Compensation benifits.pdf

Introduction to Compensation
& Benefits
Shweta Jha

This Section Will Cover
• What is Compensation and Benefits?
• Why Compensation is paid?
• What are the constituents of
Compensation & Benefits?
• What determines compensation?
• What are the various methods of paying
compensation?

Compensation and Benefits
Compensation and benefits refer to the rewards a
firm provides to its employees in exchange for their
labor. E.g. Overtime pay, stock options, 401k
matches, pension plans, days off, and even free
lunches
Benefits cover indirect pay. E.g. health insurance,
stock options, or any myriad of things offered to
employees.
Two jobs that offer identical salaries may vary wildly in the
benefits category, making one a better financial proposition than
the other.

Difference Between
Compensation and Benefits
Compensation Benefits
Compensation is an umbrella term used
to describe anything that an employer
gives an employee in exchange for their
labor.
Benefits form a subset of compensation.
Compensation is a way for an
organization to attract the best talent.
Benefits are used as a means to
motivate employees to perform better.
Compensation can be monetary or non-
monetary.
Benefits are always non-monetary.
Compensation is a direct payment for
the work an employee performs at a
company.
Benefits are an indirect payment for
their work.
Compensation is usually fully taxable,
or a part of it can be exempt from
taxation.
Benefits can be tax-free or partially
exempted from taxation.

Reason for Paying Compensation
• To keep Employees Motivated
1.It is a hygiene factor (Herzberg’s Two
Factor Theory, Vroom’s Expectancy
Theory, Adam’s Equity Theory,
Organizational Justice, etc.)
• To attract the best talent

Organizational Justice and
Compensation
• Distributive Justice: refers to the perceived
fairness of the amount of compensation the
employee receives, Procedural justice: refers to
the perceived fairness of the means used to
determine those amounts
• Distributive justice and Procedural justice lead
to higher employee retention.
• Procedural justice is more important for
employee engagement & predicts employee
motivation (Research)

Components of Compensation
Plan
• Fixed Pay: basic salary plus other fixed components
• Variable Pay: additional compensation paid to employee
based on employee’s performance, company
performance etc.
• Equity: are awarded shares of the company, often at a
discounted price
• Medical : includes the health insurance, free checkups,
medical facilities on campus etc.
• Insurance:
• Accommodation

Basic = 40 % of gross pay
Rs. 41150 x 40%= Rs. 16460
This is rounded off to Rs. 16500
Supplementary Allowance/Other Allowances/ Special
Allowance: is the extra allowances in the salary after calculating
the employee basic wage, HRA, conveyance, & medical
allowances, etc. from gross salary.
Employers do not have any statutory obligation to pay it and
they cannot be used for tax exemption as well.
Supplementary allowances = Gross wage – (basic wage + house
rent allowances + conveyance allowances + medical
allowances, etc.)
Superannuation Benefits: a type of retirement pension
provided by a company to its employees.
It is basically a superannuation scheme designed for the welfare
of an organisation’s workers in the form of a pension plan.

Calculating Various
Components of Salary
Basic Pay:
• is a fixed amount paid to employees by their
employers in return for the work performed does not
include bonuses, benefits or any other compensation
from employers.
• is a fixed part of the compensation structure of an
employee and generally depends on her or her
designation.
If the appointment of an employee is made on a pay
scale, the basic salary may increase every year.

Calculating Various
Calculating Basic Pay
Basic Salary is 40% of the Gross Pay or
50% of the CTC

Calculating Various
S
no
Earnings Deductions
1 Basic Wage (40-50% of Gross Wage)
EPF (12% of basic
wage)
2
HRA (30% of the basic wage for metro
cities & 15 % for nonmetro)
Professional Tax
3
Conveyance Allowances ( 1600 Rs in urban
areas)
TDS
4 Medical Allowances (1250 Rs)
Health Insurance /
TDS
5
Other(Special) Allowances (Balance
allowances)

Useful Salary Slip Information
1 Net salary Total Earnings – Total Deductions
2 Gross Wage
Basic wage + HRA + Conveyance + Medical +
Special allowances
3 EPF 12% of the basic wage of the employee.
4 ESI*
0.75% of employee gross wage. ( ESI applicable if
gross is upto 21,000₹)
5 CTC
Gross wage + Employer PF Contributions + Other
Benefits Given by Employer
* Discussed in next slide

ESI Calculation
The rates of the ESI contribution are
calculated on the wages paid.
Currently, the employee contribution is
0.75% of wages paid/payable, and employer
contribution is 3.25% of wages paid/payable.

ESI Calculation (Example)
Mr Hardeep with wages of Rs. 18,000 works
in a factory unit.
The contribution will be as follows:
Employee Contribution – 0.75%*18,000 = 135
Employer Contribution – 3.25%*18,000 = 585
So a total contribution of Rs. 720 will be
made

ESI Calculation
The onus of deducting the contribution and depositing the
same is on the employer.
The employer must deposit the amount within 15 days of the
end of the calendar month in which the deduction is made.
The same can be deposited online or to authorised designated
branches of SBI or other designated branches
The ESIC has facilitated the payment of ESI contributions
online via the payment gateway of 58 banks in addition to the
SBI.
The employees who receive a daily average wage of up to
Rs.176 are exempt from paying their share of contribution.
However, the employers will contribute their share in respect of
the employees having a wage of up to Rs.176 per day.

