Main - Doc 2003

M A N E A G E R I A L C O M P E N S AT I O N Page | 1
Introduction:
Compensation refers to all forms of financial return and a tangible services and benefits
employee receives as part of employment relationship. It is an integral part of human
recourse management that helps in motivating employees and improving organizational
effectiveness by paying salary or wage. ‘Salary usually paid to managers and professional
usually fit in this category.
The process of compensation is a complex network of sub-processes directed towards

remunerating people for the services rendered and motivating them to attain a desired level of
performance.
• Compensation management is responsible for each and every decision

taken, and each and every work done by Human Resource manager.
• Compensation is what employees receive in exchange for their

contribution to the organisation.
• There is wide gap between wages/salaries paid for comparable position

in different countries due to different economic systems, development
levels, political factors, traditions and culture.
• A universally accepted and fair compensation programme requires an

in-depth knowledge about the employment and taxation laws, social
security systems, customs and cost of living indices of the host
countries (where the subsidiaries are located).
• Since it is linked to individual motivational factors as well as

organisation and country-specific legal issues which must be complied
with, so as to be on the right side of the law.
• It not only removes the tax burden and other expenses, but at the same
time, allows savings for the expatriates which would be an additional
incentive for both expatriation and repatriation.
• Thus compensation management demands special attention from

global organisation in a multinational environment.
This compensation management philosophy believed in satisfying the physical needs, rather
than psychological and social needs of employees. Because employees do not work only for
money, but there are other needs too which they want to satisfy from there job, i.e., social
needs, psychological needs, safety needs, self-actualization needs etc
A fair compensation system will help in the followings:
IFIM Business School

1. An ideal compensation system should encourage the employees to perform better and
achieve the standards fixed.
2. It should help in setting up an ideal job evaluation and the set standards would be
more realistic and achievable.
3. Compensation should be uniform and consistent.
4. The system should be flexible to provide deserving compensation to the deserving

employees.
5. Compensation system should be in line with legal provisions of the country.
Compensation can be looked from different perspective as follows:
1. Society: - Society perceives compensation as a measure of justice. For example,

comparing earnings of women with those of men highlights potential pay inequities.
The gender pay gap in the U.S., after adjusting for differences in education,
experiences, and occupations, narrowed from 36 % in 1980 to 12% 2003. Differences
in compensation may vary on several factors, such as educational choices and
geographic location.
2. Stakeholders:- Linking educative pay to performance of the company is supposed to

increase stockholders’ wealth, but this linkage doesn’t always happened.
3. Managers:- Compensation is viewed by managers in the following ways:-
Compensation consider as an expensive. Competitive pressure force managers

to consider affordability of compensation decision, since labour costs can account for
more than 50% of total costs.
This is the measure for paying people, which affects the quality of work, attitude
towards customers, and willing to be flexible, learning new skills, or suggesting
innovations.
4. Employees:- Employees view compensation in the following ways:

a. Financial security for themselves.
b. Return in an exchange between employer and themselves.
c. Entitlement for being an employee of company.
d. Reward for job well done.

Literature
Review:
COMPENSATION OBJECTIVE:
All compensation elements exist to achieve some purpose. A review of compensation

practices for New Economy organizations as compared to Old Economy organizations
includes a review of the following compensation objectives:
• Competitiveness
• Motivation

• Administrative Effectiveness
• Cost Control
• Internal Equity
• Cost Benefit Efficiency
• Tax Considerations
• Capital Accumulation
• Social Concern
• Government Compliance
• Matching Concept
Competitiveness:
Organizations often cite "paying competitively" as their primary compensation goal. New
Economy organizations do not appear to be as concerned over matching going average salary
rates as their traditional counterparts. Instead, New Economy organizations compete with
incentive and variable pay (gain sharing plans, profit sharing, stock option plans that extend
down into the lower ranks, etc.).
Motivation:
Many organizations utilize compensation as a means to shape individual and group
behaviours. While the Old Economy counterparts stress the merit of the individual's
achievement and reward for both merit and individual production, the New Economy
organization is far more likely to reward the total organization and the team responsible for
an achievement (rather than a few select key individuals).

