
efforts put in by them. More
orders mean more
commission.

• Suggestion system.
– Under suggestion system the
employees are given reward if the
organization gains with the
suggestion offered by the employee.
For example, if an employee
suggests a cost saving technique of
then extra payment is given to
employee for giving that suggestion.
The amount of reward or payment
given to the employee under
suggestion system depends on the
gain or benefit which organization
gets with that suggestion it is a very
good incentive to keep the initiative
level of employees high.

• Productivity linked with wage
incentives.
– These are wage rate plans
which offer higher wages for
more productivity. Under
differential piece wage system
efficient workers are paid
higher wages as compared to
inefficient workers. To get
higher wages workers perform
efficiently.

• Retirement benefits.
– Some organizations offer
retirement benefits such as
pension, provident fund,
gratuity etc. to motivate
people. These incentives are
suitable for employees who
have security and safety need.

• Perks/ fringe Benefits/
perquisites.
– If refers to special benefits
such as medical facility, free
education for children,
housing facility etc. these
benefits are over and above
salary. These extra benefits
are related with the
performance of the
employees..

Non-Monetary/Non-Financial Incentives

Non-Monetary/Non-Financial
Incentives
• Money is not the only
motivator, the
employees who have
more of esteem and self
actualization need active
in them get satisfied with
the non-monetary
incentives only.

Incentives
• The incentives which
cannot be calculated in
terms of money are
known as non-monetary
incentives.

Incentives
• Generally people
working at high job
position or at high rank
get satisfied with non-
monetary incentives.

Incentives
• Status.
– Status refers to rank,
authority, responsibility,
recognition and prestige
related to job. By offering
higher status or rank in the
organization managers can
motivate employees having
esteem and self-
actualization need active in
them.

Incentives
• Organizational climate.
– It refers to relations between
superior/ subordinates. These
are the characteristics which
describe and organization. These
characteristics have direct
influence over the behavior of a
member. A positive approach
adapted by manager creates
better organizational climate
whereas negative approach may
spoil the climate, Employees are
always motivated in the healthy
organizational climate.

Incentives
• Career advancement.
– Managers must provide
promotional opportunities to
employees. Whenever there
are promotional opportunities
employees improve their skill
and efficiency with the hope
that they will be promoted to
high level. Promotion is a very
big stimulator or motivator
which induces people to
perform to their best level.

Incentives
• Job enrichment/ assignment
of challenging job.
– Employees get bored by
performing routine job. They
enjoy doing jobs which offer
them variety and opportunity to
show their skill. By offering
challenging jobs, autonomy to
perform job, interesting jobs,
employees get satisfied and they
are motivated. Interesting,
enriched and challenging job
itself is a very good motivator or
stimulator.

Incentives
• Employee’s recognition.
– Recognition means giving
special regard or respect
which satisfies the ego of the
subordinates. Ego-satisfaction
is a very good motivator.
Whenever the good efforts or
the positive attitudes are
show by the subordinates
then it must be recognized by
the superior in public or in
presence of other employees.
etc.

Incentives
• Employee’s recognition.
– Whenever if there is any
negative attitude or mistake is
done by subordinate then it
should be discussed in private
by calling the employee in
cabin. Examples of employee’s
recognition are congratulating
employee for good
performance, displaying the
achievement of employee,
giving certificate of
achievement, distributing
mementos, gifts etc.

Incentives
• Job security.
– Job security means life time bonding
between employees and
organization. Job security means
giving permanent or confirmation
letter. Job security ensures safety
and security need but it may have
negative impact. Once the
employees get job secured they lose
interest in job. Of example
government employees do not
perform efficiently as they have no
fare of losing job. Job security must
be given with some terms and
conditions.

Incentives
• Employee’s participation.
– It means involving employee
in decision making especially
when decisions are related to
workers. Employees follow the
decision more sincerely when
these are taken in
consultation with them for
example if target production is
fixed by consulting employee
then he will try to achieve the
target more sincerely.

Incentives
• Autonomy/ employee
empowerment.
– It means giving more freedom
to subordinates. This
empowerment develops
confidence in employees.
They use positive skill to prove
that they are performing to
the best when freedom is
given to them.

Bonus
• Bonus pay is
compensation over and
above the amount of pay
specified as a base salary
or hourly rate of pay. The
base amount of
compensation is specified
in the employee offer
letter, in the employee
personnel file, or in a
contract.

Bonus
• Bonus pay can be distributed
randomly as the company
can afford to pay a bonus, or
the amount of the bonus pay
can be specified by contract.
Bonus pay that is specified
by contract is used most
frequently to reward
executives.

