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Compensation practices
The document outlines various aspects of compensation practices, including definitions, purposes, and strategies for employee remuneration. It discusses the significance of equitable and effective compensation in achieving organizational objectives, along with the different types of financial and non-financial rewards. It also highlights the importance of aligning compensation strategies with business goals and the evolving trends in compensation management.
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Compensation practices
- 1.
- 2. VARIOUS DEFINATIONS OFCOMPENSATIONThe sum total of all forms of payments or rewards provided to employees for performing tasks to achieve organizational objectivesCompensation is the process of providing adequate, equitable and fair remuneration to the employees. It is what employees receive in exchange for their contribution to the organization. It is a comprehensive term which includes pay, incentives and benefits offered to the employees.
- 3. Compensation is asystematic approach to providing monetary value to employees in exchange for work performed. compensation may achieve several purposes assisting in recruitment, job performed and job satisfaction.PURPOSEOF COMPENSATIONEffective CompensationContribution based RemunerationEnsure EquityLegal Compliance Reward Valued BehaviorAttract talentAdministratively EfficientMotivate & Retain Staff
- 4. THE PAY MODELBusinessGoalsCompensation Philosophy/ activities serve Business ObjectivesCEOBusiness StrategyBusiness Strategy :This defines the direction in which organization is going in relation to its environment in order to achieve its objectives.Compensation Philosophy :Consists of a set of beliefs which underpin the reward/compensation strategy of the organization and govern the reward policies that determine how reward processes operate4
- 5. THE PAY MODELBusinessGoalsCompensation activities serve Business ObjectivesCEOBusiness StrategyCompensation strategy is periodically reevaluated and the Compensation plan periodically developedCompensationStrategyHR HeadOrg.StructureNon-FinancialRewardsCompensation PlanCompensation Strategy defines the intentions of the organization on reward policies, processes and practices required to ensure that it has the skilled, competent and well-motivated workforce it needs to achieve its business goals
- 6. THE PAY MODELBusinessGoalsCompensation activities serve Business ObjectivesCEOBusiness StrategyCompensation strategy is periodically reevaluated and the Compensation plan periodically developedCompensationStrategyHR HeadOrg.StructureNon-FinancialRewardsCompensation Planstrategic perspective
- 7. Compensation takes theposition that how employees are compensated can be a source of sustainable competitive advantageTHE PAY MODELBusiness GoalsCompensation activities serve Business ObjectivesCEOBusiness StrategyCompensation strategy is periodically reevaluated and the Compensation plan periodically developedCompensationStrategyHR HeadOrg.StructureNon-FinancialRewardsCompensation PlanMarket SurveysJob EvaluationPerformance ManagementC & B/S MUnit InputsCompensation Manager, along with team is responsible for carrying out compensation related activitiesPay levels /structuresContribution/outputsTotal remunerationEmployeePerformance linked PayIndividual PayInternal EquityExternal Equity7
- 8. STRATEGIC COMPENSATION PLANNINGStrategicCompensation Planning
- 9. Links thecompensation of employees to the mission, objectives, philosophies, and culture of the organization.
- 10. Serves toidentify the net monetary payments made to employees with specific functions of the HR program in establishing a pay-for performance standard.
- 11. Seeks tomotivate employees through compensation.COMPENSATION POLICY ISSUES• Pay for performance• Pay for seniority• Salary increases and promotions• Overtime and shift pay• Probationary pay• Paid and unpaid leaves• Paid holidays• Salary compression (A salary inequity problem, generally caused byinflation, resulting in longer-term employees in a position earning less thanworkers entering the firm today)• Geographic costs of living differences
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- 13.
- 14. COMPONETS OF FINANCIALCOMPENSATION
- 15. BASE PAY Thedirect financial compensation an individual receives based on the timeWorked.Two bases of calculation
- 16. Hourly/wage: payment forthe number of hours worked.
- 17. Salaried : receiveconsistent payments at the end of specific period regardless of number of hours worked Nature.
- 18. generally marketdriven ( D>S=increase in pay)
- 19.
- 20. The formalsystematic means used to identify the relative worth of jobs within anorganization.
- 21. VARIABLE PAY/PAY FORPERFORMANCE : INCENTIVES Variable Pay
- 22. Any planthat ties pay to productivity or profitability. (i.e)The standard by which managers tie compensation to employee effort and performance.
- 23. It islinked to individual, group, or organizational performance and not to time worked
- 24. Incentive PayPrograms
- 25. Establish aperformance “threshold” to qualify for incentive payments.
- 26. Emphasize ashared focus on organizational objectives.
- 27. Create sharedcommitment in that every individual contributes to organizational performance and success.TYPES OF INCENTIVES
- 28.
- 29. The worker ispaid a sum (called a piece rate) for each unit he orshe produces.Straight piecework:
- 30. A fixed sumis paid for each unit the worker produces under an established piecerate standard. An incentive may be paid for exceeding the piece rate standard.Standard hour plan:
- 31. An incentive planthat sets pay rates based on the completion of a job in a predetermined “standard time.”