Interestingly, New Economy organizations utilizing team sharing pay practices do not tend to
use formal performance appraisals. (Performance appraisals appear to alienate both the
bottom 20% of a work population and the top 20%, leading to a similar exodus from each
group.)
While Old Economy organizations stress the merit of individual achievement, New Economy
organizations are more likely to reward team effort.
Administrative Effectiveness:
Oftentimes, pay plans are utilized because they are administratively simple and inexpensive.
Administering base salaries is much less complicated than benefits or incentives. The pay
plans used by New Economy organizations often appear unsophisticated compared to the
complex pay schemes of Old Economy organization competitors. Simple, straightforward pay
plans are the rule.
Cost Control:
Compensation plans can also be designed to ensure cost control. For example, sales
compensation that is only paid when profit or sales are achieved.
New Economy organizations appear to pay less due to:
• lower salary levels
• higher retirement and health benefits
• much higher equity compensation
Internal Equity:
In Old Economy organizations, fairness in pay has been a traditional value. Job evaluation
plans oftentimes exist solely because of this objective. New Economy organizations are far
more heavily influenced by the competitive marketplace, and oftentimes pay little attention to
this objective.
Cost/Benefit Efficiency:
Governments can affect compensation practices with tax laws, making certain types of
compensation less expensive than others. For example, U.S. rules relating to stock options
and Employee Stock Options (ESOPs). Lower salary levels, higher benefits, and use of stock
options translate into more cost effective use of compensation dollars in New Economy
organizations. Cash conserving approaches are a reflection of many New Economy
organizations' working environments.
Tax Considerations:

Clearly, the use of stock options and benefits require an understanding and appreciation of tax
codes, but rarely does one hear of this objective as being the driving force for the use of any
particular compensation plan in New Economy firms. This is a change from previous decades
within the U.S. and Canada, where Old Economy organizations often found their
compensation designs dictated by tax accountants.
Capital Accumulation:
A primary goal of several compensation elements is the creation of assets and estates for
managers or employees (allowing employees to believe they are owners). Capital
accumulation has traditionally been the province of only management pay. This has changed.
New Economy organizations utilize both technology and stock options or equivalents.
Starbucks, Cisco, Microsoft, and Netscape, followed by such stalwarts as Bank of America,
have expanded the participation in these plans to the mailroom.
In the 1990's, many workers were willing to trade higher salaries at more secure and stable
companies in exchange for stock options in New Economy organizations. Due to the fact that
stock option programs required the employee to stay with the company for a set number of
years before vesting (receiving full ownership of the stocks), these programs increased
loyalty.
In many cases in the 1990's, employee stock option plans created millionaires. In recent
years, however, they have proved a false promise for employees of the many software and
technology firms that have gone under. The market, according to Esther Dyson, Chairman of
EDventure Holdings, "was sending people the wrong signals by promising them $500,000, $5
million or $50 million for a couple of years' work.
Social Concern:
Some compensation elements exist simply because owners, management, and boards utilize
social concerns in their decision making regarding compensation elements. For example,
long-term disability plans.
New Economy organizations often appear to have a concern for their human resources not
shared by their Old Economy counterparts. This is reflected in turnover statistics and
compensation plans pointed toward future (not present) compensation. Because the Internet is
available to many employees both at the office and from their homes, organizations can
communicate information that otherwise might not be known. This allows New Economy
organizations to communicate both their plans and objectives more often and at less expense
than is done by Old Economy firms.
Government Compliance:
Pay plans are often designed for no other purpose than to meet government compliance
issues. This is not as much of a concern in the 2000s as it was in the late 1970s and 1980s.
New Economy organizations are too busy in a fight for survival brought about by foreign
competition and technology changes to spend enormous time and effort on government
compliance. Few believe, however, that the labor laws, equal and minimum pay laws,
retirement plan laws and reporting, and other rules and regulations will disappear. All

countries shape compensation plans in some manner. To review U.S. and Canada laws and
regulations regarding compensation, visit the DLC Employment Law page.
Matching Goals:
The compensation plans used often depends on the way in which an organization prioritizes
these discussed objectives. Oftentimes two are more objectives can be in conflict, making
them difficult to be achieved by a single compensation plan. Because no two organizations
have exactly the same goals, there is a diverse use of compensation elements.
COMPENSATION ELEMENTS:
The following components make up compensation packages:
• Base Salaries
• Sales Incentives
• Annual Bonus Plans
• Incentive Plan Participation
• Company Wide Benefits
• Medical Plans
• Dental Plans
• Long-term Disability Plans
• Life Insurance
• Stock Option Plans
• Executive Perquisites
Base Salaries:
A base salary is a fixed amount paid to the employee. It can be determined as an hourly,
weekly, monthly, or yearly rate. The term wage instead of salary is also used in the case of
non-exempt (U.S.) or union employees. Salaries and wages account for the majority of most
organizations' total compensation expense.
In New Economy organisations:
New Economy organizations often set salaries based on what the local labour market pays.
And there are many points relating the rules of new economic organisations. They are:

• Lag traditional counterparts in salary increases. This is due to high hiring rates and the
use of stock option substitutes.
• Don’t mind overpaying for an initial hire. This can create wage compression, as
veteran employees see new hires earning more than they do.
• Have less divergent salaries and wages among their staff
• Pay higher salaries to producers, key software programmers and sales personnel.
These salaries may be as much as 20% above what the market pays.
• Give seniority increases and general across-the-board increases more commonly than
merit increases.
• Move production jobs off-shore whenever possible.
• Rarely use job evaluation and job analysis.
• Base salaries on the person, who is paid based upon his or her skills and talents. The
position the individual holds is less important.
Sales Incentives:
Sales incentives are financial rewards offered to salespeople for exceeding a sales goal. The
goals that need to be met in order for a sales person to receive incentive compensation are
specific and measurable. The incentive is usually paid in the form of cash. The basic
categories of sales incentive plans are:
• Salary-only plans: Employee receives a base salary only, no commission
• Commission-only plans: Employee's pay is based upon a set percentage of the total
amount that he or she sells
• Commission-plus-draw plans: Employee receives a specified salary each payday.