Bonus
• While employees might wish
that executive bonus
payments were tied to
performance results, this is
not always the case.

Bonus
• A structure of bonus
payments is frequently
found in sales organizations
to reward sales performance
at specified levels over and
above commission. Some
sales organizations reward
employees with bonus pay
without commission.

Bonus
• Bonus pay is used by many
organizations as a thank you
to employees or a team that
achieves significant goals.
Bonus pay is also used to
improve employee morale,
motivation, and productivity.

Bonus
• As long as bonus pay is
discretionary by the
employer, it is not
considered to be a contract.
If the employer promises a
bonus, however, the
employer may be legally
liable to pay the bonus.

Types of Bonus

Current Profit Sharing

• One very basic type of
bonus program is current
profit sharing. A company
sets aside a predetermined
amount, usually between
2.5 and 7.5 percent of
payroll but sometimes as
high as 15 percent, as a
bonus on top of base
salary.

• Such bonuses depend on
company profits, either the
entire company's
profitability or from a given
line of business. Sometimes
the bonuses are given across
the board, and sometimes
they are given in larger
percentages of
compensation the more
someone makes.

• Profit sharing refers to various
incentive plans introduced by
businesses that provide direct or
indirect payments to employees
that depend on company's
profitability in addition to
employees' regular salary and
bonuses. In publicly traded
companies these plans typically
amount to allocation of shares to
employees.

• The profit sharing plans are
based on predetermined
economic sharing rules that
define the split of gains
between the company as a
principal and the employee
as an agent

• For example, suppose the
profits are x, which might be
a random variable. Before
knowing the profits, the
principal and agent might
agree on a sharing rule s(x).
Here, the agent will receive
s(x) and the principal will
receive the residual gain x-
s(x).

• The purpose of profit
sharing bonuses is to
encourage employees to
understand how their work
affects the company's
performance and to improve
the company's profitability.

• Learn how your company
makes money and how your
position can help it make
more. The annual report and
other statements will give
you an idea of how the
company is performing.

• It will also make you look
good to your manager if
you show an interest in
the company's
performance.

Gain Sharing

Gain Sharing
• Gain sharing is a system of
management used by a
business to increase
profitability by motivating
employees to improve their
performance through
involvement and
participation. As their
performance improves,
employees share financially
in the gain (improvement).

Gain Sharing
• Gainsharing’s goal is to
improve performance and
eliminate waste (time,
energy, and materials) by
motivating employees to
work smarter as a team
rather than just working
harder.

Gain Sharing
• There are two important
parts of a Gain sharing
system. One is a bonus
calculation. The second is a
structured system for
employee involvement.
Because of these two parts,
Gain sharing is best seen as
an "organizational
development" tool.

Gain Sharing
• This type of bonus program
is most common in
manufacturing plants and is
designed to reward
productivity and improved
product quality.

Gain Sharing
• Gain sharing works best when
employees become responsible
for production quantity and
quality and are encouraged to
improve the way the product is
made. This program reflects a
philosophy that employees
know their job best.

Gain Sharing
• Gain sharing programs pay
out bonuses for statistical
improvements in production
and quality on a quarterly or
sometimes monthly basis,
providing a sense of
excitement for participants.

Gain Sharing
• These programs are often
very successful, transforming
the manufacturing plant into
a center of employee
commitment.

Employee Stock Option

• An employee stock
option (ESO) is
commonly viewed as a
complex call option on
the common stock of a
company, granted by the
company to an employee
as part of the employee's
remuneration package

• Many companies use
employee stock options
plans to retain and attract
employees, the objective
being to give employees an
incentive to behave in ways
that will boost the
company's stock price.

• If the company's stock
market price rises above the
call price, the employee
could exercise the option,
pay the exercise price and
would be issued with
ordinary shares in the
company,

• The employee would
experience a direct financial
benefit of the difference
between the market and the
exercise prices.

• If the market price falls
below the stock exercise
price at the time near
expiration, the employee is
not obligated to exercise the
option, in which case the
option will lapse.

• Another substantial reason
that companies issue
employee stock options as
compensation is to preserve
and generate cash flow.

• The cash flow comes when
the company issues new
shares and receives the
exercise price and receives a
tax deduction equal to the
"intrinsic value" of the ESOs
when exercised.