ESI
The ESI contributions cover the following benefits-
• Medical benefits
• Sickness benefit
• Maternity benefit
• Disablement benefit, including temporary
disablement benefit and permanent disablement
benefit
• Dependant’s benefit
• Funeral expenses

Understanding take home
salary
An organization guarantees a CTC of Rs. 8
lakhs. A bonus of Rs. 50,000 is paid for a FY.
Professional Tax is Rs. 2,400 a year.
Employee insurance is Rs. 3000. Calculate
the EPF deduction and the total take home
salary.

Understanding Take home
Salary
CTC= Rs. 8 lakh
The employer gives you a bonus of Rs. 50,000 for the financial year.
Gross salary = Rs. 7.5 lakh (Rs. 8 lakh – Rs. 50,000).
Professional tax= Rs. 2,400 a year (This is the professional tax in Delhi
for the present financial year).
EPF contribution= 12% of Rs. 15,000
(maximum salary limit of Rs. 15,000 per month, which is i.e Rs. 1,800 a
month or Rs. 21,600 a year. Now you have Rs. 21,600 as yearly
contribution made by the employee towards EPF and a similar
contribution of Rs. 21,600 made by the employer)
Deduct Employee Insurance= Rs. 3,000 deducted as .
Total deductions= Rs 2,400 + Rs 21,600 + Rs 21,600 + Rs 3,000 = Rs
48,600.
TAKE HOME SALARY= GROSS PAY – TOTAL DEDUCTIONS= Rs.
7,50,000 – Rs. 48,600 = Rs. 7,01,400

Preparing Salary Slip
M/s Alpha Ltd pays to its employees the salary on the basis of Basic
pay. The Gross salary of an employee consists of Basic Pay, Dearness
Pay (D.P) and House Rent Allowance (H.R.A). The components of
salary are computed according to the following terms of contract of
service:
Dearness Allowance is paid @10% of basic pay subject to a maximum of
Rs. 5400
HRA is computed as per the following scale:
Basic Pay HRA(Rs.)
Up to 10,000 5,000
From 10,001 to. 25,000 7,000
More than 25,000 9,000
Prepare payroll of the employee whose basic pay is Rs, 10,000/-, Rs.
25,000/-, Rs. 35,000

M/s Alpha Ltd pays to its employees the salary on the basis of Category. The Gross salary
of an employee consists of Basic Salary + Dearness Pay + DA +HRA + TA+CCA. The GPF
and IT are the two Deductions. The components of salary are computed according to the
following terms of contract of service: Rules for payment of Basic Salary, TA, and CCA
are as under:
Category Basic Salary TA CCA
A 25000 5000 1000
B 20000 4000 800
C 15000 3000 500
Rules for payment of DP, DA, and HRA are as under:
DP 40% of Basic
DA 41% of (Basic +DP)
HRA 25% of (Basic +DP)
Rules for Deduction of GPF, and IT are as under:
GPF 12% of Gross
IT 8% of Gross
Contd..

You are required to prepare a payroll statement for the financial year
2016-17 in the given format making maximum use of cell referencing
facility
Month Nam
e
Cat Is
HRA
is to
be
Paid
Basic DP DA HRA TA CCA Gross IT GPF Total
Ded
Net

What is Job
• Job is sum total of work performed by an
individual
• A “job” is a construct that relates elements
of what jobs are believed to consist of
(role, requirements and responsibilities) to
critical organizational outcomes.
• The idea of a job helps us understand how
organizations work

Job Evaluation
• Job evaluation is the process of comparing
a job against other jobs within the
organization to determine the appropriate
pay rate.
• Job evaluation takes place early in the
process of creating a compensation system
for the organization.
(Note: focus is the job, not the person doing
a job.)

Job Evaluation Methods
1. Internal Job Evaluation Methods
i. Quantitative Approach
a. Point Factor
b. Factor Comparison
c. Custom Factor Comparison
ii. Qualitative Approach
a. Job Ranking
b. Job Classification
2. External Job Evaluation Methods
a. Market Pricing

Job Evaluation Methods
Point Factor Method
• Are based on major core competencies that are
assigned points.
• Core competencies
– Know-How: Technical, Managerial, People Interaction
– Problem Solving: Thinking Environment and
Challenge
– Accountability: Freedom to Act, Magnitude, Impact
• Special charts and scales are used to calculate the
job’s value. The compensation structure is
developed around points.

Point Factor Method
The most typical compensable factors are skill,
knowledge, responsibility, and working conditions.

Example of Point Factor Method
Jobs Point Factor
Job Ranking
Receptionist Sales Manager 1
Sales Manager Bought Ledger Controller 2
Bought Ledger Controller Custom Services Agent 3
Custom Services Agent Accounts Ledger
Controller
4
Accounts Ledger Controller Secretory/Personal
Assistant
5
Computer Operator Market Assistant 6
Market Assistant Computer Operator 7
Secretory/Personal Assistant Receptionist 8

Point Factor Method
Advantages:
• Because it has points that are quantifiable, it gives
the impression that it’s more accurate and defensible
• A total fixed score is determined that rates a job
higher or lower than another
Disadvantages:
• Requires that factors be defined
• Values need to be assigned to each factor
• Challenges are often made by employees/managers
as to why one job got rated higher or lower than
another
• Complex and resource intensive to administer

Paired Comparison
Job Title Job A Job B Job C Job D Total Score
Job A 0 0 0 0
Job B 0 1 1 2
Job C 0 0 1 1
Job D 1 1 1 3

Factor Comparison Method
This method is a combination of both ranking and
point methods in the sense that it rates jobs by
comparing them and makes analysis by breaking
jobs into compensable factors.
This system is usually used to evaluate white collar,
professional and managerial positions.