The total amount the employee is paid on each payday is called a draw. Then at
periodic times (such as each quarter) the total commissions due the salesperson are
calculated. The draw is subtracted from the commissions due the employee. The
employee receives the remainder.
• Salary-plus-commission plans: Employee receives a base salary AND a percentage

of his or her sales
• Salary-plus-bonus plans: Employee receives a base salary and a bonus that is tied to
the employee's sales performance
In New Economy organizations:
• Have more aggressive sales plans than Old Economy organizations.

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• Reward specific target takeovers of competitors' business.
• Have a lower rate of account loss than traditional competitors.
• Attract key sales personnel with high assured base salaries (draws) AND high
incentives. Traditional companies use low draws and high incentives.
• Have high turnover among sales personnel. In part, the high salaries (draws) of New
Economy competitors produce this effect.
• Have less complex sales plans than Old Economy competitors. Commissions from
first dollar of revenue are common.
• Appear to often have better than average success with medium-sized accounts than do
Old Economy organizations.
• Give less liberal automobile expense reimbursements than in the accounting-focused

Old Economy organizations. Also these organizations may not take advantage of
Fixed and Variable Rate Automobile allowances. (DLC Course 38: Fixed and
Variable Rate (FAVR) Automobile Allowances, currently under development, will
include more about this practice.)
• Require revenue items to be $75,000/year per account, in order to attract "outside

sales personnel." So, you do not find sales forces selling small items. This relatively
high amount explains why software companies with products averaging $1,000 to
$20,000 have such a difficult time staffing and maintaining a sales force.
Annual Bonus Plans:

Bonuses are lump-sum awards, given to employees on a periodic basis (quarterly, semi-
annually or annually). The intent of bonuses is to reward employees for specific
accomplishments: employee performance, company performance, achievement of goals, etc.
Bonus awards represent extra income and an opportunity to attain above-average earnings. In
• Expect high bonuses for producers. Bonuses may run to 150% of base salary.
• Team, group, and total cash profit sharing plans are more common than in Old
Economy counterparts (many of which still utilize pension plans as their primary
means of retention).
• Bonus amounts are modest; it is as if the thought is worth the administrative effort.
Amounts can be in the 10% range for the $20,000 earner, 20% range for the $50,000
wage earner, and 30% for the $80,000 earner. Compare this to the standard change of
lifestyle goal for most Old Economy organizations' bonus plans. In these traditional
companies, bonus amounts were designed to be significant enough to cause an
individual to alter his or her lifestyle via major capital investment, a vacation, etc.

Therefore, the Old Economy organizations' bonus levels appear higher on average
than their New Economy organization competitors.
• Bonuses are not guaranteed as is the informal case with Old Economy organizations.
In traditional companies, managers are guaranteed their bonuses, regardless of
performance.
• Bonuses are more likely to be based on performance results, not performance

appraisals.
• Bonus plans are commonly used and often spread throughout an organization to levels
of employees that are doing not receive bonuses in Old Economy companies. For
example, bonuses may be paid to receptionists and mail room clerks.
Incentive Plans:
Incentives are lump sum payments that reward workers for productivity above certain
standards. Unlike general salaries or wages, incentives are variable in cost and can be adapted
to short-term circumstances.
In New Economy Organizations:
• Incentive participation is far more wide-spread than in Old Economy organizations.

This reflects New Economy philosophies of employee involvement and risk-sharing.
• Before the economy softened, high incentives were paid, even in loss situations. New
Economy companies are willing to pay extra for talent in start-up operations and
turnaround situations.
When determining competitive incentive levels, labor market rate information is useful. One
source is the Salary Assessor software, which provides incentive levels for more than 5,000
position titles and 298 metropolitan areas in the U.S. and Canada. (The area database
increases to more than 6,500 areas when used with the ERI Geographic Assessor.) The
Salary Assessor software and databases allow you to determine competitive salary and
incentive rates, based upon employee performance and experience. Company-Wide Benefits
Benefits typically include all non-cash payments. That is, they do not include direct cash
payment or stock options.
In New Economy Organizations:
• Retirement plans are almost universal. Only the smallest companies and start-up
organizations don't offer retirement plans.
• In lieu of pension plans, they offer 401(k) profit sharing plans and deferred
compensation plans. This means that new economy organization employees are
expected to participate in their own retirement planning and funding.

