Compensation practices

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Compensation is the process of providing adequate, equitable and fair remuneration to the employees. It is what employees receive in exchange for their contribution to the organization. It is a …

Compensation is the process of providing adequate, equitable and fair remuneration to the employees. It is what employees receive in exchange for their contribution to the organization. It is a comprehensive term which includes pay, incentives and benefits offered to the employees.
PURPOSEOF COMPENSATION
THE PAY MODEL
STRATEGIC COMPENSATION PLANNING
COMPENSATION POLICY ISSUES

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  • 1. COMPENSATION PRACTICES
  • 2. VARIOUS DEFINATIONS OF COMPENSATION
    • The sum total of all forms of payments or rewards provided to employees for
    performing tasks to achieve organizational objectives
    • Compensation is the process of providing adequate, equitable and fair remuneration to the employees. It is what employees receive in exchange for their contribution to the organization. It is a comprehensive term which includes pay, incentives and benefits offered to the employees.
    • 3. 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 performed and job satisfaction.
  • PURPOSEOF COMPENSATION
    Effective Compensation
    Contribution based Remuneration
    Ensure Equity
    Legal
    Compliance
    Reward Valued Behavior
    Attract talent
    Administratively Efficient
    Motivate & Retain Staff
  • 4. THE PAY MODEL
    Business Goals
    Compensation Philosophy/ activities serve Business Objectives
    CEO
    Business
    Strategy
    Business Strategy :
    This defines the direction in which organization is going in relation to its environment in order to achieve its objectives.
    Compensation Philosophy :
    Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate
    4
  • 5. THE PAY MODEL
    Business Goals
    Compensation activities serve Business Objectives
    CEO
    Business
    Strategy
    Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
    Compensation
    Strategy
    HR Head
    Org.Structure
    Non-Financial
    Rewards
    Compensation
    Plan
    Compensation Strategy
    defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs to achieve its business goals
  • 6. THE PAY MODEL
    Business Goals
    Compensation activities serve Business Objectives
    CEO
    Business
    Strategy
    Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
    Compensation
    Strategy
    HR Head
    Org.Structure
    Non-Financial
    Rewards
    Compensation
    Plan
    • strategic perspective
    • 7. Compensation takes the position that how employees are compensated can be a source of sustainable competitive advantage
  • THE PAY MODEL
    Business Goals
    Compensation activities serve Business Objectives
    CEO
    Business
    Strategy
    Compensation strategy is periodically reevaluated and the Compensation plan periodically developed
    Compensation
    Strategy
    HR Head
    Org.Structure
    Non-Financial
    Rewards
    Compensation
    Plan
    Market Surveys
    Job Evaluation
    Performance
    Management
    C & B/S M
    Unit Inputs
    Compensation Manager, along with team is responsible for carrying out compensation related activities
    Pay levels /
    structures
    Contribution
    /outputs
    Total
    remuneration
    Employee
    Performance
    linked Pay
    Individual Pay
    Internal Equity
    External Equity
    7
  • 8. STRATEGIC COMPENSATION PLANNING
    • Strategic Compensation Planning
    • 9. Links the compensation of employees to the mission, objectives, philosophies, and culture of the organization.
    • 10. Serves to identify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-for performance standard.
    • 11. Seeks to motivate employees through compensation.
  • COMPENSATION POLICY ISSUES
    • Pay for performance
    • Pay for seniority
    • Salary increases and promotions
    • Overtime and shift pay
    • Probationary pay
    • Paid and unpaid leaves
    • Paid holidays
    • Salary compression (A salary inequity problem, generally caused by
    inflation, resulting in longer-term employees in a position earning less than
    workers entering the firm today)
    • Geographic costs of living differences
  • 12. COMPENSATION ADMINISTRATION PROCESS
  • 13. CLASSIFICATION OF REWARDS
  • 14. COMPONETS OF FINANCIAL COMPENSATION
  • 15. BASE PAY
    • The direct financial compensation an individual receives based on the time
    Worked.