1. The key or benchmark jobs are selected as standards. The
key jobs selected should have standards contents, well
accepted pay rates in the community, and should consist of
a representative cross-section of all jobs that are being
evaluated-from the lowest to the highest paid job, from the
most important to the least important—and cover the full
range of requirements of each factor, as agreed upon by a
Committee representing workers and management.
2. The factors common to all jobs are identified, selected and
defined precisely. The common factors to all jobs are
usually five, viz., mental requirements, physical
requirements, skill requirements, working conditions and
responsibility.

3. Once the key jobs are identified and also the
common factors are chosen, the key jobs are, then,
ranked in terms of the selected common factors.
4. The next step is to determine a fair and equitable
base rate (usually expressed on an hourly basis)
and, then, allocate this base rate among the five
common factors as mentioned earlier.

Key Jobs Base Rate
(Daily)
Mental
Require
ments
Physical
Require
ments
Skills Working
Conditio
ns
Responsi
bility
Electrician 60 13 12 5 12 18
Welder 50 10 19 5 4 12
Mechanist 80 25 5 23 24 3
Job: Toolmaker
Skills similar to electrician (5)
Mental Requirements similar to welder (10)
Physical requirements similar to electrician (12)
Working conditions to mechanist (24)
Responsibility similar to mechanist (3)
Daily Wage rate= Rs 54 (Rs. 5+ Rs 10+ Rs 12+ Rs 24 +Rs 3)

Merits
• It is more objective method of job evaluation.
• The method is flexible as there is no upper limit on
the rating of a factor.
• It is fairly easy method to explain to employees.
• The use of limited number of factors (usually five)
ensures less chances of overlapping and over-
weighting of factors.
• It facilitates determining the relative worth of
different jobs

Demerits
• It is expensive and time-consuming method.
• Using the same five factors for evaluating
jobs may not always be appropriate because
jobs differ across and within organisations.
• It is difficult to understand and operate.

Custom Factor Comparison
The custom factor comparison method is
specific to the organization, but it is time-
consuming to establish and maintain.
In addition, the organization must monitor
market rates to maintain the system's
integrity.

Qualitative Approach to Job
Evaluation
Qualitative approaches use observations or
descriptions to define jobs.
1.Job Ranking
2.Job Classification

Evaluation
Job Ranking (Simplest Method)
• Job ranking places jobs in a hierarchy of their value to the
company.
• The 'worth' of a job is usually based on judgements of skill, effort
(physical and mental), responsibility (supervisory and fiscal), and
working conditions.
• This method is best suited to smaller organizations that can
reduce the number of positions to be reviewed to no more than
100 specific jobs.
• Job ranking generates an estimate of the correct job hierarchy, not
the exact hierarchy found in the point-factor system.
• Job ranking should be facilitated by a skilled compensation
specialist who can address favoritism by managers and evaluate
other subjective input.

Evaluation
Job Ranking
Advantages
• Simple.
• Very effective when there are relatively few jobs to be evaluated
(less than 30).
Disadvantages
• Difficult to administer as the number of jobs increases.
• Rank judgements are subjective.
• Since there is no standard used for comparison, new jobs would
have to be compared with the existing jobs to determine its
appropriate rank. In essence, the ranking process would have to
be repeated each time a new job is added to the organization.

Evaluation
Description Example
Job families
Group of jobs that involve similar work and
require similar training, skills, knowledge, and
expertise. The family is based on function and
not on organizational structure. Career
progression is most often seen within the job
family.
Finance
Job function
Specific occupational area within a family. A
job function is a category of work that can be
grouped based on similar characteristics or
skills.
Accounting
Job
Collections of tasks, duties, and
responsibilities as defined in the job
description.
Jr. accountant
Sr. accountant
Accounting manager
Accounting director
Role
A role describes the part played by an
individual employee carrying out their work.
One job can have multiple roles.
Bill, Jr. accountant Jane,
Jr. accountant

Evaluation
Job steps Hierarchy Example job title
1 CEO, Managing director Chief Executive Officer
2 Other C-level executives Chief Operating Officer
3 President President manufacturing
4 Vice President (VP) Vice President HR
5 Director Director Consulting Services
6 Manager Sales manager
7 Team leader
Technical Support Team
Leader
8
Operator, associate,
representative
Customer success specialist
Job Classification on the basis of Hierarchy

Korn Ferry (Hay) Classification
System
• The Hay job classification system assigns points
to evaluate job components to determine the
relative value of a particular job to other jobs.
• Measures three components in all jobs:
– the knowledge required,
– the problem solving required, and
– the level of accountability.
• The Hay method compares the relative value of
comparable jobs to maintain parity across an
organization.

System
• For the purposes of larger organizations with many
departments and locations, union-represented jobs, and
organizations with hierarchical rigid pay or salary
grades and needed internal equity, a system such as Hay
is appropriate.
• An evaluator uses a job evaluation instrument or
questionnaire that is filled out by the department
requesting the job or evaluation. Trained to assign points
appropriately, the evaluator assigns points to determine
where to place a job in the job classification system. The
placement of the job determines the pay or the salary
grade within the organization's compensation system.