• Medical coverage is universal. However, long-term disability and other extra benefit
plans are far less likely to be found in New Economy organizations. This reflects, in
part, the youthful staff of many New Economy companies.
• Self-insurance is found within extremely small organizations (those with less than 100
employees). Old Economy firms have more realistic medical benefit thresholds of
1,000 employees before they go self-funded.
Medical Plans:
Group medical plans provide employees and their families with health care benefits such as
hospital rooms, surgeon and physician fees, and pharmaceuticals. Employees typically
become eligible for medical plans with 30 hours of service a week. In some cases, part-time
employees are also covered. These benefits are typically received free of any income tax
liability.
• Medical coverage is extremely generous.
• There is occasionally a poor understanding of risk factors associated with self-

insuring. Many small to medium-sized organizations are self-insured and face a very
high risk of being wiped out by catastrophes. (Premature births and AIDS are two
potential financial disasters for self-insured companies.)
• HMOs have become the standard medical plan offered by most organizations.
• Hospice and outpatient care are rapidly increasing trends.
• Medical and life insurance premiums may sky rocket during the next few years,
especially as prescription drug coverage becomes standard.
• The Internet is used to outsource COBRA insurance and flexible cafeteria

administration. This can save human resources workers time and trouble.
Dental Plans:
Dental care benefits are considered an aspect of health care benefits, although insurance plans
ordinarily separate the two. Dental insurance usually covers preventative care and treatment
of teeth, gums, and the mouth. Plans might also cover orthodontia, X-rays and cosmetic
work. Employees typically become eligible for dental care plans with 30 hours of service a
week. In some cases, part-time employees are also covered. These benefits are typically
received free of any income tax liability.

• Dental HMOs are replacing the traditional 3 levels of coverage (100%-0%, 80%-20%,
and 50%-50%).
• Orthodontic coverage is far more likely to be found. This is one of the reasons why
group health plans of New Economy organizations are more costly than those of
traditional organizations. (Assume $1,000 per employee cost.)
• Full coverage of preventive treatment is the norm.
Long-Term Disability Plans:
Long-term disability insurance pays an income benefit when the insured is unable to work
due to illness or injury (even if injured on vacation). Benefits are paid weekly or monthly and
determined at a percentage of the insured's past earnings -- normally 60 to 70%. Employees
typically become eligible for long-term disability insurance plans with 30 hours of service a
week. In some cases, part-time employees are also covered. These benefits are typically
received free of any income tax liability.
• The most popular plans cover both total and partial disability.
• $20,000/month maximums are not uncommon, although $10,000/month maximums

are the norm.
• Most companies pay for all long-term disability coverage.
• Discrimination rules still do not apply to long-term disability plans within the United
States. For example, a U.S. company could legally give this benefit only to employees
who drive blue cars.
• Long-term disability coverage is less common than in traditional organizations.
Life Insurance:
Life insurance insures human lives. In a life insurance contract, the insurer agrees to pay a
stipulated sum in the event of the death of the insured or of a third person in whose life the
insured has an interest. In exchange, the insurance company receives payments of a premium
(usually at stated periods). Employees typically become eligible for life insurance plans with
30 hours of service a week. In some cases, part-time employees are also covered. Life
insurance benefits are typically received free of any income tax liability.

• The amount of life insurance coverage is above average. New Economy organizations
typically secure employee life insurance policies that pay 2.5x the base compensation.
This is approximately twice the coverage amount provided by Old Economy
organizations.
• Any group rate above $0.19/ $1,000 coverage in today's market should be questioned.
It may not be competitive.
• Full company payment is the norm.
• Most companies (New and Old Economy) will have elective group life insurance by
the end of the decade.
• The new trend is to use group universal products, where employees purchase
individual products.
The above comments relate to group rates for term life insurance plans.
Stock Option Plans:
Stock option plans (typically) provide a grant to an employee to purchase the securities of the
employer during a specified period of time for a predetermined price. The assumption is that
when the employee is allowed to purchase the stock, its market price will be higher than the
predetermined price.
• Stock option plans are available to more employees. In Old Economy organizations,
stock option plans are available only to management.
• If competition for talent exists between these two types of organizations, stock option
plans can give new economy organizations a decided edge. However, the slumping
stock market has led employees to prefer stable, secure organizations ahead of stock
options.
Perquisites:
Perquisites are additional inducements or benefits that are used to retain and attract
management and certain key personnel.
• Management perquisites reflect the search for a competitive edge. However, due to
their long-time use in old economy organizations, management prerequisites are often
more developed and utilized in traditional organizations.

• Management perquisites may be more conservative than in Old Economy

organizations. However, New Economy companies offer perquisites more liberally to
the rank and file.
• Many employees view dress codes (or the lack there of), physical fitness facilities,
day care centres, etc. to be deciding perquisites in the decision to stay with an
organization.