    • Two bases of calculation
    • 16. Hourly/wage: payment for the number of hours worked.
    • 17. Salaried : receive consistent payments at the end of specific period regardless of number of hours worked Nature.
    • 18. generally market driven ( D>S=increase in pay)
    • 19. Job Evaluation
    • 20. The formal systematic means used to identify the relative worth of jobs within an
    organization.
  • 21. VARIABLE PAY/PAY FOR PERFORMANCE : INCENTIVES
    • Variable Pay
    • 22. Any plan that ties pay to productivity or profitability. (i.e)The standard by which managers tie compensation to employee effort and performance.
    • 23. It is linked to individual, group, or organizational performance and not to time worked
    • 24. Incentive Pay Programs
    • 25. Establish a performance “threshold” to qualify for incentive payments.
    • 26. Emphasize a shared focus on organizational objectives.
    • 27. Create shared commitment in that every individual contributes to organizational performance and success.
  • TYPES OF INCENTIVES
  • 28. INDIVIDUAL INCENTIVE PLAN
    • Piecework Plans
    • 29. The worker is paid a sum (called a piece rate) for each unit he or
    she produces.
    • Straight piecework:
    • 30. A fixed sum is paid for each unit the worker produces under an established piece
    rate standard. An incentive may be paid for exceeding the piece rate standard.
    • Standard hour plan:
    • 31. An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”
    • 32. If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.
  • INDIVIDUAL INCENTIVE PLAN(CONT’D)
    • Pro and cons of piecework
    • 33. Easily understandable, equitable, and powerful incentives
    • 34. Employee resistance to changes in standards or work processes affecting output
    • 35. Quality problems caused by an overriding output focus
    • 36. Possibility of violating minimum wage standards
    • 37. Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output Merit pay
    • 38. A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.
  • BONUS
    • Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.
    Spot bonus
    • Unplanned bonus given for employee effort unrelated to an established
    performance measure.
  • 39. GROUP INCENTIVE PLAN
    • Team Incentive Plans
    • 40. Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.
    • 41. Establishing Team Incentive Payments
    • 42. Set performance measures upon which incentive payments are based
    • 43. Determine the size of the incentive bonus.
    • 44. Create a payout formula and fully explain to employees how payouts will be distributed.
    • 45. Gainsharing Plans
    • 46. Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.
  • EMPLOYEE BONUS AND GAINSHARING PLAN
  • 47. PROS CONS OF TEAM INITIATIVEPLAN
    • PROS
    • Team incentives support group planning and problem solving, thereby building a team culture.
    • The contributions of individual employees depend on group cooperation.
    • Unlike incentive plans based solely on output, team incentives can broaden the scope of the contribution that employees are motivated to make.
    • Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards.
    • CONS
    • Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.
    • Intergroup social problems—pressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the “free-ride” effect (one
  • 48. ORGANIZATIONAL INCENTIVE PLAN
    • Profit Sharing
    • 49. Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.
    • 50. Paid once in a year or deferred sums until retirement
    Challenges:
    • Agreement over division of profits between company and employees.
    • Possibility of no payout due to financial condition of company.
  • 51. ORGANIZATIONAL INCENTIVE PLAN(CONT’D)
    • Stock Options
    • 52. Granting employees the right to purchase as pecific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.
    • 53. The value of an option is subject to stock market conditions at the time that option is exercised.
    • 54. Apple , yahoo, coca cola, nike
    • 55. Employee Stock Ownership Plans (ESOPs)
    • 56. Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.( UK,USA and several other industrialized countries). This provide tax concessions to corporate orgns. And to trusts established for employee stock options. (i.e (difference between acceptance price and market value)
    • 57. The employer establishes an ESOP trust that qualifies as a tax exempt
    employee trust under Section 401(a) of the Internal Revenue Code
  • 58. WHY INCENTIVE PLAN FAIL
    • Performance pay can’t replace good management.
    • You get what you pay for.
    • “Pay is not a motivator.”
    • Rewards punish.