System
Accountability
Freedom to act: The degree of organizational
empowerment to take action and the guidance
provided to focus on decision-making.
Nature of impact: The nature of the job’s impact and
influence on organizational results.
Magnitude (area of impact): The business
measure(s) the job is designed to positively impact
(measured on an annual basis, typically in financial
terms, to achieve consistency across jobs).

System
Know-how
To achieve the accountabilities of a job
requires ‘know-how’ (or inputs), which is
the sum total of every capability or skill,
however acquired, needed for fully
competent job performance.

System
Know-how Dimensions
Practical/technical knowledge: Depth and breadth of technical
or specialized knowledge and skills needed to achieve desired
results.
Planning, organizing, and integrating (managerial)
knowledge: The requirement to undertake managerial functions,
such as planning, organizing, staffing, directing, and controlling
resources. This knowledge is applied in an integrated way to
ensure organizational results are achieved.
Communicating and influencing skills: The active requirement
for interpersonal skills that are needed for successful interaction
with individuals and groups, inside and outside the
organization.

System
Problem Solving
Problem solving measures the requirement
to use know-how conceptually, analytically,
and productively.

System
Problem Solving Dimensions
Thinking environment (freedom to think):
The job’s context and the degree to which
problems and solutions are organizationally
guided and defined through strategy, policy,
precedents, procedures, and rules.
Thinking challenge: The nature of addressable
problems and the degree to which thinking is
required to arrive at solutions that add value.

External Job Evaluation Method
Market Pricing
• Market-pricing the external value of individual jobs
enables employers to create effective competitive pay
plans and allocate compensation costs wisely.
• The most common source for such market data is third-
party compensation surveys.
• Market pricing emphasizes external competitiveness;
however, employers may have insufficient or unreliable
market data for all the organization's jobs. Additionally,
an internal job evaluation—even a simple approach,
such as ranking—is required to maintain internal equity.

Understanding Pay for Performance
(PFP)
Pay-for-performance (or performance related pay; PRP) schemes
are reward systems where some part (conceivably all) of an
employee’s remuneration depends on an assessment of
performance against predetermined criteria (Armstrong, 2002).
The basic tenant of pay-for-performance (PFP) is that higher
performance is rewarded with higher pay.
One type of PFP strategy is bonuses, which are easy to hand out
and motivate employees to accomplish short-term goals.
PFP can be used with all types of employees and at all levels of
the organization, from CEOs to managers to entry-level workers.

Pros and Cons of Pay-for-Performance for
Nonexecutives
The Good The Not-so-Good
Considered best practice in the strategic HR
literature
Applicants may be more attracted to firms with
fixed compensation practices
Can attract and retain high performers to the
organization while encouraging low
performers to voluntarily leave
The presence of PFP leads to more voluntary
and involuntary turnover
Increases productivity and motivation for
individuals
Lower paid employees may experience feelings
of inequity, relative deprivation, and injustice
Bonuses are easily administered and linked to
short term performance goals
Unequal distribution of rewards can lead to
turnover in lower level managers
Without PFP, employees may be inclined to
shirk responsibility or free ride
May weed out high performers who avoid risk
PFP in managers may reduce underperforming
employees through involuntary turnover
Employees don’t really consider short term
incentives when deciding to join or leave a
company

Piece Rate System
• Payment made on the basis of individual output
• Applicable only when output is observable and measurable and
output is directly correlated to individual output
• May encourage employees to work very fast, but may also
increase the number of errors made. Therefore, rewarding
employee performance minus errors might be more effective.

Individual Bonus
• Bonuses are one-time rewards that follow specific
accomplishments of employees.
• For example, an employee who reaches the quarterly goals set
for her may be rewarded with a lump sum bonus.
• Employee motivation resulting from a bonus is generally
related to the degree of advanced knowledge regarding bonus
specifics.

Merit Pay
• Merit pay involves giving employees a permanent pay raise based
on past performance.
• Company’s performance appraisal system is used to determine
performance levels and the employees are awarded a raise, such as
a 2% increase in pay.
• Potential Problem: In companies that give annual merit raises
without a different raise for increases in cost of living, merit pay
ends up serving as a cost-of-living adjustment and creates a sense
of entitlement on the part of employees, with even low performers
expecting them.
• Making merit pay more effective depends on making it truly
dependent on performance and designing a relatively objective
appraisal system.

Sales Commission
• At times the paycheck of sales employees is a combination of a base
salary and commissions.
• Sales commissions involve rewarding sales employees with a
percentage of sales volume or profits generated.
• Sales commissions should be designed carefully to be consistent
with company objectives.
• Example:
• Employees who are heavily rewarded with commissions may neglect
customers who have a low probability of making a quick purchase.
• If only sales volume (as opposed to profitability) is rewarded, employees may
start discounting merchandise too heavily, or start neglecting existing
customers who require a lot of attention.

Team Bonuses
• In situations in which employees should cooperate with each
other and isolating employee performance is more difficult,
companies are increasingly resorting to tying employee pay to
team performance.
• Example: In 2007, Wal-Mart gave bonuses to around 80% of
their associates based on store performance.
• If employees have a reasonable ability to influence their team’s
performance level, these programs may be effective.