Secondary
data

Managerial Compensation:
Organisations decide executive compensation packages, consisting of
basic pay, allowances, perquisites, stock options, etc., based on a number
of factors. The United States Compensation institutions’Phoenix plan uses
28 compensable factors:
• Job related related experience
• Training time required
• Frequency of review of work
• Utilisation of independent choice
• Frequency of reference to guidelines
• Frequency of work transferred through supervisor
• Analytical complexity
• Time spent in processing information
• Supervisors reporting to position level
• Travel outside work location

• Salary grade to which this position reports
• Salary grade of positions supervised
• Management responsibility
• Revenue size
• Asset size
• Employment size
• Budget size
• Payroll size
• Time spent in planning
• Contact with suppliers/customers
• Impact on departmental budget
• Directing of others
• Training of staff/physical stress experienced
• Time spent under working deadlines

• Time spent in hazardous conditions
Managerial Compensation is based on:

• Compensation systems are designed keeping in minds the strategic
goals and business objectives.
• Compensation system is designed on the basis of certain factors after

analyzing the job work and responsibilities.
JOB ANALYSIS:
•Job analysis is a systematic approach to defining the job role, description,

requirements, responsibilities, evaluation, etc.

• It helps in finding out required level of education, skills, knowledge,

training, etc for the job position. It also depicts the job worth i.e.
measurable effectiveness of the job and contribution of job to the
organization.
• Thus, it effectively contributes to setting up the compensation package

for the job position.
Components of Job Analysis:
Job analysis is a systematic procedure to analyze the requirements for the

job role and job profile. Job analysis can be further categorized into
following sub components.
Job Position:
•Job position refers to the designation of the job and employee in the
organization.

• Job position forms an important part of the compensation strategy as it

determines the level of the job in the organization.
• For example management level employees receive greater pay scale than
non-managerial employees.
• The non-monetary benefits offered to two different levels in the

organization also vary.
Job Description:
•Job description refers the requirements an organization looks for a
particular job position.
• It states the key skill requirements, the level of experience needed, level
of education required, etc.
• It also describes the roles and responsibilities attached with the job
position.
• The roles and responsibilities are key determinant factor in estimating

the level of experience, education, skill, etc required for the job. It also
helps in benchmarking the performance standards.
Job Worth:
•Job Worth refers to estimating the job worthiness i.e. how much the job
contributes to the organization.
•It is also known as job evaluation
Job description is used to analyze the job worthiness.
•Roles and responsibilities helps in determining the outcome from the job
profile.
• Once it is determined that how much the job is worth, it becomes easy
to define the compensation strategy for the position.

IMPORTANCE OF JOB ANALYSIS:

• Job analysis helps in analyzing the resources and establishing the forms
the basis for demand-supply analysis, recruitments, compensation
management, and training need assessment and performance appraisal
•Therefore, job analysis forms an integral part in the formulation of

compensation strategy of an organization. Organizations should conduct
the job analysis in a systematic at regular intervals. Job analysis can be
used for setting up the compensation packages, for reviewing
employees’ performance with the standard level of performance,
determining the training needs for employees who are lacking certain
skills.
PAY STRUCTURES:
After through analyses of the job, Pay structures are decided:
•Pay structure refers to the process of setting up the pay for a job in an
organization.
• The process deals with internal and external analysis to estimate the
compensation package for a job profile.
• Internal equity, External equity and Individual equity are the most
popular pay structures.
• Job description provides the in depth knowledge about the job profile
and its worth.
•Pay structures are the strong determinant of employee’s value in the

organization.
• It helps in analyzing the employee’s role and status in the organization

and provides for fair treatment to all employees. Pay structures also
include the estimation of incentives.
Compensation is based on Internal and external

equities:
Internal Equity:
•The internal equity method undertakes the job position in the
organizational hierarchy.

• The process aims at balancing the compensation provided to a job profile

in comparison to the compensation provided to its senior and junior level
in the hierarchy.
• The fairness is ensured using job ranking, job classification, level of

management, level of status and factor comparison.
External Equity:
•Here the market pricing analysis is done.
• Organizations formulate their compensation strategies by assessing the

competitors’ or industry standards.
• Organizations set the compensation packages of their employees

aligned with the prevailing compensation packages in the market.
•This entails for fair treatment to the employees. At times organizations

offer higher compensation packages to attract and retain the best talent
in their organizations.

SALARY SURVEYS:
Salary survey also plays a major role in determining the compensation:
•Organizations have to bridge the gap between the industry standards

and their salary packages.
• They cannot provide compensation packages that are either less than
the industry standards or are very higher than the market rates.
• For the purpose they undertake the salary survey.
• The Salary survey is the research done to analyze the industry standards
to set up the compensation strategy for the organization.
•Organizations can either conduct the survey themselves or they can

purchase the survey reports from a reputed research organization.
• By the organizations.
Principal-agent theory and executive

compensation:
Agency theory proposes that one party (the principal) delegates work to
another (the agent), who performs that work. Owners or managers, who
delegate responsibilities, are called principals. Agents are the managers or
employees who manage firm, assets for owners, or other principals.