    • Rewards rupture relationships.
    • Rewards can have unintended consequences.
    • Rewards may undermine responsiveness.
    • Rewards undermine intrinsic motivation.
  • 59. IMPLEMENTING EFFECTIVE INCENTIVE PLAN
    • Ask: Is effort clearly instrumental in obtaining the reward?
    • Link the incentive with your strategy.
    • Make sure effort and rewards are directly related.
    • Make the plan easy for employees to understand.
    • Set effective standards.
    • View the standard as a contract with your employees.
    • Get employees’ support for the plan.
    • Use good measurement systems.
    • Emphasize long-term as well as short-term success.
    • Adopt a comprehensive, commitment-oriented approach.
  • 60. INDIRECT FINANACIAL COMPENSATION - BENEFITS
    • Mandatory Benefits
    • 61. legally binding
    • 62. Voluntary Benefits
    • 63. provided at the discretion of the employer
  • VOLUNTARY BENEFITS EXAMPLES
    • Educational benefits
    • 64. Employee’s spouse education assistance( Motorola on international assignments ).
    • 65. ONGC,NIIT ,ADITYA BIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to employees who wish to study.
    • 66. Meritorious Children of employees are provided opportunity of higher
    education with loan benefits in BPCL, CPCL etc
    • Family
    • 67. Paternity leave in HLL, HCL Tech, Yes Bank, Genpact etc.,
    • 68. Wedding anniversary allowance in NIIT, SPIC etc.,
    • 69. “Joyful Working Team” and “ Happy Moments Board”- LG Electronics
    • 70. Family day at office- Bharti telecom.
  • NON FINANACIAL COMPENSATION : COMPONENTS
    • Are most effective as motivators when the award is combined with a meaningful employee recognition program.
    • Intrinsic motivators are worthwhile as financial package
    • Organization reward high performing employees
    • Psychological rewards that employees receive in recognition of their skills and contributions
  • 71. TYPES
    • Awards
    • 72. Often used to recognize productivity gains, special contributions or achievements, and service to the organization.
    • 73. Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way.
    • 74. Recognition awards
    • 75. Recognition has a positive impact on performance, either alone or in conjunction
    with financial rewards.
    • Combining financial rewards with nonfinancial ones produced performance
    improvement in service firms almost twice the effect of using each reward alone.
    • Day-to-day recognition from supervisors, peers, and team members is important.
    • 76. Best performer of the month awards in Blue Dart, ALACTEL,XANSA etc.,
    • 77. Service awards
    • 78. Award for the length of service and exactly not on performance
    • 79. IBM: thanks award
    • 80. IDEA: appreciation card
  • EQUITY AND MOTIVATION OF EMPLOYEES
    • Pay Equity (also Distributive Fairness)
    • 81. An employee’s perception that compensation received is equal to the value of the work performed.
    • 82. A motivation theory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
    • 83. Individuals form a ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.
  • RELATIONSHIP BETWEEN PAY EQUITY AND MOTIVATION
  • 84. INSTRUMENTALITY AND REWARDS
    • Vroom’s Expectancy Theory
    • 85. A person’s motivation to exert some level of effort is a function of
    three things:
    • Expectancy: that effort will lead to performance.
    • Instrumentality: the connection between performance and the appropriate reward.
    • Valence: the value the person places on the reward.
    • Motivation = E x I x V
    • If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.
    • Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.
  • 86. DETERMINANTS OF COMPENSATION
  • 87. INTERNAL DETERMINANTS
    • Employer’s Compensation Strategy
    • 88. Setting organization compensation policy to lead, lag, or match competitors’ pay.
    • Worth of a Job
    • Establishing the internal wage relationship among jobs and skill levels.
    • Employee’s Relative Worth
    • Rewarding individual employee performance
    • Employer’s Ability-to-Pay
    • Having the resources and profits to pay employees.
  • EXTERNAL DETERMINANTS
    • Labor Market Conditions
    • 89. Availability and quality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
    • 90. Area Wage Rates
    • 91. A firm’s formal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
    • 92. Cost of Living
    • 93. Local housing and environmental conditions can cause wide variations in the cost of living for employees.