• Employee stock options are
mostly offered to
management as part of their
executive compensation
package. They may also be
offered to non-executive
level staff, especially by
businesses that are not yet
profitable, insofar as they
may have few other means
of compensation

Employee Allowances

Employee Allowances
• Allowance is a sum of
money paid regularly to
a person, typically to
meet specified needs or
expenses. Allowances
are generally calculated
on basic salary.

Employee Allowances
• Types of Allowances
– 1.Fully exempted allowances.
– 2. Partly exempted allowances.
– 3. Fully taxable allowances.

Dearness Allowances

Dearness Allowances
• Dearness Allowance: This
allowance is given to
protect real income
against inflation. Generally,
dearness allowance (DA) is
paid as a percentage of
basic pay.

Dearness Allowances
• As of June 2012, the
Dearness Allowance is
calculated s a percentage of
an Indian citizen's basic
salary to mitigate the impact
of inflation on people
belonging to the low income
group,

Dearness Allowances
• The guidelines that govern
the DA vary according to
where one lives (for
example, whether rural or
urban) .

Dearness Allowances
• The III Central Pay
Commission recommended
payment of DA whenever
the CPI rose by 8 points over
the index of 200 (with base
1960 = 100). The extent of
neutralization granted with
effect from 1-1-1973 ranged
from 100% to 35%.

Dearness Allowances
• The IV Central Pay
the grant of DA on a
'percentage system' of the
basic pay (1986).It also
recommended payment of
DA twice a year; 1 January
and 1 July.

Dearness Allowances
• The V Central Pay
Commission looked into the
issue of differential
neutralization and found it
to be injustice to senior
officers and recommended
uniform neutralization of
100% to employees at all
levels

Dearness Allowances
• The Commission had
suggested that dearness
allowance should be
converted into dearness pay
every time the cost of living
rises by 50% over the base
level.

Dearness Allowances
• The VI Central Pay
revision of base year of the
Consumer Price Index (CPI)
as frequently as feasible.It
also changed base year for
DA calculation to 2001 (base
year 2001=100),

Dearness Allowances
• Formula for calculating
Dearness Allowance for
Central government
employees after 1.1.2006 is :
• Dearness Allowance %=
{(Average of AICPI(Base
year 2001=100) for the past
12 months –
115.76)/115.76}*100

House Rent Allowance

• House Rent Allowance
(HRA) is an allowance
given by many Indian
employers, including
government employers,
to salaried employees in
India to help them meet
the cost of rent of House
occupied by them on
lease or rental basis.

• HRA is exempt from tax
under Section 10(13A) of
the Income Tax Act,
subject to certain
conditions.

• House Rent Allowance
forms part of taxable
salary income of an
individual and an
employee may be
eligible to receive it, if his
employer chooses to
offer the allowance.

• Thus a salaried employee
may be eligible for House
Rent Allowance (HRA)
irrespective of Whether
he/she stays in a rented/
leased accommodation
or resides in his/her own
house.

• As stated earlier, House
Rent Allowance received
by a salaried employee is
exempt from tax under
Section 10(13A) of the
Income Tax Act, subject
to the following
conditions:

– House Rent Allowance
(HRA) is part of the salary
package offered by the
employer to the employee
– The employee receiving
HRA stays in a
leased/rented
accommodation and pays
rent for it.
– Rent paid by the salaried
employee exceeds 10% of
his/her salary.

• Rent paid by a salaried
employee to his/her
parents, for occupying a
house owned by them, is
eligible for exemption
under Indian Income Tax
Act.

• However rent paid by a
salaried employee to
his/her spouse, for
occupying a house
owned by the spouse, is
not eligible for
exemption under Indian
Income Tax Act.

• You must have valid
rental receipts, for
having paid the rent, in
order to claim tax
exemption on House
Rent Allowance (HRA).

Conveyance Allowance

• A conveyance allowance
refers to an amount of
money reimbursed to
someone for the
operation of a vehicle or
the riding of a vehicle.

• The allowance is typically
a designated amount or
percentage of total
transportation expenses
that is referenced in a
country's tax laws or
code.

• Organizations and
private or public
businesses may also
offer a conveyance
allowance in addition to
reimbursing employees
or members for
transportation expenses.

City Compensatory Allowance

• This allowance is paid to
employees who are posted
in big cities. The purpose is
to compensate the high cost
of living in cities like Delhi,
Mumbai etc.

• The CCA amount varies
from city & it is highest in
metropolitan cities. The
amount payable to the
employees depends upon
the grade pay of the
employees.

• It is not calculated on
the % of the basic salary.
It is common to a
particular class of the
employee for a
particular place.