Gain Sharing
• Gainsharing is a companywide program in which employees are
rewarded for performance gains compared to past performance.
• These gains may take the form of reducing labor costs compared to
estimates or reducing overall costs compared to past years’ figures.
These improvements are achieved through employee suggestions and
participation in management through employee committees.
• Example: Premium Standard Farms LLC, a meat processing plant,
instituted a gainsharing program in which employee-initiated changes
in production processes led to a savings of $300,000 a month. The
bonuses were close to $1,000 per person.
• These programs can be successful if the payout formula is generous,
employees can truly participate in the management of the company, and
if employees are able to communicate and execute their ideas.

Profit Sharing
• Involve sharing a percentage of company profits with all
employees.
• These programs are companywide incentives and are not very
effective in tying employee pay to individual effort, because
each employee will have a limited role in influencing company
profitability.
• At the same time, these programs may be more effective in
creating loyalty and commitment to the company by
recognizing all employees for their contributions throughout
the year.

Stock Options
• A stock option gives an employee the right, but not the
obligation, to purchase company stocks at a predetermined
price.
• Example: A company would commit to sell company stock to
employees or managers 2 years in the future at $30 per share. If
the company’s actual stock price in 2 years is $60, employees
would make a profit by exercising their options at $30 and then
selling them in the stock market.
• The purpose of stock options is to align company and employee
interests by making employees owners.

Designing Pay for Performance
Added to Base
Not Added to Base
(a)
Merit Plans
(c)
Small group incentives
(b)
Piece Rates
Commissions
Bonuses
(d)
Profit sharing
Gain sharing
Bonuses
CONTRIBUTION
TO BASE
SALARY
LEVEL OF PERFORMANCE
Individual Group

Creating Salary Increase Matrix for
Calculating Annual Merit Increase
Before you create your salary increase matrix, consider the following
as you determine your budget:
• What is the goal of your merit increase program?
• Does your organization pay below market, at market or above
market?
• If you are below market, do you want to make your organization’s
compensation program more competitive?
• If you are at market, do you want to continue the status quo?
• If you are above market, are you trying to hold down salary
growth?
• What is your organizational philosophy toward excellent
performers? What about your substandard performers?

Once your merit increase budge is aligned with your compensation
philosophy and strategy, consider using one of the two approaches
outlined below in determining salary increases:
1. Broadband approach
2. Compa-ratio approach

Broadbanding
• is the combination of a number of related job classifications into
a single pay band, for which a broad range of compensation
levels is allowed.
• gives management a wider pay range within which to pay
employees.
• This approach tends to reduce the pressure for someone to be
promoted, since broadbanding allows a person to be paid more
without a promotion.

Broadbanding (Example)
SN Designation Payband Academic Grade pay
(AGP)
1 Assistant Prof 15600- 39100
6000
7000
8000
2 Associate Prof 37400-67000 9000
3 Professor 37400-67000 10000

Calculating Salary of Assistant Prof. with Rs. 6000 AGP
1 Basic 15600
2 AGP 6000
3 Total (A) 21600
4 DA @ 167% of 21600 13176
5 HRA @ 30% Basic + AGP 6480
6 DA @167% on HRA 10821.60
7 Conveyance 3200
8 DA @ 167% on Conveyance 5344
9 Total (B) 60621.60

Compa-Ratio Approach
• A compa-ratio divides an individual’s pay rate by the midpoint of a
predetermined salary range.
• A compa-ratio of 1.0 means that the employee is paid at the exact
midpoint of the range, whereas values higher or lower than 1.0
indicate how they are paid relative to the midpoint.
Example:
If the midpoint of a salary range is $27,000, and an individual within
that range is paid $25,000, that individual is compensated at 94
percent of the midpoint (($25,000)/($27,000) = .94, or 94 percent). But
what does a .94 compa-ratio really tell us about how well this
employee is being compensated? Is this ratio appropriate for this
particular individual?

Salary Assessment through Compa-ratio
1. Assessing Individual Progression Through a Pay Range
One common use for a compa-ratio is determining where an employee
should fall on a standard pay range.
In many cases, institutions assign positions to a pay grade that has a
pre-defined minimum, maximum and midpoint.
A typical range of 80 percent to 120 percent is set around a midpoint
target for a given pay grade.
New or inexperienced employees are typically paid closer to 80
percent of the midpoint, whereas the most outstanding or longest-
tenured employees are paid more, up to the 120 percent end of the pay
range.

Benchmarking Your Institution’s Salaries Against Market Salaries
You don’t need a pay range as a basis for comparison to benefit from compa-
ratios — you could also compare your employees’ salaries to appropriate
benchmarks from market data.
Comparing the salary of your chief compliance officer, for example, to the
median salary for institutions with the same classification or affiliation can
help you determine how your institution’s pay compares to your peers. Is
your salary range competitive, or is it time to review your compensation
plan?
Low compa-ratios compared to the market might help you identify
inadequate pay as a contributing factor to high turnover, or to pinpoint
positions in which your institution is paying much higher salaries than are
necessary.

Identifying Areas of Inequity
Compa-ratios can compare salaries by any characteristic you choose,
including for a group of positions.
The average pay of one sub-group of employees can be divided by the
average pay of the larger category of employees to create a compa-
ratio that works the same as for individuals.
The possibilities are limited only by your goals.
Do administrative personnel in one unit get compensated less than
those in another unit on your campus for similar work? Are salaries
commensurate across gender or racial/ethnic groups within a position
or set of positions?