- 32. If employeesfinish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.INDIVIDUAL INCENTIVE PLAN(CONT’D)Pro and cons of piecework
- 33. Easily understandable,equitable, and powerful incentives
- 34. Employee resistanceto changes in standards or work processes affecting output
- 35. Quality problemscaused by an overriding output focus
- 36. Possibility ofviolating minimum wage standards
- 37. Employee dissatisfactionwhen incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output Merit pay
- 38. A permanentcumulative salary increase the firm awards to an individual employee based on his or her individual performance.BONUS Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.Spot bonus Unplanned bonus given for employee effort unrelated to an establishedperformance measure.
- 39. GROUP INCENTIVE PLANTeamIncentive Plans
- 40. Compensation planswhere all team members receive an incentive bonus payment when production or service standards are met or exceeded.
- 41. Establishing Team IncentivePayments
- 42. Set performancemeasures upon which incentive payments are based
- 43. Determine thesize of the incentive bonus.
- 44. Create apayout formula and fully explain to employees how payouts will be distributed.
- 45.
- 46. Programs underwhich both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.EMPLOYEE BONUS AND GAINSHARING PLAN
- 47. PROS CONS OFTEAM INITIATIVEPLANPROS• Team incentives support group planning and problem solving, thereby building a team culture.• The contributions of individual employees depend on group cooperation.• Unlike incentive plans based solely on output, team incentives can broaden the scope of the contribution that employees are motivated to make.• Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards.CONS• Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.• Intergroup social problems—pressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the “free-ride” effect (one
- 48. ORGANIZATIONAL INCENTIVE PLANProfit Sharing
- 49. Any procedureby which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.
- 50. Paid oncein a year or deferred sums until retirementChallenges:• Agreement over division of profits between company and employees.• Possibility of no payout due to financial condition of company.
- 51.
- 52. Granting employeesthe right to purchase as pecific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.
- 53. The value ofan option is subject to stock market conditions at the time that option is exercised.
- 54. Apple ,yahoo, coca cola, nike
- 55. Employee Stock OwnershipPlans (ESOPs)
- 56. Stock plansin which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.( UK,USA and several other industrialized countries). This provide tax concessions to corporate orgns. And to trusts established for employee stock options. (i.e (difference between acceptance price and market value)
- 57. The employerestablishes an ESOP trust that qualifies as a tax exemptemployee trust under Section 401(a) of the Internal Revenue Code
- 58. WHY INCENTIVE PLANFAIL• Performance pay can’t replace good management.• You get what you pay for.• “Pay is not a motivator.”• Rewards punish.• Rewards rupture relationships.• Rewards can have unintended consequences.• Rewards may undermine responsiveness.• Rewards undermine intrinsic motivation.
- 59. IMPLEMENTING EFFECTIVE INCENTIVEPLAN• Ask: Is effort clearly instrumental in obtaining the reward?• Link the incentive with your strategy.• Make sure effort and rewards are directly related.• Make the plan easy for employees to understand.• Set effective standards.• View the standard as a contract with your employees.• Get employees’ support for the plan.• Use good measurement systems.• Emphasize long-term as well as short-term success.• Adopt a comprehensive, commitment-oriented approach.
- 60. INDIRECT FINANACIAL COMPENSATION- BENEFITSMandatory Benefits
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- 62.
- 63. provided atthe discretion of the employerVOLUNTARY BENEFITS EXAMPLESEducational benefits
- 64. Employee’s spouseeducation assistance( Motorola on international assignments ).
- 65. ONGC,NIIT ,ADITYABIRLA GROUP, HLL sabbaticals (paid/ non-paid) are provided to employees who wish to study.
- 66. Meritorious Childrenof employees are provided opportunity of highereducation with loan benefits in BPCL, CPCL etc Family
- 67. Paternity leavein HLL, HCL Tech, Yes Bank, Genpact etc.,
- 68. Wedding anniversaryallowance in NIIT, SPIC etc.,
- 69. “Joyful WorkingTeam” and “ Happy Moments Board”- LG Electronics
- 70. Family dayat office- Bharti telecom.NON FINANACIAL COMPENSATION : COMPONENTS Are most effective as motivators when the award is combined with a meaningful employee recognition program.• Intrinsic motivators are worthwhile as financial package• Organization reward high performing employees• Psychological rewards that employees receive in recognition of their skills and contributions
- 71.
- 72. Often usedto recognize productivity gains, special contributions or achievements, and service to the organization.
- 73. Employees feelappreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way.
- 74.
- 75. Recognition hasa positive impact on performance, either alone or in conjunctionwith financial rewards. Combining financial rewards with nonfinancial ones produced performanceimprovement in service firms almost twice the effect of using each reward alone. Day-to-day recognition from supervisors, peers, and team members is important.
- 76. Best performer ofthe month awards in Blue Dart, ALACTEL,XANSA etc.,
- 77.
- 78. Award forthe length of service and exactly not on performance
- 79. IBM: thanksaward
- 80. IDEA: appreciationcardEQUITY AND MOTIVATION OF EMPLOYEESPay Equity (also Distributive Fairness)
- 81. An employee’sperception that compensation received is equal to the value of the work performed.