Foreign Allowance

Foreign Allowance
• This allowance is paid by the
Government of India to its
citizen employees for being
posted outside the country
and it is not included in total
income. It is completely tax-
free U/S 10 (7).

Foreign Allowance
• Foreign Service Incentive
Allowances consist of two
tax-free allowances provided
as incentives to foreign
service.

Foreign Allowance
• The Foreign Service Premium is
provided as an incentive to
foreign service and as such
recognizes that there are
disutilities and disincentives,
some of which may be
financial, resulting from service
outside Country.

Foreign Allowance
• The Post Specific Allowance
is a non-accountable travel
allowance designed to assist
employees in travelling from
post and reflects 80% of
return full (Y) economy air
fare between the
employee's post and the
headquarters city.

Child Education Allowance

• It was only in the 6th CPC
that the CHILDREN’S
EDUCATION ALLOWANCE
& HOSTEL SUBSIDY was
introduced to Central
Government employees.
Prior to this, the scheme
was being granted in a
simple form as TUITION
FEES.

• From Rs. 30 to 40 per
month, the scheme was
revamped much to the
excitement of the Central
Government employees, and
earned their appreciation.

• One could see that the
scheme, launched in the
nation’s interest and with
the intention of attaining
higher standards in the field
of education and literacy,
had succeeded.

• Under this scheme, Central
Government employees
were now eligible to refund
the educational expenses of
Rs. 1000 per month per
child, for two children,
adding up to Rs. 12,000 per
annum per child.

• By submitting original receipts
for the expenses incurred for
the education of their children
from Kindergarten, right up to
Class XII, the employee could
claim a maximum
reimbursement of Rs. 12,000
per year.

• As a result, Central
began sending their children
to only the best schools. It
wouldn't be an exaggeration
to say that the scheme was a
big boon for Central
living in small and medium-
sized towns and cities.

Overtime Allowance

Overtime Allowance
• Industrial employees are
entitled to additional
payment for work done
beyond the normal working
hours.

Overtime Allowance
• There are two sets of rules
applicable for overtime
payment viz.
• (i) Departmental Rules and
• (ii) The Factories Act.

Overtime Allowance
• For work beyond normal
working hours and upto 9
hrs. a day or beyond 44.75
hrs upto 48 hrs in a week,
overtime is paid under
departmental rules which is
known as DOT.

OVER TIME PAYMENTS UNDER
DEPARTMENTAL RULES (DOT)
• For work done beyond 9 hrs.
a day or 48 hrs a week,
payment is admissible at
twice the rate of pay plus all
allowances under the
Factories Act (often loosely
termed as OT Bonus).

OVER TIME PAYMENTS UNDER
DEPARTMENTAL RULES (DOT)
• In the case of Day Workers, the
overtime is paid at the rate of
Basic Pay + Dearness Allowances
+ City Compensatory Allowance +
Personal Pay + Special Pay
+Pension to the extent as
applicable, divided by 200 for
each hour of overtime worked.

OVER TIME PAYMENTS UNDER THE
FACTORIES ACT, 1948
• For work done, beyond 9
hrs. a day or 48 hrs a week,
there are two sets of rules –
one for the Day Worker and
the other for the Piece
Worker.

FACTORIES ACT, 1948
• Day Worker: Hourly rate of
payment which are
applicable equally in the day
shift as well in the night shift
is calculated at the rate =
twice the pay &
allowances/200.

FACTORIES ACT, 1948
• Piece Worker: Hourly rate of
payment in the day shift is
calculated at the rate = twice
the pay & allowances/200.
In the night shift, the same
becomes = (twice the pay +
pay/4 +
allowances)/200.

Helper Allowance

Helper Allowance
• Any allowance, by whatever
name called, granted to
meet the expenditure
incurred on a helper where
such helper is engaged for
the performance of duties of
an office or employment of
profit.

Academic Allowance

Academic Allowance
• Any allowance, by whatever
name called, granted for
encouraging academic
research and training
pursuits in educational and
research institutions.

Uniform Allowance

Uniform Allowance
• Uniforms that employees must
wear as a condition of
employment may be provided
tax-free as a working condition
fringe benefit so long as they
are not adaptable to street
wear or cannot be worn as
ordinary clothing.

Uniform Allowance
• Your employee does not receive a
taxable benefit if either of the
following conditions applies:
– You supply your employee with
a distinctive uniform he or she
has to wear while carrying out
the employment duties.
– You provide your employee with
special clothing (including safety
footwear and safety glasses)
designed to protect him or her
from hazards associated with
the employment.