Person Based and Job Based Internal
Structures
A job-based structure relies on the work content—tasks, behaviors,
responsibilities.
A person-based structure shifts the focus to the employee: the skills,
knowledge, or competencies the employee possesses, whether or not
they are used in the employee’s particular job.

Engineering Structure at
Lockheed Martin
uses the
work performed as the
criterion
Career Bands at GE
Healthcare
uses the individual
employees’
competencies/knowledge
required at each level of
work.

Person Based Structures- Skills Plan
• The majority of applications of skill-based pay have been in
manufacturing, where the work often involves teams, multiskills, and
flexibility.
• Advantage: People can be deployed in a way that better matches the
flow of work, thus avoiding bottlenecks as well as idle hands
• Types of Skill Plans
• Depth (specialists in corporate law, finance, or welding and hydraulic
maintenance) e.g.: pay structures for your elementary or high school teachers
and/or
• Breadth (generalists with knowledge in all phases of operations including
marketing, manufacturing, finance, and human resources).

Person Based Structures- Skills Plan
Specialist: Depth
A typical teacher’s contract specifies a series of steps, with each step corresponding to a level
of education. A bachelor’s degree in education is step 1 and is the minimum required for hiring.
To advance a step to higher pay requires additional education. Each year of seniority also is
associated with a pay increase. The result can be that two teachers may receive different pay
rates for doing essentially the same job—teaching English to high school juniors. The pay is
based on the knowledge of the individual doing the job (measured by number of college
credits and years of teaching experience) rather than on job content or output
(performance of students). The presumption is that teachers with more knowledge are more
effective and more flexible (able to teach seniors, too).
Generalist/Multiskill Based: Breadth
Employees in a multiskill system earn pay increases by acquiring new knowledge, but the
knowledge is specific to a range of related jobs. Pay increases come with certification of new
skills, rather than with job assignments. Employees can then be assigned to any of the jobs
for which they are certified, based on the flow of work.

Purpose of Skill Based Plans
Supports the Strategy and Objectives
The skills on which to base a structure need to be directly related to the organization’s objectives and
strategy
Supports Work Flow
facilitates matching people to a changing work flow.
E.g.: One national hotel chain moves many of its people to the hotel’s front desk between 4 p.m . and 7 p.m
., when the majority of guests check in. After 7 p.m ., these same employees move to the food and beverage
service area to match the demand for room service and dining room service. By ensuring that guests will not
have to wait long to check in or to eat, the hotel believes it can provide a high level of service with fewer
staff.
Is Fair to Employees
Employees like the potential of higher pay that comes with learning. And by encouraging employees to take
charge of their own development, skill-based plans may give them more control over their work lives.
Motivates Behavior Toward Organization Objectives
Person-based plans have the potential to clarify new standards and behavioral expectations. The fluid work
assignments that skill-based plans permit encourage employees to take responsibility for the complete work
process and its results, with less direction from supervisors. If less direction from supervisors is needed, then
fewer supervisors may likewise be needed.

Process of Analysing Skills
Skill analysis is a systematic process of identifying and collecting information about skills
required to perform work in an organization.
Analysis of skills: similar to the task statements in a job analysis.
Skill Blocks: Grouping of related skills into skills blocks
Skill Structure: Arranging Skills blocks into levels. To build the structure, a process is needed to
describe, certify, and value the skills.
Major skill analysis decisions:
What is the objective of the plan?
What information should be collected?
What methods should be used?
Who should be involved?
How useful are the results for pay purposes?

Process of Analysing Skills (E.g.)
Equipment manufacturer FMC assigns points and groups skills as foundation, core electives, and
optional electives. Its plan for technicians is more fully developed
• Foundation skills include a quality seminar, videos on materials handling and hazardous materials,
a three-day safety workshop, and a half-day orientation. All foundation skills are mandatory and
must be certified to reach the Technician I rate ($11).
• Core electives are necessary to the facility’s operations (e.g., fabrication, welding, painting,
finishing, assembly, inspection). Each skill is assigned a point value.
• Optional electives are additional specialized competencies ranging from computer applications to
team leadership and consensus building.
To reach Technician I ($12 per hour), 40 core elective points (of 370) must be certified, in addition to
the foundation competencies. To reach Technician II, an additional 100 points of core electives must
be certified, plus one optional elective.
A fully qualified Technician IV (certified in the foundations, 365 points of core electives, and 5
optional electives) is able to perform all work in any cell at the facility. Technician IVs earn $17.00
per hour no matter what task they are doing. FMC’s approach should look familiar to any college
student: required courses, required credits chosen among specific categories, and optional electives.
There is a minor difference, of course—FMC employees get paid for passing these courses, whereas
college students pay to take courses

Person Based Structures: Competencies
Early Definitions of Competencies
• Skills (demonstration of expertise)
• Knowledge (accumulated information)
• Self-concepts (attitudes, values, self-image)
• Traits (general disposition to behave in a certain way)
• Motives (recurrent thoughts that drive behaviors)
Current Definitions
Organizations are placing greater emphasis on business-related descriptions of behaviors “that excellent
performers exhibit much more consistently than average performers.”
Competencies are becoming “a collection of observable behaviors (not a single behavior) that require no
inference, assumption or interpretation.”

Behavioral anchors for
the competency: Impact and
Influence

• While skill- and job-based systems hone in on information about
specific tasks, competencies take the opposite approach.
• They try to abstract the underlying, broadly applicable knowledge,
skills, and behaviors that form the foundation for success at any level
or job in the organization. These are the core competencies.
• Core competencies are often linked to mission statements that express
an organization’s philosophy, values, business strategies, and plans.

