Compensation management - Module 3 – MG university - Manu Melwin Joy

Compensation ManagementModule 3 – MG University

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Grade and Pay structure

• 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 structureCompensation Management

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)

Types of Grade structure• 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.

Types of Grade structure• 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

Types of Grade structure• 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 structureCompensation Management

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 structureCompensation Management

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

Narrow Graded structure• 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 BandingCompensation Management

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.

Zones in Broad band 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.

the right cultural setting, broadbanding can do the 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.

the right cultural setting, broadbanding can do the 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 FamiliesCompensation Management

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.

A career family Structure

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

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 StructuresCompensation Management

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 spineCompensation Management

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

Performance Linked CompensationCompensation Management

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.

Performance Linked Compensation• 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.

Performance Linked Compensation• 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.

IncentivesCompensation Management

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 IncentivesCompensation Management

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

• 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 IncentivesCompensation Management

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.

• The incentives which

cannot be calculated in

terms of money are

known as non-monetary

incentives.

• Generally people

working at high job

position or at high rank

get satisfied with non-

monetary 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

• 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.

BonusCompensation Management

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.

• 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 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.

• 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 BonusCompensation Management

Current Profit SharingCompensation Management

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.

Current Profit Sharing• 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.

Current Profit Sharing• 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.

Current Profit Sharing

• 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

Current Profit Sharing• 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 SharingCompensation Management

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 OptionCompensation Management

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

Employee Stock Option

• 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 Option• 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 Stock Option• 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 AllowancesCompensation Management

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 AllowancesCompensation Management

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

Commission recommended 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

Commission recommended

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 AllowanceCompensation Management

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.

House Rent Allowance

• HRA is exempt from tax

under Section 10(13A) of

the Income Tax Act,

subject to certain

conditions.

House Rent Allowance• 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.

House Rent 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.

House Rent Allowance• 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– 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.

House Rent Allowance• 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.

House Rent Allowance• 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.

House Rent Allowance

• You must have valid

rental receipts, for

having paid the rent, in

order to claim tax

exemption on House

Rent Allowance (HRA).

Conveyance Allowance Compensation Management

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.

Conveyance Allowance

• The allowance is typically

a designated amount or

percentage of total

transportation expenses

that is referenced in a

country's tax laws or

Conveyance Allowance• 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 Compensation Management

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 Compensation Management

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 Compensation Management

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.

Child Education Allowance

• 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.

Child Education Allowance• As a result, Central

Government employees 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 Government employees living in small and medium-sized towns and cities.

Overtime Allowance Compensation Management

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.

• 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.

• 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 Compensation Management

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 Compensation Management

Academic Allowance

name called, granted for

encouraging academic

research and training

pursuits in educational and

research institutions.

Academic Allowance

name called, granted for

encouraging academic

research and training

pursuits in educational and

research institutions.

Uniform Allowance Compensation Management

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 Compensation Management

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.

Travelling Allowance

• 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.

Travelling 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 Compensation Management

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 BenefitsCompensation Management

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.

Benefits of Employee Benefits• 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.

Benefits of Employee Benefits• 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

GratuityCompensation Management

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

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

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’.

Tax treatment of gratuity• 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

Tax treatment of gratuity• 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

Tax treatment of gratuity• 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

Tax treatment of gratuity• 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)

Tax treatment of gratuity• 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

Tax treatment of gratuity

• 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.

Tax treatment of gratuity• 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.

Tax treatment of gratuity

Medical CareCompensation Management

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.

Advantages of Medical Care• 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.

Advantages of Medical Care• 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.

Advantages of Medical Care• 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.

Disadvantages of Medical Care• 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.

Disadvantages of Medical Care• 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.

Disadvantages of Medical Care• 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 InsuranceCompensation Management

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 FundCompensation Management

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 RewardsCompensation Management

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.

Executive Level Rewards• 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 Level Rewards• 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.

Executive Level Rewards• 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.

Executive Compensation has four distinct characteristics:

– Equity Compensation: The

majority of compensation of

most executive pay packages

comes in the form of

company stock.

Executive Compensation has four distinct characteristics:– 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.

Executive Compensation has four distinct characteristics:– 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 RewardsCompensation Management

Shop floor Level Rewards

• Shop-floor incentive

schemes are based on

the principle of payment

- by-performance.

Shop floor Level Rewards• 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.

Shop floor Level Rewards• 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 Compensation Management

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.

Expatriates compensation• 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.

Expatriates compensation• 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.

Expatriates compensation• 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.

Expatriates compensation• 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.

Expatriates compensation• 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.

Expatriates compensation• 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.

• 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 Compensation Management

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.

Compensation management - Module 3 – MG university - Manu Melwin Joy

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