Uniform Allowance
• Employers may provide
employees with tax-free
allowances to purchase
uniforms if the apparel
qualifies under the Internal
Revenue Code (IRC) as a
uniform and employees
substantiate their expenses
under the accountable plan
rules of the IRC.

Travelling Allowance

• A travel allowance is a
payment made to an
employee to cover expenses
when he or she travels for
work. This money might be
used to cover things like
accommodation, food, drink
and incidentals.

• An allowance may be paid to
an employee before or after
they travel. If an allowance is
paid to an employee before
they travel, the employee
does not need to use all of
the allowance.

• A single flat rate of TA
incorporating
accommodation, meals and
incidental expenses will be
paid to an employee
directed to travel on official
business by their employing
Senator or Member, where
the travel requires an
overnight stay away from
the employee’s work base.

Medical Allowance

Medical Allowance
• Medical allowance is a fixed
allowance paid every month
to the employees
irrespective of the fact
whether they submit the
supporting bills or not.

Medical Allowance
• Medical reimbursement is a
payment made to an
employee against the
medical bills produced by
him/her subject to his/her
entitlement.

Medical Allowance
• The maximum tax benefit
available is Rs. 15,000 per
annum. Under this head,
one may avail for reduction
in the taxable income for a
maximum of or up to Rs.
15,000 for medical expenses
during each financial year.

Medical Allowance
• Reimbursement by an
employer of medical expenses
incurred by an employee is
generally tax-free. Where an
employee is allowed to get
reimbursement for the medical
expenses incurred by him or
his family members, the entire
amount of reimbursement is
tax-free and is not treated as a
taxable perquisite.

Employee Benefits

Employee Benefits
• Employee benefits and
benefits in kind (also called
fringe benefits, perquisites, or
perks) include various types of
non-wage compensation
provided to employees in
addition to their normal wages
or salaries

Employee Benefits
• The purpose of employee
benefits is to increase the
economic security of staff
members, and in doing so,
improve worker retention
across the organization. As
such, it is one component of
reward management.

Benefits of Employee Benefits
• For employers:
– By providing increased access
and flexibility in employee
benefits, employers can not
only recruit but retain
qualified employees.
– Providing benefits to
employees is seen as
managing high-risk coverage
at low costs and easing the
company's financial burden.

• For employers:
– Employee benefits have been
proven to improve
productivity because
employees are more effective
with they are assured of
security for themselves and
their families.
– Premiums are tax deductible
as corporation expense, which
means savings for the
organization.

• For employees:
– Employees can experience a peace
of mind which leads to increased
productivity and satisfaction by
being assured that they are their
families are protected in any mishap
– Employees with personal life and
disability insurance can enjoy
additional protection including
income replacement in the event of
serious illness or disability
– Employees can feel a sense of pride
in their employer if they are
satisfied with the coverage they
receive

Gratuity

Gratuity
• Gratuity is a part of salary
that is received by an
employee from his/her
employer in gratitude for the
services offered by the
employee in the company.

Gratuity
• Gratuity is a defined benefit
plan and is one of the many
retirement benefits offered
by the employer to the
employee upon leaving his
job.

Gratuity
• An employee may leave his
job for various reasons, such
as – retirement /
superannuation, for a better
job elsewhere, on being
retrenched or by way of
voluntary retirement.

Gratuity
• Eligibility
– As per Sec 10 (10) of Income
Tax Act, gratuity is paid when
an employee completes 5 or
more years of full time service
with the employer(minimum
240 days a year).

Gratuity
• How does it work?
– An employer may offer
gratuity out of his own
funds or may approach a
life insurer in order to
purchase a group gratuity
plan.

Gratuity
• How does it work?
– In case the employer chooses
a life insurer, he has to pay
annual contributions as
decided by the insurer. The
employee is also free to make
contributions to his gratuity
fund. The gratuity will be paid
by the insurer based upon the
terms of the group gratuity
scheme.

Tax treatment of gratuity
• The gratuity so received by
the employee is taxable
under the head ‘Income
from salary’. In case gratuity
is received by the
nominee/legal heirs of the
employee, the same is
taxable in their hands under
the head ‘Income from other
sources’.