- 82. A motivationtheory that explains how people respond to situations in which they feel they have received less (or more) than they deserve.
- 83. Individuals forma ratio of their inputs to outcomes in their job and then compare the value of that ratio with the value of the ratio for other individuals in similar jobs.RELATIONSHIP BETWEEN PAY EQUITY AND MOTIVATION
- 84. INSTRUMENTALITY AND REWARDSVroom’sExpectancy Theory
- 85. A person’smotivation to exert some level of effort is a function ofthree things:• Expectancy: that effort will lead to performance.• Instrumentality: the connection between performance and the appropriate reward.• Valence: the value the person places on the reward.Motivation = E x I x V• If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.• Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.
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- 87.
- 88. Setting organizationcompensation policy to lead, lag, or match competitors’ pay.• Worth of a JobEstablishing the internal wage relationship among jobs and skill levels.• Employee’s Relative WorthRewarding individual employee performance• Employer’s Ability-to-PayHaving the resources and profits to pay employees.EXTERNAL DETERMINANTSLabor Market Conditions
- 89. Availability andquality of potential employees is affected by economic conditions, government regulations and policies, and the presence of unions.
- 90.
- 91. A firm’sformal wage structure of rates is influenced by those being paid by other area employers for comparable jobs.
- 92.
- 93. Local housingand environmental conditions can cause wide variations in the cost of living for employees.
- 94. Inflation canrequire that compensation rates be adjusted upward periodically to help employees maintain their purchasing power.
- 95. Collective BargainingThe termextends to all negotiations that take place between an employer, group of employers or one or more employers’ organizations on the one hand, andone or more workers’ organizations on the other to(a) Determine the working conditions and terms of employment and / or(b) Regulate relations between employer and employee/workers and / or(c) regulate relations between employer organization or employee/workers organization
- 96. NEW DEVELOPMENTS Competencybased pay and reward programmes (also skill-based pay orknowledge-based pay) Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.
- 97.
- 98. Demonstrable characteristicsof a person, including knowledge, skills, and behaviors, that enable performance.WHY COMPETENCY BASED PAY ?• Pay plans that aim for high-performance work system.• Paying for skills, knowledge, and competencies is more strategic.• Measurable skills, knowledge, and competencies are the heart of anycompany’s performance management process.
- 99. COMPETENCY BASED PAY– PROS & CONSPros
- 100.
- 101. Lower absenteeismand fewer accidents
- 102.
- 103.
- 104. Cost implicationsof paying for unused knowledge, skills and behaviors
- 105. Complexity ofprogram
- 106. Uncertainty thatthe program improves productivity Broadbanding
- 107. Consolidating salarygrades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels.TRENDS OF EXECUTIVE COMPENSATIONThe Executive Pay Package
- 108.
- 109. Short-term incentivesor bonuses
- 110. Long-term incentivesor stock plans
- 111. Perquisites (perks)EXECUTIVECOMPENSATION-EHICS & ACCOUNTABILITY• Incentive payments are excessive compared with return to stockholders.• Time periods for judging and rewarding performance are too short.• Subjective in nature• Emphasis is placed upon equaling or exceeding executive salary survey averages.• Benefits do not relate closely to individual performance.
- 112. SWEETNESS OF EXECUTIVEPERKS• Company car• Company plane• Executive eating facilities• Financial consulting• Company-paid parking• Personal liability insurance• Estate planning• First-class air travel• Home computers• Chauffeur service• Children’s education• Spouse travel• Physical exams• Mobile phones• Large insurance policies• Income tax preparation• Country club membership• Luncheon club membership• Personal home repairs• Loans• Legal counseling• Vacation cabins
- 113. LEGAL FRAMEWORK FORPAYMENT OF SALARY- INDIA• Payment of wages Act, 1936• The minimum wages Act, 1948• The payment of Bonus Act, 1965• Equal remuneration Act, 1976
- 114. COMPENSATION PACKAGE ASHOKLEYLAND
- 115. DIRECT COMPENSATIONFixed PayVariablePay : depending on no of optional days attendedVariable Pay : depending on last year’s performanceMandatory ( Indirect )
- 116. CLASSIFICATION OF REWARDSTOTALCompensationNon - FinancialFinancialPraise / RewardsDirectIndirectJob SatisfactionProvident FundGratuityTravel allowanceMobile expenseSales Promotional ExpenseMonthly SalaryAnnual IncentivesBonus
- 117. CLASSIFICATION OF REWARDSTOTALCompensationNon - FinancialFinancialPraise / RewardsDirectIndirectJob SatisfactionFuture Leadership Program (FLP): Executives earmarked and declared future leader based on their competencyDevelopment based Career Plan (DLCP): Competent executives committing 5 years service to company in the form of bond will be given minimum 2 elevation during the bond period.Executive of the year AwardCompany Jeep at individual levelForeign Tour with family for the team achieving their yearly targetMajor medical claim for self and dependant