• Core Competencies: are underlying, broadly applicable knowledge, skills, and
behaviors that form the foundation for success at any level or job in the
organization. These are the core competencies. Core competencies are often linked
to mission statements that express an organization’s philosophy, values, business
strategies, and plans
• Competency sets: translate each core competency into action. E.g.: The core
competency of business awareness, for example, competency sets might be related
to organizational understanding, cost management, third-party relationships, and
ability to identify business opportunities.
• Competency indicators: are the observable behaviors that indicate the level of
competency within each set. These indicators may be used for staffing and
evaluation as well as for pay purposes. These anchor the degree of a competency
required at each level of complexity of the work.

What Information to Collect
1. Personal characteristics: trustworthy, loyal, courteous. In business settings: personal
integrity, maturity of judgment, flexibility, and respect for others. Employees are
expected to come in the door with these characteristics and then develop and
demonstrate them in increasingly complex and ambiguous job situations.
2. Visionary: These are the highest-level competencies. They might be expressed as
possessing a global perspective, taking the initiative in moving the organization in
new directions, and able to articulate the implications for the organization of trends in
the marketplace, in world events, in the local community.
3. Organization specific: Between the above two groups are the competencies that are
tied specifically to the particular organization and to the particular function where
they are being applied. They generally include leadership, customer orientation,
functional expertise (e.g., able to leap tall buildings and explain the difference
between competencies and compensable factors), and developing others—whatever
reflects the company values, culture, and strategic intent.

Who are Executives
Senior Level of Functionaries
• Members of Board of Directors
• Full-time Directors
• CEOs etc.
Executive compensation, also known as executive pay, refers to remuneration
packages specifically designed for business leaders, senior management and
executive-level employees of a company.
Executive pay is heavily biased toward rewards for actual results. Hence if a
company underperforms, the executives typically receive a smaller fraction of
their potential pay. Conversely, if a company meets its annual objectives and
the stock price responds long term, the executives stand to receive a much
larger payout.

Components of Executive Compensation
• Base salary
• Performance based annual incentive (bonus)
• Performance based long term incentive
• Benefits
• Executive perquisites
• Contingent Payments

Base Salary
The base salary for executive pay is normally stated as an
annual salary, although it is typically paid monthly or bi-weekly,
similar to other salaried staff.

Short Term Incentives
The purpose of the annual incentive is to compensate executives for achieving the company’s short-term
business strategy.
It is based on achieving a number of goals specified for the company by the company's Board of Directors.
The nature of these goals varies depending on the business, company strategy and other conditions.
Annual objectives can include such items as:
• increasing revenue or market share
• improving profit margins
• implementing a new corporate strategy
• development of new products
• expanding to a new market, and completion of a critical project
Typically, the annual incentive is paid in cash and is expressed as a percentage of the CEOs annual
salary.
Annual incentives include a two-tier structure:
• "target" level, which is the executive’s normal expected performance, and
• "stretch" component, meaning that the company would have to obtain extraordinary results for the
maximum incentive to be paid.
This is done to encourage executives to achieve superior results.

Long Term Incentives
• This is the largest component of executive pay.
• Purpose: to reward executives for achievement of the company’s strategic
objectives that will maximize shareholder value.
• Typically these have been provided in the form of stock-based compensation,
such as:
• stock
• stock options
• restricted stock
• performance-vested stock, options, or similar devices
Performance period for a long-term incentive: between three and five years, with
the executive not receiving any pay from the incentive until the end of the
performance period.
Goals of Long-term incentive: focused on total return to shareholders, earnings per
share and other return measures, such as return on assets. Like annual incentives,
long-term incentives typically have a target and a stretch component to encourage
executives to achieve superior performance.

• Stock: Actual Ownership in company
• Stock Option: ESOP (Employee stock option plan) is an employee benefit plan
offering employees the ownership interest in the organization. It is similar to a
profit sharing plan. Under these plans the company, who is an employer , offers
its stocks at negligible or low prices. These stocks remain in an ESOP trust fund
till the vesting period and exercise these options or retire/ leaves the company.
• Restricted Stock: Restricted shares represent actual ownership of stock but come
with conditions on the timing of their sale.
• Performance- vested stocks: Vesting is a time bound stock ownership plan that
allows employees, directors, owners, and entrepreneurs to acquire equity in the
firm they are working for. The Vesting Plan decides how and when the owners
and employees gain access to or keep their shares. Introduction of a
performance based criterion to this Vesting Plan will make this a Performance
Based Vesting structure. Instead of time duration, the stocks would only be
vested if they hit certain targets within a specified period like a quarter.