• For the purpose of
calculation of exempt
gratuity, employees may be
divided into 3 categories –
– (a) Government employees
– (b)Non-government
employees covered under the
Payment of Gratuity Act, 1972
– (c)Non-government
employees not covered under
the Payment of Gratuity Act,
1972

• n case of government employees
– they are fully exempt from
receipt of gratuity.
• In case of non-government
employees covered under the
Payment of Gratuity Act, 1972 –
Maximum exemption from tax
is least of the 3 below:
– (i) Actual gratuity received;
– (ii) Rs 10,00,000;
– (iii) 15 days’ salary for each
completed year of service or
part thereof

• Here, salary = basic + DA +
commission (if it’s a fixed % of
sales turnover).
• ‘Completed year of service or
part thereof’ means: full time
service of > 6 months is
considered as 1 completed year
of service; < 6 months is ignored.
• Here, number of days in a month
is considered as 26. Therefore, 15
days’ salary is arrived as = salary
* 15/26

• In case of non-government
employees not covered under the
Payment of Gratuity Act, 1972 –
Maximum exemption from tax
is least of the 3 below:
• (i) Actual gratuity received;
• (ii) Rs 10,00,000;
• (iii) Half-month’s average salary
for each completed year of
service (no part thereof)

• Here, salary = basic + DA +
commission (if it’s a fixed % of
sales turnover).
• Completed year of service (no
part thereof) means: full time
service of > 1 year is considered
as 1 completed year of service. <
1 year is ignored.
• Average salary =10 months’
salary (immediately preceding
the month of leaving the job)/10

• Varun had been working with an IT
company since past 10 years, 7
months. He is retiring on 15th April,
2010. His current Basic = Rs 40,000
pm, DA = Rs 5,000 pm. He is going
to receive a gratuity amount of Rs 3
lakhs on retirement. Note: Varun’s
basic and DA have been the same
since past 1 year.

• Lets consider 2 situations
here – (a) Varun’s
employer is covered under
Payment of Gratuity Act,
1972; and (b) Varun’s
employer is not
covered under Payment of
Gratuity Act, 1972.

Medical Care

Medical Care
• Benefits are a critical piece
of an employee
compensation package, and
health care benefits are the
crown jewel. Health care
benefits, along with time-off
benefits, are the most
popular of benefits to
employees.

Medical Care
• Every employer must at least
consider whether to offer
these types of benefits and
in some cases employers
must offer health care in
order to remain competitive
with other businesses for
the most talented
employees and avoid
penalties imposed by health
care reform.

Medical Care
• Another reason why many
employers choose to offer
health care benefits is so
that they themselves can
take advantage of less
expensive health insurance
than they could get on their
own as well as tax breaks for
the contributions made by
the business.

Advantages of Medical Care
• Attract and retain the most
qualified employees.
– Whether health insurance is
absolutely necessary to attract
and retain the most qualified
employees will depend upon
factors such as whether your
competitors or other similarly
sized employers in your area
are offering health insurance.

• Gain tax advantages.
– You can offer employees
something that increases
their compensation
package and yet allows
you an income tax
deduction for the
contribution, so that your
out-of-pocket cost is less
than the value of the
benefit to the employee.

• Offer employees group
purchasing power.
– Even if you decide not to
contribute anything toward
your employees' health
insurance, you can offer them
the opportunity to obtain
group rates through your
business.

• Ensure the wellness of your
workers.
– Insurance plans offer
preventative care that can keep
employees healthy and working.
If employees don't get
preventative care and yearly
physicals (which they might not
do if they don't have insurance),
you could end up having more
employees out for long periods
of time with serious illnesses.

Disadvantages of Medical Care
• The costs.
– Health care costs have risen
enormously in recent years.
As a result, not only are the
costs draining valuable
resources from many small
employers, the uncertainty
makes financial planning
extremely difficult.

• The sometimes tense business of
cost-sharing with employees.
– There is a way for a small employer
to control costs and return certainty
to the process: push any additional
costs on to employees. While that
may solve the financial problems, it
creates many others. Even if you
don't want to push all the costs on
to employees, pushing some of the
costs on to them is inevitable.

• The administrative hassles.
– Even though the insurance
company from whom you
purchase the health insurance
will usually act as plan
administrator, you will have to
choose the insurer and then
spend part of your time filling
out forms, remitting premiums,
and acting as intermediary
between employee and insurer,
among many other tasks.

• The potential liability.
– The potential for liability for
selecting a health care provider
that commits malpractice on an
employee does exist. While this
risk is small and should not be
the driving reason behind a
decision not to offer health
insurance, you should be aware
that several employers have
been sued by their employees
for what they contend was their
employer's carelessness in
selecting a provider.

Health Insurance

Health Insurance
• It is a well known fact that
an employee values a health
insurance cover and its
benefits. It is viewed by the
employee as the second best
thing next to monetary
compensation, and gives the
employer the added
advantage of being able to
employ and retain the best
in the business.