Principals are risk neutral and willing to bear greater risks than agents
because their asset wealth is more likely to be diversified between
corporate assets and other equities/investments. Agents are more risk
averse than principals, because most of their wealth is concentrated in
the firm and received in the form of pay and opportunities for promotion.
The agent is tempted to take advantage of information asymmetry with
principal and act opportunistically (defined as making decisions not
aligned with principal’s interest) and use the firm resources to maximize
wealth of the agent. Agency contract provides solution to moral
hazard/agency problem, by establishing “rules of the game” to control
agent opportunism – agency’s performance will be judged by outcomes
and not behaviours (which require direct supervision of agent’s action).
The outcomes will reflect principal’s goals and risk preferences. As
Incentive alignment, the agency contract will specify a compensation plan
that aligns the interest of the principal and agent. This agency contract
will be a type of pay for Performance plan. Meeting or exceeding pre-
agreed upon financial or non- financial outcomes triggers various of
compensation (individual or group based) for the agent. Some agency
costs are borne by the principal in the form of financial incentives for the
agent.
Therefore, the traditional principal-agent model yields

several important and practical insights useful in understanding existing
contracts (and, normatively, in designing better ones). In particular, the
models highlight the trade- off between risk and incentives.
Types of compensation:
There are 4 types of compensation:

a) intrinsic compensation
b) extrinsic compensation
c) Direct compensation
d) Indirect compensation
a) Intrinsic compensation:
It concerns the non-pecuniary compensation which is related
directly to the nature of the work. Interesting work and good career
prospects may compensate for comparably low pay. We see that at

the outset of their careers, young employees are not only attracted
to the rate of pay, but in selecting their first employer
also taking to account such matters like corporate image, trainee

programmer and their scope for development.
b) extrinsic compensation:
It is a compensation of financial nature, or whose value can be
expressed in money. These forms of compensation are also referred
to as Primary and Secondary terms of employment. The secondary
terms cover all non pecuniary components whose value can
nevertheless be expressed in money.
c) Direct compensation:
It consists of employees’ fixed and variable annual income such as
Basic salary, House rent Allowance, Conveyance, Leave Traveling
Allowence etc.
Basic Salary :
Salary is the amount received by the employee in lieu of the work done by him/her for a
certain period say a day, a week, a month, etc. It is the money an employee receives from
his/her employer by rendering his/her services.
House Rent Allowance:
Organizations either provide accommodations to its employees who are from different state
or country or they provide house rent allowances to its employees. This is done to provide
them social security and motivate them to work.

Conveyance:
Organizations provide for cab facilities to their employees. Few organizations also provide
vehicles and petrol allowances to their employees to motivate them.
Leave Travel Allowance :
These allowances are provided to retain the best talent in the organization. The employees are
given allowances to visit any place they wish with their families. The allowances are scaled
as per the position of employee in the organization.
Medical Reimbursement :
Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims include
health-insurances and treatment bills reimbursements.
Bonus:
Bonus is paid to the employees during festive seasons to motivate them and provide them the
social security. The bonus amount usually amounts to one month’s salary of the employee.
Special Allowance:
Special allowance such as overtime, mobile allowances, meals, commissions, travel

expenses, reduced interest loans; insurance, club memberships, etc are provided to employees
to provide them social security and motivate them which improve the organizational
productivity
Dearness allowance:-
The payment of dearness allowance facilitates employees and workers to face the price

increase or inflation of prices of goods and services consumed by him. The onslaught of
price increase has a major bearing on the living conditions of the labour. The increasing
prices reduce the compensation to nothing and the money's worth is coming down based on
the level of inflation.
Commissions:-
Commission to Managers and employees may be based on the sales revenue or profits of the
company. It is always a fixed percentage on the target achieved. For taxation purposes,
commission is again a taxable component of compensation.

d) Indirect Compensation:
It consists of all kinds of deferred income such as pension and
insurance (health insurance, disability insurance, unemployment
and so on.) and of benefits like company car, expense allowances
and days off.
Leave Policy:
It is the right of employee to get adequate number of leave while working with the
organization. The organizations provide for paid leaves such as, casual leaves, medical leaves
(sick leave), and maternity leaves, statutory pay, etc.
Overtime Policy:
Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.
Hospitalization:
The employees should be provided allowances to get their regular check-ups, say at an
interval of one year. Even their dependents should be eligible for the medi-claims that
provide them emotional and social security.
Insurance:
Organizations also provide for accidental insurance and life insurance for employees. This
gives them the emotional security and they feel themselves valued in the organization.
Leave Travel:
The employees are provided with leaves and travel allowances to go for holiday with their
families. Some organizations arrange for a tour for the employees of the organization. This is
usually done to make the employees stress free.