Example of Performance-Vested Stocks
Suppose an employee gets offered 1000 stocks of a company that are
publicly trading at $80/share. The vesting is conditional on the stocks
hitting the $90 mark for the current quarter. 10% of the 1000 shares
get vested every quarter only if the stock price hits a predetermined
goal for that quarter. This is Performance Based Vesting of stock units.
The employee can only gain ownership when the quarterly
performance goals of the stocks are met. Vesting plans are vastly
different for owners and employees and operate on different
conditional criteria and time bound scales

Employee Benefits
Include statutory benefits such as Social Security, Medicare, Workers
Compensation, and Unemployment Insurance. Executives also participate in
other company benefits such as vacation, holidays, sick days, severance
pay, life insurance, and medical insurance.
In addition to the benefits provided salaried employees, executives are often
eligible to participate in special retirement plans.
These special plans include the following:
• nonqualified deferred compensation plans which allow executives to
voluntarily defer salary and bonus amounts until a date certain, death or
retirement (much like a non-tax-favored 401(k) plan).
• Supplemental Employee Retirement Plans (SERPs) which are meant to
supplement traditional pension plans, but are at risk
Many nonqualified deferred compensation plans and SERPs are "restoration
plans" designed to allow executives to save the same percentage of income
as other employees may save in tax-favored plans.

Executive Perquisites (Perks)
• constitute additional compensation for senior executives which are
not available to other salaried employees. These extra benefits are
normally structured to recognize the value of the executive to the
company, extraordinary demands on his or her time and other
unique conditions.
• Some perks are structured to maximize executive work time
including drivers to and from work, convenient parking, installation of
home communications systems, financial planning, and even the use
of company airplanes for personal travel. Others recognize the
unique positions of executives, especially CEOs, by providing
security both at home and when traveling. Typically, executive perks
constitute a modest component of executive.

Performance-Contingent Pay
• These are severance pay which provide for payments to executives
in the case of involuntary termination except in the event of
termination for cause. They are often included in agreements for
executives hired from outside the company to encourage him or her
to leave a prior employer in case the new arrangement sours.
• Change-in-Control agreements, also known as "golden parachutes,"
compensate executives for loss of job due to mergers or sale. They
are structured to provide additional protection to executives in the
event of a change-in-control thereby allowing executives to focus on
sale or merger opportunities that are in the best interests of
shareholders without being overly concerned as to the potential
impact on their career.

What Are Employee Benefits
• Employee benefits refer to all forms of compensation (cash/non-cash)
paid by an employer to employee apart from salary/wages for the
service provided to the employer.
• Offering employee benefits are essential to attract and retain the talent
for the company.
• Employees consistently rate benefits a key factor in job satisfaction.

Example of Employee Benefits
• education reimbursement and employee training
• on-site child care services
• financial counseling
• retirement benefits
• gym membership
• Bonuses
• pension and retirement benefits schemes
• company cars and fuel
• medical insurance
• travel expenses
• food and entertainment expenses
• childcare costs

The amount of tax which must be paid depends on the expense or
benefit; some are tax-free (e.g. mobile phones and meals in a staff
canteen).
In general, employers are responsible for reporting and paying taxes on
employee benefits

Benefits Administration Rules
Four major administration issues arise in setting up a benefit
package:
1. Who should be protected or benefited?
2. How much choice should employees have among an array
of benefits?
3. How should benefits be financed?
4. Are your benefits legally defensible?

Who should be protected or benefited?
Should all employees be treated equally with respect to benefits coverage
• What probationary periods (for eligibility of benefits) should be used for various types of
benefits? Does the employer want to cover employees and their dependents immediately upon
employment or provide such coverage only for employees who have established more or less
permanent employment with the employer? Is there a rationale for different probationary
periods with different benefits?
• Which dependents of active employees should be covered?
• Should retirees (as well as their spouses and perhaps other dependents) be covered, and for
which benefits?
• Should survivors of deceased employees (and/or retirees) be covered? If so, for which
benefits? Are benefits for surviving spouses appropriate?
• What coverage, if any, should be extended to employees who are suffering from disabilities?
• What coverage, if any, should be extended to employees during layoffs, leaves of absence,
strikes, and so forth?
• Should coverage be limited to full-time employees?
The answers to these questions depend on the policy decisions regarding adequacy, competition,
and cost effectiveness

How much choice should employees have among an array of benefits?
• Standard benefit package: employees typically have not been offered a choice
among employee benefits. Rather, a package is designed with the average
employee in mind, and any deviations in needs simply go unsatisfied.
• “Cafeteria-style,” or flexible benefit plans: employees are permitted great
flexibility in choosing the benefit options of greatest value to them.
Even companies that are not considering a flexible benefit program are offering
greater flexibility and choice. Such plans might provide, for example, (1) optional
levels of group term life insurance; (2) the availability of death or disability benefits
under pension or profit-sharing plans; (3) choices of covering dependents under
group medical expense coverage; and (4) a variety of participation, cash distribution,
and investment options under profit-sharing, thrift, and capital accumulation plans

Advantages and Disadvantages of Flexible Benefit Program
Advantages
1. Employees choose packages that best satisfy their unique needs.
2. Flexible benefits help firms meet the changing needs of a changing workforce.
3. Increased involvement of employees and families improves understanding of benefits.
4. Flexible plans make introduction of new benefits less costly. Any new option is added merely as one among a
wide variety of elements from which to choose.
5. Cost containment: Organization sets dollar maximum; employee chooses within that constraint.
Disadvantages
1. Employees make bad choices and find themselves not covered for predictable emergencies.
2. Administrative burdens and expenses increase.
3. Adverse selection: Employees pick only benefits they will use; the subsequent high benefit utilization
increases its cost.

How should benefits be financed?
• Non-contributory ( Employer pays total costs.)
• Contributory (Costs are shared between employer and
employee.)
• Employee financed (Employee pays total costs for some
benefits—by law the organization must bear the cost for
certain benefits.)

Compensation benifits.pdf

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