Health Insurance
• Health insurance is
insurance against the risk
of incurring medical
expenses among
individuals.

Health Insurance
• By estimating the overall risk
of health care and health
system expenses, among a
targeted group, an insurer
can develop a routine
finance structure, such as a
monthly premium or payroll
tax, to ensure that money is
available to pay for the
health care benefits
specified in the insurance
agreement.

Health Insurance
• Group health insurance is a
medical insurance that covers
a group of people, who are
usually the members of
societies, employees of a
common company, or
professionals in a common
group. Group health insurance
helps companies identify and
mitigate the risks faced by
their employees.

Health Insurance
• Rising costs of healthcare
have made it necessary for
every employer to cover
their employees and their
families from financial
instability that may arise in
case of hospitalization.

Health Insurance
• Also, group health insurance
helps companies in attracting
talented staff. Whether you are
a small group or a company,
you can easily retain best
talent in the industry by
offering comprehensive health
insurance coverage.

Provident Fund

Provident Fund
• The Employee Provident
Fund (EPF) or simply
Provident Fund (PF) is a
long-term savings and
pension instrument for all
salaried persons in India.

Provident Fund
• For all employees in such
an organisation who draw a
basic monthly salary
of Rs 6,500 or less, the PF is
mandatory. For all others, the
PF is optional -- such
employees can opt out of the
PF at his discretion.

Provident Fund
• The statutory requirement
– The EPF is maintained solely by
the Employees' Provident Fund
Organisation of India. As a
statutory rule, any company
having more than 20
employees, have to register
with the EPFO.

Provident Fund
• Contribution to EPF
– Employees' contribution to the
EPF comprises of 12 per cent of
the Basic + DA + the cash value
of food allowances. An equal
amount of 12 per cent is
contributed by the employer
too, to the fund.

Why should you contribute to the EPF?
• Safety of returns
– The EPF is the safest debt
instrument to invest in.
Backed by the government, it
guarantees safety of principal
as well as the interest
earned, making it suitable for
long term financial goals. It
also brings about an
automatic discipline in
investing.

• Loan options on EPF
– Most companies offer you
a loan against EPF as a
security at reasonable
rates of interest. So the
higher your PF balance, the
more is your eligibility for
such loans. In times of a
crisis, if you so require
some money, your EPF
could come to your rescue.

• Tax treatment on EPF
– The contributions you make
towards your provident fund
gets you a tax benefit under
section 80C, up to a
maximum limit of Rs
1,00,000. Also, the maturity
proceeds are tax free, if
contributions to the fund
have been for more than five
years.

• Interest earned on EPF
– The rate of interest earned
on a PF account is fixed every
year during the months of
March or April by the
Government. The EPF
currently for the financial
year 2010-2011 carries an
interest rate of 9.5 per cent.
This interest rate is
guaranteed and risk-free.

• Withdrawal facility in EPF
– The complete amount from
your PF could be withdrawn on
Retirement at the age of 55
years or due to early retirement
on account of some disability
etc. Partial withdrawal of
money from the fund is
permitted occasionally to meet
expenses of marriage, medical
costs or for building or
purchase of a home.

• Shifting of jobs
– At such times, the PF balance
could be transferred from one
employer to another. The
existing balance would
continue to stay. With fresh
contributions made by the new
employer.

• Quitting of job
– PF could be withdrawn, if
you quit your job and
provide a declaration that
you do not intend to work
for the next six month.

Executive Level Rewards

• Executive compensation
or executive pay is
composed of the
financial compensation
and other non-financial
awards received by an
executive from their firm
for their service to the
organization.

• It is typically a mixture of
salary, bonuses, shares of
or call options on the
company stock, benefits,
and perquisites, ideally
configured to take into
account government
regulations, tax law, the
desires of the organization
and the executive, and
rewards for performance

• Executive Compensation
packages are designed by a
company's Board of Directors,
typically by the Compensation
Committee consisting of
independent directors, with
the purpose of incentivizing
the executive team, who have
a significant impact on
company strategy, decision-
making, and value creation
(Pay for Performance) as well
as enhancing Executive
Retention.

• To help accomplish these goals,
Executive Compensation has
four distinct characteristics:
– Pay Package Design:
Executive pay arrangements
typically consist of six
distinct compensation
components: salary, annual
incentives, long-term
incentives, benefits,
perquisites and
severance/change-in-control
agreements.