Retirement Benefits:
Organizations provide for pension plans and other benefits for their employees which benefits
them after they retire from the organization at the prescribed age.
Holiday Homes:
Organizations provide for holiday homes and guest house for their employees at different
locations. These holiday homes are usually located in hill station and other most wanted
holiday spots. The organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.
Flexible Timings:
Organizations provide for flexible timings to the employees who cannot come to work during
normal shifts due to their personal problems and valid reasons.
Sickness benefits/pregnancy:-
The increasing social consciousness of corporate had resulted in the payment of sickness
benefit to the Employees of companies. This also includes payments during pregnancy of
women employees.

INTERNATIONAL COMPENSATION:
As an increasing number of companies become involved in

International operations, it is essential that their compensation
policy should remain balanced and comparable when crossing
borders. This may be accomplished by looking at compensation
from what is called TOTAL REMUNERATION PERSPECTIVE.
In order to properly interpret the concept of Total Remuneration, we

must distinguish between three aspects:
Employer’s Cost:
The sum needed by the company to grant an employee certain

benefits.

Gross Benefits: The sum received by the employee, or a provision

or benefit expressed in money.
Net Benefit:
The Gross benefit after taxes and social security premiums.
Since the value of benefits is not always clear in terms of money,

we must use a model to arrive at a denominator. In general, every
benefit is translated into a premium or lease sum. In many cases,
the employer’s costs are equivalent to the employee’s gross
benefits.
The overall compensation package often varies from country to legally

mandated benefits, tax sums, and cost of living, culture and employee
expectations. Some of the common elements in compensation are salary,
benefits, allowances, incentives and taxes. Patterns of compensation
management in different countries are-
United States:

In US compensation package basically comprises of a base salary, a

variable performance-linked with bonus, long term cash incentives,
compulsory benefit contributions, and voluntary benefit contributions. The
expenses an employee bears on the total income are income tax, social
security, housing, car, and medical care, so on. Managers formally review
employees past achievements, compared to previously agreed upon
performance objective. During the course of the fiscal year, salary
adjustments may be warranted. These salary actions are known as
‘interim’ increases and are generally classified in three ways:
• Administrative oversight:
Is an adjustment to an individual pay, frequently accruing shortly after the

effective date of annual merit increase.
• Alignment:
Is used to adjust the pay of individuals whose salary is low in

compensation to the pay of similarly performing employees within the
peer group.
• Retention:
Is used to reward employees who are critical to the success of an
organization’s mission or a specific programme or project.
Saudi Arabia:
The type of compensation given varies by the nationality of the employee
as well as job level .The local citizens get more benefits over other
nationalities, such as housing allowances, food allowance, auto allowance,
etc. and these excess benefits are made mandatory by Saudi labours law
.the main tool used by the Saudi companies to motivate the employees is
bonus plan.
Russia:
Having a good fixed salary is important to the Russian employee and firms
with non-competitive salaries will have difficulty attracting, motivating

and retaining employees. The optimal compensation package combines

bonus and non-monetary benefits.
Bonuses are useful complement to straight salary, which are effective in

motivating the employee. However bonus is generally not paid more than
25% of the base salaries. In most cases, bonus varies from 20% to 40% of
total salary. The most common type of bonus is the payment of “thirteen
month of salary” if certain objectives have been achieved by the company.
Apart from the above, Russians have been used to receive non-monetary
benefits such as, good lunches, medical insurance life insurance and so on
Japan:
Japan has seniority based wages system, which has two features:
• The amount of pay goes up according to the length of services and age.
• Wages are not set separately for individual jobs.
The wage system of most Japanese companies divide wage into those that
are paid every month and those that are paid in special way. Bonuses that
are ordinarily paid in summer and winter and discharge allowances that are
paid when a worker leaves the company. Monthly wages consist of wages
for scheduled hours worked & wages for non scheduled hours worked. The
former is made up of basic salary and allowances and the latter is made up
of basic salary and allowances and the latter is made up of wages for work
outside of pre-determined working hours. Basic salary is determined
according the job-related qualification within give job category. Such a
system is base on the performance and grads given by the supervisors.
Generally pay hike in Japan is given in the month of April and age linked
wage system is available in Japan and promotion and increase in salaries is
depend on the performance rating.
China:
In china the wage scale is based on egalitarianism at both enterprise and
individual level and this type wage payment was in use in 1956. In this
system there were 8 grades for workers, 15 grades for technical person,
and 25 grades for managers and administrative personnel. Wage increase
was in frequent occurring at intervals of several years.
Enterprises forms was launched in 1984, Enterprises Law issued in 1988

and related regulation was implemented in 1990 to separate the
ownership from controlling authority. So that they can implement new

wage package with more emphasis on enterprises profitability and

individual performance.