    • 94. Inflation can require that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
    • 95. Collective Bargaining
    The term extends to all negotiations that take place between an employer, group of employers or one or more employers’ organizations on the one hand, and
    one or more workers’ organizations on the other to
    (a) Determine the working conditions and terms of employment and / or
    (b) Regulate relations between employer and employee/workers and / or
    (c) regulate relations between employer organization or employee/workers organization
  • 96. NEW DEVELOPMENTS
    • Competency based pay and reward programmes (also skill-based pay or
    knowledge-based pay)
    • Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.
    • 97. Competencies
    • 98. Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.
  • WHY COMPETENCY BASED PAY ?
    • Pay plans that aim for high-performance work system.
    • Paying for skills, knowledge, and competencies is more strategic.
    • Measurable skills, knowledge, and competencies are the heart of any
    company’s performance management process.
  • 99. COMPETENCY BASED PAY – PROS & CONS
    • Pros
    • 100. Higher quality
    • 101. Lower absenteeism and fewer accidents
    • 102. Cons
    • 103. implementation problems
    • 104. Cost implications of paying for unused knowledge, skills and behaviors
    • 105. Complexity of program
    • 106. Uncertainty that the program improves productivity Broadbanding
    • 107. Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels.
  • TRENDS OF EXECUTIVE COMPENSATION
    • The Executive Pay Package
    • 108. Base salary
    • 109. Short-term incentives or bonuses
    • 110. Long-term incentives or stock plans
    • 111. Perquisites (perks)
  • EXECUTIVE COMPENSATION-EHICS & ACCOUNTABILITY
    • Incentive payments are excessive compared with return to stockholders.
    • Time periods for judging and rewarding performance are too short.
    • Subjective in nature
    • Emphasis is placed upon equaling or exceeding executive salary survey averages.
    • Benefits do not relate closely to individual performance.
  • 112. SWEETNESS OF EXECUTIVE PERKS
    • Company car
    • Company plane
    • Executive eating facilities
    • Financial consulting
    • Company-paid parking
    • Personal liability insurance
    • Estate planning
    • First-class air travel
    • Home computers
    • Chauffeur service
    • Children’s education
    • Spouse travel
    • Physical exams
    • Mobile phones
    • Large insurance policies
    • Income tax preparation
    • Country club membership
    • Luncheon club membership
    • Personal home repairs
    • Loans
    • Legal counseling
    • Vacation cabins
  • 113. LEGAL FRAMEWORK FOR PAYMENT OF SALARY- INDIA
    • Payment of wages Act, 1936
    • The minimum wages Act, 1948
    • The payment of Bonus Act, 1965
    • Equal remuneration Act, 1976
  • 114. COMPENSATION PACKAGE ASHOK LEYLAND
  • 115. DIRECT COMPENSATION
    Fixed Pay
    Variable Pay : depending on no of optional days attended
    Variable Pay : depending on last year’s performance
    Mandatory ( Indirect )
  • 116. CLASSIFICATION OF REWARDS
    TOTAL Compensation
    Non - Financial
    Financial
    Praise / Rewards
    Direct
    Indirect
    Job Satisfaction
    Provident Fund
    Gratuity
    Travel allowance
    Mobile expense
    Sales Promotional Expense
    Monthly Salary
    Annual Incentives
    Bonus
  • 117. CLASSIFICATION OF REWARDS
    TOTAL Compensation
    Non - Financial
    Financial
    Praise / Rewards
    Direct
    Indirect
    Job Satisfaction
    Future Leadership Program (FLP): Executives earmarked and declared future leader based on their competency
    Development based Career Plan (DLCP): Competent executives committing 5 years service to company in the form of bond will be given minimum 2 elevation during the bond period.
    Executive of the year Award
    Company Jeep at individual level
    Foreign Tour with family for the team achieving their yearly target
    Major medical claim for self and dependant