– Equity Compensation: The
majority of compensation of
most executive pay packages
comes in the form of
company stock.

– Performance-Contingent
Pay: Executive pay packages
are designed so that the
bulk of an executive's
compensation is contingent
on a company achieving pre-
established criteria of
specific financial results
and/or strategic objectives.

– Vesting Schedules: Even
after financial or strategic
criteria for an award is met,
full ownership of the equity
award are often conditioned
on the executive's
compliance with certain
covenants.

Shop floor Level Rewards

• Shop-floor incentive
schemes are based on
the principle of payment
- by-performance.

• These schemes reward the
number of items
produced, the time taken
to do a certain amount of
work and/or some other
measure of performance.
They may relate to part or
all of the pay received by
an employee.

• F. W. Taylor(1911), stated
that the object of shop-
floor incentive scheme
was to reward the input of
labor within
closelydefined tasks and
by so doing, to stimulate
people to work at a faster
pace and increase their
output.

• This is in accordance with
the instrumentalist view of
motivation which is closely
associated with
‘Taylorism’.

• The view that employees
will only work harder if
they get more money still
dominates thinking about
shop floor incentive
schemes.

Expatriates compensation

• Expatriation is an expensive
option so the decision to
use an expatriate requires
careful evaluation of the
benefits that the expatriate
will bring.

• A company that decides to
transfer an employee to
another country must be
prepared to propose a
compensation package that
takes into account a number
of elements such as cost of
living, housing, education
expenses and taxation and
not just salary.

• From an organizational
perspective, thinking about
expatriation often starts with
thinking about expatriate
compensation. Compensation
packages should attract, retain
and motivate employees,
while at the same time
balancing these costs with the
expected returns for the
organization, which is not an
easy task.

• Though it may seem
more expensive on the
surface to create an
expatriate compensation
package, the fact is that it
is often necessary from a
business point of view
because that specific skill
is not available locally.

• Broadly speaking, we can
differentiate between two
different approaches to
expatriate compensation:
the balance sheet approach
and the going rate
approach.

• The balance sheet
approach is the most
widely used approach by
organizations and its main
idea is to maintain the
expatriate’s standard of
living throughout the
assignment at the same
level as it was in his/her
home country.

• Another important notion is
that the balance sheet
approach implies matching
the expatriate’s salary with
home-country peers, not
with the host-country
colleagues. On top of the
home-country salary, host-
country cost of living
adjustments are usually
made.

• As argued by Sims and
Schraeder (2005) in their
recent review of expatriate
compensation practices, such
adjustments are made using
the ‘no loss’ approach:
expatriate compensation is
adjusted upward for higher
costs of living, but is not
adjusted downward if the cost
of living in the host country is
less than in the home country.

• Contrary to the balance
sheet approach, there is a
second approach, the going
rate approach, which is also
known as the ‘localization’,
‘destination’ or ‘host
country-based’ approach.

• As these names suggest, the
core of this approach lies in
linking the expatriate
compensation to the salary
structure of the host country,
taking into account local
market rates and
compensation levels of local
employees.

• The going rate method aims
to treat the expatriate
employee as a citizen of the
host country, encouraging a
“when in Rome, do as the
Romans do” mentality.

Knowledge worker compensation

• Knowledge based pay is a
system of payment where
employees are
compensated based on their
individual skill level and
education attainment.

• Under this system,
employees are rewarded for
reaching certain goals in
education, training and skill
development. Knowledge-
based pay systems provide
incentive for employees to
improve their skill set and
education.

• With job-based pay,
employee salaries are
established based on job
analysis and the
requirements of a given
position. With knowledge-
based pay, more emphasis is
placed on the ability of the
employee to do the job.

• Knowledge-based pay
rewards employees who set
goals to learn new skills and
acquire new knowledge.
Ambitious, self-motivated
employees typically prefer
this approach because it
gives them a reason to focus
on career development.

• It also provides a
mechanism to reward
employees who want to
perform at a higher level.
When companies pay for
knowledge and skill
development, they
contribute to a systemic
raising of the bar for
performance across all jobs.

• Because knowledge-based
pay is inherently more
competitive within job
ranks, it may cause conflict
among colleagues and co-
workers. Colleagues may
feel slighted or bitter
toward you if you make
more money performing
similar tasks.

• You may also feel underpaid
and undervalued if you
aren't paid the same as
someone doing the same
job at a competing
company. Plus, with a
knowledge based pay
system, you have to spend
time to take classes or
training and continue to
develop skills if you want to
make more money.

Grade and pay structure explained for compensation management

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