Primary data
INTERVIEW 1
Company Name: Contrive InfoTech Pvt. Ltd.
Name of the employee: Gangadhar K
Designation: Project Manager.
Experience: more than 9 years
Age of the employee: 36

Gender: Male
1. Which of the following economic sectors best describes your

organization?
a) Public Sector. b) Private sector

manufacturing.
c) Private Sector – Service. d) others (pls.

specify).
2. What are the fringe benefits you get?

a) Medical benefits.
b) Educational benefits.
c) Cultural and recreational needs of workmen.
3. What are the techniques that are used in your organization for
assessing compensation?
a) Performance.
b) level of personal affairs.
c) Others pls. specify ___________________________________
4. Is there any reward strategy employed by your organization?
a) Yes.
b) No.
5. Who sets the compensation goals/requirements for individuals?
a) Senior Managers.
b) Line managers/Team leaders.
c) HR professional.
6. What are the determinants for compensation in your organization?
a) Extra time work.

b) Medical or sick claims.
c) Competency of the employee.
d) Transportation.
7. How many meetings are scheduled in a year to discuss managerial

compensation?

a) 1.
b) 2.
c) 3 or more.
8. Are you going to make any changes to your compensation-

management systems in the next 12 months?
a) Yes.
b) No.
c) Don’t know.
9. Why do you have compensation management systems in your

organization? (Please tick as many boxes as appropriate)
a) Retention strategy.
b) Reward allocation.
c) Identification of employee needs.
d) Reimbursement strategy.
e) To decide of the salary.
10. In general, how effective has your organization’s compensation

management processes proved in improving overall performance?
a) Effective.
b) Moderately effective.
c) Ineffective.
11. Which according to you would improve effectiveness of an

organization’s compensation management process?
a) Monetary rewards.
b) Non monetary rewards.
c) Or both.
12. Types of extra incentives offered?
a) Monetary benefits.
b) Shares.
c) Annual incentives based on performance.
13. What are factors your organization considers before deciding on the
compensation levels?

a) Job needs.
b) Cost of living.
c) Ability to pay.
d) State regulation.
14. Which one is the suitable pay system for an employee?
a) Broad banding.
b) Competency based pay system.
15. Competency based pay system that would be paid more

compensation?
a) Jobs involving a lot of mental evaluation, skills etc.

b) Jobs involving of physical activity.
INTERVIEW 2

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M A N E A G E R I A L C O M P E N S AT I O N Page | 1

The process of compensation is a complex network of sub-processes directed towards

• Compensation management is responsible for each and every decision

• Compensation is what employees receive in exchange for their

• There is wide gap between wages/salaries paid for comparable position

• A universally accepted and fair compensation programme requires an

• Since it is linked to individual motivational factors as well as

• Thus compensation management demands special attention from

A fair compensation system will help in the followings:

IFIM Business School

3. Compensation should be uniform and consistent.

4. The system should be flexible to provide deserving compensation to the deserving

5. Compensation system should be in line with legal provisions of the country.

Compensation can be looked from different perspective as follows:

1. Society: - Society perceives compensation as a measure of justice. For example,

2. Stakeholders:- Linking educative pay to performance of the company is supposed to

3. Managers:- Compensation is viewed by managers in the following ways:-

Compensation consider as an expensive. Competitive pressure force managers

4. Employees:- Employees view compensation in the following ways:

IFIM Business School

a. Financial security for themselves.

b. Return in an exchange between employer and themselves.

c. Entitlement for being an employee of company.

d. Reward for job well done.

IFIM Business School

All compensation elements exist to achieve some purpose. A review of compensation

IFIM Business School

• Cost Benefit Efficiency

IFIM Business School

New Economy organizations appear to pay less due to:

• lower salary levels

• higher retirement and health benefits

• much higher equity compensation

IFIM Business School

IFIM Business School

• Annual Bonus Plans

• Incentive Plan Participation

• Company Wide Benefits

• Long-term Disability Plans

• Stock Option Plans

In New Economy organisations:

IFIM Business School

• Have less divergent salaries and wages among their staff

• Move production jobs off-shore whenever possible.

• Rarely use job evaluation and job analysis.

• Salary-only plans: Employee receives a base salary only, no commission

• Commission-plus-draw plans: Employee receives a specified salary each payday.

• Salary-plus-commission plans: Employee receives a base salary AND a percentage

In New Economy organizations:

• Have more aggressive sales plans than Old Economy organizations.

IFIM Business School

• Reward specific target takeovers of competitors' business.

• Have a lower rate of account loss than traditional competitors.

• Give less liberal automobile expense reimbursements than in the accounting-focused

• Require revenue items to be $75,000/year per account, in order to attract "outside

Annual Bonus Plans:

In New Economy organizations:

IFIM Business School

• Bonuses are more likely to be based on performance results, not performance

In New Economy Organizations:

• Incentive participation is far more wide-spread than in Old Economy organizations.

In New Economy Organizations: